STATEMENT OF ADDITIONAL INFORMATION
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
January 4, 2000
PILGRIM ADVISORY FUNDS, INC.
Pilgrim Asia-Pacific Equity Fund
Pilgrim MidCap Value Fund
Pilgrim LargeCap Leaders Fund
PILGRIM INVESTMENT FUNDS, INC.
Pilgrim MagnaCap Fund
Pilgrim High Yield Fund
PILGRIM BANK AND THRIFT FUND, INC.
Pilgrim Bank and Thrift Fund
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Pilgrim Government Securities Income Fund
PILGRIM MUTUAL FUNDS
Pilgrim International Core Growth Fund
Pilgrim Worldwide Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim High Yield Fund II
Pilgrim Strategic Income Fund
Pilgrim Money Market Fund
PILGRIM SMALLCAP OPPORTUNITIES FUND
Pilgrim SmallCap Opportunities Fund
PILGRIM GROWTH OPPORTUNITIES FUND
Pilgrim Growth Opportunities Fund
PILGRIM EQUITY TRUST
Pilgrim MidCap Opportunities Fund
PILGRIM MAYFLOWER TRUST
Pilgrim Emerging Markets Value Fund
Pilgrim Growth + Value Fund
Pilgrim High Total Return Fund
Pilgrim High Total Return Fund II
Pilgrim Income & Growth Fund
Pilgrim International Value Fund
Pilgrim Research Enhanced Index Fund
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
Pilgrim Balance Sheet Opportunities Fund
PILGRIM GOVERNMENT SECURITIES FUND
Pilgrim Government Securities Fund
<PAGE>
PILGRIM HIGH YIELD FUND III
Pilgrim High Yield Fund III
This Statement of Additional Information ("SAI") relates to each series
(each a "Fund" and collectively the "Funds") of each Registrant (each a
"Company") listed above. A Prospectus for the Funds, dated January 4, 2000,
which provides the basic information you should know before investing in the
Funds, may be obtained without charge from the Funds or the Funds' Principal
Underwriter, Pilgrim Securities, Inc. ("Pilgrim Securities" or the
"Distributor"), at the address listed above. This Statement of Additional
Information is not a prospectus and it should be read in conjunction with the
Prospectus, dated January 4, 2000, which has been filed with the Securities and
Exchange Commission ("SEC"). In addition, the financial statements from the
Funds' Annual Report dated December 31, 1998 and the Semi-Annual Report dated
June 30, 1999 (Equity Trust, SmallCap Opportunities Fund, Growth Opportunities
Fund, Balance Sheet Opportunities Fund, Government Securities Fund, and High
Yield Fund III), the Annual Report dated October 31, 1999 (Mayflower Trust) and
the Annual Report dated June 30, 1999 (Bank and Thrift Fund, Advisory Funds,
Investment Funds, Pilgrim Mutual Funds, and Government Securities Income Fund)
are incorporated herein by reference (excluding the Money Market Fund which is
newly organized). Copies of the Funds' Prospectus and Annual or Semi-Annual
Report may be obtained without charge by contacting Pilgrim Funds at the address
and phone number written above.
<PAGE>
TABLE OF CONTENTS
ORGANIZATION OF THE REGISTRANTS................................................3
MANAGEMENT OF THE FUNDS........................................................7
INVESTMENT MANAGER FEES.......................................................22
EXPENSE LIMITATION AGREEMENTS.................................................30
RULE 12B-1 PLANS..............................................................33
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS.......................................41
OPTIONS ON SECURITIES AND SECURITIES INDICES..................................67
INVESTMENT RESTRICTIONS.......................................................86
PORTFOLIO TRANSACTIONS.......................................................109
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................113
DETERMINATION OF SHARE PRICE.................................................120
SHAREHOLDER INFORMATION......................................................121
SHAREHOLDER SERVICES AND PRIVILEGES..........................................121
DISTRIBUTIONS................................................................124
TAX CONSIDERATIONS...........................................................124
CALCULATION OF PERFORMANCE DATA..............................................131
GENERAL INFORMATION..........................................................138
FINANCIAL STATEMENTS.........................................................141
<PAGE>
ORGANIZATION OF THE REGISTRANTS
PILGRIM ADVISORY FUNDS
Pilgrim Advisory Funds, Inc. ("Advisory Funds") is a Maryland corporation
registered as an open-end, diversified management investment company. The
Advisory Funds was organized in April 1985. The Company currently consists of
three separate diversified investment funds, Pilgrim Asia-Pacific Equity Fund
("Asia-Pacific Equity Fund"), Pilgrim MidCap Value Fund ("MidCap Value Fund")
and Pilgrim LargeCap Leaders Fund ("LargeCap Leaders Fund"), each with its own
investment objective and policies.
On November 16, 1998, the name of Pilgrim Advisory Funds, Inc. was changed
from "Pilgrim America Masters Series, Inc.," and the names of the Funds were
changed from "Pilgrim America Masters Asia-Pacific Equity Fund," "Pilgrim
America Masters MidCap Value Fund," and "Pilgrim America Masters LargeCap Value
Fund."
PILGRIM INVESTMENT FUNDS
Pilgrim Investment Funds, Inc. ("Pilgrim Investment Funds") is a Maryland
corporation registered as an open-end, diversified management investment
company. Pilgrim Investment Funds was organized in July 1969. The Company
currently consists of two separate diversified investment funds: Pilgrim
MagnaCap Fund ("MagnaCap Fund") and Pilgrim High Yield Fund ("High Yield Fund").
On August 18, 1989, shareholders of the High Yield Fund approved a proposal
to reorganize the High Yield 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 High Yield Fund became a series of PSIS.
Subsequently, on April 4, 1995, shareholders approved a proposal to reorganize
High Yield Fund from a series of PSIS to a series of the Company, a Maryland
corporation, in connection with 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 High
Yield Fund, did result in a change of manager and distributor.
On July 14, 1995, Pilgrim Investments Funds' name was changed from "Pilgrim
Investment Funds, Inc." to "Pilgrim America Investment Funds, Inc.," MagnaCap
Fund's name was changed from "Pilgrim MagnaCap Fund" to "Pilgrim America
MagnaCap Fund," and High Yield Fund's name was changed from "Pilgrim High Yield
Fund" to "Pilgrim America High Yield Fund." On November 16, 1998, the name of
the Pilgrim Investments Funds became "Pilgrim Investment Funds, Inc.," the name
of MagnaCap Fund became "Pilgrim MagnaCap Fund," and the name of High Yield Fund
became "Pilgrim High Yield Fund."
PILGRIM MUTUAL FUNDS
Pilgrim Mutual Funds is a Delaware business trust registered as an
open-end, diversified management investment company. Pilgrim Mutual Funds was
organized in 1992. Prior to a reorganization of the Trust, which became
effective on July 24, 1998 (the "Reorganization"), the Trust offered shares in a
number of separate diversified portfolios, each of which invested all of its
assets in a corresponding master fund of Nicholas-Applegate Investment Trust
(the "Master Trust"). The Reorganization eliminated this two-tiered
"master-feeder" structure.
3
<PAGE>
On March 15, 1999, the name of the Trust was changed from
"Nicholas-Applegate Mutual Funds," and the name of each Fund (except the Money
Market Fund, which is a new fund) was changed as follows:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Nicholas-Applegate International Core Growth Fund Pilgrim International Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund Pilgrim Worldwide Growth Fund
Nicholas-Applegate International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Nicholas-Applegate Emerging Countries Fund Pilgrim Emerging Countries Fund
Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund
Nicholas-Applegate Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Nicholas-Applegate Small Cap Growth Fund Pilgrim SmallCap Growth Fund
Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund
Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund
Nicholas-Applegate High Yield Bond Fund Pilgrim High Yield Fund II
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
On May 24, 1999, the names of the following Funds were changed as follows:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Pilgrim International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund
Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund
Pilgrim High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund III that, if approved by shareholders of Pilgrim High Yield Fund III,
will result in the reorganization of Pilgrim High Yield Fund III into the
Pilgrim High Yield Fund II series of Pilgrim Mutual Funds. If the Agreement and
Plan of Reorganization is approved by shareholders, the Reorganization is
expected to occur in the spring of 2000.
The Trustees have approved an Agreement and Plan of Reorganization for
Balance Sheet Opportunities Fund and Income & Growth Fund that, if approved by
shareholders of Balance Sheet Opportunities Fund and Income & Growth Fund, will
result in the reorganization Balance Sheet Opportunities Fund and Income &
Growth Fund into the Pilgrim Balanced Fund, a series of Pilgrim Mutual Funds. If
the Agreement and Plan of Reorganization is approved by shareholders, the
Reorganization is expected to occur in the spring of 2000.
PILGRIM BANK AND THRIFT FUND
Pilgrim Bank and Thrift Fund, Inc. ("Bank and Thrift Fund") is a Maryland
corporation registered as an open-end, diversified management investment
company. The Bank and Thrift Fund was organized in November 1985 and changed its
name from "Pilgrim Regional BankShares, Inc." to "Pilgrim America Bank and
Thrift Fund, Inc." in April, 1996. 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. On
November 16, 1998, the name of the Fund became "Pilgrim Bank and Thrift Fund."
PILGRIM GOVERNMENT SECURITIES INCOME FUND
Pilgrim Government Securities Income Fund, Inc. ("Government Securities
Income Fund") is a California corporation registered as an open-end, diversified
management investment company. The Government Securities Income Fund was
organized in May 1984.
The Trustees have approved an Agreement and Plan of Reorganization for the
Government Securities Income Fund that, if approved by shareholders of the
Government Securities Income Fund in the spring of 2000, will result in the
reorganization of the Pilgrim Government Securities Fund into the Government
Securities Income Fund.
4
<PAGE>
PILGRIM SMALLCAP OPPORTUNITIES FUND
Pilgrim SmallCap Opportunities Fund ("SmallCap Opportunities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. SmallCap Opportunities Fund was organized in 1986. On
November 1, 1999, the name of SmallCap Opportunities Fund was changed from
"Northstar Special Fund" (formerly Advantage Special Fund).
PILGRIM GROWTH OPPORTUNITIES FUND
Pilgrim Growth Opportunities Fund ("Growth Opportunities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. Growth Opportunities Fund was organized in 1986. On November
1, 1999, the name of Growth Opportunities Fund was changed from "Northstar
Growth Fund" (formerly Advantage Growth Fund).
PILGRIM EQUITY TRUST
Pilgrim Equity Trust ("Equity Trust") is a Massachusetts business trust
registered as an open-end, diversified management investment company. Equity
Trust was organized in June of 1998. The Company currently consists of one
separate diversified investment fund, Pilgrim MidCap Opportunities Fund ("MidCap
Opportunities Fund"). On November 1, 1999, the name of Equity Trust was changed
from the "Northstar Equity Trust", and MidCap Opportunities Fund was changed
from "Northstar Mid-Cap Growth Fund."
PILGRIM MAYFLOWER TRUST
Pilgrim Mayflower Trust ("Mayflower Trust") is a Massachusetts business
trust registered as an open-end, management investment company. The Mayflower
Trust and two of its series Pilgrim Income & Growth Fund ("Income & Growth
Fund") and Pilgrim High Total Return Fund ("High Total Return Fund") were
organized in 1993. Pilgrim Growth + Value Fund ("Growth + Value Fund) and
Pilgrim High Total Return Fund II ("High Total Return Fund II") were organized
in 1996. Pilgrim International Value Fund ("International Value Fund") commenced
operations on March 6, 1995 as the Brandes International Fund, a series of
Brandes Investment Trust. It was reorganized on April 21, 1997 as the
International Value Fund, a series of the Pilgrim Mayflower Trust. Pilgrim
Emerging Markets Value Fund ("Emerging Markets Value Fund") and Pilgrim Research
Enhanced Index Fund ("Research Enhanced Index Fund"), each a series of Pilgrim
Mayflower Trust, were organized 1998.
On November 1, 1999, the name of Mayflower Trust was changed from
"Northstar Trust" (formerly Northstar Advantage Trust). On the same date, the
following funds changed their names as follows:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Northstar Emerging Markets Value Fund Pilgrim Emerging Markets Value Fund
Northstar Growth + Value Fund Pilgrim Growth + Value Fund
Northstar High Total Return Fund (formerly Pilgrim High Total Return Fund
Northstar Advantage High Total Return Fund)
Northstar High Total Return Fund II Pilgrim High Total Return Fund II
Northstar Income & Growth Fund (formerly Pilgrim Income & Growth Fund
Northstar Advantage Income and Growth Fund)
Northstar International Value Fund Pilgrim International Value Fund
Northstar Research Enhanced Index Fund Pilgrim Research Enhanced Index Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for
Income & Growth Fund that, if approved by shareholders of Income & Growth Fund
in the spring of 2000, will result in the reorganization of Income & Growth Fund
into the Pilgrim Balanced Fund series of Pilgrim Mutual Funds.
5
<PAGE>
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
Pilgrim Balance Sheet Opportunities Fund ("Balance Sheet Opportunities
Fund") is a Massachusetts business trust registered as an open-end, diversified
management investment company. Balance Sheet Opportunities Fund was organized in
1986. On November 1, 1999, Pilgrim Balance Sheet Opportunities Fund's name was
changed from "Northstar Balance Sheet Opportunities Fund" (formerly Advantage
Income Fund).
The Trustees have approved an Agreement and Plan of Reorganization for
Balance Sheet Opportunities Fund that, if approved by shareholders of Balance
Sheet Opportunities Fund in the spring of 2000, will result in the
reorganization of Balance Sheet Opportunities Fund into the Pilgrim Balanced
Fund series of Pilgrim Mutual Funds.
PILGRIM GOVERNMENT SECURITIES FUND
Pilgrim Government Securities Fund ("Government Securities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. Government Securities Fund was organized in 1986. On
November 1, 1999, Government Securities Fund's name was changed from "Northstar
Government Securities Fund" (formerly Advantage Government Securities Fund).
The Trustees have approved an Agreement and Plan of Reorganization for
Government Securities Fund that, if approved by shareholders of Government
Securities Fund in the spring of 2000, will result in the reorganization of
Government Securities Fund into Government Securities Income Fund.
PILGRIM HIGH YIELD FUND III
Pilgrim High Yield Fund III ("High Yield Fund III") is a Massachusetts
business trust registered as an open-end, diversified management investment
company. High Yield Fund III was organized in 1989. On November 1, 1999, High
Yield Fund III's name was changed from "Northstar High Yield Fund" (formerly
Advantage High Yield Fund).
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund III that, if approved by shareholders of High Yield Fund III in the
spring of 2000, will result in the reorganization of the High Yield Fund III
into the High Yield Fund II series of Pilgrim Mutual Funds.
6
<PAGE>
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS/TRUSTEES.
Each Company is managed by its Directors/Trustees ("Board of Directors" and
"Board of Trustees" are used interchangeably in this SAI). The Directors and
Officers of the Companies 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 1940 Act, by virtue of that person's affiliation with the
Companies, or the Companies' Investment Managers ("Pilgrim Investments" and
"Pilgrim Advisors" or the "Investment Manager(s)"). Unless otherwise noted, the
mailing address of the Directors/Trustees and officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. The Board of Directors/Trustees
governs each Fund and is responsible for protecting the interests of
shareholders. The Directors/Trustees are experienced executives who oversee the
Funds' activities, review contractual arrangements with companies that provide
services to each Fund, and review each Fund's performance.
