PILGRIM
- -------
THE VALUE OF INVESTING(R)
P R O S P E C T U S
November 1, 1998
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40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, AZ 85004
(800) 992-0180
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The Pilgrim Funds are a family of diversified, open-end and closed-end
management investment companies. This Prospectus describes the open-end
investment company portfolios, also known as mutual funds (the Funds), each of
which has its own investment objectives and policies.
EQUITY FUNDS
PILGRIM MAGNACAP FUND
(formerly Pilgrim America MagnaCap Fund)
(MagnaCap Fund)
PILGRIM LARGECAP LEADERS FUND
(formerly Pilgrim America Masters LargeCap Value Fund)
(LargeCap Leaders Fund)
PILGRIM MIDCAP VALUE FUND
(formerly Pilgrim America Masters MidCap Value Fund)
(MidCap Value Fund)
PILGRIM BANK AND THRIFT FUND
(formerly Pilgrim America Bank and Thrift Fund)
(Bank and Thrift Fund)
PILGRIM ASIA-PACIFIC EQUITY FUND
(formerly Pilgrim America Masters Asia-Pacific Equity Fund)
(Asia-Pacific Equity Fund)
INCOME FUNDS
PILGRIM HIGH YIELD FUND
(formerly Pilgrim America High Yield Fund)
(High Yield Fund)
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(Government Securities Income Fund)
Each Fund offers different classes of shares, with varying types and amounts of
sales and distribution charges. These Pilgrim 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 November 1, 1998, as amended from time to time, 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 Group, Inc.
(Shareholder Servicing Agent) at (800) 992-0180.
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.
LIKE ALL MUTUAL FUND SHARES, NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSES UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
----
THE EQUITY FUNDS AT A GLANCE .............................................. 3
THE INCOME FUNDS AT A GLANCE .............................................. 4
SUMMARY OF EXPENSES ....................................................... 5
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES ............................. 8
INVESTMENT PRACTICES AND RISK CONSIDERATIONS .............................. 12
DIVERSIFICATION AND CHANGES IN POLICIES ................................... 19
YEAR 2000 COMPLIANCE ...................................................... 19
SHAREHOLDER GUIDE ......................................................... 20
Pilgrim Purchase Options(TM) ............................................. 20
Purchasing Shares ........................................................ 27
Exchange Privileges and Restrictions ..................................... 28
How to Redeem Shares ..................................................... 29
MANAGEMENT OF THE FUNDS ................................................... 30
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................ 34
PERFORMANCE INFORMATION ................................................... 36
ADDITIONAL INFORMATION .................................................... 36
FINANCIAL HIGHLIGHTS ...................................................... 36
2
<PAGE>
THE EQUITY FUNDS AT A GLANCE*
FUND OBJECTIVES AND POLICIES
- ----------------------- --------------------------------------------------------
MagnaCap Fund Long term growth of capital with income as a
secondary consideration.
Invests in equity securities that are determined to be
of high quality by the Investment Manager based
upon certain selection criteria.
Normally fully invested.
Pilgrim Investments, Inc., serves as Investment
Manager for MagnaCap Fund.
LargeCap Leaders Long-term capital appreciation.
Fund Invests in equity securities issued by companies
believed to be undervalued that generally have a
market capitalization of at least $5 billion.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for LargeCap Leaders Fund.
MidCap Value Fund Long-term capital appreciation.
Invests in equity securities of companies believed to
be undervalued that have a market capitalization of
between $200 million and $5 billion.
Normally fully invested.
Cramer Rosenthal McGlynn, LLC., (CRM) provides
portfolio management services for MidCap Value
Fund.
Bank and Thrift Fund Long-term capital appreciation with income as a
secondary objective.
Invests primarily in equity securities of national and
state-chartered banks (other than money center
banks), thrifts, the holding or parent companies of
such depository institutions, and in savings accounts
of mutual thrifts. Up to 35% of the Fund's total assets
may be invested in equity securities of money center
banks, other financial services companies, other
issuers deemed suitable by the Investment Manager,
debt securities, and securities of other investment
companies.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for Bank and Thrift Fund.
Asia-Pacific Equity Long-term capital appreciation.
Fund Invests in equity securities of companies based in the
Asia-Pacific region, which includes China, Hong
Kong, Indonesia, Korea, Malaysia, Phillippines,
Singapore, Taiwan and Thailand, but not Australia
and Japan.
Normally fully invested.
HSBC Asset Management America, Inc. and HSBC
Asset Management Hong Kong Limited, subsidiaries
of HSBC Holdings plc, provides portfolio
management services for Asia-Pacific Equity Fund.
FUND STRATEGY
- ----------------------- --------------------------------------------------------
MagnaCap Fund The Investment Manager generally selects
companies that meet the Fund's disciplined
investment strategy: consistent payment of, or
ability to, pay dividends; substantial increases in
the ability to pay dividends; reinvested
substantial earnings; strong balance sheets; and
attractive prices.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
LargeCap Leaders The Investment Manager seeks large
Fund capitalization companies believed to present a
good value based upon price compared to
projected earnings and that are leaders in their
industries, and considers whether those
companies have a sustainable competitive edge.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
MidCap Value Fund CRM, a `value' manager, seeks to identify middle
capitalization companies having one or more of
the following characteristics: they are undergoing
fundamental change; are undervalued; and are
misunderstood by the investment community.
Investment prospects are viewed on a long-term
basis and not on market timing.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
Bank and Thrift Fund Portfolio securities are selected principally on the
basis of fundamental investment value and
potential for future growth, including securities
of institutions that the Fund believes are
well-positioned to take advantage of
opportunities currently developing in the banking
and thrift industries.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities, and exposure to the financial and
market risks of the banking and thrift industries,
which may present greater risk than a portfolio
that is not concentrated in a group of related
industries. Bank and thrift stocks may be
impacted by state and federal legislation and
regulations and regional and general economic
conditions.
You can expect fluctuation in the value of the
Fund's portfolio securities and the Fund's shares.*
Asia-Pacific Equity Portfolio securities are selected based upon a
Fund combination of a macroeconomic overview of
the region, specific country analysis, setting
target country weightings, industry analysis and
stock selection.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities, and exposure to changes in currency
exchange rates and other risks of foreign
investment. You can expect fluctuation in the
value of the Fund's portfolio securities and the
Fund's shares.*
* This summary description should be read in conjunction with the more complete
description of the Fund's investment objectives and policies set forth
elsewhere in this Prospectus. For information regarding the purchase and
redemption of shares of the Fund, refer to the `Shareholder Guide.' For
information regarding the risk factors of the Fund, refer to `Investment
Practices and Risk Considerations' below.
3
<PAGE>
THE INCOME FUNDS AT A GLANCE*
FUND OBJECTIVES AND POLICIES
- ------------------ -------------------------------------------------------------
High Yield Fund High level of current income with capital
appreciation as a secondary objective.
Invests at least 65% of its assets in a diversified
portfolio of high-yielding debt securities commonly
referred to as `junk bonds.' May also invest up to
35% of its total assets in other types of fixed income
securities, preferred and common stocks, warrants
and other securities.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for High Yield Fund.
Government High level of current income consistent with liquidity
Securities and preservation of capital.
Income Fund Normally invests at least 70% of its assets in
securities issued or guaranteed by the U.S.
Government, or certain of its agencies and
instrumentalities. The Fund does not invest in highly
leveraging derivatives, such as swaps, interest-only or
principle-only stripped mortgage-backed securities or
interest rate futures contracts.
Normally fully invested.
Pilgrim Investments, Inc. serves as investment
Manager for Government Securities Income Fund.
FUND STRATEGY
- ------------------ -------------------------------------------------------------
High Yield Fund The Investment Manager selects high-yielding
fixed income securities that do not, in its
opinion, involve undue risk relative to the
securities' return characteristics.
Principal risk factors: exposure to financial,
market and interest rate risks and greater credit
risks than with higher-rated bonds. You can
normally 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 The Investment Manager analyzes various U.S.
Securities Government securities and selects those offering
Income Fund the highest yield consistent with maintaining
liquidity and preserving capital.
Principal risk factors: exposure to financial and
interest rate risks, and prepayment risk on
mortgage related securities. You can normally
expect fluctuation in the value of the Fund's
shares in response to changes in interest rates,
and relatively little fluctuation in the absence of
such changes.*
* This summary description should be read in conjunction with the more complete
description of the Fund's investment objectives and policies set forth
elsewhere in this Prospectus. For information regarding the purchase and
redemption of shares of the Fund, refer to the `Shareholder Guide.' For
information regarding the risk factors of the Fund, refer to `Investment
Practices and Risk Considerations' below.
4
<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). For each Fund, you may select from up to three separate
classes of shares: Class A, Class B and Class M.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M(1)
------- ------- ----------
<S> <C> <C> <C>
Maximum initial sales charge imposed on purchases of the
Equity Funds (as a percentage of offering price) ...... 5.75%(2) None 3.50%(2)
Maximum initial sales charge imposed on purchases of the
Income Funds (as a percentage of offering price) ...... 4.75%(2) None 3.25%(2)
Maximum contingent deferred sales charge (CDSC) on each
Fund (at the lower of original purchase price or the
redemption proceeds) ................................. None (3) 5.00%(4) None
</TABLE>
The Funds have no redemption fees, exchange fees or sales charges on reinvested
dividends.
- ------------
(1) Bank and Thrift Fund does not offer Class M shares.
(2) 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.'
(3) 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.'
(4) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See 'Class B Shares: Deferred Sales
Charge Alternative.'
5
<PAGE>
ANNUAL OPERATING EXPENSES AND EXAMPLES
The table below reflects the Annual Operating Expenses incurred by the Class A,
B and M shares of each Fund for the fiscal year or period ended June 30, 1998.
The Annual Operating Expenses for certain Funds are subject to waivers that are
described in the footnotes following the table. The "Examples" to the right of
the table show the cumulative expenses you would pay on a $1,000 investment,
assuming (i) reinvestment of all dividends and distributions, (ii) 5% annual
return and (iii) redemption at the end of the period (unless otherwise noted):
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
MAGNACAP FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees 0.72% 0.72% 0.72%
Distribution (12b-1 fees)(1) 0.30% 1.00% 0.75%
Other Expenses 0.35% 0.35% 0.35%
---- ---- ----
Total fund
operating expenses 1.37% 2.07% 1.82%
==== ==== ====
LARGECAP LEADERS FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees 1.00% 1.00% 1.00%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 1.75% 2.50% 2.25%
==== ==== ====
MIDCAP VALUE FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees 1.00% 1.00% 1.00%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 1.75% 2.50% 2.25%
==== ==== ====
BANK AND THRIFT FUND++ CLASS A CLASS B
------- -------
Management fees 0.72% 0.72%
Distribution (12b-1 fees)(1) 0.25% 1.00%
Other Expenses 0.23% 0.23%
---- ----
Total fund
operating expenses 1.20% 1.95%
==== ====
ASIA-PACIFIC EQUITY FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees 1.25% 1.25% 1.25%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 2.00% 2.75% 2.50%
==== ==== ====
HIGH YIELD FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees(4) 0.60% 0.60% 0.60%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.15% 0.15% 0.15%
---- ---- ----
Total fund
operating expenses(3) 1.00% 1.75% 1.50%
==== ==== ====
GOVERNMENT SEC. INC. FUND CLASS A CLASS B CLASS M
------- ------- -------
Management fees 0.50% 0.50% 0.50%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.75% 0.75% 0.75%
---- ---- ----
Total fund
operating expenses(5) 1.50% 2.25% 2.00%
==== ==== ====
EXAMPLES
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 71 71 21 53
After 3 years 98 95 65 90
After 5 years 128 131 111 130
After 10 years 213 222 (2) 222 (2) 241
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 74 75 25 57
After 3 years 109 108 78 103
After 5 years 147 153 133 151
After 10 years 252 265 (2) 265 (2) 284
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 74 75 25 57
After 3 years 109 108 78 103
After 5 years 147 153 133 151
After 10 years 252 265 (2) 265 (2) 284
CLASS A CLASS B CLASS B+
--------- --------- ----------
After 1 year $ 69 $ 70 $ 20
After 3 years 93 91 61
After 5 years 120 125 105
After 10 years 195 208 (2) 208 (2)
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 77 78 28 59
After 3 years 117 115 85 110
After 5 years 159 165 145 163
After 10 years 277 290 (2) 290 (2) 309
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 57 68 18 47
After 3 years 78 85 55 78
After 5 years 100 115 95 112
After 10 years 164 186(2) 186 (2) 206
CLASS A CLASS B CLASS B+ CLASS M
--------- --------- ---------- --------
After 1 year 62 73 23 52
After 3 years 93 100 70 93
After 5 years 125 140 120 137
After 10 years 218 240 (2) 240 (2) 258
(Footnotes on next page.)
6
<PAGE>
- ------------
+ Assumes no redemption at end of period.
++ The Fund changed its year end from December 31 to June 30, therefore, the
expenses reflected are for the six months ended June 30, 1998 annualized.
(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) Assumes Class B shares converted to Class A shares at the end of the eighth
year following purchase.
(3) The Investment Manager has entered into expense limitation agreements under
which it will limit expenses, excluding distribution fees, interest,
taxes, brokerage and extraordinary expenses, to 1.50% for MidCap Value
Fund and LargeCap Leaders Fund, 1.75% for Asia-Pacific Equity Fund, and
0.75% for High Yield Fund. These expense limitations will apply to each
Fund individually until at least December 31, 1998. Prior to the waiver
and reimbursement of Fund expenses, Other Expenses and Total Fund
Operating Expenses for the fiscal year ended June 30, 1998 for the
following Funds were: for MidCap Value Fund, 0.53% and 1.78% for Class A,
0.53% and 2.53% for Class B, and 0.53% and 2.28% for Class M; for LargeCap
Leaders Fund, 1.03% and 2.28% for Class A, 1.03% and 3.03% for Class B,
and 1.03% and 2.78% for Class M; for Asia-Pacific Equity Fund, 1.30% and
2.80% for Class A, 1.30% and 3.55% for Class B, and 1.30% and 3.30% for
Class M; and for High Yield Fund, 0.32% and 1.17% for Class A, 0.32% and
1.92% for Class B, and 0.32% and 1.67% for Class M.
(4) The management fees for High Yield Fund have been restated to reflect
current fees.
(5) 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 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. Without such waiver, Other Expenses and Total
Fund Operating Expenses for the fiscal year ended June 30, 1998 would have
been 0.83% and 1.58% for Class A, 0.83% and 2.33% for Class B, and 0.83%
and 2.08% for Class M.
The purpose of the table on the previous page 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.'
Use of the assumed 5% return in the Examples is required by the Securities and
Exchange Commission. The Examples are not an illustration of past or future
investment results, and should not be considered a representation of past or
future expenses, actual expenses may be more or less than those shown.
7
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
MAGNACAP FUND. The 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 its objectives by investing primarily in equity securities issued by
companies that the Investment Manager determines are of high quality based upon
the selection criteria described below. 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 Depositary Receipts
(ADRs)). Although 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 `Risk Considerations --
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 is managed in accordance with the philosophy that companies that
can best meet the Fund's objectives have paid increasing dividends or have had
the capability to pay rising dividends from their operations. Normally, stocks
are acquired only if at least 65% of the Fund's assets are invested in
companies that meet the following criteria:
1. CONSISTENT DIVIDENDS. A company must have paid or had the financial
capability from its operations to pay a dividend in 8 out of the last
10 years.
2. SUBSTANTIAL DIVIDEND INCREASES. A company must have increased its
dividend or had the financial capability from its operations to have
increased its dividend at least 100% over the past 10 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
the company's total capitalization or a company's bonds must be rated
at least A- or A-3.
5. ATTRACTIVE PRICE. A company's current share price should be in the
lower half of the stock's price/earnings ratio range for the past ten
years, or the ratio of the share price to its anticipated future
earnings must be an attractive value in relation to the average for
its industry peer group or that of the Standard & Poor's 500 Composite
Stock Price Index.
The Investment Manager may also consider other factors in selecting investments
for the Fund. The remainder of the Fund's assets may be invested in equity
securities that the Investment Manager believes have growth potential because
they represent an attractive value. Also, 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.
LARGECAP LEADERS FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investing
primarily in equity securities issued by companies with large market
capitalizations that the Investment Manager believes sell at reasonable prices
relative to their projected earnings. The Investment Manager seeks companies
that it believes are leaders in their industries and considers whether these
companies have a sustainable competitive edge. The Portfolio Manager's
investment goal is to participate in up markets while cushioning the portfolio
during a downturn. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to have large
market capitalization, although the Fund may also invest to a limited degree in
companies that have a market capitalization between $1 billion and $5 billion.
The equity securities in which the Fund may invest include common stock,
convertible securities, preferred stock, ADRs, and warrants. The Fund will
normally be invested as fully as practicable (at least 80%) in equity
securities and will normally invest at least 65% of its assets in companies
with large market capitalizations. The Fund may also invest in high-quality
debt securities, as described in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
8
<PAGE>
MIDCAP VALUE FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investment in
equity securities issued by companies with middle market capitalizations, i.e.,
market capitalizations between $200 million and $5 billion, although the Fund
may also invest to a limited degree in companies that have larger or smaller
market capitalizations. The equity securities in which the Fund may invest
include common stock, convertible securities, preferred stock and warrants. The
Fund will normally be invested as fully as practicable (at least 80%) in equity
securities of companies with middle market capitalizations. The Fund may also
invest in high-quality debt securities, as described in `Risk Considerations --
Temporary Defensive and Other Short-Term Positions.'
The Fund is managed in accordance with the disciplined investment style that
the Portfolio Manager, Cramer Rosenthal McGlynn, LLC (CRM), employs in managing
midcap value portfolios. As a value adviser, CRM does not attempt to time
market fluctuations; rather it relies on stock selection to achieve investment
results, seeking out those stocks that are undervalued and, in some cases,
neglected by financial analysts. The Portfolio Manager's investment philosophy
is to take advantage of periodic inefficiencies that develop in the valuation
of publicly traded companies. Generally, its approach to finding such companies
is to first identify dynamic change that can be material to a company's
operations. Dynamic change means change within a company that is likely to have
a material impact on its operations. Examples include new senior management,
new products or markets, or any material divestitures, acquisitions, or
mergers. The philosophy is that this type of change often creates
misunderstanding in the marketplace that can result in a company's stock being
undervalued relative to its future prospects and peer group. The Portfolio
Manager seeks to identify this change at an early stage and conduct an
evaluation of the company's business. In applying this approach, the Portfolio
Manager focuses on middle capitalization companies where dynamic change can be
material.
CRM seeks companies that it believes will look different in the future in terms
of their operations, finances, and/or management. Once change is identified,
the Portfolio Manager conducts an evaluation of a company that includes
creating a financial model based principally upon projected cash flow, as
opposed to reported earnings. The company's stock is evaluated in the context
of what the market is willing to pay for the shares of comparable companies and
what a strategic buyer would pay for the whole company. CRM also evaluates the
degree of investor recognition of a company by monitoring the number of sell
side analysts who closely follow the company and the nature of the shareholder
base. Before deciding to purchase a stock CRM conducts a business analysis to
corroborate its observations and assumptions, including, in most instances,
discussions with management, customers and suppliers. Also, an important
consideration is the extent to which management holds an ownership interest in
a company. In its overall assessment, CRM seeks stocks that have a favorable
risk/reward ratio over an 18 to 24 month holding period.
BANK AND THRIFT FUND. The Fund primarily seeks long-term capital appreciation;
a secondary objective is income. The Fund pursues its objectives by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of (i) national and state-chartered banks (other than money center
banks), (ii) thrifts, (iii) the holding or parent companies of such depository
institutions, and (iv) in savings accounts of mutual thrifts, which investment
may entitle the investor to participate in future stock conversions of the
mutual thrifts. These portfolio securities are selected principally on the
basis of fundamental investment value and potential for future growth,
including securities of institutions that the Fund believes are well positioned
to take advantage of the attractive investment opportunities developing in the
banking and thrift industries. In making decisions concerning the selection of
portfolio securities for the Fund, the Investment Manager conducts its own
evaluation of the depository institution which is a potential investment by the
Fund and does not take into account the credit rating of the debt securities
issued by such institution. These equity securities include common stocks and
securities convertible into common stock (including convertible bonds,
convertible preferred stock, and warrants) but do not include non-convertible
preferred stocks or adjustable rate preferred stocks.
An investment in the Fund's shares cannot be considered a complete investment
program. Because the Fund's investment portfolio will be concentrated in
specific segments of the banking and thrift industries, the shares may be
subject to greater risk than the shares of a fund whose portfolio is less
concentrated.