Set forth below is information regarding the Directors/Trustees of the
Funds. (Ms. Baldwin, Mr. Burton, Mr. Patton, and Mr. Stallings are not Trustees
of the Mayflower Trust, but rather they serve as a member of its Advisory Board.
Ms. Baldwin is not a Trustee of the SmallCap Opportunities, Growth
Opportunities, Balance Sheet Opportunities, Government Securities, and the High
Yield Fund III Funds, but rather she serves as a member of their Advisory
Boards.)
Mary A. Baldwin, Ph.D. (Age 60) 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, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Managers.
Al Burton. (Age 71) 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, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Managers.
Paul S. Doherty. (Age 65) Director. President, of Doherty, Wallace,
Pillsbury and Murphy, P.C., Attorneys. Mr. Doherty is a Director of
Tambrands, Inc. Mr. Doherty is also a Director and/or Trustee of each of
the Funds managed by the Investment Managers.
Robert B. Goode. (Age 69) Director. Currently retired. Mr. Goode was
formerly Chairman of The First Reinsurance Company of Hartford (1990-1991)
and President and Director of American Skandis Life Assurance Company
(1987-1989). Mr. Goode is also a Director and/or Trustee of each of the
Funds managed by the Investment Managers.
Alan L. Gosule. (Age 58) Director. Partner, Rogers & Wells (since 1991).
Mr. Gosule is a Director of F.L. Putnam Investment Management Co., Inc. Mr.
Gosule is also a Director and/or Trustee of each of the Funds managed by
the Investment Managers.
*Mark Lipson. (Age 50) Director. Chairman and Director of Pilgrim Advisors,
Inc., and Director of Pilgrim Funding, Inc. Mr. Lipson was formerly
Chairman of Pilgrim Holdings Corporation and Northstar Distributors, Inc.;
Director of Northstar Administrators Corporation; President of Pilgrim
Funding, Inc.; Director, President and Chief Executive Officer of National
Securities & Research Corporation; and Director/Trustee and President of
the National Affiliated Investment Companies and certain of National's
subsidiaries (prior to August 1993). Mr. Lipson is also a Director and/or
Trustee of each of the Funds managed by the Investment Managers.
Walter H. May. (Age 63) Director. Retired. Mr. May was formerly a Senior
Executive for Piper Jaffray, Inc. Mr. May is also a Director and/or Trustee
of each of the Funds managed by the Investment Managers.
7
<PAGE>
Jock Patton. (Age 54) Director. Private Investor. Director of Hypercom
Corporation (since January 1999), Stuart Entertainment, Inc. (since January
1999), and JDA Software Group, Inc. (since January 1999). Mr. Patton was
formerly Director of Artisoft, Inc. (August 1994 - July 1998); President
and Co-owner of 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, Trustee, or a member of the Advisory Board of each of
the Funds managed by the Investment Managers.
David W.C. Putnam. (Age 60) Director. President, Clerk and Director of F.L.
Putnam Securities Company, Inc., F.L. Putnam Investment Management Company,
Inc., Trust Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is Director of
Anchor Investment Management Corporation and President and Director/Trustee
of Anchor Capital Accumulation Trust, Anchor International Bond Trust,
Anchor Gold and Currency Trust, Anchor Resources and Commodities Trust and
Anchor Strategic Assets Trust. Mr. Putnam is also a Director and/or Trustee
of each of the Funds managed by the Investment Managers.
John R. Smith. (Age 76) Director. President of New England Fiduciary
Company (since 1991). Mr. Smith is Chairman of Massachusetts Educational
Financing Authority (since 1987), Vice Chairman of Massachusetts Health and
Education Authority and formerly Financial Vice President of Boston College
(1970-1991). Mr. Smith is also a Director and/or Trustee of each of the
Funds managed by the Investment Managers.
*Robert W. Stallings. (Age 50) Director. Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim
Group, Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim
Investments, Inc. (since December 1994); Chairman, Pilgrim Securities, Inc.
("Pilgrim Securities") (since December 1994); President and Chief Executive
Officer of Pilgrim Funding, Inc. (since November 1999); and Chairman,
President and Chief Executive Officer of Pilgrim Holdings Corporation
(Pilgrim Capital Corporation merged into this subsidiary October 29, 1999)
(since August 1991). Mr. Stallings is also a Director, Trustee, or a member
of the Advisory Board of each of the Funds managed by the Investment
Managers.
*John G. Turner. (Age 60) Chairman. Chairman and Chief Executive Officer of
Relia Star Financial Corp. and Relia Star Life Insurance Co. (since 1993);
Chairman of ReliaStar United Services Life Insurance Company and ReliaStar
Life Insurance Company of New York (since 1995); Chairman of Northern Life
Insurance Company (since 1992); Director of Northstar Investment Management
Corporation and affiliates (since October 1993); Chairman and
Director/Trustee of the Northstar affiliated investment companies (since
October 1993). Mr. Turner was formerly President of ReliaStar Financial
Corp. and ReliaStar Life Insurance Co. (1989-1991) and President and Chief
Operating Officer of ReliaStar Life Insurance Company (1986-1991). Mr.
Turner is also Chairman of each of the Funds managed by the Investment
Managers.
David W. Wallace. (Age 75) Director. Chairman of Putnam Trust Company and
FECO Engineered Systems, Inc. Mr. Wallace is President and Director/Trustee
of the Robert R. Young Foundation, Governor of the New York Hospital and
Director of UMC Electronics and Zurn Industries, Inc. Mr. Wallace was
formerly Chairman of Lone Star Industries, Chairman and Chief Executive
Officer of Todd Shipyards, Bangor Punta Corporation, and National
Securities & Research Corporation. Mr. Wallace is also a Director and/or
Trustee of each of the Funds managed by the Investment Managers.
Each Fund pays each Director who is not an interested person a pro rata
share, as described below, of (i) an annual retainer of $20,000; (ii) $5,000 per
quarterly Board meeting; (iii) $500 per committee meeting; (iv) $500 per special
or telephonic meeting; and (v) out-of-pocket expenses. The pro rata share paid
by each Fund is based on the Funds' 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 (and, in the case of Mary A. Baldwin,
Al Burton, Jock Patton, and Robert W. Stallings, Funds for which they serve as a
member of the Advisory Board).
8
<PAGE>
COMPENSATION OF DIRECTORS.
The following tables set forth information regarding compensation of
Directors by each Company and other funds managed by the Investment Manager for
the fiscal year ended June 30, 1999, October 31, 1999, or December 31, 1998, as
applicable. Officers of the Companies and Directors who are interested persons
of the Companies 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 served during that fiscal year.
9
<PAGE>
COMPENSATION TABLE*
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION AGGREGATE
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE FROM COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE COMPENSATION BALANCE FROM
FROM PILGRIM FROM SMALLCAP FROM GROWTH FROM HIGH COMPENSATION FROM SHEET GOVERNMENT
NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES YIELD FUND FROM EQUITY MAYFLOWER OPPORTUNITIES SECURITIES
PERSON, POSITION FUNDS(1)(5) FUND(2)(6) FUND(2)(6) III(2)(6) TRUST(2)(6) TRUST(4)(3)(6) FUND(2)(6) FUND(3)(6)
---------------- ----------- ---------- ---------- --------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dann V. Angeloff(7) $25,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Fred C. Applegate(7) $22,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Walter E. Auch(8) 20,476 N/A N/A N/A N/A N/A N/A N/A
Former Director/
Advisory Officer
Mary A. Baldwin 1,476
Director(9)(10)
John P. Burke 1,476 N/A N/A N/A N/A N/A N/A N/A
Director (9)(11)
Al Burton(9)(10) 1,476 N/A N/A N/A N/A N/A N/A N/A
Director
Theodore J. Coburn $24,000 N/A N/A N/A N/A N/A N/A N/A
Director(7)
Darlene Deremer $21,000 N/A N/A N/A N/A N/A N/A N/A
Director(7)
Paul S. Doherty N/A $2,369 $1,369 $1,369 $308 $8,086 $1,369 $1,369
Director(8)(12)
Bruce S. Foerster N/A N/A N/A N/A N/A N/A N/A N/A
Former Director (13)
Robert B. Goode, Jr N/A $2,338 $1,338 $1,338 $308 $7,817 $1,338 $1,338
Director (9)(12)
Alan S. Gosule N/A $2,369 $1,369 $1,369 $308 $6,731 $1,369 $1,369
Director(9)(12)
George F. Keane(7) $23,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Arthur B. Laffer(7) $18,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM
AGGREGATE AGGREGATE AGGREGATE FROM BENEFITS ESTIMATED REGISTRANT
COMPENSATION COMPENSATION COMPENSATION GOVERNMENT ACCRUED ANNUAL AND FUND
FROM FROM FROM BANK SECURITIES AS PART OF BENEFITS COMPLEX PAID
NAME OF ADVISORY INVESTMENT AND THRIFT INCOME FUND UPON TO
PERSON, POSITION FUNDS(1) FUNDS(1) FUND(1) FUND(1) EXPENSES RETIREMENT DIRECTORS(1)
---------------- -------- -------- ------- ------- -------- ---------- ------------
Dann V. Angeloff(7) N/A N/A N/A N/A None N/A $25,000
Former Director (1 board)
Fred C. Applegate(7) N/A N/A N/A N/A None N/A $22,000
Former Director (1 board)
Walter E. Auch(8) $89 $643 $553 $26 N/A N/A $13,250
Former Director/ (3 boards)
Advisory Officer
Mary A. Baldwin $1,248 $8,028 $8,422 $388 N/A N/A $30,000
Director(9)(10) (6 boards)
John P. Burke $1,248 $8,028 $8,422 $388 N/A N/A $30,000
Director (9)(11) (6 boards)
Al Burton(9)(10) $1,248 $8,028 $8,422 $388 N/A N/A $29,500
Director (6 boards)
Theodore J. Coburn N/A N/A N/A N/A None N/A $24,000
Director(7) (1 board)
Darlene Deremer N/A N/A N/A N/A None N/A $21,000
Director(7) (1 board)
Paul S. Doherty N/A N/A N/A N/A N/A N/A $16,000
Director(8)(12) (7 boards)
Bruce S. Foerster $600 $3,434 $4,222 $134 N/A N/A $15,000
Former Director (13) (5 boards)
Robert B. Goode, Jr N/A N/A N/A N/A N/A N/A $15,500
Director (9)(12) (7 boards)
Alan S. Gosule N/A N/A N/A N/A N/A N/A $14,000
Director(9)(12) (7 boards)
George F. Keane(7) N/A N/A N/A N/A None N/A $23,000
Former Director (1 board)
Arthur B. Laffer(7) N/A N/A N/A N/A None N/A $18,000
Former Director (1 board)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION AGGREGATE
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE FROM COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE COMPENSATION BALANCE FROM
FROM PILGRIM FROM SMALLCAP FROM GROWTH FROM HIGH COMPENSATION FROM SHEET GOVERNMENT
NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES YIELD FUND FROM EQUITY MAYFLOWER OPPORTUNITIES SECURITIES
PERSON, POSITION FUNDS(1)(5) FUND(2)(6) FUND(2)(6) III(2)(6) TRUST(2)(6) TRUST(4)(3)(6) FUND(2)(6) FUND(3)(6)
---------------- ----------- ---------- ---------- --------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark L. Lipson N/A $0 $0 $0 $0 $0 $0 $0
Director (9)(12)(14)
Walter H. May (9)(12) N/A $2,369 $1,369 $1,369 $308 $8,087 $1,369 $1,369
Jock Patton (9)(10) 1,476 N/A N/A N/A N/A N/A N/A N/A
Director
David W.C. Putnam (12) N/A $2,338 $1,338 $1,338 $308 $7,466 $1,338 $1,338
(7 boards)
John R. Smith (9)(12) $2,369 $1,369 $1,369 $308 $8,086 $1,369 $1,369
Director
Robert W. Stallings $0 N/A N/A N/A N/A N/A N/A N/A
Director(9)(10)(14)
John G. Turner (12)(14) N/A $0 $0 $0 $0 $0 $0 $0
Director
David W. Wallace(9)(12) N/A $2,369 $1,369 $1,369 $308 $7,735 $1,369 $1,369
Charles E. Young(7) $23,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
<CAPTION>
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM
AGGREGATE AGGREGATE AGGREGATE FROM BENEFITS ESTIMATED REGISTRANT
COMPENSATION COMPENSATION COMPENSATION GOVERNMENT ACCRUED ANNUAL AND FUND
FROM FROM FROM BANK SECURITIES AS PART OF BENEFITS COMPLEX PAID
NAME OF ADVISORY INVESTMENT AND THRIFT INCOME FUND UPON TO
PERSON, POSITION FUNDS(1) FUNDS(1) FUND(1) FUND(1) EXPENSES RETIREMENT DIRECTORS(1)
---------------- -------- -------- ------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark L. Lipson N/A N/A N/A N/A N/A N/A $0
Director (9)(12)(14) (7 boards)
Walter H. May (9)(12) N/A N/A N/A N/A N/A N/A $16,000
Jock Patton (9)(10) $1,229 $7,883 $8,291 $381 N/A N/A $29,500
Director (6 boards)
David W.C. Putnam (12) N/A N/A N/A N/A N/A N/A $13,250
John R. Smith (9)(12) N/A N/A $16,000
Director (7 boards)
Robert W. Stallings $0 $0 $0 $0 N/A N/A $0
Director(9)(10)(14) (6 boards)
John G. Turner (12)(14) N/A N/A N/A N/A N/A N/A $0
Director (7 boards)
David W. Wallace(9)(12) N/A N/A N/A N/A N/A N/A $13,750
(7 boards)
Charles E. Young(7) N/A N/A N/A N/A None N/A $23,000
Former Director (1 board)
</TABLE>
- ----------
* Officers and Trustees who are interested persons do not receive any
compensation from the Funds.
(1) Information provided for the fiscal year ended June 30, 1999.
(2) Information provided for the fiscal year ended December 31, 1998.
(3) Information provided for the fiscal year ended October 31, 1999.
(4) This total does not include the Research Enhanced Index Fund which
commenced operations on December 20, 1998.
(5) Prior to May 24, 1999, the Trust was part of a different Fund complex.
Effective May 24, 1999, when Pilgrim Investments, Inc. became the
investment adviser to the Funds, the Trust joined the Pilgrim family of
funds.
(6) Prior to November 1, 1999, the Fund was part of a different Fund complex.
Effective November 1, 1999, the Trust joined the Pilgrim family of funds.
(7) Resigned as Trustee effective May 21, 1999.
11
<PAGE>
(8) Mr. Auch was elected as a Director of Pilgrim Bank and Thrift Fund, Inc.
and Pilgrim Prime Rate Trust on May 24, 1999. While he was a trustee of
Pilgrim Mutual Funds (formerly Nicholas-Applegate Mutual Funds) prior to
that date, Pilgrim Mutual Funds was not part of the Pilgrim Fund complex
until May 24, 1999. Mr. Auch also served as a non-voting advisory director
for Pilgrim Advisory Funds, Inc., Pilgrim Investment Funds, Inc. and
Pilgrim Government Securities Income Fund, Inc., effective May 24, 1999.
Resigned as Trustee effective October 29, 1999.
(9) Also serves as a member of the Board of Trustees of the Pilgrim Prime Rate
Trust.
(10) Elected a Trustee or non-voting advisory board member of SmallCap
Opportunities Fund, Growth Opportunities Fund, High Yield Fund III, Equity
Trust, Mayflower Trust, Balance Sheet Opportunities Fund, and Government
Securities Fund on November 16, 1999.
(11) Resigned effected October 29, 1999.
(12) Elected a Director/Trustee of Mutual Funds, Advisory Funds, Investment
Funds, Bank and Thrift Fund, and Government Securities Income Fund on
October 26, 1999.
(13) Resigned as a Director effected September 30, 1998.
(14) "Interested person," as defined in the Investment Company Act of 1940, of
the Company because of the affiliation with the Investment Manager.
+ Pilgrim Mutual Funds has recently changed its fiscal year end to June 30.
12
<PAGE>
OFFICERS
Unless otherwise noted, the mailing address of the officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. The following individuals serve as
officers for each Fund:
James R. Reis, Executive Vice President and Assistant Secretary. (Age 42)
Director, Vice Chairman (since December 1994), Executive Vice President
(since April 1995), and Director of Structured Finance (since April 1998),
Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994)
and Vice Chairman (since November 1995) of Pilgrim Securities; Executive
Vice President, Assistant Secretary and Chief Credit Officer of Pilgrim
Prime Rate Trust; Executive Vice President and Assistant Secretary of each
of the other Pilgrim Funds. Chief Financial Officer (since December 1993),
Vice Chairman and Assistant Secretary (since April 1993) and former
President (May 1991 - December 1993), Pilgrim Capital (formerly Express
America Holdings Corporation). Presently serves or has served as an officer
or director of other affiliates of Pilgrim Capital.
Stanley D. Vyner, Executive Vice President. (Age 49) President and Chief
Executive Officer (since August 1996), Pilgrim Investments; Executive Vice
President of most of the other Pilgrim Funds (since July 1996). Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, Executive Vice President and Secretary. (Age 50)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of each of the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, Senior Vice President and Principal Financial Officer.
(Age 41) Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice
President and Principal Financial Officer of each of the other Pilgrim
Funds. He served in same capacity from January, 1995 - April, 1997.
Formerly, Chief Financial Officer of Endeaver Group (April, 1997 to June,
1998).
Robert S. Naka, Senior Vice President and Assistant Secretary. (Age 36)
Senior Vice President, Pilgrim Investments (since November 1999) and
Pilgrim Group, Inc. (since August 1999). Senior Vice President and
Assistant Secretary of each of the other Pilgrim Funds. Formerly Vice
President, Pilgrim Investments (April 1997 - October 1999), Pilgrim Group,
Inc. (February 1997 - August 1999). Formerly Assistant Vice President,
Pilgrim Group, Inc. (August 1995 - February 1997). Formerly Operations
Manager, Pilgrim Group, Inc. (April 1992 - April 1995).
Robyn L. Ichilov, Vice President and Treasurer. (Age 32) Vice President,
Pilgrim Investments (since August 1997), Accounting Manager (since November
1995). Vice President and Treasurer of most of the other Pilgrim Funds.
Formerly Assistant Vice President and Accounting Supervisor for PaineWebber
(June 1993 - April 1995).
13
<PAGE>
In addition to the above listed officers, the following individuals also serve
as officers for the indicated Fund:
PILGRIM ADVISORY FUNDS
G. David Underwood, Vice President and Senior Sub-Adviser. (Age 50) Vice
President, Pilgrim Investments (since December 1996). Formerly Director of
Funds Management, First Interstate Capital Management (January 1995 -
November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
PILGRIM INVESTMENT FUNDS
Howard N. Kornblue, Senior Vice President and Senior Sub-Adviser. (Age 58)
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. (Age 40)
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).
PILGRIM MUTUAL FUNDS
Kevin G. Mathews, Senior Vice President and Senior Sub-Adviser. (Age 40)
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).
G. David Underwood, Vice President and Senior Sub-Adviser. (Age 50) Vice
President, Pilgrim Investments (since December 1996). Formerly Director of
Funds Management, First Interstate Capital Management (January 1995 -
November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
Robert K. Kinsey, Vice President and Sub-Adviser. (Age 42) Vice President,
Pilgrim Investments (since March 1999). Formerly Vice President and Fixed
Income Sub-Adviser, Federated Investors (January 1995 - March 1999);
Principal and Sub-Adviser, Harris Investment Management (July 1992 -
January 1995).
BANK AND THRIFT FUND
Carl Dorf, Senior Vice President and Senior Sub-Adviser. (Age 59) Senior
Vice President (since February 1997), Pilgrim Investments, Inc. Formerly
Vice President, Pilgrim Investments, Inc. (August 1995 - February 1997).
Formerly Vice President, Pilgrim Bank and Thrift Fund, Inc. (January 1996 -
May 1997). Formerly Vice President, Pilgrim Management Corporation (January
1991 - April 1995).
GOVERNMENT SECURITIES INCOME FUND
Robert K. Kinsey, Vice President and Senior Sub-Adviser. (Age 42) Vice
President, Pilgrim Investments (since March 1999). Formerly Vice President
and Fixed Income Sub-Adviser, Federated Investors (January 1995 - March
1999); Principal and Sub-Adviser, Harris Investment Management (July 1992 -
January 1995).
14
<PAGE>
MAYFLOWER TRUST
Kevin G. Mathews, Senior Vice President and Senior Portfolio. (Age 40)
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).
Mary Lisanti, Executive Vice President and Sub-Adviser. (Age 43) Executive
Vice President and Chief Investment Adviser-Equities, Pilgrim Investments
(since November 1999). Formerly Sub-Adviser, Strong Capital Management
(September 1996 - May 1998); Managing Director and Sub-Adviser, Banker
Trust Corporation (March 1993 - August 1996).
EQUITY TRUST
Mary Lisanti, Executive Vice President and Sub-Adviser. (Age 43) Executive
Vice President and Chief Investment Adviser-Equities, Pilgrim Investments
(since November 1999). Formerly Sub-Adviser, Strong Capital Management
(September 1996 - May 1998); Managing Director and Sub-Adviser, Banker
Trust Corporation (March 1993 - August 1996).
SMALLCAP OPPORTUNITIES FUND.
Mary Lisanti, Executive Vice President and Sub-Adviser. (Age 43) Executive
Vice President and Chief Investment Adviser-Equities, Pilgrim Investments
(since November 1999). Formerly Sub-Adviser, Strong Capital Management
(September 1996 - May 1998); Managing Director and Sub-Adviser, Banker
Trust Corporation (March 1993 - August 1996).
GROWTH OPPORTUNITIES FUND.
Mary Lisanti, Executive Vice President and Sub-Adviser. (Age 43) Executive
Vice President and Chief Investment Adviser-Equities, Pilgrim Investments
(since November 1999). Formerly Sub-Adviser, Strong Capital Management
(September 1996 - May 1998); Managing Director and Sub-Adviser, Banker
Trust Corporation (March 1993 - August 1996).
BALANCE SHEET OPPORTUNITIES FUND.
Kevin G. Mathews, Senior Vice President and Senior Sub-Adviser. (Age 40)
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).
G. David Underwood, Vice President and Senior Sub-Adviser. (Age 50) Vice
President, Pilgrim Investments (since December 1996). Formerly Director of
Funds Management, First Interstate Capital Management (January 1995 -
November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
Robert K. Kinsey, Vice President and Sub-Adviser. (Age 42) Vice President,
Pilgrim Investments (since March 1999). Formerly Vice President and Fixed
Income Sub-Adviser, Federated Investors (January 1995 - March 1999);
Principal and Sub-Adviser, Harris Investment Management (July 1992 -
January 1995).
15
<PAGE>
GOVERNMENT SECURITIES FUND.
Robert K. Kinsey, Vice President and Senior Sub-Adviser. (Age 42) Vice
President, Pilgrim Investments (since March 1999). Formerly Vice President
and Fixed Income Sub-Adviser, Federated Investors (January 1995 - March
1999); Principal and Sub-Adviser, Harris Investment Management (July 1992 -
January 1995).
HIGH YIELD FUND III.
Kevin G. Mathews, Senior Vice President and Senior Sub-Adviser. (Age 40)
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).
PRINCIPAL SHAREHOLDERS
As of December 15, 1999, the Directors and Officers as a group owned less
than 1% of any class of each Fund's outstanding shares. As of that date, 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 as follows:
<TABLE>
<CAPTION>
CLASS AND TYPE OF PERCENTAGE
Fund ADDRESS OWNERSHIP PERCENTAGE OF CLASS OF FUND
---- ------- --------- ------------------- -------
<S> <C> <C> <C> <C>
Pilgrim Inv Fiduciary Trust Co Cust Class C 7.65% 0.04008%
Magnacap IRA R/O Robert P MacNeil Record Holder
Fund 69736 Henry Ross Dr
Romeo, MI 48065-4040
Pilgrim Advest Inc Class C 27.83% 0.22743%
LargeCap FBO 655-70562-12 Record Holder
Leaders Fund 90 State House Square
Hartford, CT 06103-3708
Pilgrim PaineWebber Cust FBO Class C 5.27% 0.04301%
LargeCap Lynda A Shephard Record Holder
Leaders Fund PO Box 3321
Weehawken, NJ 07087-8154
Pilgrim Joseph E Chodl & Class C 8.39% 0.06851%
LargeCap Stepanie E Chodl JTWROS Record Holder
Leaders Fund 201 Lake Hinsdale Dr Apt. 308
Clarendon Hills, IL 60514-2236
Pilgrim Growth Northern Trust Co TTEE FBO Class A 7.69% 1.77236%
Opportunities Reliastar Success Shar Plan & ESOP Record Holder
Fund 22-47317
PO Box 92956
Chicago, IL 60675-2956
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Growth Norwest Bank Minnesota NA Class I 18.18% 5.83646%
Opportunities FBO Reliastar Pension Plan Record Holder
Fund A/C #13132700
PO Box 1533
Minneapolis, MN 55480
Pilgrim MidCap Prudential Securities Inc. FBO Class C 5.64% 0.02267%
Value Fund Jerome M Garden Tr PSP &Trust PS Plan Record Holder
150 E Huron St. Ste 910
Chicago, IL 60611-2946
Pilgrim MidCap Prudential Securities Inc. FBO Class C 5.59% 0.02247%
Value Fund Mr Michael D Fox IRA 05/13/99 Record Holder
2893 Idlewood Ln
Pilgrim MidCap Raymond James & Assoc Inc Cust Class C 16.29% 0.06553%
Value Fund Carl D Mastis IRA Record Holder
4684 Colima Ct
Saint Louis, MO 63128-2309
Pilgrim MidCap H Andrew Gross Class A 14.41% 0.90068%
Opportunities 17 Purchase Hills Dr Record Holder
Fund Purchase, NY 10577
Pilgrim MidCap Mary Lisanti & Class A 10.06% 0.62844%
Opportunities Anthony O'Connor Record Holder
Fund 215 Old Beach Glen Road
Boonton, NJ 07005
Pilgrim MidCap Olde Discount FBO 18109486 Class A 5.34% 0.33369%
Opportunities 751 Griswold St Record Holder
Fund Detroit, MI 48266-3224
Pilgrim MidCap Donald Pels Class Q 39.13% 0.95190%
Growth Fund 375 Park Ave Ste 3305 Record Holder
New York, NY 10152-3399
Pilgrim SmallCap Suntrust Bank Central FL NA TTEE Class Q 20.00% 0.45475%
Growth Fund FBO Akerman Senterfitt & Edison PA Record Holder
Cash or Deferred PSP & Trust C/O
Fascorp Record Keeper 8515 E
Orchard Rd Ste 212
Englewood, CO 80111-5037
Pilgrim SmallCap Suntrust Bank Central FL NA TTEE Class Q 15.83% 0.36003%
Growth Fund FBO Hubbard Construction Co Emp Record Holder
PSP and 401K Plan C/O Fascorp
Record Keeper 8515 E Orchard Rd
Ste 212
Englewood, CO 80111-5037
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim SmallCap Susan S Rand Class Q 11.79% 0.26813%
Growth Fund PO Box 452 Record Holder
Salisbury, CT 06068-0452
Pilgrim Int'l Trust Company of America Class A 5.29% 1.45761%
Core Growth 7103 S Revere Pkwy Record Holder
Fund Englewood, CO 80112-3936
Pilgrim Int'l PaineWebber FBO Class A 7.94% 2.19047%
Core Growth Thomas R Sloan Record Holder
Fund 705 Sunset Drive
Greensboro, NC 27408-6414
Pilgrim Int'l PaineWebber FBO Class C 7.74% 2.12374%
Core Growth Arnold I Richman, Int'l Acct Record Holder
Fund 218 North Charles Street, Ste 500
Baltimore, MD 21201-4019
Pilgrim Emerging CIBC World Markets Corp. Class A 5.75% 2.72268%
Markets PO Box 3484 Record Holder
Value Fund Church Street Station
New York, NY 10008-3484
Pilgrim Asia Conti Investments LLC Class A 6.94% 2.55410%
Pacific Equity C/O Continental Grain Co Record Holder
Fund Attn: Mary Greenebaum
277 Park Ave
New York, NY 10172-003
Pilgrim Gov't Red Lake County Court House Class A 6.97% 4.14455%
Securities Attn: Jay Gilemette Record Holder
Income Fund Red Lake Falls, MN 56750
Pilgrim Gov't Jeffery J Malek Class C 7.95% 0.05997%
Securities 1799 Herman Dr Record Holder
Income Fund York, PA 17404-1030
Pilgrim Gov't WFS Cust FBO Class C 33.86% 0.25542%
Securities Gail C Mazur IRA Record Holder
Income Fund A/C 5788-9419
11 Nettlecreek Rd
Fairport, NY 14450-3021
Pilgrim Gov't George E & Florence E Leslie Tr Class M 5.65% 0.13884%
Securities FBO Leslie Family Trust Record Holder
Income Fund PO Box 70400
Pasadena, CA 91117-7400
Pilgrim Gov't Carol A McArthur Separate Property Class M 8.71% 0.21403%
Securities 395 Sawdust Rd Ste 2153 Record Holder
Income Fund The Woodlands, TX 77380-2242
Pilgrim Gov't Prudential Securities Inc. FBO Class M 19.17% 0.47137%
Securities Dr. Antonio Aguirre Record Holder
Income Fund Zeisselstr 8
60138 Frankfort AM, Germany
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Gov't First Clearing Corporation Cust Class C 7.04% 0.15648%
Securities Fund FBO 1536-2048 W Dean Bidgood Jr. Record Holder
C/O Bidgood & Associates
2605 Meridian Pkwy Ste 200
Pilgrim Strategic Eastern Bank & Trust Class A 14.54% 2.95125%
Income Fund FBO Munksjo Paper 401K Record Holder
217 Essex St
Salem, MA 01970-3792
Pilgrim Strategic CNA Trust FBO Class B 7.03% 2.97319%
Income Fund Con Agg Recycling Corp Record Holder
PO Box 5024
Costa Mesa, CA 92628-5024
Pilgrim Strategic Wachovia Securities Inc Class C 5.50% 1.96650%
Income Fund FBO 5750066416 Record Holder
301 N Main St, MC-32002
Winston-Salem, NC 27150-0002
Pilgrim High New Life Corp of America FBO Class A 5.14% 1.48783%
Yield Fund Norvell L Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Olde Discount FBO 09005070 Class C 6.51% 0.08954%
Yield Fund 751 Griswold St Record Holder
Detroit, MI 48226-3224
Pilgrim High Wachovia Securities Inc. Class A 7.98% 1.1254%
Yield Fund II FBO 324-75213-17 Record Holder
PO Box 1220
Charlotte, NC 28201-1220
Pilgrim High New Life Corp of America FBO Class C 12.98% 2.94440%
Yield Fund II Norvell L Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Prudential Securities Inc FBO Class A 5.23% 0.65355%
Total Return Mr Richard Simon TTEE Record Holder
Fund II Richard Simon Rev Trust
Aventura, FL 33180-2566
Pilgrim Money Advest Inc FBO Class A 7.60% 0.82757%
Market Fund 440-70255-11 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Advest Inc FBO Class A 22.60% 2.46035%
Market Fund 426-70457-16 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Advest Inc FBO Class A 9.35% 1.01818%
Market Fund 440-70340-18 Record Holder
90 State House Square
Hartford, CT 06103-3708
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Money Advest Inc FBO Class A 6.16% 0.67102%
Market Fund 440-72623-12 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Marvin Anthony McCall & Class A 7.50% 0.81601%
Market Fund Lisa Diane McCall JTWROS Record Holder
2711 Morning Leaf Ct
Spring, TX 77388-5441
Pilgrim Money Raymond James Assoc Inc Cust IRA Class C 8.38% 1.08620%
Market Fund FBO Thomas P Johnson Record Holder
7449 S Ogden Way
Littleton, CO 80122-1472
Pilgrim Money Resources Trust Co Tr FBO Class C 6.64% 0.86114%
Market Fund Barbara G Metzler I###-##-#### Record Holder
PO Box 5900
Denver, CO 80217-5900
Pilgrim Money Salomon Smith Barney Inc Class C 12.92% 1.67494%
Market Fund FBO 00124605083 Record Holder
333 West 34th St - 3rd Floor
New York, NY 10001
Pilgrim Money PaineWebber FBO Class C 5.36% 0.69506%
Market Fund Carolyn L Mehew Record Holder
PO Box 3321
Weehawken, NJ 07087-8154
Pilgrim Money PaineWebber FBO Class C 6.78% 0.87921%
Market Fund Harvey and Constance Fox Co-Ttees Record Holder
Fox Family Trust
20455 Chalet Lane
Saratoga, CA 95070-4928
Pilgrim Balance Wexford Clearing Services Corp Class C 10.67% 0.14206%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Nicholas De Morato IRA
Fund 527 Hillside St
Forest City, PA 18421-9615
Pilgrim Balance Wexford Clearing Services Corp Class C 7.12% 0.09485%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Frances A Tartaglione IRA R/O
Fund 114 Holden Blvd
Staten Island, NY 10314-5368
Pilgrim Balance Wexford Clearing Services Corp Class C 15.98% 0.21273%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Anthony F Costa IRA
Fund 52 Hayrick Ln
Commack, NY 11725-1420
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Balance Wexford Clearing Services Corp Class C 6.31% 0.08393%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Teresa R Costa IRA
Fund 52 Hayrick Ln
Commack, NY 11725-1420
Pilgrim Balance Wexford Clearing Services Corp Class C 27.13% 0.36119%
Sheet Colt Collectors Assn Inc Record Holder
Opportunities C/O Richard Burdick - Treasurer
Fund PO Box 4667
Ventura, CA 93007
Pilgrim Trust Company of America Class Q 5.25% 0.45542%
Convertible FBO TCA Record Holder
Fund 7103 Revere Pkwy
Englewood, CO 80112-3936
Pilgrim Dalton L Knauss Ttee Class Q 11.23% 0.97421%
Convertible ElaineV Knauss Revocable Trust Record Holder
Fund PO Box 1108
Carefree, AZ 85377-1108
Pilgrim Dalton L Knauss Ttee Class Q 11.26% 0.97678%
Convertible Dalton L Knauss Revocable Trust Record Holder
Fund PO Box 2173
Carefree, AZ 85377-2173
</TABLE>
INVESTMENT MANAGERS
The Investment Manager for the Equity Trust, SmallCap Opportunities Fund,
Growth Opportunities Fund, Mayflower Trust, Balance Sheet Opportunities Fund,
the Government Securities Fund and the High Yield Fund III is Pilgrim Advisors,
Inc. The Investment Manager for the Bank and Thrift Fund, Advisory Funds,
Investment Funds, Pilgrim Mutual Funds and Government Securities Income Fund is
Pilgrim Investments, Inc. (Pilgrim Advisors, Inc. and Pilgrim Investments, Inc.