9
<PAGE>
The Investment Manager believes that a number of factors may contribute to the
potential for growth in the value of equity securities of depository
institutions, including the fact that such depository institutions are:
(i) located in geographic regions experiencing strong economic
growth and able to participate in such growth;
(ii) well-managed and currently providing above-average returns on
assets and shareholders' equity;
(iii) attractive candidates for acquisition by a money center bank
or another regional bank, as defined in 'The Banking and Thrift
Industries,' below, or attractive partners for business combinations,
as a result of opportunities created by the trend towards deregulation
and interstate banking or in order to create larger, more efficient
banking combinations;
(iv) expanding their business into new financial services or
geographic areas that have become or may become permissible due to an
easing of regulatory constraints; or
(v) investing assets in technology that is intended to increase
productivity.
The Investment Manager also believes that factors may contribute to increased
earnings of securities of depository institutions, including the following:
(i) changes in the sources of revenues of banks, such as the
implementation of certain new transaction-based fees;
(ii) a focus on variable rate pricing of bank products, which is
less sensitive than fixed pricing to cyclical interest rate changes;
(iii) the ability, as a result of liberalization of regulation, to
offer financial products and services which may have a higher rate of
return than traditional banking and financial services products;
(iv) the recent implementation of share repurchase programs by
certain banks; or
(v) a trend towards increased savings and investing as the average
age of the population of the United States gets older.
The Fund's policy of investing under normal market conditions at least 65% of
its total assets in the equity securities of (i) national and state-chartered
banks (other than money center banks), (ii) thrifts, (iii) the holding or
parent companies of such depository institutions, and (iv) in savings accounts
of mutual thrifts is fundamental and may only be changed with approval of the
shareholders of the Fund.
The Fund invests the remaining 35% of its total assets in the equity
securities, including preferred stocks or adjustable rate preferred stocks, of
money center banks, other financial services companies, other issuers deemed
suitable by the Investment Manager (which may include companies that are not in
financial services industries), in securities of other investment companies and
in nonconvertible debt securities (including certificates of deposit,
commercial paper, notes, bonds or debentures) that are either issued or
guaranteed by the United States Government or agency thereof or issued by a
corporation or other issuer and rated investment grade or comparable quality by
at least one nationally recognized rating organization. The Fund may also
invest in short-term, investment grade debt securities, as described in `Risk
Considerations -- Temporary Defensive and Other Short-Term Positions.'
ASIA-PACIFIC EQUITY FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investment in
equity securities listed on stock exchanges in countries in the Asia-Pacific
region or issued by companies based in this region. Asia-Pacific countries in
which the Fund invests include, but are not limited to, China, Hong Kong,
Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, but do
not include Japan and Australia. The equity securities in which the Fund may
invest include common stock, convertible securities, preferred stock, warrants,
ADRs, European Depositary Receipts and other depositary receipts. The Fund will
normally be invested as fully as practicable (at least 80%) in equity
securities of Asia-Pacific issuers. The Fund may also invest in high-quality
debt securities, as described in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
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The Fund will be managed using the investment philosophy that the Portfolio
Manager, HSBC Asset Management Americas, Inc. and HSBC Asset Management Hong
Kong Limited (HSBC), employs in managing private Asia-Pacific portfolios.
Investment decisions are based upon a disciplined approach that takes into
consideration the following factors: (i) macroeconomic overview of the region;
(ii) specific country analysis; (iii) setting target country weightings; (iv)
evaluation of industry sectors within each country; and (v) selection of
specific stocks. Decisions on company selection include analysis of such
fundamental factors as absolute rates of change of earnings growth, earnings
growth relative to the market and industry, quality of earnings and stability
of earnings growth, quality of management and product line, interest rate
sensitivity and liquidity of the stock. HSBC seeks to take profits when the
Portfolio Manager believes that a market or stock has risen fairly or
disproportionately to other investment opportunities.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: (1) the country in which the issuer was organized; (2)
the country in which the principal securities market for that issuer is
located; (3) the country in which the issuer derives at least 50% of its
revenues or profits from goods produced or sold, investments made, or services
performed; or (4) the country in which the issuer has at least 50% of its
assets situated.
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 (ordinarily not to
exceed 35% of the Fund's assets) may be invested 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 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
Corporation (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.
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INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The following pages contain information about certain types of securities in
which one or more of 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.
RISK CONSIDERATIONS
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. Each Fund is
subject to varying degrees of financial, market and credit risks.
TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS. Each Fund's assets may be
invested in certain short-term, high-quality debt instruments (and, in the case
of Bank and Thrift Fund, investment grade debt instruments) and in U.S.
Government securities for the following purposes: (i) to meet anticipated
day-to-day operating expenses; (ii) pending the Investment Manager's or
Portfolio Manager's ability to invest cash inflows; (iii) to permit the Fund to
meet redemption requests; and (iv) for temporary defensive purposes. Bank and
Thrift Fund, MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund and
Asia-Pacific Equity Fund may also invest in such securities if the Fund's
assets are insufficient for effective investment in equities.
Although it is expected that each Fund will normally be invested consistent
with its investment objectives and policies, the short-term instruments in
which a Fund (except Government Securities Income Fund) may invest include: (i)
short-term obligations of the U.S. Government and its agencies,
instrumentalities, authorities or political subdivisions; (ii) other 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. LargeCap Leaders Fund, MidCap Value
Fund and Asia-Pacific Equity Fund may also invest in long-term U.S. Government
securities and money market funds, while Asia-Pacific Equity Fund may invest in
short-term obligations of foreign governments and their agencies,
instrumentalities, authorities, or political subdivisions. The short-term
instruments in which Government Securities Income Fund may invest include
short-term U.S. Government securities and repurchase agreements on U.S.
Government securities. The Funds will normally invest in short-term instruments
that do not have a maturity of greater than one year.
MIDCAP COMPANY EQUITY SECURITIES. The MidCap Value Fund will invest
substantially all of its assets, and MagnaCap Fund, LargeCap Leaders Fund, Bank
and Thrift Fund and Asia-Pacific Equity Fund may invest, in the equity
securities of middle capitalization companies. Investment in middle
capitalization companies may involve greater risk than is customarily
associated with securities of larger, more established companies. These
securities may be less marketable and subject to more abrupt or erratic market
movements than securities of larger companies.
BANK AND THRIFT FUND: SECURITIES OF BANKS AND THRIFTS. Bank and Thrift Fund
invests primarily in equity securities of banks and thrifts. A `money center
bank' is a bank or bank holding company that is typically located in an
international financial center and has a strong international business with a
significant percentage of its assets outside the United States. `Regional
banks' are banks and bank holding companies which provide full service banking,
often operating in two or more states in the same geographic area, and whose
assets are primarily related to domestic business. Regional banks are smaller
than money center banks and also may include banks conducting business in a
single state or city and banks operating in a limited number of states in one
or more geographic regions. The third category which constitutes the majority
in number of banking organizations are typically smaller institutions that are
more geographically restricted and less well-known than money center banks or
regional banks and are commonly described as `community banks.'
The Bank and Thrift Fund may invest in the securities of banks or thrifts that
are relatively smaller, engaged in business mostly within their geographic
region, and are less well-known to the general investment
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community than money center and larger regional banks. The shares of depository
institutions in which the Fund may invest may not be listed or traded on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation System (`NASDAQ'); as a result there may be
limitations on the Fund's ability to dispose of them at times and at prices
that are most advantageous to the Fund.
The profitability of banks and thrifts is largely dependent upon interest rates
and the resulting availability and cost of capital funds over which these
concerns have limited control, and, in the past, such profitability has shown
significant fluctuation as a result of volatile interest rate levels. In
addition, general economic conditions are important to the operations of these
concerns, with exposure to credit losses resulting from financial difficulties
of borrowers.
Changes in state and Federal law are producing significant changes in the
banking and financial services industries. Deregulation has resulted in the
diversification of certain financial products and services offered by banks and
financial services companies, creating increased competition between them. In
addition, state and federal legislation authorizing interstate acquisitions as
well as interstate branching has facilitated the increasing consolidation of
the banking and thrift industries. Although regional banks involved in
intrastate and interstate mergers and acquisitions may benefit from such
regulatory changes, those which do not participate in such consolidation may
find that it is increasingly difficult to compete effectively against larger
banking combinations. Proposals to change the laws and regulations governing
banks and companies that control banks are frequently introduced at the federal
and state levels and before various bank regulatory agencies. The likelihood of
any changes and the impact such changes might have are impossible to determine.
The last few years have seen a significant amount of regulatory and legislative
activity focused on the expansion of bank powers and diversification of
services that banks may offer. These expanded powers have exposed banks to
well-established competitors and have eroded the distinctions between regional
banks, community banks, thrifts and other financial institutions.
The thrifts in which the Bank and Thrift Fund invests generally are subject to
the same risks as banks discussed above. Such risks include interest rate
changes, credit risks, and regulatory risks. Because thrifts differ in certain
respects from banks, however, thrifts may be affected by such risks in a
different manner than banks. Traditionally, thrifts have different and less
diversified products than banks, have a greater concentration of real estate in
their lending portfolio, and are more concentrated geographically than banks.
Thrifts and their holding companies are subject to extensive government
regulation and supervision including regular examinations of thrift holding
companies by the Office of Thrift Supervision (the `OTS'). Such regulations
have undergone substantial change since the 1980's and will probably change in
the next few years.
INVESTMENTS IN FOREIGN SECURITIES. Asia-Pacific Equity Fund invests primarily,
and 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.
LargeCap Leaders Fund may invest in ADRs. ADRs are dollar-denominated receipts
issued generally by domestic banks and representing a deposit with the bank of
a security of a foreign issuer, and are publicly traded in the U.S.
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) settlement and clearance
procedures in some countries that may not be reliable and can result in delays
in settlement; (vii) higher transactional and custodial expenses than for
domestic securities; and (viii) 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
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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.
EMERGING MARKET INVESTMENTS. Asia-Pacific Equity Fund may invest in emerging
market securities issued by companies based in emerging market countries in the
Asia-Pacific region. An emerging market country is generally considered to be a
country whose economy is less developed or mature than economies in other more
developed countries or whose markets are undergoing a process of relatively
basic development. `Emerging market countries' consist of all countries
determined by the World Bank or the United Nations to have developing or
emerging economies and markets. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries.
In addition to the risks generally of investing in emerging market securities,
there are particular risks associated with investing in developing Asia-Pacific
countries including: (i) certain markets, such as those of China, being in the
earliest stages of development; (ii) high concentration of market capitalization
and trading volume in a small number of issuers representing a limited number of
industries, as well as a high concentration of investors and financial
intermediaries; (iii) political and social uncertainties; (iv) over-dependence
financial intermediaries; (iii) political and social uncertainties; (iv)
over-dependence on exports, especially with respect to primary commodities,
making these economies vulnerable to changes in commodity prices; (v)
overburdened infrastructure and obsolete financial systems; (vi) environmental
problems; (vii) less well developed legal systems than many other industrialized
nations; and (viii) less reliable custodial services and settlement practices.
CORPORATE DEBT SECURITIES. High Yield Fund may invest in corporate debt
securities. In addition, High Yield Fund may also invest in high quality
short-term corporate debt for temporary defensive purposes. See "Temporary
Defensive and Other Short-Term Positions" above. Corporate debt securities
include corporate bonds, debentures, notes and other similar corporate debt
instruments, including convertible securities. The investment return on a
corporate debt security reflects interest earnings and changes in the market
value of the security. The market value of a corporate debt security will
generally increase when interest rates decline, and decrease when interest
rates rise. There is also the risk that the issuer of a debt security will be
unable to pay interest or principal at the time called for by the instrument.
Investments in corporate debt securities that are rated below investment grade
are described in "High Yield Securities" below.
HIGH YIELD SECURITIES. High Yield Fund may 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 provide 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 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.
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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 ended June 30, 1998, 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 -- 4.61%, B -- 58.6%, CCC
- -- 2.42%, CC -- 0.40%, and D -- 0.34%, respectively, and (2) unrated High Yield
Securities as a group -- 33.60%.
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 a 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. D -- in payment default. S&P applies
indicators `+,' no character, and `+' to its rating categories. The indicators
show relative standing within the major rating categories.
OTHER INVESTMENT COMPANIES. LargeCap Leaders Fund, MidCap Value Fund, Bank and
Thrift Fund and Asia-Pacific Equity Fund each may invest in other investment
companies ("Underlying Funds"). Each Fund may not (i) invest more than 10% of
its total assets in Underlying Funds, (ii) invest more than 5% of its total
assets in any one Underlying Fund, or (iii) purchase greater than 3% of the
total outstanding securities of any one Underlying Fund.
There are some potential disadvantages associated with investing in other
investment companies. For example, you would indirectly bear additional fees.
The Underlying Funds pay various fees, including, management fees,
administration fees, and custody fees. By investing in those Underlying Funds
indirectly, you indirectly pay a proportionate share of the expenses of those
funds (including management fees, administration fees, and custodian fees), and
you also pay the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities (except MagnaCap Fund, which may not invest in restricted
securities). A 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 at approximately the value at which it is
carried. 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. Each Fund may only invest up to 15% of its
net assets in illiquid securities.
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
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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.
MORTGAGE-RELATED SECURITIES. Government Securities Income Fund and High Yield
Fund may invest up to 100% of their 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. Early prepayment may expose a Fund to a
lower rate of return upon reinvestment of the principal. Prepayment rates vary
widely and cannot be accurately predicted. They may be affected by changes in
market interest rates. Therefore, 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.
Like other fixed income securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however, when interest rates
are declining, the value of mortgage-backed securities with prepayment features
may not increase as much as other fixed income securities. The rate of
prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security, and may have the effect of shortening or extending
the effective maturity of the security beyond what was anticipated at the time
of the purchase. Unanticipated rates of prepayment on underlying mortgages can
be expected to increase the volatility of such securities. 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.
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.'
INVESTMENT TECHNIQUES
BORROWING. Bank and Thrift Fund may borrow money from banks to obtain
short-term credits as are necessary for the clearance of securities
transactions, but not in an amount exceeding 15% of its total assets. All Funds
except Bank and Thrift may borrow from banks solely for temporary or emergency
purposes up to certain amounts (10% of total assets in the case of Government
Securities Income Fund, 5% of total assets in the case of MagnaCap Fund and
High Yield Fund, and 33 1/3% of total assets in the case of MidCap Value Fund,
LargeCap Leaders Fund and Asia-Pacific Equity 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 of any increase or decrease in the value of portfolio
securities or the net asset value (NAV) of a Fund, and money borrowed will be
subject to interest costs.
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FOREIGN CURRENCY TRANSACTIONS. Substantially all of the assets of the
Asia-Pacific Equity Fund will be invested in securities denominated in foreign
currencies and a corresponding portion of the Fund's revenues will be received
in such currencies. Unfavorable changes in the relationship between the U.S.
dollar and the relevant foreign currencies, therefore, will adversely affect
the value of the Fund's shares. The Asia-Pacific Equity Fund ordinarily will
not engage in hedging transactions to guard against the risk of currency
fluctuation. However, the Fund reserves the right to do so, and, toward this
end, may enter into forward foreign currency contracts. This investment
technique is described in the Fund's Statement of Additional Information.
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 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 and/or liquid assets 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, MagnaCap
Fund, High Yield Fund and Government Securities Income Fund may lend 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 and/or liquid assets
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 decrease, 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 and/or
17
<PAGE>
liquid assets 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. In the case of MidCap Value Fund, LargeCap
Leaders Fund and Asia-Pacific Equity Fund, it is expected that derivatives will
not ordinarily be used for any of the Funds, but a Fund may make occasional use
of certain derivatives for hedging. For example, MidCap Value Fund, LargeCap
Leaders Fund and Asia-Pacific Equity Fund may purchase put options, which give
the Fund the right to sell a security it holds at a specified price. A Fund
would purchase an option to attempt to preserve the value of securities that it
holds, which it could do by exercising the option if the price of the security
falls below the `strike price' for the option. The Funds will not engage in any
other type of options transactions.
Another use of derivatives that only may be employed by the Asia-Pacific Equity
Fund is to enter into forward currency contracts and foreign exchange futures
('futures') contracts, which provide for delivery of a certain amount of
foreign currency to the Fund on a specified date. The Fund would enter into a
forward currency or futures contract when it intends to purchase or sell a
security denominated in a foreign currency and it desires to `lock in' the U.S.
dollar price of the security. The Funds will not engage in any other type of
forward contracts or futures contracts. For additional information on options
and foreign currency contracts, see `Options on Securities' and `Foreign
Currency Exchange Transactions' in the Fund's Statement of Additional
Information.
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, `U.S. Government
Securities' in Government Securities Income Fund's Statement of Additional
Information, and `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 a 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. A 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. A 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. A 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
a 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 `Option Writing' and `Financial Futures Contracts and Related Options' in
High Yield Fund's Statement of Additional Information.
18
<PAGE>
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. Unless otherwise
specified, other investment policies of any of the Funds may be changed by the
Board of Directors of that Fund without shareholder approval. 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.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if
the computer systems used by the Investment Manager and the Funds' other
service providers do not properly process and calculate date-related
information after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. The Investment Manager is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Funds' other major service providers. It is not
anticipated that the Funds will directly bear any material costs associated
with the Investment Manager and the Fund's other service providers efforts to
become Year 2000 compliant. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Funds
nor can there be any assurance that the Year 2000 Problem will not have an
adverse effect on the companies whose securities are held by the Funds or on
global markets or economies, generally.
19
<PAGE>
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
Depending upon the Fund, you may select from two or 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(1)
--------- --------- ---------
<S> <C> <C> <C>
Maximum Initial Sales Charge on Purchases
MagnaCap Fund, LargeCap Leaders Fund, MidCap
Value Fund, Asia-Pacific Equity Fund ........ 5.75%(2) None 3.50%
Bank and Thrift Fund .......................... 5.75%(2) None N/A
High Yield Fund and Government Securities
Income Fund ................................. 4.75%(2) None 3.25%
CDSC ........................................... None (3) 5.00%(4) None
Annual Distribution Fees(5) .................... 0.25%(6) 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) Bank and Thrift Fund does not offer Class M shares.
(2) Imposed upon purchase. Reduced for purchases of $50,000 or more.
(3) 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.'
(4) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See `Class B Shares: Deferred Sales
Charge Alternative.'
(5) Annual asset-based distribution charge.
(6) 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.'
MAGNACAP FUND, LARGECAP LEADERS FUND, MIDCAP VALUE FUND,
BANK AND THRIFT FUND AND ASIA-PACIFIC EQUITY FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS 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>
20
<PAGE>
HIGH YIELD FUND
AND GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS 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 $500,00 ................ 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 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>
PERIOD
DEALER DURING WHICH
ON PURCHASES OF: CDSC ALLOWANCE 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 as orders for Class A shares or declined.
The amount of the CDSC 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:
YEAR OF REDEMPTION AFTER PURCH CDSC
------------------------------ ----
First ........................................... 5%
Second .......................................... 4%
Third ........................................... 3%
Fourth .......................................... 3%
Fifth ........................................... 2%
Sixth ........................................... 1%
Seventh and following ........................... 0%
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 rate.
21
<PAGE>
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 each Fund's 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 orders for Class A 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:
MAGNACAP FUND, LARGECAP LEADERS FUND, MIDCAP VALUE FUND,
BANK AND THRIFT FUND AND ASIA-PACIFIC EQUITY FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS 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>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS 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 are not offered by Bank and Thrift Fund and 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 other open-end
funds in the Pilgrim Funds 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 Account
Application or the Statement of Additional Information for details on the
Letter of Intent option or contact the Shareholder Servicing Agent at (800)
992-0180 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 any other open-end
funds in the Pilgrim Funds (excluding Pilgrim General 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
22
<PAGE>
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 Account Application or the Statement of
Additional Information for details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.
For the purposes of Rights of Accumulation and the Letter of Intent Privilege,
shares held by investors in the Pilgrim Funds which impose a CDSC may be
combined with Class A 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
following cases. 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.
1) 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 one 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 shares held at
the time of death or initial determination of permanent disability.
2) 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 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.
3) 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 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 open-end Pilgrim 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 open-end Pilgrim Fund within the previous 90 days. These shareholders
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 unaffiliated mutual fund on which a sales charge was paid or which
were subject at any time to a CDSC, and which unaffiliated fund was: with
respect to purchases of Bank and Thrift Fund, a fund invested primarily in
financial services entities;
23
<PAGE>
with respect to purchases of MagnaCap Fund, a domestic growth fund; with
respect to purchases of the MidCap Value Fund, a mid-cap fund; with respect
to purchases of the LargeCap Leaders Fund, a large-cap fund; with respect
to purchases of the Asia-Pacific Equity Fund, a fund investing in companies
based in the Asia-Pacific region; with respect to purchases of High Yield
Fund, a high yield bond fund; and with respect to purchases of Government
Securities Income Fund, a government securities fund.