are collectively referred to as the "Investment Manager"). Pilgrim Advisors,
Inc. was formerly known as Northstar Investment Management Corporation until its
name change following the acquisition on October 29, 1999.
In this capacity, the Investment Manager, subject to the authority of the
Trustees of the Funds, and subject to delegation of certain responsibilities to
Navellier Fund Management, Inc. as the Sub-Adviser for the Growth + Value Fund,
Brandes Investment Partners, L.P. as the Sub-Adviser for the International Value
Fund and the Emerging Markets Value Fund, Nicholas-Applegate Capital Management
as the Sub-Adviser for the International Core Growth Fund, Worldwide Growth
Fund, International SmallCap Growth Fund, Emerging Countries Fund, LargeCap
Growth Fund, MidCap Growth Fund, SmallCap Growth Fund, and Convertible Fund, and
HSBC Asset Management (Americas) Inc. and HSBC Asset Management (Hong Kong)
Limited as the Sub-Adviser for the Asia-Pacific Equity Fund and J.P. Morgan
Investment Management Inc. as the Sub-Adviser for the Research Enhanced Index
Fund, serves as investment manager to the Funds and has overall responsibility
for the management of each Funds' portfolio. The Investment Manager oversees the
investment management of the Sub-Advisers for the Funds which are managed by a
Sub-Adviser. The Investment Manager serves pursuant to separate Investment
Management Agreements between the Investment Manager and each Company on behalf
of the Funds. The Investment Management Agreements require the Investment
Manager to oversee the provision of all investment advisory and portfolio
management services for the Funds.
21
<PAGE>
Pilgrim Advisors, Inc. and Pilgrim Investments, Inc. are both registered as
investment advisers with the SEC and serve as investment adviser to registered
investment companies (or series thereof), as well as privately managed accounts.
As of December 15, 1999, Investment Manager had assets under management of
approximately $13.6 billion. Pilgrim Advisors, Inc. and Pilgrim Investments,
Inc. are wholly-owned subsidiaries of ReliaStar Financial Corp. (NYSE:RLR).
Through its subsidiaries, ReliaStar Financial Corp. offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education.
Each Investment Management Agreement requires the Investment Manager to
provide, subject to the supervision of the Board of Directors/Trustees,
investment advice and investment services to the Fund and to furnish advice and
recommendations with respect to investment of the Fund's assets and the purchase
or sale of its portfolio securities. The Investment Manager also provides
investment research and analysis. Each Investment Management Agreement provides
that the Investment Manager is not subject to liability to the Fund for any act
or omission in the course of, or connected with, rendering services under the
Agreement, except by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations and duties under the Agreement.
After an initial two year term, each Investment Management Agreement
continues in effect from year to year so long as such continuance is
specifically approved at least annually by (a) the Board of Directors/Trustees
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/Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Investment Manager by vote cast in person at a meeting called for the
purpose of voting on such approval.
Each Investment Management Agreement is terminable without penalty with not
less than 60 days' notice by the Board of Directors/Trustees 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).
INVESTMENT MANAGER FEES
The Investment Manager bears the expense of providing its services, and
pays the fees of the Sub-Adviser (if any). For its services, each Fund pays the
Investment Manager a monthly fee in arrears equal to the following as a
percentage of the Fund's average daily net assets during the month:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
SmallCap Growth Fund 1.00% of the Fund's average net assets
MidCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Balanced Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
22
<PAGE>
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250 million
of average net assets, and 0.35% of the average
net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the Fund's
average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
International SmallCap 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
Money Market 0.50% of average net assets if the Fund has not
invested substantially all of its assets in
another investment company, 0.25% if substantially
all of its assets are invested in another
investment company
MidCap Value Fund 1/12 of 1.00% of the Fund's average daily net
assets during the month (approximately 1.00% on an
annual basis)
LargeCap Leaders Fund 1/12 of 1.00% of the Fund's average daily net
assets during the month (approximately 1.00% on an
annual basis)
Asia-Pacific Equity Fund 1/12 of 1.25% of the Fund's average daily net
assets during the month (approximately 1.25% on an
annual basis)
MagnaCap Fund 1.00% of the Fund's average daily net assets 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
High Yield Fund 0.60% of the Fund's average daily net asset value.
Prior to April 17, 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
Bank and Thrift Fund 1.00% of the first $30 million of average daily
net assets, 0.75% of the next $95 million of
average daily net assets and 0.70% of average
daily net assets in excess of $125 million. The
fees are computed and accrued daily and paid
monthly
Government Securities 0.50% of the Fund's average daily net assets on
Income Fund the first $500 million of net assets. The annual
rate is reduced to 0.45% on net assets from $500
million to $1 billion, and to 0.40% on net assets
in excess of $1 billion
- --------
* The Money Market Fund will also pay advisory fees to Reserve
Management Company, Inc., the investment adviser of Primary
Institutional Fund, a series of Reserve Institutional Trust, the
investment company in which the Money Market Fund invests
substantially all of its assets.
23
<PAGE>
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
SmallCap Opportunities Fund 0.75% of the Fund's average daily net assets
Mid-Cap Opportunities Fund 1.00% of the Fund's average daily net assets
Growth Opportunities Fund 0.75% of the Fund's average daily net assets
Growth + Value Fund 1.00% of the Fund's average daily net assets
International Value Fund 1.00% of the Fund's average daily net assets
Emerging Markets Value Fund 1.00% of the Fund's average daily net assets
Research Enhanced Index Fund 0.70% of the Fund's average daily net assets
Income & Growth Fund 0.75% on the first $250 million of aggregate
average daily net assets Fund, 0.70% on the next
$250 million of such assets, 0.65% on the next
$250 million of such assets; 0.60% on the next
$250 million of such assets, and 0.55% on the
remaining aggregate daily net assets in excess of
$1 billion
Government Securities Fund 0.65% of the Fund's average daily net assets
High Yield Fund III 0.60% of the Fund's average daily net assets
High Total Return Fund II 0.75% of the Fund's average daily net assets
High Total Return Fund 0.75% on the first $250 million of aggregate
average daily net assets of each Fund, 0.70% on
the next $250 million of such assets, 0.65% on the
next $250 million of such assets; 0.60% on the
next $250 million of such assets, and 0.55% on the
remaining aggregate daily net assets of each Fund
in excess of $1 billion.
Balance Sheet 0.65% of the Fund's average daily net assets. This
Opportunities Fund fee is accrued daily and payable monthly
SUB-ADVISORY AGREEMENTS
The Investment Management Agreement for certain Funds provides that the
Investment Manager, with the approval of the Company's Board of Directors, may
select and employ investment advisers to serve as Sub-Adviser for any Fund
("Sub-Adviser"), and shall monitor the Sub-Advisers' investment programs and
results, and coordinate the investment activities of the Sub-Advisers to ensure
compliance with regulatory restrictions. The Investment Manager pays all of its
expenses arising from the performance of its obligations under the Investment
Management Agreement, including all fees payable to the Sub-Advisers, executive
salaries and expenses of the Directors/Trustees and Officers of the Company who
are employees of the Investment Manager or its affiliates and office rent of the
Company. The Sub-Advisers pay all of their expenses arising from the performance
of their obligations under the sub-advisory agreements (the "Sub-Advisory
Agreements").
24
<PAGE>
Subject to the expense reimbursement provisions described in this Statement
of Additional Information, other expenses incurred in the operation of the
Company are borne by the Funds, including, without limitation, investment
advisory fees; brokerage commissions; interest; legal fees and expenses of
attorneys; fees of independent auditors, transfer agents and dividend disbursing
agents, accounting agents, and custodians; the expense of obtaining quotations
for calculating each Fund's net asset value; taxes, if any, and the preparation
of each Fund's tax returns; cost of stock certificates and any other expenses
(including clerical expenses) of issue, sale, repurchase or redemption of
shares; fees and expenses of registering and maintaining the registration of
shares of the Funds under federal and state laws and regulations; expenses of
printing and distributing reports, notices and proxy materials to existing
shareholders; expenses of printing and filing reports and other documents filed
with governmental agencies; expenses of annual and special shareholder meetings;
expenses of printing and distributing prospectuses and statements of additional
information to existing shareholders; fees and expenses of Directors of the
Company who are not employees of the Investment Manager or any Sub-Adviser, or
their affiliates; membership dues in trade associations; insurance premiums; and
extraordinary expenses such as litigation expenses.
The Sub-Advisory Agreements may be terminated without payment of any
penalties by the Investment Manager, the Directors/Trustees, on behalf of a
Company, or the shareholders of such Fund upon 60 days' prior written notice.
Otherwise, the Sub-Advisory Agreements will remain in effect for two years and
will, thereafter, continue in effect from year to year, subject to the annual
approval of the appropriate Board of Directors/Trustees, on behalf of a Fund, or
the vote of a majority of the outstanding voting securities, and the vote, cast
in person at a meeting duly called and held, of a majority of the
Directors/Trustees, on behalf of a Fund who are not parties to the Sub-Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of any such
Party.
Pursuant to a Sub-Advisory Agreement between Pilgrim Advisors and Navellier
Fund Management, Inc. ("Navellier"), Navellier acts as Sub-Adviser to the Growth
+ Value Fund. In this capacity, Navellier, subject to the supervision and
control of Pilgrim Advisors and the Trustees of such Fund, manages the Fund's
portfolio investments, consistently with its investment objective, and executes
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. Fees payable under the Sub-Advisory Agreement accrue daily and are
paid monthly by Pilgrim Advisors. Navellier is wholly owned and controlled by
its sole stockholder, Louis G. Navellier. Navellier's address is 1 East Liberty,
Third Floor, Reno, Nevada, 89501.
Pursuant to Sub-Advisory Agreements between Pilgrim Advisors and Brandes
Investment Partners, L.P. ("Brandes"), Brandes acts as Sub-Adviser to the
International Value Fund and the Emerging Markets Value Fund, respectively. In
this capacity, Brandes, subject to the supervision and control of Pilgrim
Advisors and the Trustees of the Funds, manages each Fund's portfolio
investments, consistently with each Fund's investment objective, and executes
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. Fees payable under the Sub-Advisory Agreements accrue daily and
are paid monthly by Pilgrim Advisors. Brandes' address is 12750 High Bluff
Drive, San Diego, California 92130. Charles Brandes, who controls the general
partner of Brandes, serves as one of the Managing Directors of Brandes.
Pursuant to a Sub-Advisory Agreement between Pilgrim Advisors and J.P.
Morgan Investment Management Inc., ("J.P. Morgan"), J.P. Morgan acts as
Sub-Adviser to the Research Enhanced Index Fund. In this capacity, J.P. Morgan,
subject to the supervision and control of Pilgrim Advisors and the Trustees of
the Fund, on behalf of the Fund, manages the Fund's portfolio investments,
consistently with the Fund's investment objective, and executes any of the
Fund's investment policies that it deems appropriate to utilize from time to
time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid
monthly by Pilgrim Advisors. J.P. Morgan's address is 522 Fifth Avenue, New
York, New York 10036.