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, and their families of
Pilgrim America Capital Corporation (Pilgrim) 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 Fund distributed by the Distributor
or from Pilgrim 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
Purchase Options(TM) -- 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) Broker-dealers, who have signed selling group agreements with the
Distributor, and registered representatives and employees of such
broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles,
aunts, siblings, nephews, nieces, step relations, relations-at-law and
cousins).
9) Broker-dealers using third party administrators for qualified
retirement plans who have entered into an agreement with the Pilgrim Funds
or an affiliate, subject to certain operational and minimum size
requirements specified from time-to-time by the Pilgrim Funds.
10) Accounts as to which a banker or broker-dealer charges an account
management fee (`wrap accounts').
11) Any registered investment company for which Pilgrim Investments,
Inc. serves as investment manager.
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) 992-0180, 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 open-end Pilgrim Funds. 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 personnel, payment for travel expenses (including meals and
lodging) incurred by sales personnel to various locations for such seminars or
training programs, seminars for the public, advertising and sales campaigns
regarding the Funds or other open-end Pilgrim Funds 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)
24
<PAGE>
0.30% of the value of the Funds' shares sold by the dealer during a particular
period, and (2) 0.10% of the value of the Funds' shares held by the dealer's
customers for more than one year, calculated on an annual basis.
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 the
Fund's Class A, Class B and Class M shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Funds and in connection with services rendered to shareholders of each
Fund, each Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of each Fund's
average daily net assets attributable to that class):
CLASS A SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
---- --------- ------------
MagnaCap Fund ............................. 0.25% 0.05%
LargeCap Leaders Fund, MidCap
Value Fund, Bank and Thrift Fund,
Asia-Pacific Equity Fund ................. 0.25% n/a*
High Yield Fund and
Government Securities Income Fund ........ 0.25% n/a
------------
* Subject to increase by action of the Fund's Directors to a rate not
exceeding .10% per annum.
CLASS B SHARES
SERVICING DISTRIBUTION
FUNDS FEE FEE
----- --------- ------------
All Funds ................................. 0.25% 0.75%
CLASS M SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
---- --------- ------------
All Funds except Bank and Thrift Fund ...... 0.25% 0.50%*
------------
* Subject to increase by action of the Fund's Directors to a rate not
exceeding 0.75% per annum.
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 shareholder 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. With respect to Class A shares of MagnaCap Fund, High
Yield Fund and Government Securities Income Fund, the Distributor will be
reimbursed for its actual expenses incurred under the 12b-1
25
<PAGE>
Plan. The Distributor has incurred costs and expenses with respect to Class A
shares that may be reimbursable in future months or years in the amounts of
$4,916,710 for MagnaCap Fund (1.11% of its net assets), $1,561,725 for High
Yield Fund (0.56% of its net assets), and $927,642 for Government Securities
Income Fund (3.42% of its net assets) as of June 30, 1998. With respect to
Class A shares of all other Funds and the Class B and Class M shares of each
Fund, 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 well as the other Pilgrim
Funds.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis
to Authorized Dealers for distribution and shareholder servicing as set forth
below.
CLASS A AND B SHARES
SERVICING
FUND FEE
---- ---
All Funds ................................ .25%
CLASS M SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
---- --------- ------------
Magna Cap Fund, LargeCap
Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund ................... .25% .40%
High Yield Fund and Government
Securities Income Fund ..................... .25% .15%
Payments are calculated as a percentage of the Fund's average daily NAV
attributed to each class of shares 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 General 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.
26
<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
Authorized Dealer $1,000 ($250 for IRAs). in a Fund is $100.
By Mail Visit or consult an Authorized Dealer. Visit or consult your Authorized Dealer.
Make your check payable to the Pilgrim Fill out the Account Additions form
Funds 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 Operations Department Call the Pilgrim Operations Dept.
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 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 #751-8315; 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
Account Application and send it to:
Pilgrim Funds.
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 cash, travelers checks, third party checks, money orders and checks
drawn on non-US banks (even if payment may be effected through a US bank) will
not be accepted. The Investment 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 set forth above under "Purchase of Shares" 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
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 regular trading on the New York Stock Exchange, (normally 4:00 p.m.
Eastern Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer
27
<PAGE>
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 regular 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 Account Application or
contact the Shareholder Servicing Agent at (800) 992-0180.
RETIREMENT PLANS. The Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
available prototype IRA, Roth IRA and Simple 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) 992-0180.
IFTC currently receives a $12 custodian fee annually for the maintenance of
such 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 Shareholder Servicing 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 open-end Pilgrim Fund other than Pilgrim General 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 subsequently be exchanged for shares
of an open-end Pilgrim Fund of the same class as the original shares
28
<PAGE>
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 other open-end Pilgrim Fund 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 Account Application that signifies 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. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in
the same class of any other open-end Pilgrim 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
Authorized Dealer 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 signa-
ture guarantee by an eligible guarantor. It will also be necessary for corporate in-
vestors 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 Account Application. If you are entitled to a CDSC waiver, you
must complete the CDSC waiver form in the Account Application. To determine
whether a signature guarantee or other documentation is required, shareholders
may call the Shareholder Servicing Agent at (800) 992-0180.
Expedited Redemption By Check
The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (maximum $100,000) mailed
to an address which has been on record with the Pilgrim Funds for at least 30
days. This privilege is automatically assigned to you unless you check the box on
the Account Application which signifies that you do not wish to utilize such
option.
By Wire
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 Account Application. Under normal circumstances, proceeds will be
transmitted to your bank on the business day following receipt of your instruc-
tions, provided redemptions may be made. To effect an Expedited Redemption,
please call the Shareholder Servicing 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>
29
<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 Account Application. To have funds
deposited to your bank account, follow the instructions on the 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 three 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
Investment Funds, Inc., which is a registered investment company that was
organized as a Maryland corporation in July 1969.
LargeCap Leaders Fund, MidCap Value Fund and Asia-Pacific Equity Fund are
series of Pilgrim Advisory Funds, Inc., which is a registered investment
company that was organized as a Maryland corporation in April, 1995.
Bank and Thrift Fund is the single series of Pilgrim Bank and Thrift Fund,
Inc., which is a registered investment company that was incorporated in
Maryland in November, 1985 as a closed-end, diversified management investment
company. The Fund operated as a closed-end fund prior to October 17, 1997. On
October 16, 1997, shareholders approved open-ending the Fund and since October
17, 1997, the Fund has operated as an open-end fund.
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 has overall responsibility for the
management of the Funds. Each Fund and the Investment Manager have entered into
an agreement that requires the Investment Manager to provide or oversee all
investment advisory and portfolio management services for the Fund.
30
<PAGE>
Each agreement 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. Each 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 certain assets of the previous
adviser to the Funds in a transaction that closed on April 7, 1995. The
Investment Manager bears its expenses of providing the services described
above. Investment Management fees are computed and accrued daily and paid
monthly
Bank and Thrift Fund pays the Investment Manager a fee at an annual rate of
1.00% of the first $30,000,000 of average daily net assets, 0.75% of the next
$95,000,000 of average daily net assets, and 0.70% of average daily net assets
in excess of $125,000,000. .
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.
High Yield Fund pays the Investment Manager a fee at an annual rate of 0.60% of
the average daily net assets of the Fund. LargeCap Leaders Fund and MidCap
Value Fund each pay the Investment Manager a fee at an annual rate of 1.00% of
the Fund's average daily net assets, and the Asia-Pacific Fund pay the
Investment Manager a fee at an annual rate of 1.25% of the Fund's average daily
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 0.25% 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 has entered into expense limitation agreements with
respect to certain of the Funds, pursuant to which the Investment Manager has
agreed to waive or limit its fees and to assume other expenses so that the
total annual ordinary operating expenses of these Funds (excluding interest,
taxes, brokerage commissions, extraordinary expenses such as litigation, other
expenses not incurred in the ordinary course of such Fund's business, expenses
of any counsel or other persons or services retained by the Company's directors
who are not "interested persons" of the Investment Manager, and distribution
(12b-1) fees) do not exceed: 0.75% for High Yield Fund; 1.50% for LargeCap
Leaders Fund and MidCap Value Fund; and 1.75% for Asia-Pacific Equity Fund.
The expense limitation agreements provide that these expense limitations shall
continue until December 31, 1998 for High Yield Fund, LargeCap Leaders Fund,
MidCap Value Fund and Asia-Pacific Equity Fund. The Investment Manager may
extend, but may not shorten, the period of these limitations without the
consent of the Funds, so long as the extension is at the same expense
limitation amount discussed above. Each Fund described above will at a later
date reimburse the Investment Manager for management fees waived and other
expenses assumed by the Investment Manager during the previous 36 months, but
only if, after such reimbursement, the Fund's expense ratio does not exceed the
percentage described above. The Investment Manager will only be reimbursed for
fees waived or expenses assumed after the effective date of the expense
limitation agreements. Each expense limitation agreement will terminate
automatically upon termination of the respective investment management
agreement with the Investment Manager, and may be terminated by the Investment
Manager or the Fund upon 90 days written notice.
31
<PAGE>
THE PORTFOLIO MANAGERS. For MidCap Value Fund and Asia-Pacific Equity Fund, the
Investment Manager has engaged two of the most respected institutional
investment advisers in the world. For portfolios similar to these Funds, these
firms usually require large investment minimums to open an account, and their
services for these types of portfolios are typically available only to wealthy
individuals and large institutional clients. The Portfolio Managers have been
selected primarily on the basis of their successful application of a
consistent, well-defined, long-term investment approach over a period of
several market cycles.
MIDCAP VALUE FUND. Cramer Rosenthal McGlynn, LLC. (CRM) serves as Portfolio
Manager to the MidCap Value Fund. CRM's predecessor was founded in 1973 to
manage portfolios for a select number of high net worth individuals and their
related foundations, endowment funds, pension plans and other entities, and CRM
currently manages approximately $4 billion for more than 200 individual and
institutional clients, with a minimum investment size for private accounts of
$5 million. The three founding principals of CRM have each spent over 35 years
in the investment business. The firm has managed investments in small and
middle capitalization companies for 25 years. Accounts managed by Cramer
Rosenthal own in the aggregate approximately 17% of the outstanding voting
securities of Pilgrim.
Gerald B. Cramer, Chairman of CRM, Edward D. Rosenthal, Vice Chairman of CRM,
Ronald H. McGlynn, Manager, President and Chief Executive Officer of CRM, Jay
B. Abramson, Executive Vice President and Director of Research of CRM, and
Michael Prober, Portfolio Manager and Research Analyst, are primarily
responsible for portfolio management of MidCap Value Fund. Messrs. Cramer,
Rosenthal and McGlynn founded CRM's predecessor in 1973. Mr. Abramson has been
with CRM or its predecessor for 13 years. Mr. Prober has been with CRM for 6
years.
ASIA-PACIFIC EQUITY FUND. HSBC Asset Management Americas Inc. and HSBC Asset
Management Hong Kong Limited (collectively, HSBC) serve jointly as Portfolio
Manager to the Asia-Pacific Equity Fund. The firms are part of HSBC Asset
Management, the global investment advisory and fund management business unit of
HSBC Holdings plc (founded as the Hong Kong and Shanghai Banking Corporation in
1865) which, with headquarters in London, is one of the world's largest banking
and financial organizations. HSBC Asset Management manages over approximately
$49 billion of assets worldwide for a wide variety of institutional, retail and
private clients, with a minimum investment size for private accounts of $10
million for Asia-Pacific investors. HSBC Asset Management has advisory
operations in Hong Kong and Singapore, among other locations. Its parent
company has over a century of operations in local economies throughout the
Asia-Pacific region.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
Ian Burden, Chief Investment Officer, HSBC Hong Kong, and Man Wing Chung,
Director, HSBC Hong Kong, are primarily responsible for portfolio management of
Asia-Pacific Equity Fund. Mr. Lutcher joined HSBC in 1997, and has over 20
years of investment experience. Prior to joining HSBC, Mr. Lutcher was with
Merrill Lynch Asset Management. Mr. Burden has been with HSBC for 17 years, and
has 24 years investment experience. Mr. Chung has been with HSBC for 5 years,
and has 10 years investment experience.
Each Portfolio Manager serves the pertinent Fund under an agreement with the
Investment Manager. Each Portfolio Manager has discretion to purchase and sell
securities for the portfolio of its respective Fund in accordance with that
Fund's objectives, policies and restrictions. Although the Portfolio Managers
are subject to the general supervision by the Board of Directors and the
Investment Manager, the Board and/or the Investment Manager do not evaluate the
investment merits of specific securities transactions. The agreement with each
Portfolio Manager may be terminated by the Board of Directors of the Funds, by
the Investment Manager or by the Portfolio Manager. Thus, it is possible that
in the future, one or more of the current Portfolio Managers would no longer be
engaged for a Fund. It is not anticipated that Portfolio Managers will be
replaced in the ordinary course of operations.
As compensation for their services to the Funds, the Investment Manager (and
not the Fund) pays HSBC and CRM fees at annual rates of 0.50% of the average
daily net assets of the Asia-Pacific Equity and MidCap Value Funds,
respectively.
PARENT COMPANY AND DISTRIBUTOR
The Investment Manager and Pilgrim Securities, Inc. (Distributor), the
Funds' principal underwriter, are indirect, wholly owned subsidiaries of
Pilgrim America Capital Corporation (NASDAQ: PACC). Through its
32
<PAGE>
subsidiaries, Pilgrim America Capital Corporation engages in the financial
services business, focusing on providing investment advisory, administrative
and distribution services to open-end and closed-end investment companies and
private accounts. For more information on Pilgrim America Capital Corporation
please see each Fund's Statement of Additional Information.
INVESTMENT PERSONNEL
MAGNACAP FUND. This Fund is managed by a team led by Howard N. Kornblue, Senior
Vice President and Senior Portfolio Manager for the Investment Manager. Mr.
Kornblue has served as a Portfolio Manager of MagnaCap Fund since 1989. Prior
to joining Pilgrim 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.
The other individuals on the team are G. David Underwood, Anuradha Sahai and
Robert M. Kloss.
LARGECAP LEADERS FUND. This Fund is managed by a team led by G. David
Underwood, C.F.A., Vice President and Senior Portfolio Manager for the
Investment Manager. Mr. Underwood is the Lead Portfolio Manager of LargeCap
Leaders Fund. Prior to joining the investment Manager in December, 1996, Mr.
Underwood served as Director of Funds Management for First Interstate Capital
Management. Mr. Underwood's prior experience includes a 10 year association
with Integra Trust Company of Pittsburgh where he served as Director of
Research and Senior Portfolio Manager and two years with C.S. McKee Investment
Advisors as a Portfolio Manager. A Chartered Financial Analyst and past
president of the Pittsburgh Society of Financial Analysts, Mr. Underwood
received his B.S. degree from Arizona State University and has done graduate
work in economics and finance at Washington and Jefferson College. He is a
graduate of Pennsylvania Bankers Trust School.
The other individuals on the team are Anuradha Sahai and Robert M. Kloss.
BANK AND THRIFT FUND. Carl Dorf, C.F.A., Senior Vice President and Senior
Portfolio Manager of Bank and Thrift Fund has been managing the Fund's
portfolio since January 1991, when he joined the Investment Manager's
predecessor. Mr. Dorf is also a Senior Vice President of the Investment
Manager. Prior to joining the Investment Manager's predecessor, he was a
principal of Dorf & Associates Investment Counsel. His 35 plus years of
portfolio management and research experience include positions with Moody's
Investors Service, Inc., as an analyst in the Banking & Finance Department;
with Nuveen Corp. as a financial securities analyst; with Loews Corp. as a fund
manager with responsibility for $150 to $250 million in utility and financial
stocks; with BA Investment Management Corp. as a senior financial stock
analyst; and with RNC Capital Management as manager of 150 individual, pension,
and profit-sharing accounts. A Chartered Financial Analyst, Mr. Dorf earned
both BBA/Finance and Investments and MBA/Finance and Investments degrees from
the Bernard Baruch School of Business and Public Administration, The City
College of New York.
HIGH YIELD FUND. Kevin G. Mathews, Senior Vice President and Senior Portfolio
Manager of the Investment Manager, has served as Portfolio Manager of High
Yield Fund since June 1995, and also served as Portfolio Manager of Government
Securities Income Fund from June 1995 through September 1996. Prior to joining
the Investment Manager, Mr. Mathews was a Vice President and Senior Portfolio
Manager with 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.
GOVERNMENT SECURITIES INCOME FUND. Charles G. Ullerich, C.F.A. and C.I.A., Vice
President of the Investment Manager, has served as Portfolio Manager of
Government Securities Income Fund since September 1996 and served as Assistant
Portfolio Manager of that Fund from August 1995 to September 1996. Prior to
joining Pilgrim Group, Mr. Ullerich was Vice President of Treasury Services for
First Liberty Bank of
33
<PAGE>
Macon, GA, where he was Portfolio Manager for a conservatively-managed $150
million mortgage and treasury securities 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 will, 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.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder
Servicing Agent for the Funds. The Shareholder Servicing Agent is responsible
for responding to written and telephonic inquiries from shareholders. Each Fund
pays the Shareholder Servicing Agent a monthly fee on a per-contact basis,
based upon incoming and outgoing telephonic and written correspondence.
PORTFOLIO TRANSACTIONS. The Investment Manager, or Portfolio Manager in the
case of MidCap Value Fund and Asia-Pacific Equity Fund, will place orders to
execute securities transactions that are designed to implement each Fund's
investment objectives and policies. The Investment Manager, or Portfolio
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, or Portfolio Managers, may consider brokerage and research
services provided by a broker to Portfolio Manager or the Investment Manager or
their affiliates, 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 or Portfolio 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. Consistent with this
policy, portfolio transactions may be executed by brokers affiliated with a
Portfolio Manager or the Investment Manager, so long as the commission paid to
the affiliated broker is reasonable and fair compared to the commission that
would be charged by an unaffiliated broker in a comparable transaction. In
addition, the Investment Manager or Portfolio Manager may place securities
transactions with brokers that provide certain services to a Fund. The
Investment Manager or Portfolio 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. In the case of LargeCap Leaders Fund, MidCap Value
Fund, Bank and Thrift Fund, and Asia-Pacific Equity Fund, dividends and
distributions from net investment income and capital gains, if any, will be
paid at least annually. 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. 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
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 Fund which offers Class A, B or M shares. Both accounts must be of the
same class. If you are a shareholder of Pilgrim 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
34
<PAGE>
account of any open-end Pilgrim Fund which offers Class A, B, or M shares.
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. To qualify, a Fund must meet certain income,
asset diversification and distribution requirements. In any fiscal year in
which a Fund so qualifies and distributes to shareholders all of its taxable
income and gains, the Fund itself generally is relieved of federal income and
excise taxes.
Dividends paid out of a Fund's investment company taxable income (including
dividends, interest and short-term capital gains) will be taxable to a U.S.
shareholder as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Fund may 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), if any, designated as capital gain
dividends will be taxable as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares.
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.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a gain or loss which will be a capital gain or loss if the shares are
held as a capital asset and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.
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.
Certain of the Funds, and in particular Asia-Pacific Equity Fund, may make
investments outside the U.S. If a Fund has income from sources within foreign
countries, that income may be subject to withholding and other taxes imposed by
such countries, which could reduce the Fund's investment income.
This is a brief summary of some of the tax laws that affect your investment in
a Fund. Please see each Fund's Statement of Additional Information and your tax
adviser for further information.
35
<PAGE>
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.
A Fund may also publish a distribution rate in sales literature and in investor
communications preceded or accompanied by a copy of the current Prospectus. The
current distribution rate for a Fund is the annualization of the Fund's
distribution per share divided by the maximum offering price per share of a
Fund at the respective month-end. 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. Each Fund's Articles of Incorporation permit the
Directors to authorize the creation of additional series, 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.
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 Funds' Annual Report dated as of June 30,
1998. Further information about each Fund's performance is contained in the
Funds' Annual Report, which may be obtained without charge.
36
<PAGE>
PILGRIM MAGNACAP FUND
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG Peat Marwick LLP, independent
auditors. For all periods ending prior to July 1, 1994, the financial
information was audited by another independent auditor.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995(a)
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.92 $ 16.69 $ 14.03 $ 12.36
-------- -------- ---------- ----------
Income from investment
operations:
Net investment income (loss) 0.04 0.10 0.09 0.12
Net realized and unrealized gain
on investments 3.02 4.16 2.87 2.29
-------- -------- ---------- ----------
Total from investment operations 3.06 4.26 2.96 2.41
-------- -------- ---------- ----------
Less distributions from:
Net investment income 0.04 0.10 0.06 0.14
Distributions in excess of net
investment income 0.02 0.02 -- --
Realized gains on investment 1.85 4.91 0.24 0.60
-------- -------- ---------- ----------
Total distributions 1.91 5.03 0.30 0.74
-------- -------- ---------- ----------
Net asset value, end of period $ 17.07 $ 15.92 $ 16.69 $ 14.03
======== ======== ========== ==========
TOTAL RETURN(c) 20.53% 30.82% 21.31% 20.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $348,759 $290,355 $ 235,393 $ 211,330
Ratios to average net assets:
Expenses 1.37% 1.46% 1.68% 1.59%
Net investment income 0.29% 0.64% 0.54% 0.98%
Portfolio turnover rate 53% 77% 15% 6%
Average commission rate paid(e) $ 0.0422 $ 0.0686 -- --
CLASS A
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.05 $ 11.98 $ 10.93 $ 10.74 $ 10.52 $ 9.12
---------- ---------- ---------- -------- --------- ---------
Income from investment
operations:
Net investment income (loss) 0.15 0.14 0.13 0.20 0.15 0.17
Net realized and unrealized gain
on investments 0.89 0.82 1.16 0.33 1.24 1.39
---------- ---------- ---------- -------- --------- ---------
Total from investment operations 1.04 0.96 1.29 0.53 1.39 1.56
---------- ---------- ---------- -------- --------- ---------
Less distributions from:
Net investment income 0.14 0.12 0.24 0.16 0.17 0.16
Distributions in excess of net
investment income -- -- -- -- -- --
Realized gains on investment 0.59 0.77 -- 0.18 1.00 --
---------- ---------- ---------- -------- --------- ---------
Total distributions 0.73 0.89 0.24 0.34 1.17 0.16
---------- ---------- ---------- -------- --------- ---------
Net asset value, end of period $ 12.36 $ 12.05 $ 11.98 $ 10.93 $ 10.74 $ 10.52
========== ========== ========== ======== ========= =========
TOTAL RETURN(c) 9.13% 8.21% 11.93% 5.21% 13.84% 17.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 190,435 $ 197,250 $ 196,861 $199,892 $ 224,059 $ 204,552
Ratios to average net assets:
Expenses 1.53% 1.53% 1.60% 1.50% 1.50% 1.60%
Net investment income 1.16% 1.09% 1.20% 2.00% 1.40% 1.80%
Portfolio turnover rate 7% 36% 49% 182% 12% 1.29%
Average commission rate paid(e) -- -- -- -- -- --
</TABLE>
- ------------
(a) Pilgrim 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.
(b) Commencement of offering of shares.
(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 for less than one year is not annualized.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
37
<PAGE>
PILGRIM MAGNACAP FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.81 $ 16.59 $ 14.22
--------- --------- ----------
Income from investment operations:
Net investment income (loss) (0.04) -- 0.06
Net realized and unrealized gain on investments 2.97 4.13 2.61
--------- --------- ----------
Total from investment operations 2.93 4.13 2.67
--------- --------- ----------
Less distributions from:
Net investment income -- -- 0.06
Distributions in excess of net investment income 0.03 -- --
Realized gains on investment 1.85 4.91 0.24
--------- --------- ----------
Total distributions 1.88 4.91 0.30
--------- --------- ----------
Net asset value, end of period $ 16.86 $ 15.81 $ 16.59
========= ========= ==========
TOTAL RETURN(c) 19.76% 29.92% 18.98%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S) $ 77,787 $ 37,427 $ 10,509
Ratios to average net assets:
Expenses 2.07% 2.16% 2.38%(d)
Net investment income (0.41)% (0.04)% 0.07%(d)
Portfolio turnover rate 53% 77% 15%
Average commission rate paid(e) $ 0.0422 $ 0.0686 --
CLASS M
------------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.87 $ 16.63 $ 14.22
--------- --------- ----------
Income from investment operations:
Net investment income (loss) -- 0.02 0.08
Net realized and unrealized gain on investments 2.98 4.16 2.63
--------- --------- ----------
Total from investment operations 2.98 4.18 2.71
--------- --------- ----------
Less distributions from:
Net investment income -- 0.02 0.06
Distributions in excess of net investment income 0.05 0.01 --
Realized gains on investment 1.85 4.91 0.24
--------- --------- ----------
Total distributions 1.90 4.94 0.30
--------- --------- ----------
Net asset value, end of period $ 16.95 $ 15.87 $ 16.63
========= ========= ==========
TOTAL RETURN(c) 20.00% 30.26% 19.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 14,675 $ 6,748 $ 1,961
Ratios to average net assets:
Expenses 1.82% 1.91% 2.13%(d)
Net investment income (0.16)% 0.22% 0.32%(d)
Portfolio turnover rate 53% 77% 15%
Average commission rate paid(e) $ 0.0422 $ 0.0686 --
</TABLE>
- ------------
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(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 for less than one year is not annualized.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
38
<PAGE>
PILGRIM LARGECAP LEADERS FUND*
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.17 $ 11.77 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.01 0.06 0.07
Net realized and unrealized gain on investments 2.30 2.63 1.87
---------- ----------- ----------
Total from investment operations 2.31 2.69 1.94
---------- ----------- ----------
Less distributions:
Net investment income -- -- 0.07
In excess of net investment income -- 0.05 0.01
Realized gains on investments 1.59 0.24 0.09
In excess of realized gains 0.19 -- --
---------- ----------- ----------
Total distributions 1.78 0.29 0.17
---------- ----------- ----------
Net asset value, end of period $ 14.70 $ 14.17 $ 11.77
========== =========== ==========
TOTAL RETURN (b) 17.71% 23.24% 19.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 7,606 $ 8,961 $ 2,530
Ratios to average net assets:
Expenses (c)(d)(e) 1.75% 1.75% 1.75%(f)
Net investment income (loss) (c)(d)(e) 0.03% 0.41% 0.65%(f)
Portfolio turnover rate 78% 86% 59%(f)
Average commission rate paid (g) $ 0.0518 $ 0.0586 --
CLASS B
----------------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 aA)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.04 $ 11.71 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.10) (0.02) 0.06
Net realized and unrealized gain on investments 2.28 2.59 1.81
----------- ----------- ------------
Total from investment operations 2.18 2.57 1.87
----------- ----------- ------------
Less distributions:
Net investment income -- -- 0.06
In excess of net investment income -- -- 0.01
Realized gains on investments 1.59 0.24 0.09
In excess of realized gains 0.19 -- --
----------- ----------- ------------
Total distributions 1.78 0.24 0.16
----------- ----------- ------------
Net asset value, end of period $ 14.44 $ 14.04 $ 11.71
=========== =========== ============
TOTAL RETURN (b) 16.91% 22.23% 18.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 15,605 $ 13,611 $ 1,424
Ratios to average net assets:
Expenses (c)(d)(e) 2.50% 2.50% 2.50%(f)
Net investment income (loss) (c)(d)(e) (0.72)% (0.35)% (0.25)%(f)
Portfolio turnover rate 78% 86% 59%(f)
Average commission rate paid (g) $ 0.0518 $ 0.0586 --
CLASS M
------------------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (A)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.10 $ 11.73 $ 10.00
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.07) -- 0.06
Net realized and unrealized gain on investments 2.30 2.62 1.83
----------- ----------- -----------
Total from investment operations 2.23 2.62 1.89
----------- ----------- -----------
Less distributions:
Net investment income -- -- 0.06
In excess of net investment income -- 0.01 0.01
Realized gains on investments 1.59 0.24 0.09
In excess of realized gains 0.19 -- --
----------- ----------- -----------
Total distributions 1.78 0.25 0.16
----------- ----------- -----------
Net asset value, end of period $ 14.55 $ 14.10 $ 11.73
=========== =========== ===========
TOTAL RETURN (b) 17.20% 22.58% 19.06%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S) $ 5,533 $ 4,719 $ 1,240
Ratios to average net assets:
Expenses (c)(d)(e) 2.25% 2.25% 2.25%(f)
Net investment income (loss) (c)(d)(e) (0.47)% (0.10)% 0.06%(f)
Portfolio turnover rate 78% 86% 59%(f)
Average commission rate paid (g) $ 0.0518 $ 0.0586 --
</TABLE>
- ------------
* Effective November 1, 1997, Pilgrim Investments, Inc. assumed the portfolio
investment responsibilities of the Fund from ARK Asset Management Company,
Inc.
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1998, the ratios of expenses to average net assets were 2.28%, 3.03%
and 2.78% and the ratios of net investment income (loss) to average net
assets were (0.50)%, (1.25)% and (1.00)% for Class A, B and M shares,
respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1997, the ratios of expenses to average net assets were 2.33%, 3.08%
and 2.83% and the ratios of net investment income (loss) to average net
assets were (0.18)%, (0.91)% and (0.68)% for Class A, B and M shares,
respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the annualized ratios of expenses to average net assets were
5.44%, 5.79% and 5.90% and the annualized ratios of net investment income
(loss) to average net assets were (3.04)%, (3.53)% and (3.59)% for Class A,
B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
39
<PAGE>
PILGRIM MIDCAP VALUE FUND
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (aa
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.64 $ 11.99 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.07) (0.02) 0.13
Net realized and unrealized gain on investments 2.71 2.85 1.91
----------- ----------- -------------
Total from investment operations 2.64 2.83 2.04
----------- ----------- -------------
Less distributions:
Net investment income -- -- 0.05
In excess of net investment income -- 0.07 --
Realized gains on investments 0.49 0.11 --
----------- ----------- -------------
Total distributions 0.49 0.18 0.05
----------- ----------- -------------
Net asset value, end of period $ 16.79 $ 14.64 $ 11.99
=========== =========== =============
TOTAL RETURN (b) 18.40% 23.89% 20.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 27,485 $ 16,985 $ 2,389
Ratios to average net assets:
Expenses (c)(d)(e) 1.75% 1.75% 1.75%(f)
Net investment income (loss) (c)(d)(e) (0.53)% (0.13)% 2.00%(f)
Portfolio turnover rate 85% 86% 60%(f)
Average commission rate paid (g) $ 0.0421 $ 0.0592 --
CLASS B CLASS M
------------------------------------ ------------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR Ten Months
ENDED ENDED ENDED ENDED ENDED Ended
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, June 30,
1998 1997 1996 (a) 1998 1997 1996 (a)
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.49 $ 11.94 $ 10.00 $ 14.49 $ 11.93 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.18) (0.05) 0.07 (0.15) (0.03) 0.06
Net realized and unrealized gain on investments 2.65 2.76 1.90 2.67 2.76 1.91
-------- -------- -------- -------- -------- ---------
Total from investment operations 2.47 2.71 1.97 2.52 2.73 1.97
-------- -------- -------- -------- -------- ---------
Less distributions:
Net investment income -- -- 0.03 -- -- 0.04
In excess of net investment income -- 0.05 -- -- 0.06 --
Realized gains on investments 0.49 0.11 -- 0.49 0.11 --
-------- -------- -------- -------- -------- ---------
Total distributions 0.49 0.16 0.03 0.49 0.17 0.04
-------- -------- -------- -------- -------- ---------
Net asset value, end of period $ 16.47 $ 14.49 $ 11.94 $ 16.52 $ 14.49 $ 11.93
======== ======== ======== ======== ======== =========
TOTAL RETURN (b) 17.40% 22.95% 19.80% 17.76% 23.21% 19.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 40,575 $ 23,258 $ 2,123 $ 13,232 $ 8,378 $ 1,731
Ratios to average net assets:
Expenses (c)(d)(e) 2.50% 2.50% 2.50%(f) 2.25% 2.25% 2.25%(f)
Net investment income (loss) (c)(d)(e) (1.28)% (0.90)% 1.27%(f) (1.03)% (0.63)% 1.16%(f)
Portfolio turnover rate 85% 86% 60%(f) 85% 86% 60%(f)
Average commission rate paid (g) $ 0.0421 $ 0.0592 -- $ 0.0421 $ 0.0592 --
</TABLE>
- ------------
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1998, the ratios of expenses to average net assets were 1.78%, 2.53%
and 2.28% and the ratios of net investment income (loss) to average net
assets were (0.57)%, (1.32)% and (1.07)% for Class A, B and M shares,
respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1997, the ratios of expenses to average net assets were 1.94%, 2.69%
and 2.44% and the ratios of net investment income (loss) to average net
assets were (0.32)%, (1.11)% and (0.81)% for Class A, B and M shares,
respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the annualized ratios of expenses to average net assets were
4.91%, 5.32% and 4.72% and the annualized ratios of net investment income
(loss) to average net assets were (1.17)%, (1.56)% and (1.32)% for Class A,
B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
40
<PAGE>
PILGRIM BANK AND THRIFT FUND
For the six-month period ended June 30, 1998 and the years ended December 31,
1997, 1996, and 1995, the information in the table below, with the exception of
the information in the row labeled "Total Investment Return at Net Asset Value"
for periods prior to January 1, 1997, have been audited by KPMG Peat Marwick
LLP, independent auditors. For all periods ending prior to December 31, 1995,
the financial information, with the exception of the information in the row
labeled "Total Investment Return at Net Asset Value", was audited by another
independent auditor. The information in the row labeled "Total Investment
Return at Net Asset Value" has not been audited for periods prior to January 1,
1997. Prior to October 17, 1997, the Class A shares were designated as Common
Stock and the Fund operated as a closed-end investment company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------
JUNE 30, 1998* 1997**
------------------------------------- --------------------------------
CLASS A CLASS B CLASS A CLASS B(a)
------------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
beginning of year $ 25.87 $ 25.85 $ 17.84 $ 25.25
------------ ------------ ----------- ------------
Income (loss) from investment
operations:
Net investment income 0.11 0.01 0.34 0.04
Net realized and unrealized
gain (loss) on investments 1.54 1.54 10.83 2.92
------------ ------------ ----------- ------------
Total from investment operations 1.65 1.55 11.17 2.96
------------ ------------ ----------- ------------
Less distributions:
Net investment income -- -- 0.31 0.04
Excess of net investment in-
come -- -- -- --
Realized capital gains -- -- 2.65 2.04
Tax return of capital -- -- 0.18 0.28
------------ ------------ ----------- ------------
Total distributions 0.00 0.00 3.14 2.36
------------ ------------ ----------- ------------
Other:
Reduction in net asset value
from rights offering -- -- -- --
------------ ------------ ----------- ------------
Net asset value, end of year $ 27.52 $ 27.40 $ 25.87 $ 25.85
============ ============ =========== ============
Closing market price, end of year -- -- -- --
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) -- -- -- --
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(e) 6.38% 6.00% 64.86% 11.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($millions) $ 549 $ 360 $ 383 $ 76
Ratios to average net assets:
Expenses 1.20%(h) 1.95%(h) 1.10% 1.89%(h)
Net investment income 0.94%(h) 0.19%(h) 1.39% 0.99%(h)
Portfolio turnover rate 2% 2% 22% 22%
Average commission rate paid(i) $ 0.023 $ 0.023 $ 0.013 $ 0.013
1996 1995(b) 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
beginning of year $ 14.83 $ 10.73 $ 11.87 $ 12.46 $ 10.12 $ 7.49 $ 10.26 $ 9.54 $ 8.17
------- ------- ------- ------- -------- ------- -------- ------- -------
Income (loss) from investment
operations:
Net investment income 0.32 0.31 0.26 0.26 0.22 0.24 0.31 0.30 0.31
Net realized and unrealized
gain (loss) on investments 5.18 4.78 (0.53) 0.75 2.93 3.33 (2.20) 1.50 1.43
------- ------- ------- ------- -------- ------- -------- ------- -------
Total from investment operations 5.50 5.09 (0.27) 1.01 3.15 3.57 (1.89) 1.80 1.74
------- ------- ------- ------- -------- ------- -------- ------- -------
Less distributions:
Net investment income 0.32 0.31 0.22 0.26 0.22 0.24 0.31 0.31 0.37
Excess of net investment in-
come 0.03 0.03 -- -- -- -- -- -- --
Realized capital gains 2.14 0.65 0.65 0.73 0.47 -- -- 0.44 --
Tax return of capital -- -- -- -- 0.12 0.70 0.57 0.33 --
------- ------- ------- ------- -------- ------- -------- ------- -------
Total distributions 2.49 0.99 0.87 0.99 0.81 0.94 0.88 1.08 0.37
------- ------- ------- ------- -------- ------- -------- ------- -------
Other:
Reduction in net asset value
from rights offering -- -- -- (0.61) -- -- -- -- --
------- ------- ------- ------- -------- ------- -------- ------- -------
Net asset value, end of year $ 17.84 $ 14.83 $ 10.73 $ 11.87 $ 12.46 $ 10.12 $ 7.49 $ 10.26 $ 9.54
======= ======= ======= ======= ======== ======= ======== ======= =======
Closing market price, end of year $ 15.75 $ 12.88 $ 9.13 $ 10.88 $ 11.63 $ 9.50 $ 7.13 $ 9.13 $ 7.75
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) 43.48% 52.81% (8.85)% 1.95%(d) 31.53% 47.52% (12.45)% 32.25% 30.17%
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(e) 41.10% 49.69% (1.89)% 7.79%(f) 32.36%(g) 49.49% (18.14)% 20.79% 22.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($millions) $ 252 $ 210 $ 152 $ 168 $ 141 $ 101 $ 75 $ 103 $ 96
Ratios to average net assets:
Expenses 1.01% 1.05% 1.28% 0.91% 1.24% 1.31% 1.29% 1.26% 1.18%
Net investment income 1.94% 2.37% 2.13% 2.08% 2.00% 2.68% 3.59% 4.15% 3.28%
Portfolio turnover rate 21% 13% 14% 17% 20% 31% 46% 63% 43%
Average commission rate paid(i) -- -- -- -- -- -- -- -- --
</TABLE>
Footnotes on next page
41
<PAGE>
PILGRIM BANK AND THRIFT FUND
(Continued)
* Effective June 30, 1998, Bank and Thrift Fund changed its year end to June
30.
** The Fund converted from a closed-end investment company to an open-end
investment company on October 17, 1997.
(a) From the period October 20, 1997 (initial offering of Class B shares)
through December 31, 1997.
(b) On April 7, 1995, the Investment Manager acquired the rights to manage the
Fund and certain other mutual funds previously managed by Pilgrim
Management Corporation.
(c) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
(d) Calculation of total return excludes the effect of the per share dilution
resulting from the Rights Offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(e) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(f) Total return is calculated assuming full participation in the 1993 rights
offering.
(g) Total return is calculated assuming no particpation in the 1992 rights
offering.
(h) Annualized.