25
<PAGE>
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and
Nicholas-Applegate Capital Management ("NACM"), dated October 29, 1999, NACM
acts as Sub-Adviser to the International Core Growth Fund, Worldwide Growth
Fund, International SmallCap Growth Fund, Emerging Countries Fund, LargeCap
Growth Fund, MidCap Growth Fund, SmallCap Growth Fund, and Convertible Fund. In
this capacity, NACM, subject to the supervision and control of Pilgrim
Investments and the Trustees of the Funds, manages each Fund's portfolio
investments, consistently with each Fund's investment objective, and executes
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. NACM's address is 600 West Broadway, 30th Floor, San Diego,
California 92101. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership, the general partner of which
is Nicholas-Applegate Capital Management Holdings, Inc., a California
corporation owned by Arthur Nicholas.
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and HSBC
Asset Management (Americas) Inc. and HSBC Asset Management (Hong Kong) Limited
(collectively HSBC), HSBC acts as Sub-Adviser to the Asia-Pacific Equity Fund.
HSBC is part of HSBC Asset Management, the global investment advisory and fund
management business of the HSBC Group. In this capacity, HSBC, subject to the
supervision and control of Pilgrim Investments and the Trustees of the Fund,
manages the Fund's portfolio investments, consistently with the Fund's
investment objective, and executes any of the Fund's investment policies that it
deems appropriate to utilize from time to time. HSBC's address is 140 Broadway,
6th Floor, New York, New York 10005.
As compensation to each Sub-Adviser for its services, the Investment
Manager pays the Sub-Adviser a monthly fee in arrears equal to the following as
a percentage of a Fund's average daily net assets managed during the month:
SERIES ANNUAL SUB-ADVISORY FEE
- ------ -----------------------
SmallCap Growth Fund 0.50% of the Fund's average net assets
MidCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Emerging Countries Fund 0.625% of the Fund's average net assets
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
International SmallCap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
International Core 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
Growth + Value Fund 0.50% of the Fund's average daily net assets
International Value Fund 0.50% of the Fund's average daily net assets
26
<PAGE>
SERIES ANNUAL SUB-ADVISORY FEE
- ------ -----------------------
Emerging Markets Fund 0.50% of the Fund's average daily net assets
Research Enhanced Index Fund 0.20% of the Fund's average daily net assets
Asia-Pacific Equity Fund 1/12 of .50% of the Fund's average daily net
assets
Former Sub-Adviser for LargeCap Leaders Fund. Ark Asset Management Co., Inc.
(Ark) served as Sub-Adviser to the LargeCap Leaders Fund from September 1, 1995
through October 31, 1997. For the fiscal year ended June 30, 1997, the
Investment Manager paid portfolio management fees to Ark of $60,843. For the
period from July 1, 1997 through October 31, 1997, the Sub-Adviser paid
portfolio management fees to Ark of $48,365.
Former Sub-Adviser for MidCap Value Fund. Cramer Rosenthal McGlynn, LLC (CRM) or
its predecessor served as Sub-Adviser to the MidCap Value Fund through September
30, 1999. For the fiscal years ended June 30, 1999, 1998 and 1997, the
Investment Manager paid portfolio management fees to CRM of $343,208, $339,347,
and $193,080, respectively.
Investment Adviser of the Primary Fund. The Money Market Fund invests
substantially all of its assets in the Primary Fund. The Primary Fund is managed
by Reserve Management Company, Inc. Reserve Management Company, Inc. currently
manages assets in excess of $5 billion and has over 27 years of investment
experience. The Investment Management Agreement for the Primary Fund provides
that Reserve Investment Management Company, Inc. shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a fund in
connection with the matters to which the Agreement relates, except a loss
resulting from the willful misfeasance, bad faith or gross negligence on the
part of Reserve Management Company, Inc. or from reckless disregard by it of its
duties and obligations thereunder. Reserve Management Company, Inc. may make
such advertising and promotional expenditures, using its own resources, as it
from time to time deems appropriate.
ADMINISTRATION
Pilgrim Group, Inc. serves as Administrator for the Funds, pursuant to an
Administrative Services Agreement with Equity Trust, Mayflower Trust, Pilgrim
Mutual Funds, Balance Sheet Opportunities Fund, SmallCap Opportunities Fund,
Growth Opportunity Fund, Government Securities Fund and High Yield Fund III.
Subject to the supervision of the Board of Trustees, the Administrator provides
the overall business management and administrative services necessary to the
proper conduct of the Funds' business, except for those services performed by
the Investment Manager under the Investment Advisory Agreements, the custodian
for the Funds under the Custodian Agreements, the transfer agent for the Funds
under the Transfer Agency Agreements, and such other service providers as may be
retained by the Funds from time to time. The Administrator acts as liaison among
these service providers to the Funds. The Administrator is also responsible for
ensuring that the Funds operate in compliance with applicable legal requirements
and for monitoring the Investment Manager for compliance with requirements under
applicable law and with the investment policies and restrictions of the Funds.
The Administrator is an affiliate of the Investment Manager.
Prior to May 24, 1999, Pilgrim Mutual Funds had an Administration Agreement
with Investment Company Administration ("ICA"), 4455 East Camelback Road, Suite
261-E, Phoenix, Arizona 85018. Pursuant to an Administration Agreement with
Pilgrim Mutual Funds, ICA was responsible for performing all administrative
services required for the daily business operations of Pilgrim Mutual Funds,
subject to the supervision of the Board of Trustees of Pilgrim Mutual Funds. For
the fiscal years ended March 31, 1999 and 1998, ICA received aggregate
compensation of $1,059,155 and $848,799, respectively, for all of the series of
the Pilgrim Mutual Funds.
27
<PAGE>
Also, prior to May 24, 1999, Pilgrim Mutual Funds had an Administrative
Services Agreement with NACM under which NACM was responsible for providing all
administrative services which are not provided by ICA or by Pilgrim Mutual
Funds' Distributor, transfer agents, accounting agents, independent accountants
and legal counsel. For the fiscal years ended March 31, 1999 and 1998, NACM
received aggregate compensation of $1,603,130 and $1,972,037, respectively, for
all of the series of the Pilgrim Mutual Funds pursuant to the Administrative
Services Agreement.
The amounts of the advisory and administrative fees paid by each Fund for
the fiscal years ended June 30, 1999, 1998, and 1997 were:
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE THE
BANK AND THRIFT FUND, ADVISORY FUNDS, INVESTMENT FUNDS, PILGRIM MUTUAL
FUNDS,(1) AND THE GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
June 30 March 31 March 31
------------- --------------------------- ---------------------------
1999 1999 1999 1998 1998
Advisory Fees Advisory Fees Admin. Fees Advisory Fees Admin. Fees
------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
International Core Growth Fund (4).. $ 253,063.00 $1,061,288 $173,481 $308,562 $33,687
Worldwide Growth Fund(4)............ 589,768 1,472,492 224,190 1,251,181 143,214
International SmallCap Growth Fund(4) 327,972 1,149,529 183,409 658,893 74,259
Emerging Countries Fund(4).......... 716,000 3,476,180 384,714 2,790,216 353,322
LargeCap Growth Fund(4)............. 115,161 178,627 95,257 32,530 2,326
MidCap Growth Fund(4)............... 549,879 3,049,230 546,605 3,422,148 290,286
SmallCap Growth Fund(4)............. 811,208 5,334,833 656,416 6,613,874 424,276
Convertible Fund(4)................. 438,229 1,997,038 386,381 1,427,198 140,734
Balanced Fund(4).................... 66,601 261,803 110,065 220,025 28,299
Strategic Income Fund(2)............ 23,699 124,514 90,504 94,359 15,378
High Yield Fund II(4)............... 132,246 466,926 113,645 36,505 5,938
Money Market Fund................... N/A N/A N/A N/A N/A
June 30, 1999 June 30, 1998 June 30, 1997
Advisory Fees Advisory Fees Advisory Fees
------------- ------------- -------------
LargeCap Leaders Fund............... $300,494 $286,830 $174,325
MidCap Value Fund................... 670,780 678,816 250,512
Asia Pacific Equity Fund............ 303,920 553,589 773,252
High Yield Fund...................... 2,176,246 977,868 332,032
Bank and Thrift Fund(3)............. 5,893,806 2,446,063 2,361,103
MagnaCap Fund........................ 3,200,909 2,846,061 2,157,744
Government Securities Income Fund... 189,816 144,487 170,619
</TABLE>
- ----------
(1) Prior to the Reorganization, the Pilgrim Mutual Funds had not engaged the
services of an investment adviser for the Trust's A, B, C and Institutional
Portfolios because these portfolios invested all their assets in master
funds of the Master Trust. Consequently, the amounts of the advisory fees
reported below for the Pilgrim Mutual Funds were for services provided to
the master funds of the Master Trust.
(2) Includes the advisory fees, fee reductions and expense reimbursements of
the Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the Strategic Income Fund.
(3) Prior to October 17, 1997, the investor manager was paid management fees
based on average weekly net assets. 1998 includes management fees for a
six-month period ended June 30, 1998.
(4) Reflects three month period from April 1, 1999 to June 30, 1999
28
<PAGE>
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE
MAYFLOWER TRUST DURING THE FISCAL YEAR ENDED OCTOBER 31
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
ADVISORY ADMIN. ADVISORY ADMIN. ADVISORY ADMIN.
FEES FEES FEES FEES FEES(1) FEES(1)
---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Growth + Value Fund 2,711,399 358,875 $ 1,696,786 169,679 538,291 74,529
International Value Fund (3) 7,164,823 931,067 $ 3,501,309 486,422 789,163 116,315
Emerging Markets Value Fund 145,031 20,184 $ 45,079 4,508 N/A N/A
Research Enhanced Index Fund(4) 690,257 122,493 N/A N/A N/A N/A
Income & Growth Fund 902,463 138,464 $ 1,399,807 186,641 1,513,778 233,759
High Total Return Fund II 1,877,964 308,071 $ 1,470,229 196,031 68,888 14,025
High Total Return Fund 4,228,374 726,605 $ 5,691,286 995,897 5,442,788 989,855
</TABLE>
- ----------
(1) Does not reflect expense reimbursement of $99,612 for Emerging Markets
Value Fund and $27,865 for High Total Return Fund II.
(2) Does not reflect expense reimbursement of $11,165 for Growth + Value Fund,
$173,911 for International Value Fund or $105,669 for High Total Return
Fund II.
(3) Prior to April 21, 1997, the International Value Fund was managed by
Brandes Investment Partners L.P. The administrator for the Fund was the
Investment Company Administration Corporation.
(4) The Research Enhanced Index Fund commenced operations on December 30, 1998.
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE THE
EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND, GROWTH OPPORTUNITIES FUND,
BALANCE SHEET OPPORTUNITIES FUND, GOVERNMENT SECURITIES FUND, AND
HIGH YIELD FUND III DURING FISCAL YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees Fees
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SmallCap Opportunities Fund(1)......... $2,033,840 392,303 2,341,067 266,145 1,146,789 N/A
Mid-Cap Opportunities Fund(1),(3)...... $ 73,797 7,380 N/A N/A N/A N/A
Growth Opportunities Fund(1)........... $1,541,921 239,970 1,412,949 136,648 575,383 N/A
Government Securities Fund(1)(2)....... $ 697,032 133,321 762,504 78,343 923,929 N/A
High Yield Fund III.................... $1,537,716 322,406 1,289,419 180,250 941,594 N/A
Balance Sheet Opportunities Fund(4).... $ 365,125 75,818 398,127 46,191 532,941 N/A
</TABLE>
- ----------
(1) Does not reflect expense reimbursement of $37,687 for the Mid-Cap
Opportunities Fund and a fee waiver of $160,854 for the Government
Securities Fund for the year ended December 31, 1998; expense reimbursement
of $10,635 for the Growth Opportunities Fund and $227,803 for the
Government Securities Fund for the year ended December 31, 1997; and
expense reimbursement of $20,615 for the SmallCap Opportunities Fund and
$34,126 for the Growth Opportunities Fund for the year ended December 31,
1996.
(2) Net of waiver of investment advisory fees of $160,854, $201,863 and
$284,286 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(3) The Mid-Cap Opportunities Fund commenced operations on August 20, 1998.
(4) Does not reflect expense reimbursement of $20,690 for the year end December
31, 1997 or expense reimbursement of $41,925 for the year ended December
31, 1996.
29
<PAGE>
During the fiscal years ended October 31, 1999, 1998, and 1997, the Funds
listed below paid the following subadvisory fees:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR OCTOBER 31
1999 1998 1997
---- ---- ----
Growth + Value Fund ............... $1,355,700 $998,812 $275,490
International Value Fund .......... 3,582,411 1,750,654 288,604
Emerging Markets Value Fund (1) ... 56,232 26,985 N/A
Research-Enhanced Index Fund ...... 199,666 N/A N/A
Income & Growth Fund .............. N/A 178,919 245,657
- ----------
(1) For the period December 1, 1998 through February 28, 1999, Brandes
Investment Partners, L.P. agreed to waive the subadvisory fee for Emerging
Markets Value Fund.
During the fiscal years ended December 31, 1998, 1997 and 1996, the
SmallCap Opportunities Fund paid the following subadvisory fees:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR ENDED DECEMBER 31
1998 1997 1996
------ ------ -----
SmallCap Opportunities Fund $789,408 1,498,283 723,585
During the fiscal years ended June 30, 1999, 1998, and 1997, the Investment
Manager paid sub-advisory fees to the following:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR ENDED JUNE 30
1999 1998 1997
---- ---- ----
Asia-Pacific Equity Fund $121,638 307,103 221,487
International Core Growth Fund (1)(2) 19,830 N/A N/A
Worldwide Growth Fund (1)(2) 110,816 N/A N/A
International SmallCap Growth Fund (1)(2) 58,033 N/A N/A
Emerging Countries Fund (1)(2) 104,238 N/A N/A
LargeCap Growth Fund (1)(2) 33,219 N/A N/A
MidCap Growth Fund (1)(2) 105,229 N/A N/A
SmallCap Growth Fund (1)(2) 157,474 N/A N/A
Convertible Fund (1)(2) 101,904 N/A N/A
- ----------
(1) Prior to May 24, 1999, the funds were managed by Nicholas-Applegate and had
no Sub-Advisor fees.
(2) Reflects three month period between April 1, 1999 to June 30, 1999.
EXPENSE LIMITATION AGREEMENTS
The Investment Manager entered into expense limitation agreements with the
following Funds, pursuant to which the Investment Manager has agreed to waive or
limit its fees. In connection with these arguments and certain U.S. tax
requirements, the Investment Manager will assume other expenses so that the
total annual ordinary operating expenses of the Funds (which excludes interest,
taxes, brokerage commissions, extraordinary expenses such as litigation, other
expenses not incurred in the ordinary course of each Fund's business, and
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) do not exceed:
30
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS M CLASS Q
- ----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund 2.00% 2.75% N/A 2.50% N/A
SmallCap Growth Fund 1.59% 2.24% 2.24% N/A 1.49%
MidCap Growth Fund 1.35% 2.00% 2.00% N/A 1.25%
MidCap Value Fund 1.75% 2.50% 2.50% 2.25% 1.75%
LargeCap Growth Fund 1.35% 2.00% 2.00% N/A 1.25%
LargeCap Leaders Fund 1.75% 2.50% 2.50% 2.25% 1.75%
Convertible Fund 1.33% 1.98% 1.98% N/A 1.23%
Balanced Fund 1.35% 2.00% 2.00% N/A 1.25%
Strategic Income Fund 0.95% 1.35% 1.35% N/A 0.85%
High Yield Fund II 1.10% 1.75% 1.75% N/A 1.00%
Emerging Countries Fund 2.00% 2.65% 2.65% N/A 1.90%
Worldwide Growth Fund 1.65% 2.30% 2.30% N/A 1.55%
International SmallCap Growth Fund 1.77% 2.42% 2.42% N/A 1.67%
International Core Growth Fund 1.73% 2.38% 2.38% N/A 1.63%
Money Market Fund 1.25% 2.00% 2.00% N/A N/A
High Yield Fund 1.10% 1.85% 1.85% 1.60% 1.10%
</TABLE>
Each 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 agreements. Nicholas-Applegate Capital
Management will bear 50% of any fees waived and other expenses assumed pursuant
to the expense limitation agreement with respect to any Fund for which it serves
as sub-adviser, and will receive 50% of any recoupment amount with respect to
such Funds.
Each expense limitation agreement provides that these expense limitations
shall continue until October 31, 2001. Thereafter, the agreement will
automatically renew for one-year terms unless the Investment Manager provides
written notice of the termination of the agreement to the Trust at least 30 days
prior to the end of the then-current term. In addition, the agreement will
terminate upon termination of the Investment Management Agreement, or it may be
terminated by the Trust, without payment of any penalty, upon ninety (90) days'
prior written notice to the Investment Manager at its principal place of
business.
For Pilgrim Mutual Funds (other than the Money Market Fund which is a new
fund), 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 Advisory Funds, excluding distribution fees, interest,
taxes, brokerage and extraordinary expenses, to 0.75%.
31
<PAGE>
The voluntary fee reductions are as follows:
JUNE 30 MARCH 31
------- -------------------------------
FUND 1999(1) 1999(1) 1998 1997
- ---- ------- ------- ---- ----
SmallCap Growth Fund $29,487 $518,164 $675,970 $487,625
MidCap Growth Fund 1,010 301,613 591,684 652,932
LargeCap Growth Fund 4,314 154,098 132,912 5,199
Convertible Fund 0 318,025 339,803 757,713
Balanced Fund 12,611 132,033 182,871 1,122,862
Strategic Income Fund 31,139 232,922 419,604 1,148,587
High Yield Fund II 54,363 318,323 111,479 15,731
Emerging Countries Fund 69,001 816,718 628,044 811,357
Worldwide Growth Fund 0 242,660 381,568 980,833
International SmallCap Growth Fund 3,405 168,199 389,240 851,489
International Core Growth Fund 11,093 253,811 204,723 37,345
June 30
-------------------------------
1999 1998 1997
---- ---- ----
LargeCap Leaders Fund $76,094 $151,645 $100,148
MidCap Value Fund 21,944 21,934 49,495
Asia-Pacific Equity Fund 249,734 355,259 334,704
High Yield Fund 441,770 269,351 219,739
- ----------
(1) Reflects three month period from April 1, 1999 to June 30, 1999.
The Investment Manager has entered into an expense limitation agreement
with the High Yield Fund, 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 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, and 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)
do not exceed the following ratios for the periods indicated:
Period Limit Applies Class A Class B Class C Class M Class Q
- -------------------- ------- ------- ------- ------- -------
Through 12/31/1999 1.00% 1.75% 1.75% 1.50% 1.00%
From 1/1/2000 through
termination of Agreement 1.10% 1.85% 1.85% 1.60% 1.10%
The High Yield 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.
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 High Yield Fund, excluding distribution fees,
interest, taxes, brokerage and extraordinary expenses, to 0.75%.
Government Securities Income Fund. Pursuant to the terms of the Investment
Management Agreement of the Government Securities Income Fund, the Investment
Manager will reimburse the Fund to the extent that the gross operating costs and
expenses, excluding any interest, taxes, brokerage commissions, amortization of
organizational expenses, extraordinary expenses, and distribution (Rule 12b-1)
32
<PAGE>
fees on Class B and Class M shares in excess of an annual rate of .25% of the
average daily net assets of these classes, exceed 1.50% of its 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.
DISTRIBUTOR
Shares of each Fund are distributed by Pilgrim Securities, Inc. ("Pilgrim
Securities" or the "Distributor") pursuant to a Distribution Agreement between
each Company and the Distributor. Each Distribution Agreement requires the
Distributor to use its best efforts on a continuing basis to solicit purchases
of shares of the Funds. Each Company 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
("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. Each Distribution Agreement will
remain in effect for two years and from year to year thereafter only if its
continuance is approved annually by a majority of the Board of Directors 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 Company. See the Prospectus for information
on how to purchase and sell shares of the Funds, and the charges and expenses
associated with an investment. The sales charge retained by the Distributor and
the commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a subsidiary of ReliaStar.
For the fiscal year ended June 30, 1999, the Distributor received the
following amounts in sales charges, after reallowance to Dealers in connection
with rates of shares of Bank and Thrift Fund, Advisory Funds, Investment Funds,
Mutual Funds, and Government Securities Income Fund: $871,391 with respect to
Class A shares; $146,773 with respect to Class B shares; $14,263 with respect to
Class C shares; and $42,420 with respect to Class M shares.
For the fiscal year ended October 31, 1999, the Distributor received the
following amounts in sales charges, after reallowance to Dealers, in connection
with sales of shares of Mayflower Trust: $477,146 with respect to Class A
shares; $6,055,717 with respect to Class B shares; and $247,753 with respect to
Class C shares.
For the fiscal year ended December 31, 1998, the Distributor (or Advest)
received the following amounts in sales charges, after reallowance to Dealers in
connection with sales of shares of SmallCap Opportunities Fund, Equity Trust,
Growth Opportunities Fund, Government Securities Fund, High Yield Fund III, and
Balance Sheet Opportunities Fund: $65,519 with respect to Class A shares;
$1,641,240 with respect to Class B shares; $45,300 with respect to Class C
shares; and $52,319 with respect to Class T shares.
RULE 12B-1 PLANS
Each Company has a distribution plan pursuant to Rule 12b-1 under the 1940
Act applicable to most classes of shares offered by each Fund ("Rule 12b-1
Plans"). The Funds intend to operate the Rule 12b-1 Plans in accordance with
their terms and the National Association of Securities Dealers, Inc. rules
concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be
entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C, Class M, Class Q shares and
Class T in amounts as set forth in the following table. The Funds do not have a
12b-1 Plan with respect to the Institutional Class.
33
<PAGE>
<TABLE>
<CAPTION>
FEES BASED ON AVERAGE DAILY NET ASSETS
-----------------------------------------------------------
NAME OF FUND CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T
------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund 0.25% 1.00% N/A 0.75% N/A N/A
MidCap Value Fund 0.25% 1.00% 1.00% 0.75% 0.25% N/A
LargeCap Leaders Fund 0.25% 1.00% 1.00% 0.75% 0.25% N/A
MagnaCap Fund 0.30% 1.00% 1.00% 0.75% 0.25% N/A
High Yield Fund 0.25% 1.00% 1.00% 0.75% 0.25% N/A
Bank and Thrift Fund 0.25% 1.00% 1.00% N/A N/A N/A
Government Securities Income Fund 0.25% 1.00% 1.00% 0.75% 0.25% N/A
International Core Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
Worldwide Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
International SmallCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
Emerging Countries Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
LargeCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
MidCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
SmallCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
Convertible Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
Balanced Fund 0.35% 1.00% 1.00% N/A 0.25% N/A
High Yield Fund II 0.35% 1.00% 1.00% N/A 0.25% N/A
Strategic Income Fund 0.35% 0.75% 0.75% N/A 0.25% N/A
Money Market Fund 0.25% 1.00% 1.00% N/A 0.25% N/A
SmallCap Opportunities Fund 0.30% 1.00% 1.00% N/A N/A 0.95%
Growth Opportunities Fund 0.30% 1.00% 1.00% N/A N/A 0.95%
MidCap Opportunities Fund 0.30% 1.00% 1.00% N/A N/A N/A
Emerging Markets Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
Growth + Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
High Total Return Fund 0.30% 1.00% 1.00% N/A N/A N/A
High Total Return Fund II 0.30% 1.00% 1.00% N/A N/A N/A
Income & Growth Fund 0.30% 1.00% 1.00% N/A N/A N/A
International Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
Research Enhanced Index Fund 0.30% 1.00% 1.00% N/A N/A N/A
Balance Sheet Opportunities Fund 0.30% 1.00% 1.00% N/A N/A 0.75%
Government Securities Fund 0.30% 1.00% 1.00% N/A N/A 0.65%
High Yield Fund III 0.30% 1.00% 1.00% N/A N/A 0.65%
</TABLE>
The Rule 12b-1 Plan for the Money Market Fund provides that the
distribution fee is reduced by that amount, if any, paid to the Distributor or
any affiliate of Distributor from the investment adviser or distributor of any
investment company in which the Money Market Fund invests.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C, Class M, Class Q,
and Class T shares of the Funds, including payments to dealers for selling
shares of the Funds and for servicing shareholders of these classes of the
Funds. Activities for which these fees may be used include: promotional
activities; preparation and distribution of advertising materials and sales
literature; expenses of organizing and conducting sales seminars; personnel
costs and overhead of the Distributor; printing of prospectuses and statements
of additional information (and supplements thereto) and reports for other than
existing shareholders; payments to dealers and others that provide shareholder
services; interest on accrued distribution expenses; and costs of administering
the Rule 12b-1 Plans. No more than 0.75% per annum of 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.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly
basis to Authorized Dealers for both distribution and shareholder servicing at
rates that are based on the average daily net assets of shares that are
registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. The rates, on an annual basis, are as follows: 0.25% for Class A, 0.25%
for Class B, 1.00% (.75% for Strategic Income Fund) for Class C, 0.65% (0.40%
for Government Securities Income Fund and High Yield Fund) for Class M, 0.25%
for Class Q, and 0.15 - 0.95% for Class T. Rights to these ongoing payments
begin to accrue in the 13th month following a purchase of Class A, B or C shares
and in the 1st month following a purchase of Class M, Class Q and Class T
Shares.
34
<PAGE>
The Distributor will be reimbursed for its actual expenses incurred under a
Rule 12b-1 Plan with respect to Class A shares of MagnaCap Fund, High Yield Fund
and Government Securities Income Fund. 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 $1,023,574 for MagnaCap Fund (0.30% of its net
assets), $299,650 for High Yield Fund (0.25% of its net assets), and $64,135 for
Government Securities Income Fund (0.25% of its net assets) as of June 30, 1999.
With respect to Class A shares of each other Fund and Class B, Class C, Class M,
Class Q, and Class T shares of each Fund that offers the class, the Distributor
will receive payment without regard to actual distribution expenses it incurs.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of a Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1
Plans also recognize that the Investment Manager and/or the Distributor may use
their resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers. Such compensation and
incentives may include, but are not limited to, cash, merchandise, trips and
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited sales personnel, payment for
travel expenses (including meals and lodging) incurred by sales personnel and
members of their families, or other invited guests, to various locations for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more of the Funds or other funds managed by the
Investment Manager and/or other events sponsored by dealers. In addition, the
Distributor may, at its own expense, pay concessions in addition to those
described above to dealers that satisfy certain criteria established from time
to time by the Distributor. These conditions relate to increasing sales of
shares of the Funds over specified periods and to certain other factors. These
payments may, depending on the dealer's satisfaction of the required conditions,
be periodic and may be up to (1) 0.30% of the value of the Funds' shares sold by
the dealer during a particular period, and (2) 0.10% of the value of the Funds'
shares held by the dealer's customers for more than one year, calculated on an
annual basis.