(i) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
42
<PAGE>
PILGRIM ASIA-PACIFIC EQUITY FUND
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.93 $ 10.35 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.03 0.02 0.03
Net realized and unrealized gain (loss) on invest-
ments and foreign currency transactions (6.50) 0.58 0.34
---------- --------- ----------
Total from investment operations (6.47) 0.60 0.37
---------- --------- ----------
Less distributions:
Net investment income -- -- --
In excess of net investment income -- -- 0.02
Realized gains on investments -- -- --
Tax return of capital -- 0.02 --
---------- --------- ----------
Total distributions -- 0.02 0.02
---------- --------- ----------
Net asset value, end of period $ 4.46 $ 10.93 $ 10.35
========== ========= ==========
TOTAL RETURN (b) (59.29)% 5.78% 3.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 11,796 $ 32,485 $ 18,371
Ratios to average net assets:
Expenses (c)(d)(e) 2.00% 2.00% 2.00%(f)
Net investment income (loss) (c)(d)(e) 0.38% 0.00% 0.33%(f)
Portfolio turnover rate 81% 38% 15%
Average commission rate paid (g) $ 0.0081 $ 0.0096 --
<CAPTION>
CLASS B CLASS M
----------------------------------- ----------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR TEN MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a) 1998 1997 1996 (a)
---- ---- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.83 $ 10.31 $ 10.00 $ 10.86 $ 10.32 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.03) (0.07) (0.01) -- (0.05) --
Net realized and unrealized gain (loss) on invest-
ments and foreign currency transactions (6.43) 0.59 0.32 (6.46) 0.59 0.33
-------- -------- -------- -------- --------- ---------
Total from investment operations (6.46) 0.52 0.31 (6.46) 0.54 0.33
-------- -------- -------- -------- --------- ---------
Less distributions:
Net investment income -- -- -- -- -- --
In excess of net investment income -- -- -- -- -- 0.01
Realized gains on investments -- -- -- -- -- --
Tax return of capital -- -- -- -- -- --
-------- -------- -------- -------- --------- ---------
Total distributions -- -- -- -- -- 0.01
-------- -------- -------- -------- --------- ---------
Net asset value, end of period $ 4.37 $ 10.83 $ 10.31 $ 4.40 $ 10.86 $ 10.32
======== ======== ======== ======== ========= =========
TOTAL RETURN (b) (59.65)% 5.04% 3.19% (59.48)% 5.26% 3.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 9,084 $ 30,169 $ 17,789 $ 4,265 $ 11,155 $ 6,476
Ratios to average net assets:
Expenses (c)(d)(e) 2.75% 2.75% 2.75%(f) 2.50% 2.50% 2.50%(f)
Net investment income (loss) (c)(d)(e) (0.39)% (0.79)% (0.38)%(f) (0.07)% (0.55)% (0.16)%(f)
Portfolio turnover rate 81% 38% 15% 81% 35% 15%
Average commission rate paid (g) $ 0.0081 $ 0.0096 -- $ 0.0081 $ 0.0096 --
</TABLE>
- ------------
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1998, the ratios of expenses to average net assets were 2.80%, 3.55%
and 3.30% and the ratios of net investment income (loss) to average net
assets were (0.42)%, (1.19)% and (0.88)% for Class A, B and M shares,
respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1997, the ratios of expenses to average net assets were 2.54%, 3.29%
and 3.04% and the ratios of net investment income (loss) to average net
assets were (0.53)%, (1.33)% and (1.09)% for Class A, B and M shares,
respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the annualized ratios of expenses to average net assets were
3.47%, 4.10% and 3.88% and the annualized ratios of net investment income
(loss) to average net assets were (1.14)%, (1.73)% and (1.53)% for Class A,
B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
43
<PAGE>
PILGRIM HIGH YIELD FUND
For the fiscal years ended June 30, 1998, 1997, and 1996 and the eight-month
period ended June 30, 1995, the information in the table below has been audited
by KPMG Peat Marwick LLP, independent auditors. For all periods ending prior to
November 1, 1994, 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.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
EIGHT
MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------------------- JUNE 30,
1998 1997 1996 1995(a)(b)
--------- ------- ------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.80 $ 6.36 $ 6.15 $ 5.95
Income (loss) from
investment operations:
Net investment income 0.61 0.61 0.59 0.35
Net realized and unrealized
gain (loss) on investments 0.16 0.43 0.16 0.21
-------- ------- ------- ---------
Total from investment operation 0.77 1.04 0.75 0.56
-------- ------- ------- ---------
Less distributions from:
Net investment income 0.63 0.60 0.54 0.36
Distributions in excess of net
investment income -- -- -- --
-------- ------- ------- ---------
Total distributions 0.63 0.60 0.54 0.36
-------- ------- ------- ---------
Net asset value, end of period $ 6.94 $ 6.80 $ 6.36 $ 6.15
======== ======= ======= =========
TOTAL RETURN(d) 11.71% 17.14% 12.72% 9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $102,424 $35,940 $18,691 $ 15,950
Ratios to average net assets:
Expenses(e)(f)(g) 1.00% 1.00% 1.00% 2.25%(i)
Net investment income(e)(f)(g)(h) 9.05% 9.54% 9.46% 8.84%(i)
Portfolio turnover rate 209% 394% 399% 166%
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.47 $ 5.77 $ 5.70 $ 5.03 $ 6.46 $ 7.29
Income (loss) from
investment operations:
Net investment income 0.54 0.53 0.63 0.66 0.82 0.88
Net realized and unrealized
gain (loss) on investments (0.51) 0.70 0.07 0.74 (1.40) (0.80)
------- -------- -------- -------- ---------- --------
Total from investment operation 0.03 1.23 0.70 1.40 (0.58) 0.08
------- -------- -------- -------- ---------- --------
Less distributions from:
Net investment income 0.55 0.53 0.63 0.68 0.85 0.91
Distributions in excess of net
investment income -- -- -- 0.05 -- --
------- -------- -------- -------- ---------- --------
Total distributions 0.55 0.53 0.63 0.73 0.85 0.91
------- -------- -------- -------- ---------- --------
Net asset value, end of period $ 5.95 $ 6.47 $ 5.77 $ 5.70 $ 5.03 $ 6.46
======= ======== ======== ======== ========== ========
TOTAL RETURN(d) 0.47% 22.12% 12.65% 30.00% (10.08)% 0.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $16,046 $ 18,797 $ 17,034 $ 23,820 $ 21,598 $ 31,356
Ratios to average net assets:
Expenses(e)(f)(g) 2.00% 2.02% 2.03% 1.89% 1.75% 1.79%
Net investment income(e)(f)(g)(h) 8.73% 8.36% 10.93% 12.40% 14.11% 12.61%
Portfolio turnover rate 192% 116% 193% 173% 183% 210%
</TABLE>
Footnotes on next page
44
<PAGE>
PILGRIM HIGH YIELD FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B CLASS M
---------------------------------- --------------------------------
JULY 17, JULY 17,
YEAR ENDED JUNE 30, 1995(c) TO YEAR ENDED JUNE 30, 1995(c)
---------------------- JUNE 30, -------------------- JUNE 30,
1998 1997 1996 1998 1997 1996
------------ ----------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 6.78 $ 6.36 $ 6.20 $ 6.78 $ 6.36 $ 6.20
Income (loss) from investment operations:
Net investment income 0.58 0.57 0.48 0.59 0.58 0.50
Net realized and unrealized gain (loss) on investments 0.14 0.41 0.14 0.14 0.41 0.14
-------- ------- -------- ------- --------- --------
Total from investment operation 0.72 0.98 0.62 0.73 0.99 0.64
-------- ------- -------- ------- --------- --------
Less distributions from:
Net investment income 0.58 0.56 0.46 0.59 0.57 0.48
Distributions in excess of net investment income -- -- -- -- -- --
-------- ------- -------- ------- --------- --------
Total distributions 0.58 0.56 0.46 0.59 0.57 0.48
-------- ------- -------- ------- --------- --------
Net asset value, end of period $ 6.92 $ 6.78 $ 6.36 $ 6.92 $ 6.78 $ 6.36
======== ======= ======== ======= ========= ========
TOTAL RETURN(d) 10.90% 16.04% 10.37% 11.16% 16.29% 10.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $154,303 $40,225 $ 2,374 $19,785 $ 8,848 $ 1,243
Ratios to average net assets:
Expenses(e)(f)(g) 1.75% 1.75% 1.75%(i) 1.50% 1.50% 1.50%(i)
Net investment income(e)(f)(g)(h) 8.30% 8.64% 9.02%(i) 8.55% 8.93% 9.41%(i)
Portfolio turnover rate 209% 394% 339% 209% 394% 339%
</TABLE>
- ------------
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Effective November 1, 1994, High Yield Fund changed its year end to June
30.
(c) Commencement of offering of shares.
(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 for the period ended June
30, 1998, the ratios of expenses to average net assets were 1.17%, 1.92%
and 1.67% and the ratios of net investment income to average net assets
were 8.88%, 8.13% and 8.38% for Class A, B and M shares, respectively.
(f) Prior to the waiver and reimbursement of expenses for the year ended June
30, 1997, the ratios of expenses to average net assets were 1.42%, 2.17%
and 1.92% and the ratios of net investment income to average net assets
were 9.09%, 8.18% and 8.47% for Class A, B and M shares, respectively.
(g) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the ratios of expenses to average net assets were 2.19%, 2.94%
(i) and 2.69% (i), and the ratios of net investment income to average net
assets were 8.27%, 8.05% (i) and 8.51% (i), for Class A, B and M shares,
respectively.
(h) Prior to the waiver of expenses, the ratio of expenses to average net
assets was 2.35% (i) in 1995 and 2.07% in 1994 for Class A shares. Prior to
the waiver of expenses, the ratio of net investment income to average net
assets was 8.74% (i) in 1995 and 8.66% in 1994 for Class A shares.
(i) Annualized.
45
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG Peat Marwick LLP, independent
auditors. For all periods ending prior to July 1, 1994, the financial
information was audited by another independent auditor.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997 1996 1995(a) 1994
---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 12.71 $ 12.59 $ 12.97 $ 12.73 $ 13.96
Income (loss) from
investment operations:
Net investment income 0.64 0.69 0.75 0.84 0.84
Net realized and unrealized
gain (loss) on investments 0.30 0.20 (0.32) 0.24 (1.17)
---------- ---------- -------- ---------- ----------
Total from investment operations 0.94 0.89 0.43 1.08 (0.33)
---------- ---------- -------- ---------- ----------
Less distributions from:
Net investment income 0.64 0.69 0.75 0.84 0.90
Distributions in excess of net
investment income 0.13 0.04 -- -- --
Tax return of capital -- 0.04 0.06 -- --
---------- ---------- -------- ---------- ----------
Total distributions 0.77 0.77 0.81 0.84 0.90
---------- ---------- -------- ---------- ----------
Net asset value, end of period $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73
========== ========== ======== ========== ==========
TOTAL RETURN(d) 7.63% 7.33% 3.34% 8.96% (2.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 23,682 $ 29,900 $ 38,753 $ 43,631 $ 61,100
Ratios to average net assets:
Expenses(e)(f)(g) 1.50% 1.42% 1.51% 1.40% 1.21%
Net investment income(e)(f)(g) 5.13% 5.78% 5.64% 6.37% 6.44%
Portfolio turnover rate 134% 172% 170% 299% 402%
<CAPTION>
1993(c) 1992 1991 1990 1989
---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 13.76 $ 13.76 $ 13.79 $ 14.23 $ 14.23
Income (loss) from
investment operations:
Net investment income 1.13 1.19 1.25 1.25 1.31
Net realized and unrealized
gain (loss) on investments 0.18 -- (0.03) (0.38) 0.02
---------- ---------- -------- -------- ---------
Total from investment operations 1.31 1.19 1.22 0.87 1.33
---------- ---------- -------- -------- ---------
Less distributions from:
Net investment income 1.11 1.19 1.25 1.31 1.33
Distributions in excess of net
investment income -- -- -- -- --
Tax return of capital -- -- -- -- --
---------- ---------- -------- -------- ---------
Total distributions 1.11 1.19 1.25 1.31 1.33
---------- ---------- -------- -------- ---------
Net asset value, end of period $ 13.96 $ 13.76 $ 13.76 $ 13.79 $ 14.23
========== ========== ======== ======== =========
TOTAL RETURN(d) 9.82% 8.98% 9.27% 6.51% 10.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 87,301 $ 96,390 $110,674 $122,212 $ 144,769
Ratios to average net assets:
Expenses(e)(f)(g) 1.12% 1.10% 1.14% 1.14% 1.06%
Net investment income(e)(f)(g) 8.06% 8.59% 9.09% 9.02% 9.45%
Portfolio turnover rate 466% 823% 429% 448% 537%
</TABLE>
Footnotes on next page
46
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B CLASS M
--------------------------------- ---------------------------------
YEAR YEAR JULY 17, Year Year July 17,
ENDED ENDED 1995(b) TO Ended Ended 1995(b) to
JUNE 30, JUNE 30, JUNE 30, June 30, June 30, June 30,
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.68 $ 12.59 $ 12.95 $ 12.72 $ 12.59 $ 12.95
Income (loss) from investment operations:
Net investment income 0.60 0.67 0.66 0.64 0.70 0.68
Net realized and unrealized gain (loss) on investments 0.24 0.11 (0.37) 0.23 0.14 (0.36)
--------- --------- ---------- --------- --------- ---------
Total from investment operations 0.84 0.78 0.29 0.87 0.84 0.32
--------- --------- ---------- --------- --------- ---------
Less distributions from:
Net investment income 0.60 0.67 0.65 0.63 0.70 0.68
Distributions in excess of net investment income 0.08 0.02 -- 0.08 -- --
Tax return of capital -- -- -- -- 0.01 --
--------- --------- ---------- --------- --------- ---------
Total distributions 0.68 0.69 0.65 0.71 0.71 0.68
--------- --------- ---------- --------- --------- ---------
Net asset value, end of period $ 12.84 $ 12.68 $ 12.59 $ 12.88 $ 12.72 $ 12.59
========= ========= ========== ========= ========= =========
TOTAL RETURN(d) 6.78% 6.38% 2.25% 7.02% 6.88% 2.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 3,220 $ 1,534 $ 73 $ 224 $ 61 $ 24
Ratios to average net assets:
Expenses(e)(f)(g) 2.25% 2.17% 2.26%(h) 2.00% 1.92% 2.01%(h)
Net investment income(e)(f)(g) 4.24% 4.92% 4.98%(h) 4.29% 5.25% 5.73%(h)
Portfolio turnover rate 134% 172% 170% 134% 172% 170%
</TABLE>
(a) Pilgrim 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.
(b) Commencement of offering of shares.
(c) During this period, average daily borrowing 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.
(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 for the period ended June
30, 1998, the ratios of expenses to average net assets were 1.58%, 2.33%
and 2.08% (g), and the ratios of net investment income to average net
assets were 5.06%, 4.20% and 4.24% for Class A, B and M shares,
respectively.
(f) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the ratios of expenses to average net assets were 1.57%, 2.41%(g)
and 2.16%(g), and the ratios of net investment income to average net assets
were 5.74%, 4.83%(g) and 5.58%(g) for Class A, B and M shares,
respectively.
(g) Prior to the waiver expenses for the period ended June 30, 1995, 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% for Class A shares.
(h) Annualized.
47
<PAGE>
Investment Manager
PILGRIM INVESTMENTS, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Distributor
PILGRIM SECURITIES, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Shareholder Servicing Agent
PILGRIM GROUP, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Transfer Agent
DST SYSTEMS, INC.
P.O. Box 419368
Kansas City, Missouri 64141-6368
Custodian
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, Missouri 64105
Legal Counsel
DECHERT PRICE & RHOADS
1775 Eye Street, N.W.
Washington, D.C. 20006
Independent Auditors
KPMG PEAT MARWICK LLP
725 South Figueroa Street
Los Angeles, California 90017
PROSPECTUS
November 1, 1998
<PAGE>
PILGRIM MAGNACAP FUND
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
Pilgrim MagnaCap Fund (the "Fund") is a diversified series of Pilgrim 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 November 1, 1998, 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
Securities, Inc. ("Pilgrim Securities" or 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) 992-0180.
TABLE OF CONTENTS
PAGE
----
General Information and History................................................2
Management of the Fund.........................................................2
Distribution Plan..............................................................7
Supplemental Description of Investments and Techniques........................10
Investment Restrictions.......................................................13
Portfolio Transactions........................................................14
Additional Purchase and Redemption Information................................16
Determination of Share Price..................................................21
Shareholder Services and Privileges...........................................22
Distributions.................................................................25
Tax Considerations............................................................25
Performance Information.......................................................28
General Information...........................................................30
Financial Statements..........................................................31
<PAGE>
GENERAL INFORMATION AND HISTORY
Pilgrim MagnaCap Fund (the "Fund") is a diversified series of Pilgrim Investment
Funds, Inc. (the "Company"), a Maryland corporation that was organized in 1969.
The Company consists of two series, the Fund and Pilgrim High Yield Fund. On
July 14, 1995, the Company's name was changed from "Pilgrim Investment Funds,
Inc." to "Pilgrim America Investment Funds, Inc." and the Fund's name was
changed from "Pilgrim MagnaCap Fund" to "Pilgrim America MagnaCap Fund."
The Board of Directors of the Company has approved a change in the name of the
Company and the Fund, to be effective on November 16, 1998. On November 16,
1998, the name of the Company will become "Pilgrim Investment Funds, Inc.," and
the name of the Fund will become "Pilgrim MagnaCap Fund." This Statement of
Additional Information reflects the names of the Company and the Fund as they
will be on November 16, 1998.
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.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by its Board of Directors. The Directors
and Officers of the Fund are listed below. An asterisk (*) has been placed next
to the name of each Director who is an "interested person," as that term is
defined in the Investment Company Act of 1940 (the "1940 Act"), by virtue of
that person's affiliation with the Fund or Pilgrim Investments, Inc., the Fund's
investment manager (the "Investment Manager" or "Pilgrim Investments").
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix,
Arizona 85016. (Age 59.) Director. Realtor, Coldwell Banker Success
Realty (formerly, The Prudential Arizona Realty) for more than the last
five years. Ms. Baldwin is also Vice President, United States Olympic
Committee (November 1996 - Present), and formerly Treasurer, United
States Olympic Committee (November 1992 - November 1996). Ms. Baldwin
is also a director and/or trustee of each of the funds managed by the
Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130.
(Age 66.) Director. Commissioner of Banking, State of Connecticut
(January 1995 - Present). Mr. Burke was formerly President of Bristol
Savings Bank (August 1992 - January 1995) and President of Security
Savings and Loan (November 1989 - August 1992). Mr. Burke is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
70.) Director. President of Al Burton Productions for more than the
last five years; formerly Vice President, First Run Syndication, Castle
Rock Entertainment (July 1992 - November 1994). Mr. Burton is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Jock Patton, 40 North Central Avenue, Phoenix, Arizona 85004. (Age 52.)
Director. Private Investor. Director of Artisoft, Inc. Mr. Patton was
formerly President and Co-owner, StockVal, Inc. (April 1993 - June
1997) and a partner and director of the law firm of
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<PAGE>
Streich, Lang, P.A. (1972 - 1993). Mr. Patton is also a director and/or
trustee of each of the funds managed by the Investment Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ
85004. (Age 49.) Chairman, Chief Executive Officer, and President.
Chairman, Chief Executive Officer and President of Pilgrim Group, Inc.
(since December 1994); Chairman, Pilgrim Investments (since December
1994); Director, Pilgrim Securities (since December 1994); Chairman,
Chief Executive Officer and President of Pilgrim Bank and Thrift Fund,
Inc., Pilgrim Government Securities Income Fund, Inc., Pilgrim Advisory
Funds, Inc. (formerly, Pilgrim America Masters Series, Inc.) and
Pilgrim Investment Funds, Inc. (since April 1995). Chairman and Chief
Executive Officer of Pilgrim Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Pilgrim America Capital
Corporation (formerly, Express America Holdings Corporation) ("Pilgrim
Capital") (since August 1990).
The Fund pays each Director who is not an interested person, the Fund's pro rata
share, as described below, of (i) an annual retainer of $20,000; (ii) $1,500 per
quarterly and special Board meeting; (iii) $500 per committee meeting; (iv) $500
per special telephonic meeting; and (v) out-of-pocket expenses. During the
fiscal year ended June 30, 1998, the Fund paid an aggregate of $25,182 to the
Directors. The pro rata share paid by the Fund is based on the Fund's average
net assets as a percentage of the average net assets of all the funds managed by
the Investment Manager for which the Directors serve in common as
directors/trustees.
COMPENSATION OF DIRECTORS
The following table sets forth information regarding compensation of Directors
by the Fund and other funds managed by the Investment Manager for the fiscal
year ended June 30, 1998. 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.
-3-
<PAGE>
COMPENSATION TABLE
FISCAL YEAR ENDED JUNE 30, 1998
<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)(4)............... $5,022 N/A N/A $28,600
(5 boards)
John P. Burke, Director(2)(4) ................ $5,040 N/A N/A $28,700
(5 boards)
Al Burton, Director (3)(4).................... $5,040 N/A N/A $28,700
(5 boards)
Bruce S. Foerster, Director (4)(5)............ $5,040 N/A N/A $28,700
(5 boards)
Jock Patton (4)(6)............................ $5,040 N/A N/A $28,700
(5 boards)
Robert W. Stallings, Director and $0 N/A N/A $0
Chairman (1)(7)............................. (5 boards)
</TABLE>
- -----------------------
1 Current Board member, term commencing April 7, 1995.
2 Commenced service as Trustee on May 5, 1997.
3 Board member since 1985.
4 Member of Audit Committee.
5 Mr. Foerster resigned as a Director of the Company effective September
30, 1998.
6 Current Board member, term commencing August 28, 1995.
7 "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, AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41.)
Director, Vice Chairman (since December 1994) and Executive Vice
President (since April 1995), Pilgrim Group, Inc. and Pilgrim
Investments; Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of Pilgrim
Securities; Executive Vice President and Assistant Secretary of each of
the other funds in the Pilgrim Group of Funds; Chief Financial Officer
(since December 1993), Vice Chairman and Assistant Secretary (since
April 1993) and former President (May 1991 - December 1993), Pilgrim
Capital (formerly Express America Holdings Corporation).
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48.)
Executive Vice President (since August 1996), Pilgrim Group, Inc.;
President and Chief Executive Officer (since August 1996), Pilgrim
Investments; Executive Vice President of (since July 1996) of most of
the funds in the Pilgrim Group of Funds. Formerly Chief Executive
Officer (November 1993 - December 1995) HSBC Asset Management Americas,
Inc., and Chief Executive Officer, and Actuary (May 1986 - October
1993) HSBC Life Assurance Co.
-4-
<PAGE>
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.)
Executive Vice President (since April 1998) and Secretary (since April
1995), Pilgrim Capital (formerly, Express America Holdings
Corporation), Pilgrim Group, Inc., Pilgrim Investments, and Pilgrim
Securities; Executive Vice President and Secretary of each of the funds
in the Pilgrim Group of Funds. Presently serves or has served as an
officer or director of other affiliates of Pilgrim Capital. Formerly,
Senior Vice President, Pilgrim Capital, Pilgrim Group, Inc., Pilgrim
Investments and Pilgrim Securities (April 1995 - April 1998); Senior
Vice President, Express America Mortgage Corporation (June 1992 -
August 1994) and President, Beverly Hills Securities Corp. (January
1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL
OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer, PAGI, Pilgrim
Investments, Pilgrim Securities (since June 1998) and Pilgrim Financial
(since August, 1998). He served in same capacity from January, 1995 -
April, 1997. Chief Financial Officer of Endeaver Group (April, 1997 to
June, 1998).
Howard N. Kornblue, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 56.)
Senior Vice President, Pilgrim Investments (since August 1995).
Formerly Senior Vice President, Pilgrim Group, Inc. (November 1986 -
April 1995).
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 39.)
Senior Vice President, Pilgrim Investments (since July 1998). Formerly
Vice President, Pilgrim Investments (August 1995 - July 1998); Vice
President, Van Kampen America Capital (May 1987 - April 1995).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.)
Vice President, Pilgrim Investments (since April 1997) and Pilgrim
Group, Inc. (since February 1997). Vice President and Assistant
Secretary of each of the funds in the Pilgrim Group of Funds. Formerly
Assistant Vice President, Pilgrim Group, Inc. (August 1995 - February
1997). Formerly, Operations Manager, Pilgrim Group, Inc. (April 1992 -
April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30)
Vice President, Pilgrim Investments (since August 1997) and Pilgrim
Financial (since May 1998), Accounting Manager (since November 1995).
Formerly Assistant Vice President and Accounting Supervisor for Paine
Webber (June, 1993 - April, 1995).
PRINCIPAL SHAREHOLDERS. As of September 30, 1998, the Directors and Officers of
the Fund owned less than 1% of any class of the Fund's outstanding shares. As of
September 30, 1998, 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 that Merrill Lynch, Pierce Fenner & Smith, Inc., 4800 Deer Lake Drive,
Jacksonville, Florida 32246-6484, owned 14.30% of the Class A shares and 13.74%
of the Class B shares.
-5-
<PAGE>
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Fund and has overall responsibility for the management of the Fund. The
Investment Management Agreement between the Fund and the Investment Manager
requires the Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Fund. The Investment Manager,
which was organized in December 1994, is registered as an investment adviser
with the SEC and serves as investment adviser to four other registered
investment companies (or series thereof) as well as privately managed accounts.
As of October 15, 1998, the Investment Manager had assets under management of
approximately $5.3 billion.
The Investment Manager is a wholly-owned subsidiary of Pilgrim Group, Inc.,
which itself is a wholly-owned subsidiary of Pilgrim Capital, a Delaware
corporation, the shares of which are traded on the NASDAQ National Market System
(NASDAQ: PACC) and which is a holding company that through its subsidiaries
engages in the financial services business.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all
executive salaries and expenses of the Directors and Officers of the Fund who
are employees of the Investment Manager or its affiliates and office rent for
the Fund. Other expenses incurred in the operation of the Fund are borne by it,
including, without limitation, investment advisory fees; brokerage commissions;
interest; legal fees and expenses of attorneys; fees of independent auditors,
transfer agents and dividend disbursing agents, accounting agents, and
custodians; the expense of obtaining quotations for calculating the Fund's net
asset value; taxes, if any, and the preparation of the Fund's tax returns; cost
of stock certificates and any other expenses (including clerical expenses) of
issue, sale, repurchase or redemption of shares; expenses of registering and
qualifying shares of the Fund under federal and state laws and regulations;
expenses of printing and distributing reports, notices and proxy materials to
existing shareholders; expenses of printing and filing reports and other
documents filed with governmental agencies; expenses of annual and special
shareholder meetings; expenses of printing and distributing prospectuses and
statements of additional information to existing shareholders; fees and expenses
of Directors of the Fund who are not employees of the Investment Manager or its
affiliates; membership dues in the Investment Company Institute; insurance
premiums; and extraordinary expenses such as litigation expenses.
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, 1998, the total net assets of the Fund were approximately $441
million. For the fiscal years ended June 30, 1998, 1997 and 1996, the Fund paid
management fees to the current Investment Manager of approximately $2,846,061,
$2,157,744 and $1,805,000, respectively.
The Investment Management Agreement will continue in effect from year to year so
long as such continuance is specifically approved at least annually by (a) the
Board of Directors or (b) the vote of a "majority" (as defined in the 1940 Act)
of the Fund's outstanding shares voting as a single class; provided, that in
either event the continuance is also approved by at least a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Investment Manager by vote cast in person at a meeting called for the
purpose of voting on such approval.
The Investment Management Agreement is terminable without penalty with not less
than 60 days' notice by the Board of Directors or by a vote of the holders of a
majority of the Fund's outstanding shares voting as a
-6-
<PAGE>
single class, or upon not less than 60 days' notice by the Investment Manager.
The Investment Management Agreement will terminate automatically in the event of
its "assignment" (as defined in the 1940 Act).
DISTRIBUTOR. Shares of the Fund are distributed by Pilgrim Securities (the
"Distributor") pursuant to an Underwriting Agreement between the Fund and the
Distributor. The Underwriting 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. If 90% or more of the sales
commission is reallowed, such Authorized Dealer may be deemed to be an
"underwriter" as that term is defined under the Securities Act of 1933, as
amended. The Underwriting 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. The
Distributor, like the Investment Manager, is a wholly-owned subsidiary of
Pilgrim Group, Inc., which is a wholly-owned subsidiary of Pilgrim America
Capital Corporation.
DISTRIBUTION PLAN
The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). The Fund
intends to operate the Rule 12b-1 Plan in accordance with its terms and the
National Association of Securities Dealers, Inc. ("NASD") Rules concerning sales
charges. Under the Rule 12b-1 Plan, the Distributor may be entitled to payment
each month in connection with the offering, sale, and shareholder servicing of
Class A, Class B, and Class M shares in amounts not to exceed the following:
with respect to Class A shares at an annual rate of up to 0.30% of the average
daily net assets of the Class A shares of the Fund; with respect to Class B
shares at an annual rate of up to 1.00% of the average daily net assets of the
Class B shares of the Fund; and with respect to Class M shares at an annual rate
of up to 1.00% of the average daily net assets of the Class M shares of the
Fund. The Board of Directors has approved under the Rule 12b-1 Plan payments of
the following amounts to the Distributor each month in connection with the
offering, sale, and shareholder servicing of Class A, Class B, and Class M
shares as follows: (i) with respect to Class A shares at an annual rate equal to
0.30% of the average daily net assets of the Class A shares of the Fund; (ii)
with respect to Class B shares at an annual rate equal to 1.00% of the average
daily net assets of the Class B shares of the Fund; and (iii) with respect to
Class M shares at an annual rate equal to 0.75% of the average daily net assets
of the Class M shares of the Fund. Of these amounts, fees equal to an annual
rate of 0.25% of the average daily net assets of the Fund are for shareholder
servicing for each of the classes.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for both distribution and shareholder servicing at the annual
rate of 0.25%, 0.25%, and 0.65% of the Fund's average daily net assets of Class
A, Class B, and Class M shares, respectively, that are registered in the name of
that Authorized Dealer as nominee or held in a shareholder account that
designates that Authorized Dealer as the dealer of record. Rights to these
ongoing payments begin to accrue in the 13th month following a purchase of Class
A or B shares and in the 1st month following purchase of Class M shares. These
fees may be used to cover the expenses of the Distributor primarily intended to
result in the sale of Class A, Class B, and Class M shares of the Fund,
including payments to Authorized Dealers for selling shares of the Fund and for
servicing shareholders of these classes of the Fund. Activities for which these
fees may be used include: preparation and distribution of advertising materials
and sales literature; expenses of organizing and conducting sales seminars;
overhead of the Distributor; printing of prospectuses and
-7-
<PAGE>
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 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. In addition, the Distributor may, at its own expense, pay concessions
in addition to those described above to dealers that satisfy certain criteria
established from time to time by the Distributor. These conditions relate to
increasing sales of shares of the Funds over specified periods and to certain
other factors. These payments may, depending on the dealer's satisfaction of the
required conditions, be periodic and may be up to (1) 0.30% of the value of the
Funds' shares sold by the dealer during a particular period, and (2) 0.10% of
the value of the Funds' shares held by the dealer's customers for more than one
year, calculated on an annual basis.
The Rule 12b-1 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.
-8-
<PAGE>
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, 1998 were $2,252,652, including expenses for: advertising -
$55,294; salaries and commissions - $1,632,478; printing, postage, and handling
- - $149,499; brokers' servicing fees - $328,369; and miscellaneous and other
promotional activities - $87,012. 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, 1998 were $513,263, including expenses
for: advertising -- $12,599; salaries and commissions -- $371,957; printing,
postage, and handling -- $34,063; brokers' servicing fees -- $74,818; and
miscellaneous and other promotional activities -- $19,826. 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, 1998 were
$85,544, including expenses for: advertising -- $2,100; salaries and commissions
- -- $61,993; printing, postage, and handling -- $5,677; brokers' servicing fees
- -- $12,470; and miscellaneous and other promotional activities -- $3,304. Of the
total amount incurred by the Distributor during the last year, $2,066,428 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 reallowed to
selling dealers are not an expense of the Fund and have no effect on the net
asset value of the Fund. For the fiscal years ended June 30, 1998, 1997 and
1996, total commissions allowed to other dealers were approximately $1,981,777,
$1,545,304 and $954,329, respectively. For the fiscal years ended June 30, 1998,
1997 and 1996, the current Distributor retained approximately $145,641, $93,294
and $23,160 or approximately 7.35%, 6.04% and 2.37% of the total commissions
assessed on shares of the Fund.
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.
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS AND TECHNIQUES
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."
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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 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 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
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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 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
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expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
The introduction of the euro (a common currency for the European Economic and
Monetary Union) in January 1999 could have an adverse effect of the Fund's
ability to value holdings denominated in local currencies and on trading and
other administrative systems which affect such securities.
BANKING INDUSTRY OBLIGATIONS
The Fund may invest in banking industry obligations, including certificates of
deposit, bankers' acceptances, and fixed time deposits, with a maturity of one
year or less. The Fund will not invest in obligations issued by a bank unless
(i) the bank is a U.S. bank and a member of the FDIC and (ii) the bank has total
assets of at least $1 billion (U.S.) or, if not, the Fund's investment is
limited to the FDIC-insured amount of $100,000.
PORTFOLIO TURNOVER
In seeking growth of capital, the Fund reserves the right to dispose of any
security without regard to the period of time it has been held, and to take
short- or long-term profits when such action is consistent with its objectives
and with sound investment practice. The Fund may at times take prompt advantage
of changes in market environment or purchase securities based primarily upon
short-term market considerations; however, its principal objective is to seek
long-term gains.
During its fiscal years ended June 30, 1996, 1997, and 1998 the Fund's annual
total portfolio turnover was 15%, 77% and 53%, respectively. The annual turnover
rate of the Fund's portfolio is generally expected to be less than 100%,
although it may be in excess of 100% in years when the Fund has taken a
significant defensive position. The turnover rate may vary greatly from year to
year as well as within a year, and may also be affected by cash requirements for
redemptions of Fund shares, and by the necessity of maintaining the Fund as a
regulated investment company under the Internal Revenue Code in order to receive
favorable tax treatment.
DIVERSIFICATION
The Fund is a diversified investment company, which means that it meets the
following requirements: at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the Fund's total assets and
to not more than 10% of the outstanding voting securities of such issuer.
INVESTMENT RESTRICTIONS
The following additional fundamental policies and investment restrictions have
been adopted by the Fund and cannot be changed without approval by the vote of a
majority of the outstanding voting securities of the Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
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The Fund MAY NOT:
(1) Engage in the underwriting of securities of other issuers.
(2) Invest in "restricted securities" which cannot in the absence of an
exemption be sold without an effective registration statement under the
Securities Act of 1933, as amended.
(3) Engage in the purchase and sale of interests in real estate,
commodities or commodity contracts (although this does not preclude marketable
securities of companies engaged in these activities).
(4) Engage in the making of loans to other persons, except (a) through
the purchase of a portion of an issue of publicly distributed bonds, debentures
or other evidences of indebtedness customarily purchased by institutional
investors or (b) by the loan of its portfolio securities in accordance with the
policies described under "Lending of Portfolio Securities."
(5) Borrow money except from banks for temporary or emergency purposes,
and then not in excess of 5% of the value of its total assets.
(6) Mortgage, pledge or hypothecate its assets in any manner, except in
connection with any authorized borrowings and then not in excess of 10% of the
value of its total assets.
(7) Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of its portfolio
transactions.
(8) Effect short sales, or purchase or sell puts, calls, spreads or
straddles.
(9) Buy or sell oil, gas, or other mineral leases, rights or royalty
contracts, or participate on a joint or joint and several basis in any
securities trading account.
(10) Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets.
(11) Invest more than 25% of the value of its total assets in any one
industry.
(12) Purchase or retain in its portfolio any security if an Officer or
Director of the Fund or its investment manager owns beneficially more than 1/2
of 1% of the outstanding securities of such issuer, and in the aggregate such
persons own beneficially more than 5% of the outstanding securities of such
issuer.
(13) Issue senior securities, except insofar as the Fund may be deemed
to have issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies or investment techniques, and except for purposes
of this investment restriction, collateral, escrow, or margin or other deposits
with respect to the making of short sales, the purchase or sale of futures
contracts or related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to be an
issuance of a senior security.
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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 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.
PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the portfolio of the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Management Agreement, the Investment Manager
determines, subject to the instructions of and review by the Board of Directors
of the Company, which securities are to be purchased and sold by the Fund and
which brokers are to be eligible to execute portfolio transactions of the Fund.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker," unless in the opinion of the
Investment Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, the Investment Manager will use its best
efforts to choose a broker capable of providing the brokerage services necessary
to obtain the most favorable price and execution available. The full range and
quality of brokerage services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm's risk in positioning a
block of securities, and other factors. The Investment Manager seeks to obtain
the best commission rate available from brokers which are believed to be capable
of providing efficient execution and handling of the orders. In those instances
where it is reasonably determined that more than one broker can offer the
brokerage services needed to obtain the most favorable price and execution
available, consideration may be given to those brokers that supply research and
statistical information to the Fund and/or the Investment Manager, and provide
other services in addition to execution services. The Investment Manager
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Investment Manager under its Agreement
with the Fund, to be useful in varying degrees, but of indeterminable value. The
placement of portfolio brokerage with broker-dealers who have sold shares of the
Fund is subject to rules adopted by the NASD. Provided the Fund's officers are
satisfied that the Fund is receiving the most favorable price and execution
available, the Fund may also consider the sale of the Fund's shares as a factor
in the selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Fund's general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for the Fund, the Fund may also give weight to
the ability of a broker to furnish brokerage and research services to the Fund
or the Investment Manager, even if the specific services were not imputed 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.
During the Fund's last three fiscal years ended June 30, 1996, 1997 and 1998,
total brokerage commissions paid by the Fund amounted to approximately $113,000,
$600,000 and $456,000, respectively. The Fund does not intend to effect any
brokerage transaction in its portfolio securities with any broker-dealer
affiliated
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directly or indirectly with the Investment Manager, except for any sales of
portfolio securities that may legally be made pursuant to a tender offer, in
which event the Investment Manager will offset against the management fee a part
of any tender fees that legally may be received by such affiliated
broker-dealer.
Investment decisions for the Fund are made independently from those of the other
Pilgrim Funds, 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
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the Investment Manager's research and analysis, and, therefore, it may benefit a
Fund by improving the quality of the investment advice. The advisory fees paid
by a Fund are not reduced because the Investment Manager receives such services.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Fund's
transfer agent, DST Systems, Inc. ("Transfer Agent"), plus, for Class A and
Class M shares, a varying sales charge depending upon the class of shares
purchased and the amount of money invested, as set forth in the Prospectus. The
Distributor may, from time to time, at its discretion, allow the selling dealer
to retain 100% of such sales charge, and such dealer may therefore be deemed an
"underwriter" under the Securities Act of 1933, as amended. The Distributor, at
its expense, may also provide additional promotional incentives to dealers in
connection with sales of shares of the Fund and other funds managed by the
Investment Manager. In some instances, such incentives may be made available
only to dealers whose representatives have sold or are expected to sell
significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families to locations
within or outside of the United States, merchandise or other items. Dealers may
not use sales of the Fund's shares to qualify for the incentives to the extent
such may be prohibited by the laws of any state.
Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE
Class A or Class M shares of the Fund may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
shares of the Fund (or shares of other funds managed by the Investment Manager,
in accordance with the terms of such privileges established for such funds)
within the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Fund's Transfer Agent, or be postmarked, within 90 days after
the date of redemption. This privilege may only be used once per calendar year.
Payment must accompany the request and the purchase will be made at the then
current net asset value of the Fund. Such purchases may also be handled by a
securities dealer who may charge a shareholder for this service. If the
shareholder has realized a gain on the redemption, the transaction is taxable
and any reinvestment will not alter any applicable Federal capital gains tax. If
there has been a loss on the redemption and a subsequent reinvestment pursuant
to this privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
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
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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 Pilgrim Funds), the Distributor may pay the selling firm
0.25% of the amount invested.
Shareholders of Pilgrim 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 open-end Pilgrim Funds may reinvest such amount plus
any shares acquired through dividend reinvestment in Class A or Class M shares
of the Fund at its current net asset value, without a sales charge.
Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers or affiliated corporations thereof or any trust,
pension, profit-sharing or other benefit plan for such persons, broker-dealers,
for their own accounts or for members of their families (defined as current
spouse, children, parents, grandparents, uncles, aunts, siblings, nephews,
nieces, step-relations, relations at-law, and cousins) employees of such
broker-dealers (including their immediate families) and discretionary advisory
accounts of the Investment Manager, may purchase Class A or Class M shares of
the Fund at net asset value without a sales charge. Such purchaser may be
required to sign a letter stating that the purchase is for his own investment
purposes only and that the securities will not be resold except to the Fund. The
Fund may, under certain circumstances, allow registered investment advisers to
make investments on behalf of their clients at net asset value without any
commission or concession.
Class A or M shares may also be purchased at net asset value by certain fee
based registered investment advisers, trust companies and bank trust departments
under certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another Participating Fund or from Pilgrim Prime Rate Trust.
Shares of the Fund are acquired at net asset value by Investors Fiduciary Trust
Company, Kansas City, Missouri, as Custodian for Pilgrim Investment Plans, a
unit investment trust for the accumulation of shares of the Fund. As of
September 30, 1998, less than 2% of the Fund's then total outstanding shares
were held by said Custodian for the account of such plan holders.
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 open-end Pilgrim Fund 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 Pilgrim Fund will be effective only after notification to the
Distributor that the investment qualifies for a discount. The shareholder's
holdings in the Investment Manager's Funds (excluding Pilgrim General Money
Market Shares) acquired within 90 days before the Letter of Intent is filed will
be counted towards completion of the Letter of Intent but will not be entitled
to a retroactive downward adjustment of sales charge until the
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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 Funds, in the form of shares, in the investor's name to
assure that the full applicable sales charge will be paid if the intended
purchase is not completed. The shares in escrow will be included in the total
shares owned as reflected on the monthly statement; income and capital gain
distributions on the escrow shares will be paid directly to the investor. The
escrow shares will not be available for redemption by the investor until the
Letter of Intent has been completed, or the higher sales charge paid. If the
total purchases, less redemptions, equal the amount specified under the Letter,
the shares in escrow will be released. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by the Distributor and the dealer with whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before, and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the applicable offering price. If the total purchases, less
redemptions, are less than the amount specified under the Letter, the investor
will remit to the Distributor an amount equal to the difference in dollar amount
of sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single account in the name of the investor or to the investor's order. If
within 10 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of shares in escrow to realize
such difference will be made. If the proceeds from a total redemption are
inadequate, the investor will be liable to the Distributor for the difference.