The Rule 12b-1 Plans have been approved by the Board of Directors of each
Fund, including all of the Directors who are not interested persons of the
Company as defined in the 1940 Act. 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 Company 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. Each Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Directors or by a vote of a majority of the Fund's outstanding shares on 60
days written notice. The Distributor or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Directors has determined
that differing distribution arrangements in connection with the sale of new
shares of a Fund is necessary and appropriate in order to meet the needs of
different potential investors. Therefore, the Board of Directors, including
those Directors who are not interested persons of the Company, concluded that,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Rule 12b-1 Plans as
tailored to each class of each Fund, will benefit such Funds and their
respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
35
<PAGE>
material amendments to a Plan or any distribution or service agreement shall be
approved by the Directors who are not interested persons of the Company, 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 be
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
During their fiscal year ended December 31, 1998, expenses incurred by the
Distributor for distribution-related activities with respect to each class of
shares of each Fund listed below were as follows:
Distribution Expenses Class A Class B Class C
- --------------------- ------- ------- -------
SMALLCAP OPPORTUNITIES FUND
Salaries/Overides .......................... $204,015 $102,411 $ 22,425
Commissions Paid ........................... -- 106,926 56,642
Marketing, RMM, & Convention Expense ....... 280,528 110,510 19,687
Total ...................................... 484,543 319,847 98,754
MIDCAP OPPORTUNITIES FUND
Salaries/Overides .......................... $ 1,504 $ 47 $ 3
Commissions Paid ........................... -- -- --
Marketing, RMM, & Convention Expense ....... 25,684 9,038 1,808
Total ...................................... 27,188 9,085 1,811
GROWTH OPPORTUNITIES FUND
Salaries/Overides .......................... $ 71,838 $ 11,550 $ 1,286
Commissions Paid ........................... -- 3,933 3,802
Marketing, RMM, & Convention Expense ....... 62,864 8,228 921
Total ...................................... 134,702 23,711 6,009
GOVERNMENT SECURITIES FUND
Salaries/Overides .......................... $ 77,481 $ 23,296 $ 2,286
Commissions Paid ........................... -- 7,887 8,515
Marketing, RMM, & Convention Expense ....... 52,524 10,739 817
Total ...................................... 130,005 41,922 11,618
HIGH YIELD FUND III
Salaries/Overides .......................... $ 75,788 $110,938 $ 16,931
Commissions Paid ........................... -- 66,716 53,100
Marketing, RMM, & Convention Expense ....... 110,537 79,289 10,566
Total ...................................... 186,325 256,943 80,597
36
<PAGE>
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, C and Q shares for the
fiscal period ended June 30, 1999 were as follows:
DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS Q
- --------------------- ------- ------- ------- -------
INTERNATIONAL CORE GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 31 23 21 19
Printing ........................... 595 437 391 364
Salaries & Commissions ............. 8,279 6,084 5,450 5,065
Broker Servicing ................... 1,640 1205 1080 1003
Miscellaneous ...................... 852 626 561 521
Total .............................. 11,397 8,375 7,503 6,972
WORLDWIDE GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 77 31 282 16
Printing ........................... 1,477 588 5,354 281
Salaries & Commissions ............. 28,724 11,441 104,098 5,473
Broker Servicing ................... 4,075 1,623 14,767 776
Miscellaneous ...................... 2,117 843 7,671 403
Total .............................. 36,470 14,526 132,172 6,949
INT'L SMALLCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 69 40 47 87
Printing ........................... 1,319 755 886 1,666
Salaries & Commissions ............. 14,673 8,409 9,859 18,531
Broker Servicing ................... 3,639 2,086 2,445 4,596
Miscellaneous ...................... 1,891 1,084 1,270 2,388
Total .............................. 21,591 12,374 14,507 27,268
EMERGING COUNTRIES FUND $ -- $ -- $ -- $ --
Advertising ........................ 98 47 72 129
Printing ........................... 1,852 892 1,372 2,459
Salaries & Commissions ............. 24,679 11,882 18,276 32,756
Broker Servicing ................... 5,110 2,460 3,784 6,782
Miscellaneous ...................... 2,655 1,278 1,966 3,524
Total .............................. 34,394 16,559 25,470 45,650
LARGECAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 112 175 75 29
Printing ........................... 2,130 3,317 1,404 547
Salaries & Commissions ............. 14,165 22,059 4,340 3,637
Broker Servicing ................... 5,874 9,148 3,873 1,508
Miscellaneous ...................... 3,052 4,752 2,012 784
Total .............................. 25,333 39,451 16,704 6,505
MIDCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 31 22 176 8
Printing ........................... 610 421 3,343 146
Salaries & Commissions ............. 28,002 19,331 153,574 6,719
Broker Servicing ................... 1,682 1,161 9,223 403
Miscellaneous ...................... 874 603 4,792 210
Total .............................. 31,199 21,538 171,108 7,486
SMALLCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising ........................ 55 27 205 5
Printing ........................... 1,045 503 3,891 100
Salaries & Commissions ............. 42,184 20,319 157,025 4,024
Broker Servicing ................... 2,883 1,389 10,731 275
Miscellaneous ...................... 1,498 721 5,575 143
Total .............................. 47,665 22,959 177,427 4,547
37
<PAGE>
DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS Q
- --------------------- ------- ------- ------- -------
CONVERTIBLE FUND $ -- $ -- $ -- $ --
Advertising ........................ 61 54 186 11
Printing ........................... 1,145 1,042 3,536 209
Salaries & Commissions ............. 29,922 27,223 92,398 5,465
Broker Servicing ................... 3,158 2,874 9,753 577
Miscellaneous ...................... 1,641 1,493 5,067 300
Total .............................. 35,927 32,686 110,940 6,562
BALANCED FUND $ -- $ -- $ -- $ --
Advertising ........................ 17 11 65 --
Printing ........................... 314 214 1,253 6
Salaries & Commissions ............. 5,824 3,973 23,259 114
Broker Servicing ................... 865 590 3,456 17
Miscellaneous ...................... 449 307 1,795 9
Total .............................. 7,469 5,095 29,828 146
HIGH YIELD FUND II $ -- $ -- $ -- $ --
Advertising ........................ 21 53 13 6
Printing ........................... 409 1005 252 122
Salaries & Commissions ............. 7,040 17,312 4,336 2,100
Broker Servicing ................... 1,127 2,771 694 336
Miscellaneous ...................... 585 1,440 361 175
Total .............................. 9,182 22,581 5,656 2,739
STRATEGIC INCOME FUND $ -- $ -- $ -- $ --
Advertising ........................ 16 30 47 1
Printing ........................... 296 578 894 20
Salaries & Commissions ............. 2,673 5,205 8,044 177
Broker Servicing ................... 818 1,593 2,462 54
Miscellaneous ...................... 425 828 1,279 28
Total .............................. 4,228 8,234 12,726 280
MONEY MARKET FUND
Advertising ........................ N/A N/A N/A N/A
Printing ........................... N/A N/A N/A N/A
Salaries & Commissions ............. N/A N/A N/A N/A
Broker Servicing ................... N/A N/A N/A N/A
Miscellaneous ...................... N/A N/A N/A N/A
Total .............................. N/A N/A N/A N/A
During their fiscal year ended October 31, 1999,(1) expenses incurred by
the Distributor for distribution-related activities with respect to each class
of shares of each Fund listed below were as follows:
Distribution Expenses Class A Class B Class C
- --------------------- ------- ------- -------
GROWTH + VALUE FUND ..................... $ -- $ -- $ --
Salaries+Overides ....................... 203,959 167,908 124,870
Commissions Paid ........................ 15,711 10,417 250,545
Marketing, RMM, & Convention Expense .... 84,432 85,651 74,640
Total ................................... 304,102 263,976 450,055
INTERNATIONAL VALUE FUND
Salaries/Overides ....................... 1,522,722 299,846 545,963
Commissions Paid ........................ 164,784 9,180 1,383,699
Marketing, RMM, & Convention Expense .... 428,046 123,709 252,555
Total ................................... 2,115,552 432,735 2,182,217
38
<PAGE>
Distribution Expenses Class A Class B Class C
- --------------------- ------- ------- -------
EMERGING MARKETS VALUE FUND
Salaries/Overides ....................... 31,614 3,335 10,776
Commissions Paid ........................ 97 0 25,987
Marketing, RMM, & Convention Expense .... 11,726 4,064 7,233
Total ................................... 43,437 7,399 43,996
RESEARCH ENHANCED INDEX FUND
Salaries/Overides ....................... 113,194 174,798 174,812
Commissions Paid ........................ 69,413 0 702,009
Marketing, RMM, & Convention Expense .... 72,991 63,238 77,189
Total ................................... 255,598 238,036 954,010
INCOME & GROWTH FUND
Salaries/Overides ....................... 100,665 32,411 34,862
Commissions Paid ........................ 0 8,884 4,215
Marketing, RMM, & Convention Expense .... 60,290 23,158 27,188
Total ................................... 160,955 64,453 66,265
HIGH TOTAL RETURN FUND II
Salaries/Overides ....................... 93,765 160,313 85,465
Commissions Paid ........................ 0 8,678 122,294
Marketing, RMM, & Convention Expense .... 62,566 83,993 55,091
Total ................................... 156,331 252,984 262,850
HIGH TOTAL RETURN FUND
Salaries/Overides ....................... 303,005 309,315 106,423
Commissions Paid ........................ 20,160 74,013 136,149
Marketing, RMM, & Convention Expense .... 192,437 187,354 67,061
Total ................................... 515,602 570,682 309,633
- ----------
(1) Information is only available as of September 30, 1999.
During the fiscal year ended December 31, 1998, expenses incurred by the
Distributor (for Advest with respect to Class T Shares prior to June 2, 1995)
for certain distribution related activities with respect to each class of shares
of the Fund were as follows:
Distribution Expense Class A Class B Class C Class T
-------------------- ------- ------- ------- -------
Balance Sheet Opportunities Fund
Salaries/Overides ....................... $35,330 $ 4,803 $ 311 $ --
Commissions Paid ........................ -- 2,667 249 --
Marketing, RMM, & Convention Expense .... 34,475 3,933 495 --
Total ................................... 69,805 11,403 1,055 --
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, C, M, and Q shares for the
fiscal year ended June 30, 1999 were as follows (the Funds did not offer Class C
or Class Q shares until May 24, 1999):
<TABLE>
<CAPTION>
DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS M CLASS Q
- --------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASIA-PACIFIC EQUITY FUND
Advertising ................ $ 517 $ 410 N/A $ 222 N/A
Printing ................... 9,692 7,790 N/A 4,235 N/A
Salaries & Commissions ..... 63,457 51,008 N/A 27,727 N/A
Broker Servicing ........... 21,931 17,628 N/A 9,582 N/A
Miscellaneous .............. 10,467 8,415 N/A 4,574 N/A
Total ...................... 106,058 85,251 N/A 46,340 N/A
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS M CLASS Q
- --------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
MIDCAP VALUE FUND
Advertising ................ $ 517 $ 1,111 $ 2 $ 490 N/A
Printing ................... 9,692 21,108 30 9320 N/A
Salaries & Commissions ..... 63,457 226,491 320 100,011 N/A
Broker Servicing ........... 21,931 46,552 66 20,556 N/A
Miscellaneous .............. 10,467 20,008 27 8,835 N/A
Total ...................... 106,058 315,270 445 139,212 N/A
LARGECAP LEADERS FUND
Advertising ................ $ 199 $ 543 N/A $ 236 N/A
Printing ................... 3,783 10,312 N/A 4,490 N/A
Salaries & Commissions ..... 38,736 105,585 N/A 45,970 N/A
Broker Servicing ........... 8,483 23,124 N/A 10,068 N/A
Miscellaneous .............. 3,935 10,726 N/A 4,670 N/A
Total ...................... 55,136 150,290 N/A 65,434 N/A
MAGNACAP FUND
Advertising ................ $ 7,519 $ 2,431 $ 12 $ 659 N/A
Printing ................... 142,855 46,191 219 12,514 N/A
Salaries & Commissions ..... 1,206,704 390,175 1,849 105,707 N/A
Broker Servicing ........... 319,208 103,212 489 27,962 N/A
Miscellaneous .............. 144,731 46,797 222 12,678 N/A
Total ...................... 1,821,017 588,806 2,791 159,520 N/A
HIGH YIELD FUND
Advertising ................ $ 3,296 $ 7,012 $ 18 $ 947 N/A
Printing ................... 62,618 133,234 344 17,996 N/A
Salaries & Commissions ..... 481,059 1,023,562 2,644 138,255 N/A
Broker Servicing ........... 115,540 245,838 635 33,206 N/A
Miscellaneous .............. 73,102 155,542 402 21,009 N/A
Total ...................... 735,615 1,565,188 4,043 211,413 N/A
BANK AND THRIFT FUND
Advertising ................ $ 8,400 $ 9,498 N/A N/A N/A
Printing ................... 159,602 180,455 N/A N/A N/A
Salaries & Commissions ..... 1,080,995 1,222,226 N/A N/A N/A
Broker Servicing ........... 359,413 406,370 N/A N/A N/A
Miscellaneous .............. 171,147 193,507 N/A N/A N/A
Total ...................... 1,779,557 2,012,056 N/A N/A N/A
GOV'T SECURITIES INCOME FUND
Advertising ................ $ 693 $ 259 $ 1 $ 29 N/A
Printing ................... 13,169 4,922 22 543 N/A
Salaries & Commissions ..... 102,076 38,150 174 4,212 N/A
Broker Servicing ........... 29,556 11,046 51 1,220 N/A
Miscellaneous .............. 13,718 5,127 24 566 N/A
Total ...................... 159,212 59,504 272 6,570 N/A
</TABLE>
Prior to May 24, 1999, the Trust had a Distribution Plan with respect to
Pilgrim Mutual Funds with respect to each Class of each Fund (other than the
Money Market Fund) and a separate Shareholder Service Plan with respect to each
Class of each Fund (other than the Money Market Fund). Under the Distribution
Plan, NAS (the Distributor's predecessor) was entitled to payment each month in
the following amounts: with respect to Class A shares at an annual rate of up to
0.10% of the average daily net assets of the Class A shares of a Fund; with
respect to Class B shares at an annual rate of up to 0.75% of the average daily
net assets of the Class B shares of a Fund; and with respect to Class C shares
at an annual rate of up to 0.75% of the average daily net assets of the Class C
shares of a Fund. The Distribution Plan did not apply to Class Q shares. Under
the Distribution Plan, NAS was paid without regard to actual distribution
expenses it incurred. The aggregate amounts earned by NAS pursuant to that
Distribution Plan for the fiscal year ended June 30, 1999, were as follows:
40
<PAGE>
Fund Name 12b-1 Payments
- --------- --------------
International Core Growth Fund $ 174,064
Worldwide Growth Fund 822,359
International SmallCap Growth Fund 208,084
Emerging Countries Fund 549,129
LargeCap Growth Fund 102,429
MidCap Growth Fund 1,526,263
SmallCap Growth Fund 1,874,462
Convertible Fund 1,108,863
Balanced Fund 210,891
Strategic Income Fund 52,773
High Yield Fund II 411,227
Under the Shareholder Service Plan for the Pilgrim Mutual Funds, NAS was
entitled to payment each month in the following amounts: with respect to Class A
shares at an annual rate of up to 0.25% of the average daily net assets of the
Class A shares of a Fund; with respect to Class B shares at an annual rate of up
to 0.25% of the average daily net assets of the Class B shares of a Fund; with
respect to Class C shares at an annual rate of up to 0.25% of the average daily
net assets of the Class C shares of a Fund; and with respect to Class Q shares
at an annual rate of up to 0.25% of the average daily net assets of the Class Q
shares of a Fund. Under the Shareholder Service Plan, NAS was paid only with
respect to expenses actually incurred. If expenses incurred by NAS exceeded the
amount of the shareholder service fee in a particular month, the excess amount
would be carried forward and recovered in a future period if NAS's actual
expenses were less than the shareholder service fee. However, effective May 24,
1999, the Funds were no longer responsible for those excess amounts.
SHAREHOLDER SERVICING AGENT
Pilgrim Group, Inc. serves as Shareholder Servicing Agent for the Funds.
The Shareholder Servicing Agent is responsible for responding to written and
telephonic inquiries from shareholders. Each Fund pays the Shareholder Servicing
Agent a monthly fee on a per-contact basis, based upon incoming and outgoing
telephonic and written correspondence.
OTHER EXPENSES
In addition to the management fee and other fees described previously, each
Fund pays other expenses, such as legal, audit, transfer agency and custodian
out-of-pocket fees, proxy solicitation costs, and the compensation of Directors
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.
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS
Some of the different types of securities in which the Funds may invest,
subject to their respective investment objectives, policies and restrictions,
are described in the Prospectus under "The Funds," "Investment Objectives and
Policies," and "Investment Practices and Risk Considerations." Additional
information concerning the characteristics and risks of certain of the Funds'
investments are set forth below. There can be no assurance that any of the Funds
will achieve their investment objectives. References to the Money Market Fund
include investments by the Primary Fund in which it invests.
41
<PAGE>
TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS
Each Fund's assets (other than the Money Market Fund whose investments are
typically short-term) 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 Sub-Adviser's ability to invest cash inflows; (iii) to permit the
Fund to meet redemption requests; and (iv) for temporary defensive purposes. A
Fund for which the investment objective is capital appreciation 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.
COMMON STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES
Each Fund (other than Government Securities Income Fund and the Money
Market Fund) may invest in common stocks, which represent an equity (ownership)
interest in a company. This ownership interest generally gives a Fund the right
to vote on issues affecting the company's organization and operations. Such
investments will be diversified over a cross-section of industries and
individual companies. For Funds other than the LargeCap Growth Fund, some of
these companies will be organizations with market capitalizations of $500
million or less or companies that have limited product lines, markets and
financial resources and are dependent upon a limited management group. Examples
of possible investments include emerging growth companies employing new
technology, cyclical companies, initial public offerings of companies offering
high growth potential, or other corporations offering good potential for high
growth in market value. The securities of such companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
Each Fund (other than the Money Market 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, a Fund seeks the
opportunity, through the conversion feature, to participate in the capital
appreciation of the common stock into which the securities are convertible,
while investing at a better price than may be available on the common stock or
obtaining a higher fixed rate of return than is available on common stocks. The
value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
42
<PAGE>
The market value of convertible debt securities tends to vary inversely
with the level of interest rates. The value of the security declines as interest
rates increase and increases as interest rates decline. Although under normal
market conditions longer term debt securities have greater yields than do
shorter term debt securities of similar quality, they are subject to greater
price fluctuations. A convertible security may be subject to redemption at the
option of the issuer at a price established in the instrument governing the
convertible security. If a convertible security held by a Fund is called for
redemption, the Fund must permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Funds
because the Funds purchase such securities for their equity characteristics.