In the event of a total redemption of the account prior to fulfillment of the
Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor. By
completing the Letter of Intent section of the Shareholder Application, an
investor grants to the Distributor a security interest in the shares in escrow
and agrees to irrevocably appoint the Distributor as his attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due and authorizes the Transfer
Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as
directed by the Distributor. The investor or the securities dealer must inform
the Transfer Agent or the Distributor that this Letter is in effect each time a
purchase is made.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other funds distributed by
the Distributor (excluding Pilgrim 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
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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 open-end Pilgrim Funds (excluding Pilgrim General
Money Market Shares) purchased and owned of record or beneficially by a
corporation, including employees of a single employer (or affiliates thereof)
including shares held by its employees, under one or more retirement plans, can
be combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase, provided such transactions
are not prohibited by one or more provisions of the Employee Retirement Income
Security Act or the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules applicable to
retirement plans before investing.
REDEMPTIONS
Payment to shareholders for shares redeemed will be made within three days after
receipt by the Fund's Transfer Agent of the written request in proper form,
except that the Fund may suspend the right of redemption or postpone the date of
payment as to the Fund during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
(the "SEC" or the "Commission") or such Exchange is closed for other than
weekends and holidays; (b) an emergency exists as determined by the Commission
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable; or (c) for such other period as the Commission may
permit for the protection of the Fund's shareholders. At various times, the Fund
may be requested to redeem shares for which it has not yet received good
payment. Accordingly, the Fund may delay the mailing of a redemption check until
such time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Fund reserves
the right, upon 30 days' written notice, to redeem, at net asset value (less any
applicable deferred sales charge), the shares of any shareholder whose account
has a value of less than $1,000 in the Fund, other than as a result of a decline
in the net asset value per share. Before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount
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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.
Certain purchases of Class A shares and most Class B shares may be subject to a
CDSC or redemption fee. For purchase payments subject to such CDSC, the
Distributor may pay out of its own assets a commission from 0.25% to 1.00% of
the amount invested for Class A purchases over $1 million and 4% of the amount
invested for Class B shares.
Shareholders will be charged a CDSC or redemption fee if certain of those shares
are redeemed within the applicable time periods as stated in the Prospectus.
No CDSC or redemption fee is imposed on any shares subject to a CDSC or
redemption fee to the extent that those shares (i) are no longer subject to the
applicable holding period, (ii) resulted from reinvestment of distributions on
CDSC or redemption fee shares or (iii) were exchanged for shares of another fund
managed by the Investment Manager, provided that the shares acquired in such
exchange and subsequent exchanges will continue to remain subject to the CDSC,
if applicable, until the applicable holding period expires.
The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services. The shareholder must notify the Fund either directly or through
the Distributor at the time of redemption that the shareholder is entitled to a
waiver of CDSC or redemption fee. The waiver will then be granted subject to
confirmation of the shareholder's entitlement. The CDSC or redemption fee, which
may be imposed on Class A shares purchased in excess of $1 million, will also be
waived for registered investment advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients.
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.
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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 regular trading on the
New York Stock Exchange (normally 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, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market. Securities for which
quotations are not readily available and all other assets will be valued at
their respective fair values as determined in good faith by or under the
direction of the Board of Directors of the Company. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of the
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of the Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to the Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Directors.
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 regular trading on the New York
Stock Exchange will be confirmed at the offering price computed as of the close
of regular trading on the Exchange provided the
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order is received by the Distributor prior to its close of business that same
day (normally 4:00 P.M. Pacific time). It is the responsibility of the dealer to
insure that all orders are transmitted timely to the Fund. Orders received by
dealers after the close of trading on the New York Stock Exchange will be
confirmed at the next computed offering price as described in the Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Fund provides a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of the Fund
on a regular basis. Such a Program may be started with an initial investment
($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no
obligation to continue. The Program may be terminated without penalty at any
time by the investor or the Fund. The minimum investment requirements may be
waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
For investors purchasing shares of the Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of the Fund on
a periodic basis, the Fund may, in lieu of furnishing confirmations following
each purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. SHAREHOLDERS MAY RELY ON THESE STATEMENTS IN LIEU
OF CERTIFICATES. CERTIFICATES REPRESENTING SHARES OF THE FUND WILL NOT BE ISSUED
UNLESS THE SHAREHOLDER REQUESTS THEM IN WRITING.
SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS
For self-employed individuals and corporate investors that wish to purchase
shares of the Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Fund.) The annual contract maintenance charge may
be waived from time to time. For further details, including the right to appoint
a successor Custodian, see the Plan and Custody Agreements as provided by the
Fund. Employers who wish to use shares of the Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
INDIVIDUAL RETIREMENT ACCOUNTS
Investors having earned income are eligible to purchase shares of the Fund under
an 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. Simple
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IRA plans which employers may establish on behalf of their employees are also
available. Roth IRA plans which enable employed and self-employed individuals to
make non-deductible contributions, and, under certain circumstances, effect
tax-free withdrawals, are also available. Copies of model Custodial Account
Agreements are available from the Distributor. Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as the Custodian under these model
Agreements, 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 and Simple IRA are contained in IRS
required disclosure statements, 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 Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address
on the registration. This address cannot reflect any change
within the previous thirty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
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(c) Only one telephone redemption (where proceeds are being mailed
to the address of record) can be processed with in a 30 day
period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
5. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have
the same account information and options except as stated in the
Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141
and deposited into your account before any transaction may be
processed.
8. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares
of the Pilgrim 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.
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The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must,
among other things: (a) derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loaned, gains
from the sale or other disposition of stock or securities and gains from the
sale or other disposition of foreign currencies, or other income (including
gains from options, futures contracts and forward contracts) derived with
respect to the Fund's business of investing in stocks, securities or currencies;
(b) diversify its holdings so that, at the end of each quarter of the taxable
year, (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 (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Fund as a regulated investment company does not involve
government supervision of management or of their investment practices, or
policies. As a regulated investment company, the Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes as
dividends to its shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the Fund
intends to make distributions in accordance with the calendar year distribution
requirement.
DISTRIBUTIONS
Dividends of investment company taxable income (including net short-term capital
gains) are taxable to shareholders as ordinary income. Distributions of
investment company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to the Fund's dividend
income from U.S. corporations and if other applicable requirements are met.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends will be taxable to shareholders
as long-term capital gains, regardless of the length of time the Fund's shares
have been hold by a shareholder, and are not eligible for the dividends-received
deduction. Generally, dividends and distributions are taxable to shareholders,
whether received in cash or reinvested in 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
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received by shareholders on December 31 of the calendar year in which declared,
rather than the calendar year in which the dividends are actually received.
Distributions by the Fund reduce the net asset value of the Fund shares. Should
a distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain an described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by the Fund. The price of shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in stocks of foreign companies that are classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income in investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over the period during
which the Fund held the PFIC stock. The Fund itself will be subject to tax on
the portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to shareholders.
Excess distributions include any gain from the sale of PFIC stock as well an
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.
The Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, the Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply.
Alternatively, another election is available that involves marking to market the
Fund's PFIC stock at the end of each taxable year, with the result that
unrealized gains are treated as though they were realized, and are reported as
ordinary income; and any mark-to-market losses, as well as losses from an actual
disposition of PFIC stock, would be reported as ordinary loss to the extent of
any net mark-to-market gains included in income in prior years.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries.
SALE OF SHARES
Upon the sale or exchange of his shares, a shareholder will realize a taxable
gain or loss depending upon his basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and which generally may be eligible for reduced federal tax
rates, depending upon the shareholder's holding period for the shares. 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
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long-term capital loss to the extent of any distributions or capital gain
dividends received by the shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he in not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.
OTHER TAXES
Distributions also may be subject to state, local and foreign taxes. U.S. tax
rules applicable to foreign investors may differ significantly from those
outlined above. This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. Shareholders are advised to consult
their own tax advisers for details with respect to the particular tax
consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
The Fund may, from time to time, include "total return" in advertisements or
reports to shareholders or prospective investors. Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Fund over periods of 1, 5 and 10
years (up to the life of the Fund), calculated pursuant to the following formula
which is prescribed by the SEC:
-27-
<PAGE>
n
P(1 + T) = ERV
where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b 6
2[( --- + 1) - 1]0
cd
where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
ADDITIONAL PERFORMANCE QUOTATIONS
Advertisements of total return will always show a calculation that includes the
effect of the maximum sales charge but may also show total return without giving
effect to that charge. Because these additional quotations will not reflect the
maximum sales charge payable, these performance quotations will be higher than
the performance quotations that reflect the maximum sales charge.
Total returns are based on past results and are not necessarily a prediction of
future performance.
-28-
<PAGE>
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., Value
Line, Inc. or similar independent services that monitor the performance of
mutual funds or with other appropriate indexes of investment securities. In
addition, certain indexes may be used to illustrate historic performance of
select asset classes. The performance information may also include evaluations
of the 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 total return for Class A shares of the Fund for the one-,
five-, and ten-year periods ended June 30, 1998 was 13.61%, 18.85%, and 14.95%,
respectively. The average annual total return for the Class B shares for the
year ended June 30, 1998 and for the period from July 17, 1995 (commencement of
operations) through June 30, 1998, was 14.76% and 22.45%, respectively. The
average annual total return for the Class M shares for the year ended June 30,
1998 and for the period from July 17, 1995 (commencement of operations) through
June 30, 1998, was 15.77% and 21.93%, respectively.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to, age characteristics, of various countries and
regions in which the Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of the Fund's portfolio; (v) the major industries located in
various jurisdictions; (vi) the number of shareholders in the Fund or other
Pilgrim Funds and the dollar amount of the assets under management; (vii)
descriptions of investing methods such as dollar-cost averaging, best day/worst
day scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Fund and individual stocks in the Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of the
Fund or other industry specialists; (x) lists or statistics of certain of the
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of the Fund; and (xii) descriptions of the benefits of
working with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, Pilgrim Capital, Pilgrim Group, Inc. or
affiliates of the Fund, the Investment Manager, Pilgrim Capital or Pilgrim
Group, Inc. including (i) performance rankings of other funds managed by the
Investment Manager, or the individuals employed by the Investment Manager who
exercise responsibility for the day-to-day management of the Fund, including
rankings of mutual funds published by Lipper Analytical Services, Inc.,
Morningstar, Inc., CDA Technologies, Inc., or other rating services, companies,
publications or other persons who rank mutual funds or other investment products
on overall performance or other criteria; (ii)
-29-
<PAGE>
lists of clients, the number of clients, or assets under management; (iii)
information regarding the acquisition of the Pilgrim Funds by Pilgrim Capital,
(iv) the past performance of Pilgrim Capital and Pilgrim Group, Inc.; (v) the
past performance of other funds managed by the Investment Manager; and (vi)
information regarding rights offerings conducted by closed-end funds managed by
the Investment Manager.
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. 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 High Yield Fund, and 100,000,000 are not classified. All
shares when issued are fully paid, non-assessable, and redeemable. Shares have
no preemptive rights. All shares have equal voting, dividend and liquidation
rights. Shares have non-cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Directors can elect
100% of the Directors if they choose to do so, and in such event the holders of
the remaining shares voting for the election of Directors will not be able to
elect any person or persons to the Board of Directors. Generally, there will not
be annual meetings of shareholders.
The Board of Directors may classify or reclassify any unissued shares into
shares of any series by setting or changing in any one or more respects, from
time to time, prior to the issuance of such shares, the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
qualifications of such shares. Any such classification or reclassification will
comply with the provisions of the 1940 Act. 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. 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, 801 Pennsylvania, , Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of the Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Fund are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W.., Washington, D.C. 20006.
INDEPENDENT AUDITORS. KPMG Peat Marwick LLP, 725 South Figueroa Street, Los
Angeles, California 90017, acts as independent auditors for the Fund.
OTHER INFORMATION. The Company is registered with the SEC as a management
investment company. Such registration does not involve supervision of the
management or policies of the Fund by any governmental agency. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in the Registration Statement filed with the Commission and copies of
such information may be obtained from the Commission upon payment of the
prescribed fee or examined at the Commission in Washington, D.C. without charge.
Investors of the Fund will be kept informed of its progress through semi-annual
reports showing diversification of portfolio, statistical data and any other
significant data, including financial statements audited by independent
certified public accountants.
FINANCIAL STATEMENTS
The financial statements of the Fund for the fiscal year ended June 30, 1998 are
incorporated herein by reference from the Fund's Annual Report to Shareholders.
Copies of the Fund's Annual Report may be obtained without charge by contacting
the Fund at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004, (800)
992-0180.
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<PAGE>
Investment Manager
PILGRIM INVESTMENTS, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Distributor
PILGRIM SECURITIES, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Shareholder Servicing Agent
PILGRIM GROUP, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Transfer Agent
DST SYSTEMS, INC.
P.O. Box 419368
Kansas City, Missouri 64141-6368
Custodian
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, Missouri 64105
Legal Counsel
DECHERT PRICE & RHOADS
1775 Eye Street, N.W.
Washington, D.C. 20006
Independent Auditors
KPMG PEAT MARWICK LLP
725 South Figueroa Street
Los Angeles, California 90017
Prospectus
November 1, 1998
<PAGE>
PILGRIM HIGH YIELD FUND
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
Pilgrim High Yield Fund (the "Fund") is a diversified series of Pilgrim
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 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 November 1, 1998, 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) 992-0180.
TABLE OF CONTENTS
PAGE
----
General Information and History................................................2
Management of the Fund.........................................................2
Distribution Plan..............................................................7
Supplemental Description of Investments and Techniques........................10
Investment Restrictions.......................................................25
Portfolio Transactions........................................................27
Additional Purchase and Redemption Information................................29
Determination of Share Price..................................................34
Shareholder Services and Privileges...........................................35
Distributions.................................................................38
Tax Considerations............................................................38
Performance Information.......................................................42
General Information...........................................................44
Financial Statements..........................................................45
<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 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 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 Pilgrim America Capital
Corporation (formerly 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. On July 14, 1995, the Company's name was changed from
"Pilgrim Investment Funds, Inc." to "Pilgrim America Investment Funds, Inc." and
the Fund's name was changed from "Pilgrim High Yield Fund" to "Pilgrim America
High Yield Fund."
The Board of Directors of the Company has approved a change in the name of the
Company and the Fund, to be effective on November 16, 1998. On November 16,
1998, the name of the Company will become "Pilgrim Investment Funds, Inc.," and
the name of the Fund will become "Pilgrim High Yield Fund." This Statement of
Additional Information reflects the names of the Company and the Fund as they
will be on November 16, 1998.
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.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by its Board of Directors. The Directors
and Officers of the Fund are listed below. An asterisk (*) has been placed next
to the name of each Director who is an "interested person," as that term is
defined in the Investment Company Act of 1940 (the "1940 Act"), by virtue of
that person's affiliation with the Fund or Pilgrim Investments, Inc., the Fund's
investment manager (the "Investment Manager" or "Pilgrim Investments").
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix,
Arizona 85016. (Age 59.) Director. Realtor, Coldwell Banker Success
Realty (formerly, The Prudential Arizona Realty) for more than the last
five years. Ms. Baldwin is also Vice President, United States Olympic
Committee (November 1996 - Present), and formerly Treasurer, United
States Olympic Committee (November 1992 - November 1996). Ms. Baldwin
is also a director and/or trustee of each of the funds managed by the
Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130.
(Age 66.) Director. Commissioner of Banking, State of Connecticut
(January 1995 - Present). Mr. Burke was formerly President of Bristol
Savings Bank (August 1992 - January 1995) and President of Security
Savings and Loan (November 1989 - August 1992). Mr. Burke is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
70.) Director. President of Al Burton Productions for more than the
last five years; formerly Vice President, First Run Syndication, Castle
Rock Entertainment (July 1992 - November 1994).
-2-
<PAGE>
Mr. Burton is also a director and/or trustee of each of the funds
managed by the Investment Manager.
Jock Patton, 40 North Central Avenue, Phoenix, Arizona 85004. (Age 52.)
Director. Private Investor. Director of Artisoft, Inc. Mr. Patton was
formerly President and Co-owner, StockVal, Inc. (April 1993 - June
1997) and a partner and director of the law firm of Streich, Lang, P.A.
(1972 - 1993). Mr. Patton is also a director and/or trustee of each of
the funds managed by the Investment Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ
85004. (Age 49.) Chairman, Chief Executive Officer, and President.
Chairman, Chief Executive Officer and President of Pilgrim Group, Inc.
(since December 1994); Chairman, Pilgrim Investments (since December
1994); Director, Pilgrim Securities, Inc. ("Pilgrim Securities") (since
December 1994); Chairman, Chief Executive Officer and President of
Pilgrim Bank and Thrift Fund, Inc., Pilgrim Government Securities
Income Fund, Inc., Pilgrim Advisory Funds, Inc. (formerly, Pilgrim
America Masters Series, Inc.) and Pilgrim Investment Funds, Inc. (since
April 1995). Chairman and Chief Executive Officer of Pilgrim Prime Rate
Trust (since April 1995). Chairman and Chief Executive Officer of
Pilgrim America Capital Corporation (formerly, Express America Holdings
Corporation) ("Pilgrim Capital") (since August 1990).
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) $500
per special telephonic meeting; and (v) out of pocket expenses. During the
fiscal year ended June 30, 1998, the Fund paid an aggregate of approximately
$9,135 to the Directors. The pro rata share paid by the Fund is based on the
Fund's average net assets as a percentage of the average net assets of all the
funds managed by the Investment Manager for which the Directors serve in common
as directors/trustees.
COMPENSATION OF DIRECTORS. The following table sets forth information regarding
compensation of Directors by the Fund and other funds managed by the Investment
Manager for the fiscal year ended June 30, 1998. 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.
-3-
<PAGE>
COMPENSATION TABLE
FISCAL YEAR ENDED JUNE 30, 1998
<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)(4)................ $1,823 N/A N/A $28,600
(5 boards)
John P. Burke(2)(4), Director ................. $1,828 N/A N/A $28,700
(5 boards)
Al Burton, Director (3)(4)..................... $1,828 N/A N/A $28,700
(5 boards)
Bruce S. Foerster, Director(4)(5).............. $1,828 N/A N/A $28,700
(5 boards)
Jock Patton (4)(6)............................. $1,828 N/A N/A $28,700
(5 boards)
Robert W. Stallings, Director and $0 N/A N/A $0
Chairman (1)(7).............................. (5 boards)
</TABLE>
- ----------
1 Current Board member, term commencing April 7, 1995.
2 Commenced service as Trustee on May 5, 1997.
3 Board member since 1985.
4 Member of Audit Committee.
5 Mr. Foerster resigned as a Director of the Company effective September 30,
1998.
6 Current Board member, term commencing August 28, 1995.
7 "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, AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41.)
Director, Vice Chairman (since December 1994) and Executive Vice
President (since April 1995), Pilgrim Group, Inc. and Pilgrim
Investments; Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of Pilgrim
Securities; Executive Vice President and Assistant Secretary of each of
the other funds in the Pilgrim Group of Funds; Chief Financial Officer
(since December 1993), Vice Chairman and Assistant Secretary (since
April 1993) and former President (May 1991 - December 1993), Pilgrim
Capital (formerly Express America Holdings Corporation).
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48.)
Executive Vice President (since August 1996), Pilgrim Group, Inc.;
President and Chief Executive Officer (since August 1996), Pilgrim
Investments; Executive Vice President of (since July 1996) of most of
the funds in the Pilgrim Group of Funds. Formerly Chief Executive
Officer (November 1993 - December 1995) HSBC Asset Management Americas,
Inc., and Chief Executive Officer, and Actuary (May 1986 - October
1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.)
Executive Vice President (since April 1998) and Secretary (since April
1995), Pilgrim Capital (formerly, Express America Holdings
Corporation), Pilgrim Group, Inc., Pilgrim Investments, and Pilgrim
Securities; Executive Vice President and Secretary of each of the funds
in the Pilgrim Group of Funds. Presently serves or has served as an
officer or director of other affiliates of Pilgrim Capital. Formerly,
-4-
<PAGE>
Senior Vice President, Pilgrim Capital, Pilgrim Group, Inc., Pilgrim
Investments and Pilgrim Securities (April 1995 - April 1998); Senior
Vice President, Express America Mortgage Corporation (June 1992 -
August 1994) and President, Beverly Hills Securities Corp. (January
1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL
OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.)
Senior Vice President and Chief Financial Officer, Pilgrim Group, Inc.,
Pilgrim Investments, Pilgrim Securities (since June 1998) and Pilgrim
Financial (since August, 1998). He served in same capacity from
January, 1995 - April, 1997. Chief Financial Officer of Endeaver Group
(April, 1997 to June, 1998).
Howard N. Kornblue, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 56.)
Senior Vice President, Pilgrim Investments (since August 1995).
Formerly Senior Vice President, Pilgrim Group, Inc. (November 1986 -
April 1995).
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 39.)
Senior Vice President, Pilgrim Investments (since July 1998). Formerly
Vice President, Pilgrim Investments (August 1995 - July 1998); Vice
President, Van Kampen America Capital (May 1987 - April 1995).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.)
Vice President, Pilgrim Investments (since April 1997) and Pilgrim
Group, Inc. (since February 1997). Vice President and Assistant
Secretary of each of the funds in the Pilgrim Group of Funds. Formerly
Assistant Vice President, Pilgrim Group, Inc. (August 1995 - February
1997). Formerly, Operations Manager, Pilgrim Group, Inc. (April 1992 -
April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30)
Vice President, Pilgrim Investments (since August 1997) and Pilgrim
Financial (since May 1998), Accounting Manager (since November 1995).
Formerly Assistant Vice President and Accounting Supervisor for Paine
Webber (June, 1993 - April, 1995).
PRINCIPAL SHAREHOLDERS. As of September 30, 1998, the Directors and officers of
the Fund as a group owned less than 1% of any class of the Fund's outstanding
shares. As of September 30, 1998, 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 that Merrill Lynch, Pierce Fenner & Smith, Inc., 4800
Deer Lake Drive, Jacksonville, Florida 32246-6484, owned 10.03% of the Class A
shares and 9.27% of the Class M shares, and Prudential Securities, Inc., 1 New
York Plaza, New York, New York 10004-1901, owned 9.71% of the Class A shares and
31.33% of the Class B shares.
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Fund and has overall responsibility for the management of the Fund. The
Investment Management Agreement between the Fund
-5-
<PAGE>
and the Investment Manager requires the Investment Manager to oversee the
provision of all investment advisory and portfolio management services for the
Fund. The Investment Manager, which was organized in December 1994, is
registered as an investment adviser with the SEC and serves as investment
adviser to four other registered investment companies (or series thereof) as
well as privately managed accounts. As of October 15, 1998, the Investment
Manager had assets under management of approximately $5.3 billion.
The Investment Manager is a wholly-owned subsidiary of Pilgrim Group, Inc.,
which itself is a wholly-owned subsidiary of Pilgrim Capital, a Delaware
corporation, the shares of which are traded on the NASDAQ National Market System
(NASDAQ: PACC) and which is a holding company that through its subsidiaries
engages in the financial services business.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all
executive salaries and expenses of the Directors and Officers of the Fund who
are employees of the Investment Manager or its affiliates and office rent for
the Fund. Other expenses incurred in the operation of the Fund are borne by it,
including, without limitation, investment advisory fees; brokerage commissions;
interest; legal fees and expenses of attorneys; fees of independent auditors,
transfer agents and dividend disbursing agents, accounting agents, and
custodians; the expense of obtaining quotations for calculating the Fund's net
asset value; taxes, if any, and the preparation of the Fund's tax returns; cost
of stock certificates and any other expenses (including clerical expenses) of
issue, sale, repurchase or redemption of shares; expenses of registering and
qualifying shares of the Fund under federal and state laws and regulations;
expenses of printing and distributing reports, notices and proxy materials to
existing shareholders; expenses of printing and filing reports and other
documents filed with governmental agencies; expenses of annual and special
shareholder meetings; expenses of printing and distributing prospectuses and
statements of additional information to existing shareholders; fees and expenses
of Directors of the Fund who are not employees of the Investment Manager or its
affiliates; membership dues in the Investment Company Institute; insurance
premiums; and extraordinary expenses such as litigation expenses.
As compensation for its services, the Investment Manager is paid monthly an
annual fee at the rate of 0.60% of the average daily net asset value of the
Fund. Prior to April 16, 1998, the Investment Management fee was an annual fee
at a rate of 0.75% on the first $25 million in net assets, 0.625% on net assets
over $25 million up to $100 million, 0.50% on net assets over $100 million up to
$500 million, and 0.40% for net assets over $500 million. For the fiscal years
ended June 30, 1998, 1997 and 1996, the Fund paid management fees to the current
Investment Manager of approximately $977,868, $332,032 and $127,000,
respectively.
The Investment Management Agreement will continue in effect from year to year so
long as such continuance is specifically approved at least annually by (a) the
Board of Directors or (b) the vote of a "majority" (as defined in the 1940 Act)
of the Fund's outstanding shares voting as a single class; provided, that in
either event the continuance is also approved by at least a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Investment Manager by vote cast in person at a meeting called for the
purpose of voting on such approval.
The Investment Management Agreement is terminable without penalty with not less
than 60 days' notice by the Board of Directors or by a vote of the holders of a
majority of the Fund's outstanding shares voting as a single class, or upon not
less than 60 days' notice by the Investment Manager. The Investment Management
Agreement will terminate automatically in the event of its "assignment" (as
defined in the 1940 Act).
The Investment Manager has entered into an expense limitation agreement with the
Company, pursuant to which the Investment Manager has agreed to waive or limit
its fees and to assume other expenses so
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that the total annual ordinary operating expenses of the Fund (which excludes
interest, taxes, brokerage commissions, extraordinary expenses such as
litigation, other expenses not incurred in the ordinary course of such Fund's
business, expenses of any counsel or other persons or services retained by the
Company's directors who are not "interested persons" (as defined in the 1940
Act) of the Investment Manager, and amounts payable pursuant to a plan adopted
in accordance with Rule 12b-1 under the 1940 Act) do not exceed 0.75%.
The expense limitation agreement provides that the expense limitation shall
continue until December 31, 1998. The Investment Manager may extend, but may not
shorten, the period of the limitation without the consent of the Fund, so long
as the extension is at the same expense limitation amount discussed above. The
Fund will at a later date reimburse the Investment Manager for management fees
waived and other expenses assumed by the Investment Manager during the previous
36 months, but only if, after such reimbursement, the Fund's expense ratio does
not exceed the percentage described above. The Investment Manager will only be
reimbursed for fees waived or expenses assumed after the effective date of the
expense limitation agreement. The expense limitation agreement will terminate
automatically upon termination of the respective investment management agreement
with the Investment Manager, and may be terminated by the Investment Manager or
the Fund upon 90 days written notice.
Prior to the expense limitation agreement described above, the Investment
Manager voluntarily agreed to waive all or a portion of its fee and to reimburse
operating expenses of the Fund, excluding distribution fees, interest, taxes,
brokerage and extraordinary expenses, to 0.75%. For the fiscal years ended June
30, 1998, June 30, 1997 and June 30, 1996, the voluntary fee reduction resulted
in a waiver of $269,351, $219,739 and $127,903, respectively.
DISTRIBUTOR. Shares of the Fund are distributed by Pilgrim Securities, Inc. (the
"Distributor") pursuant to an Underwriting Agreement. The Underwriting 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. If 90% or more of the sales commission is reallowed, such Authorized
Dealer may be deemed to be an "underwriter" as that term is defined under the
Securities Act of 1933, as amended. The Underwriting Agreement will remain in
effect from year to year 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. The
Distributor, like the Investment Manager, is a wholly-owned subsidiary of
Pilgrim Group, Inc., which is a wholly-owned subsidiary of Pilgrim America
Capital Corporation.
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
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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.
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. In addition, the Distributor may, at its own expense, pay concessions
in addition to those described above to dealers that satisfy certain criteria
established from time to time by the Distributor. These conditions relate to
increasing sales of shares of the Funds over specified periods and to certain
other factors. These payments may, depending on the dealer's satisfaction of the
required conditions, be periodic and may be up to (1) 0.30% of the value of the
Funds' shares sold by the dealer during a particular period, and (2) 0.10% of
the value of the Funds' shares held by the dealer's customers for more than one
year, calculated on an annual basis.
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<PAGE>
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, 1998 were $619,931, including expenses for: advertising -
$14,027; salaries and commissions - $462,836 printing, postage, and handling -
$37,925; brokers' servicing fees - $83,230 and miscellaneous and other
promotional activities - $21,913. 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, 1998 were $938,272, including expenses
for: advertising -- $21,230; salaries and commissions -- $700,508; printing,
postage, and handling -- $57,400; brokers' servicing fees -- $125,969; and
miscellaneous and other promotional activities -- $33,165. 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, 1998 were
$117,284, including expenses for: advertising -- $2,654; salaries and
commissions -- $87,563; printing, postage, and handling -- $7,175; brokers'
servicing fees -- $15,746; and miscellaneous and other promotional activities --
$4,146. Of the total amount incurred by the Distributor during the fiscal year
ended June 30, 1998, $1,250,907 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 years ended June 30, 1998, 1997 and
1996, the Distributor received commissions, after allowance to dealers on the
sale of the Fund's shares, of $217,320, $100,481 and $1,125, respectively, or
approximately 4.55%, 6.28% and 1.09%, respectively, of total commissions
assessed on purchases of the Fund.
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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.
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS AND TECHNIQUES
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:
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.
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<PAGE>
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 considerations 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 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,
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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
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dealers that provide that the Fund has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but 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 liquid
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.
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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 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 and/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
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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 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
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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 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
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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 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
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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 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.
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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 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.
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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.
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
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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.
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
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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 governmental administration or
economic or monetary policy. In addition, it is generally more difficult to
obtain court judgments outside the United States.
The introduction of the euro (a common currency for the European Economic and
Monetary Union) in January 1999 could have an adverse effect of the Fund's
ability to value holdings denominated in local currencies and on trading and
other administrative systems which affect such securities.
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
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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.
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
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 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 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.
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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.
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.)
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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.)
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
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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.
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.
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. 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.
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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 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.
During the Fund's fiscal years ended June 30, 1998, 1997 and 1996, the Fund did
not pay any brokerage commissions. 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.
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.
Investment decisions for the Fund are made independently from those of the other
Pilgrim Funds, although it is possible that at times identical securities will
be selected for purchase or sale by more than one of such 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. 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 in
some cases this system could have a detrimental effect on the price or value of
the security insofar as the Fund is concerned.
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<PAGE>
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.
For the fiscal years ended June 30, 1998 and 1997, the Fund's portfolio turnover
rates were 209% and 394%, respectively. The Fund places no restrictions on
portfolio turnover. Because a high turnover rate increases transaction costs and
may increase taxable gains, the Investment Manager carefully weighs the
anticipated benefits of short-term investing against these consequences. An
increased portfolio turnover rate is due to a greater volume of shareholder
purchase orders and other special market conditions.
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, DST Systems, Inc. ("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
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<PAGE>
shares. The incentives may include payment for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives and members of their families to locations within or outside of
the United States, merchandise or other items. Dealers may not use sales of the
Fund's shares to qualify for the incentives to the extent such may be prohibited
by the laws of any state.
Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE
Class A or Class M shares of the Fund may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
shares of the Fund (or shares of other funds managed by the Investment Manager
in accordance with the terms of such privileges established for such funds)
within the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Fund's Transfer Agent, or be postmarked, within 90 days after
the date of redemption. This privilege may only be used once per calendar year.
Payment must accompany the request and the purchase will be made at the then
current net asset value of the Fund. Such purchases may also be handled by a
securities dealer who may charge a shareholder for this service. If the
shareholder has realized a gain on the redemption, the transaction is taxable
and any reinvestment will not alter any applicable Federal capital gains tax. If
there has been a loss on the redemption and a subsequent reinvestment pursuant
to this privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
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 Pilgrim Funds), the Distributor may pay the
selling firm 0.25% of the amount invested.
Shareholders of Pilgrim 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 open-end Pilgrim Funds may reinvest such amount plus any
shares acquired through dividend reinvestment in Class A or Class M shares of
the Fund at its current net asset value, without a sales charge.
Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers or affiliated corporations thereof or any trust,
pension, profit-sharing or other benefit plan for such persons, broker-dealers,
for their own accounts or for members of their families (defined as current
spouse, children, parents, grandparents, uncles, aunts, siblings, nephews,
nieces, step-relations, relations at-law, and cousins)
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<PAGE>
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 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 open-end Pilgrim Fund 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 Pilgrim Fund will be effective only after notification to the
Distributor that the investment qualifies for a discount. The shareholder's
holdings in the Investment Manager's funds (excluding Pilgrim General Money
Market Shares) acquired within 90 days before the Letter of Intent is filed will
be counted towards completion of the Letter of Intent but will not be entitled
to a retroactive downward adjustment of sales charge until the Letter of Intent
is fulfilled. Any redemptions made by the shareholder during the 13-month period
will be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemption) during the period.
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 Funds, in the form of shares, in the investor's name to
assure that the full applicable sales charge will be paid if the intended
purchase is not completed. The shares in escrow will be included in the total
shares owned as reflected on the monthly statement; income and capital gain
distributions on the escrow shares will be paid directly 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
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<PAGE>
sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single account in the name of the investor or to the investor's order. If
within 10 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of shares in escrow to realize
such difference will be made. If the proceeds from a total redemption are
inadequate, the investor will be liable to the Distributor for the difference.
In the event of a total redemption of the account prior to fulfillment of the
Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor. By
completing the Letter of Intent section of the Shareholder Application, an
investor grants to the Distributor a security interest in the shares in escrow
and agrees to irrevocably appoint the Distributor as his attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due and authorizes the Transfer
Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as
directed by the Distributor. The investor or the securities dealer must inform
the Transfer Agent or the Distributor that this Letter is in effect each time a
purchase is made.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other funds distributed by
the Distributor (excluding Pilgrim 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 open-end Pilgrim Funds (excluding Pilgrim General
Money Market Shares) purchased and owned of record or beneficially by a
corporation, including employees of a single employer (or affiliates thereof)
including shares held by its employees, under one or more retirement plans, can
be combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase, provided such transactions
are not prohibited by one or more provisions of the Employee Retirement Income
Security Act or the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules applicable to
retirement plans before investing.
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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 SEC or such Exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio securities or valuation of net assets of the
Fund not reasonably practicable; or (c) for such other period as the SEC may
permit for the protection of the Fund's shareholders. At various times, the Fund
may be requested to redeem shares for which it has not yet received good
payment. Accordingly, the Fund may delay the mailing of a redemption check until
such time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Fund reserves
the right, upon 30 days' written notice, to redeem, at net asset value (less any
applicable deferred sales charge), the shares of any shareholder whose account
has a value of less than $1,000 in the Fund, other than as a result of a decline
in the net asset value per share. Before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount that will
increase the value of the account to at least $1,000 before the redemption is
processed. This policy will not be implemented where the Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B shares may be subject to a
CDSC or redemption fee. For purchase payments subject to such CDSC, the
Distributor may pay out of its own assets a commission from 0.25% to 1.00% of
the amount invested for Class A purchases over $1 million and 4% of the amount
invested for Class B shares.
Shareholders will be charged a CDSC or redemption fee if certain of those shares
are redeemed within the applicable time periods as stated in the Prospectus.
No CDSC or redemption fee is imposed on any shares subject to a CDSC or
redemption fee to the extent that those shares (i) are no longer subject to the
applicable holding period, (ii) resulted from reinvestment of distributions on
CDSC or redemption fee shares or (iii) were exchanged for shares of another fund
managed by the Investment Manager, provided that the shares acquired in such
exchange and subsequent exchanges will continue to remain subject to the CDSC,
if applicable, until the applicable holding period expires.
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The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services. The shareholder must notify the Fund either directly or through
the Distributor at the time of redemption that the shareholder is entitled to a
waiver of CDSC or redemption fee. The waiver will then be granted subject to
confirmation of the shareholder's entitlement. The CDSC or redemption fee, which
may be imposed on Class A shares purchased in excess of $1 million, will also be
waived for registered investment advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients.
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 regular trading on the
New York Stock Exchange (normally 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, Martin Luther King, Jr. 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
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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.
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 regular trading on the New York
Stock Exchange will be confirmed at the offering price computed as of the close
of regular trading on the 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.
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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 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 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. Simple IRA
plans which employers may establish on behalf of their employees are also
available. Roth IRA plans which enable employed and self-employed individuals to
make non-deductible contributions, and, under certain circumstances, effect
tax-free withdrawals, are also available. Copies of model Custodial Account
Agreements are available from the Distributor. Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as the Custodian under these model
Agreements, 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 and Simple IRA are contained in IRS
required disclosure statements, 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).
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<PAGE>
2. Telephone redemption and/or exchange instructions should be made by dialing
1-800-992-0180.
3. Pilgrim Funds will not permit exchanges in violation of any of the terms and
conditions set forth in the Funds' Prospectus or herein.
4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on the
registration. This address cannot reflect any change within the previous
thirty (30) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to the
address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the address of
record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a predetermined
bank account is $5,000.
5. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have the
same account information and options except as stated in the Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but must be
forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141 and deposited
into your account before any transaction may be processed.
8. If a portion of the shares to be exchanged are held in escrow in connection
with a Letter of Intent, the smallest number of full shares of the Pilgrim
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.
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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.
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must,
among other things: (a) derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loaned, gains
from the sale or other disposition of stock or securities and gains from the
sale or other disposition of foreign currencies, or other income (including
gains from options, futures contracts and forward contracts) derived with
respect to the Fund's business of investing in stocks, securities or currencies;
(b) diversify its holdings so that, at the end of each quarter of the taxable
year, (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 (c) 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.
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DISTRIBUTIONS
Dividends of investment company taxable income (including net short-term capital
gains) are taxable to shareholders as ordinary income. The Fund expects that
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 will be taxable
to shareholders as long-term capital gains, regardless of the length of time the
Fund's shares have been hold by a shareholder, and are not eligible for the
dividends-received deduction. Generally, dividends and distributions are taxable
to shareholders, whether received in cash or reinvested in 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. If the Fund invests in certain high yield original issue discount
securities issued by corporations, a portion of the original issue discount
accruing on the securities may be eligible for the deduction for dividends
received by corporations. In such event, properly designated dividends of
investment company taxable income received from the Fund by its corporate
shareholders, to the extent attributable to such portion of accrued original
issue discount, may be eligible for this deduction for dividends received by
corporations.
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.
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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.
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.
Notwithstanding any of the foregoing, the Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, notional principal contract, futures or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options, futures and forward contracts
and short sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment of
appreciated financial positions does not apply to certain transactions closed in
the 90-day period ending with the 30th day after the close of the Fund's taxable
year, if certain conditions are met.
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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, which generally may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares. 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 applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he in not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.
OTHER TAXES
Distributions also may be subject to state, local and foreign taxes. U.S. tax
rules applicable to foreign investors may differ significantly from those
outlined above. This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. Shareholders are advised to consult
their own tax advisers for details with respect to the particular tax
consequences to them of an investment in the Fund.
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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:
n
P(1 + T) = ERV
where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b 6
2[( --- + 1) - 1]0
cd
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.
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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.
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., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the 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
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the performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results.
The average annual total return of the Class A shares of the Fund for the one,
five and ten year periods ended June 30, 1998 was 6.39%, 9.95% and 9.99%,
respectively. The average annual total return for the Class B shares for the one
year period ended June 30, 1998, and for the period from July 17, 1995
(commencement of operations) through June 30, 1998, was 5.90% and 11.78%,
respectively. The average annual total return for the Class M shares for the one
year period ended June 30, 1998, and for the period from July 17, 1995
(commencement of operations) through June 30, 1998, was 7.52% and 11.60%,
respectively.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to age characteristics, of various countries and
regions in which the Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of the Fund's portfolio; (v) the major industries located in
various jurisdictions; (vi) the number of shareholders in the Fund or other
Pilgrim Funds and the dollar amount of the assets under management; (vii)
descriptions of investing methods such as dollar-cost averaging, best day/worst
day scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Fund and individual stocks in the Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of the
Fund or other industry specialists; (x) lists or statistics of certain of the
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of the Fund, and (xii) descriptions of the benefits of
working with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, Pilgrim Capital, Pilgrim Group, Inc. or
affiliates of the Fund, the Investment Manager, Pilgrim Capital or Pilgrim
Group, Inc. including (i) performance rankings of other funds managed by the
Investment Manager, or the individuals employed by the Investment Manager who
exercise responsibility for the day-to-day management of the Fund, including
rankings of mutual funds published by Lipper Analytical Services, Inc.,
Morningstar, Inc., CDA Technologies, Inc., or other rating services, companies,
publications or other persons who rank mutual funds or other investment products
on overall performance or other criteria; (ii) lists of clients, the number of
clients, or assets under management; (iii) information regarding the acquisition
of the Pilgrim Funds by Pilgrim Capital, (iv) the past performance of Pilgrim
Capital and Pilgrim Group, Inc.; (v) the past performance of other funds managed
by the Investment Manager; and (vi) information regarding rights offerings
conducted by closed-end funds managed by the Investment Manager.
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. The Articles of Incorporation of the Company
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 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. All shares have equal voting,
dividend and liquidation rights. 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
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remaining shareholders would not be able to elect any Directors. Generally,
there will not be annual meetings of shareholders.
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. 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, 1775 Eye Street, N.W., Washington, D.C. 20006.
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, 1998 are
incorporated herein by reference from the Fund's Annual Report to Shareholders.
Copies of the Fund's Annual Report may be obtained without charge by contacting
the Fund at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004, (800)
992-0180.
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