As a matter of operating policy, each fund which comprises the Pilgrim
Mutual Funds will invest no more than 5% of its net assets in warrants. A
warrant gives the holder a right to purchase at any time during a specified
period a predetermined number of shares of common stock at a fixed price. Unlike
convertible debt securities or preferred stock, warrants do not pay a fixed
dividend. Investments in warrants involve certain risks, including the possible
lack of a liquid market for resale of the warrants, potential price fluctuations
as a result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercised, resulting in a loss of the Fund's entire
investment therein).
Each fund which comprises the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, a fund may purchase a non-convertible debt security and
a warrant or option, which enables the fund to have a convertible-like position
with respect to a company, group of companies or stock index. Synthetic
convertible securities are typically offered by financial institutions and
investment banks in private placement transactions. Upon conversion, the fund
generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike a
true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market value
of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. A Fund only invests in synthetic convertibles with respect
to companies whose corporate debt securities are rated "A" or higher by Moody's
or "A" or higher by S&P and will not invest more than 15% of its net assets in
such synthetic securities and other illiquid securities.
The MidCap Value Fund will invest substantially all of its assets, and
LargeCap Leaders Fund, Asia-Pacific Equity Fund, and Bank and Thrift Fund may
invest, in the equity securities of certain midcap companies. Midcap companies
will tend to be smaller, more emerging companies and investment in these
companies may involve greater risk than is customarily associated with
securities of larger, more established companies. Midcap companies may
experience relatively higher growth rates and higher failure rates than do
larger companies. The trading volume of securities of midcap companies is
normally less than that of larger companies and, therefore, may
disproportionately affect their market price, tending to make them rise more in
response to buying demand and fall more in response to selling pressure than is
the case with larger companies.
PREFERRED STOCK
Each Fund (other than the Money Market Fund) may invest in preferred stock.
Preferred stock, unlike common stock, offers a stated dividend rate payable from
a corporation's earnings. Such preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
43
<PAGE>
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be
"cumulative," requiring all or a portion of prior unpaid dividends to be paid
before dividends are paid on the issuer's common stock. Preferred stock also
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation, and may be
"participating," which means that it may be entitled to a dividend exceeding the
stated dividend in certain cases. The rights of preferred stocks on the
distribution of a corporation's assets in the event of a liquidation are
generally subordinate to the rights associated with a corporation's debt
securities.
EURODOLLAR CONVERTIBLE SECURITIES
Each fund which comprises the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the same
or a different issuer. Interest and dividends on Eurodollar securities are
payable in U.S. dollars outside of the United States. The Funds may invest
without limitation in Eurodollar convertible securities that are convertible
into foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange or the American Stock Exchange or convertible into publicly
traded common stock of U.S. companies. The Funds may also invest up to 15% of
its total assets invested in convertible securities, taken at market value, in
Eurodollar convertible securities that are convertible into foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each fund which comprises the Pilgrim Mutual Funds may invest in Eurodollar
and Yankee Dollar instruments. Eurodollar instruments are bonds that pay
interest and principal in U.S. dollars held in banks outside the United States,
primarily in Europe. Eurodollar instruments are usually issued on behalf of
multinational companies and foreign governments by large underwriting groups
composed of banks and issuing houses from many countries. Yankee Dollar
instruments are U.S. dollar denominated bonds issued in the U.S. by foreign
banks and corporations. These investments involve risks that are different from
investments in securities issued by U.S. issuers. See "Foreign Investment
Considerations."
SECURITIES OF BANKS AND THRIFTS
The 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 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
44
<PAGE>
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.
SHORT-TERM INVESTMENTS
The Funds may invest in the following securities and instruments:
Bank Certificates of Deposit, Bankers' Acceptances and Time Deposits. The Funds
may acquire certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. The Primary Institutional Fund in which the Money Market Fund
invests substantially all of its assets, requires that the foreign banks whose
obligations it acquires have capital, surplus and undivided profits of $25
billion.
A Fund holding instruments of foreign banks or financial institutions may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. See "Foreign Investments" below. Domestic banks and foreign
banks are subject to different governmental regulations with respect to the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry depends largely
upon the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
45
<PAGE>
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry. Federal and state laws and regulations require domestic banks
to maintain specified levels of reserves, limited in the amount which they can
loan to a single borrower, and subject to other regulations designed to promote
financial soundness. However, such laws and regulations do not necessarily apply
to foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under their respective investment objectives and
policies stated above and in their Prospectuses, the Funds may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a banking
institution for a specified period of time at a specified interest rate.
Savings Association Obligations. The Funds that comprise the Pilgrim Mutual
Funds may invest in certificates of deposit (interest-bearing time deposits)
issued by savings banks or savings and loan associations that have capital,
surplus and undivided profits in excess of $100 million, based on latest
published reports, or less than $100 million if the principal amount of such
obligations is fully insured by the U.S. Government.
Commercial Paper, Short-Term Notes and Other Corporate Obligations. The Funds
may invest a portion of their assets in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper and short-term notes will normally have maturities of
less than nine months and fixed rates of return, although such instruments may
have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher (A-1 for the Primary Institutional Fund in
which the Money Market Fund invests substantially all of its assets) by S&P,
"Prime-l" or "Prime-2" by Moody's (Prime-1 for the Primary Institutional Fund in
which the Money Market Fund invests substantially all of its assets), or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Investment Manager or Sub-Adviser to
be of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds (other
than Money Market Fund) may purchase corporate obligations which have remaining
maturities of one year or less from the date of purchase and which are rated
"AA" or higher by S&P or "Aa" or higher by Moody's.
U.S. GOVERNMENT SECURITIES
The Funds may invest in U.S. Government securities which include
instruments issued by the U.S. Treasury, such as bills, notes and bonds. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the full faith and credit of the United States. They differ primarily
in their interest rates, the lengths of their maturities and the dates of their
issuances. In addition, U.S. Government securities include securities issued by
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association, which are also backed by the full faith and credit of the
United States. Also included in the category of U.S. Government securities are
instruments issued by instrumentalities established or sponsored by the U.S.
Government, such as the Student Loan Marketing Association, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation. While these
securities are issued, in general, under the authority of an Act of Congress,
the U.S. Government is not obligated to provide financial support to the issuing
instrumentalities, although under certain conditions certain of these
authorities may borrow from the U.S. Treasury. In the case of securities not
backed by the full faith and credit of the U.S., the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the U.S. itself in the event the agency or instrumentality does not meet its
commitment. Each Fund will invest in securities of such agencies or
instrumentalities only when the Sub-Adviser is satisfied that the credit risk
with respect to any instrumentality is comparable to the credit risk of U.S.
government securities backed by the full faith and credit of the United States.
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MUNICIPAL SECURITIES
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in debt obligations issued by state and local
governments, territories and possessions of the U.S., regional government
authorities, and their agencies and instrumentalities ("municipal securities").
Municipal securities include both notes (which have maturities of less than one
year) and bonds (which have maturities of one year or more) that bear fixed or
variable rates of interest.
In general, "municipal securities" debt obligations are issued to obtain
funds for a variety of public purposes, such as the construction, repair, or
improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assistance (although without obligation) to make up deficiencies in the
debt service reserve fund.
The Funds may purchase insured municipal debt in which scheduled payments
of interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
MORAL OBLIGATION SECURITIES
Municipal securities may include "moral obligation" securities which are
usually issued by special purpose public authorities. If the issuer of moral
obligation bonds cannot fulfill its financial responsibilities from current
revenues, it may draw upon a reserve fund, the restoration of which is moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
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INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in tax-exempt industrial development bonds and pollution
control bonds which, in most cases, are revenue bonds and generally are not
payable from the unrestricted revenues of an issuer. They are issued by or on
behalf of public authorities to raise money to finance privately operated
facilities for business, manufacturing, housing, sport complexes, and pollution
control. Consequently, the credit quality of these securities is dependent upon
the ability of the user of the facilities financed by the bonds and any
guarantor to meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in lease obligations or installment purchase contract
obligations of municipal authorities or entities ("municipal lease
obligations"). Although lease obligations do not constitute general obligations
of the municipality for which its taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payment due under the lease obligation. A Fund may also purchase
"certificates of participation," which are securities issued by a particular
municipality or municipal authority to evidence a proportionate interest in base
rental or lease payments relating to a specific project to be made by the
municipality, agency or authority. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in any year unless
money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
The Funds will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at least
one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Manager or Sub-Adviser to be critical to the
lessee's ability to deliver essential services; and (4) contain legal features
which the Investment Manager or Sub-Adviser deems appropriate, such as covenants
to make lease payments without the right of offset or counterclaim, requirements
for insurance policies, and adequate debt service reserve funds.
SHORT-TERM MUNICIPAL OBLIGATIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in short-term municipal obligations. These securities
include the following:
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They also are usually general obligations of the issuer.
Bond Anticipation Notes normally are issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the money
for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal National Mortgage Association or the
Government National Mortgage Association.
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Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365 days
or less) promissory notes issued by municipalities to supplement their cash
flow.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may acquire variable and floating rate instruments. Credit rating
agencies frequently do not rate such instruments; however, the Investment
Manager or Sub-Adviser will determine what unrated and variable and floating
rate instruments are of comparable quality at the time of the purchase to rated
instruments eligible for purchase by the Fund. An active secondary market may
not exist with respect to particular variable or floating rate instruments
purchased by a Fund. The absence of such an active secondary market could make
it difficult for the Fund to dispose of the variable or floating rate instrument
involved in the event of the issuer of the instrument defaulting on its payment
obligation or during periods in which the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss to
the extent of the default. Variable and floating rate instruments may be secured
by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in "index-linked" or "commodity-linked" notes, which are
debt securities of companies that call for interest payments and/or payment at
maturity in different terms than the typical note where the borrower agrees to
make fixed interest payments and to pay a fixed sum at maturity. Principal
and/or interest payments on an index-linked note depend on the performance of
one or more market indices, such as the S&P 500 Index or a weighted index of
commodity futures such as crude oil, gasoline and natural gas. The Funds may
also invest in "equity linked" and "currency-linked" debt securities. At
maturity, the principal amount of an equity-linked debt security is exchanged
for common stock of the issuer or is payable in an amount based on the issuer's
common stock price at the time of maturity. Currency-linked debt securities are
short-term or intermediate term instruments having a value at maturity, and/or
an interest rate, determined by reference to one or more foreign currencies.
Payment of principal or periodic interest may be calculated as a multiple of the
movement of one currency against another currency, or against an index.
Index and currency-linked securities are derivative instruments which may
entail substantial risks. Such instruments may be subject to significant price
volatility. The company issuing the instrument may fail to pay the amount due on
maturity. The underlying investment or security may not perform as expected by
the Investment Manager or Sub-Adviser. Markets, underlying securities and
indexes may move in a direction that was not anticipated by the Investment
Manager or Sub-Adviser. Performance of the derivatives may be influenced by
interest rate and other market changes in the U.S. and abroad. Certain
derivative instruments may be illiquid. See "Illiquid Securities" below.
CORPORATE DEBT SECURITIES
Each Fund may invest in corporate debt securities. Corporate debt
securities include corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities. The investment
return on a corporate debt security reflects interest earnings and changes in
the market value of the security. The market value of a corporate debt security
will generally increase when interest rates decline, and decrease when interest
rates rise. There is also the risk that the issuer of a debt security will be
unable to pay interest or principal at the time called for by the instrument.
Investments in corporate debt securities that are rated below investment grade
are described in "High Yield Securities" below.
Debt obligations that are deemed investment grade carry a rating of at
least Baa from Moody's or BBB from Standard and Poor's, or a comparable rating
from another rating agency or, if not rated by an agency, are determined by the
Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have
speculative characteristics and changes in economic circumstances are more
likely to lead to a weakened capacity to make interest and principal payments
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than higher rated bonds. The Primary Fund in which the Money Market Fund invests
will invest only in corporate debt securities rated A-1 or above.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred to
as "junk bonds." These bonds are subject to greater market fluctuations and risk
of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:
Sensitivity to Interest Rate and Economic Changes. The economy and interest
rates affect high yield securities differently from other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, a 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 bonds and the Funds'
asset values.
Payment Expectations. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
Liquidity and Valuation. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact the Investment Manager's or Sub-Adviser's ability to accurately value
high yield bonds and the Funds' assets and hinder the Funds' ability to dispose
of the bonds. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high yield
bonds, especially in a thinly traded market.
Credit Ratings. Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. The rating of an issuer
is also heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. Also, since credit rating agencies may
fail to timely change the credit ratings to reflect subsequent events, the
Investment Manager or Sub-Adviser must monitor the issuers of high yield bonds
in the Funds' portfolios to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments, and to assure
the bonds' liquidity so the Funds can meet redemption requests.
BANKING INDUSTRY OBLIGATIONS
Each Fund may invest in banking industry obligations, including
certificates of deposit, bankers' acceptances, and fixed time deposits. The
Funds 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.
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WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure prices or yields deemed advantageous at the time, the
Funds may purchase or sell securities on a when-issued or a delayed-delivery
basis generally 15 to 45 days after the commitment is made. The Funds will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the purpose of leverage. In such transactions, delivery of the
securities occurs beyond the normal settlement periods, but no payment or
delivery is made by, and no interest accrues to, the Fund prior to the actual
delivery or payment by the other party to the transaction. Due to fluctuations
in the value of securities purchased on a when-issued or a delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers. Similarly, the sale of securities for delayed-delivery
can involve the risk that the prices available in the market when delivery is
made may actually be higher than those obtained in the transaction itself. Each
Fund will establish a segregated account with the Custodian consisting of cash
and/or liquid assets in an amount equal to the amount of its when-issued and
delayed-delivery commitments which will be "marked to market" daily. Each Fund
will only make commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities before
the settlement date if it is deemed advisable as a matter of investment
strategy. A Fund may not purchase when issued securities or enter into firm
commitments, if as a result, more than 15% of the Fund's net assets would be
segregated to cover such securities.
When the time comes to pay for the securities acquired on a delayed
delivery basis, a Fund will meet its obligations from the available cash flow,
sale of the securities held in the segregated 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). Depending on market conditions, the Funds could
experience fluctuations in share price as a result of delayed delivery or
when-issued purchases.
HIGH YIELD SECURITIES
The High Yield Fund, High Yield Fund III, High Total Return Fund II, the
Balance Sheet Opportunities Fund, and High Total Return Fund each may invest in
high yield securities, which are debt securities that are rated lower than Baa
by Moody's Investors Service or BBB by Standard & Poor's Corporation, or of
comparable quality if unrated.
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.
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. Also, their yields
and market values tend to fluctuate more than higher-rated securities.
Fluctuations in value do not affect the cash income from the securities, but are
reflected in a 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.
The yields earned on high yield securities generally are related to the
quality ratings assigned by recognized rating agencies. 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 --
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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.
Certain securities held by a Fund may permit the issuer at its option to
call, or redeem, its securities. If an issuer were to redeem securities held by
a Fund during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
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.
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 Funds defaults, the Funds 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 Funds' 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 Funds 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 a
Fund'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 Funds owns illiquid or restricted high yield securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. At times of less liquidity, it
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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.
Taxation. Special tax considerations are associated with investing in high yield
securities structured as zero coupon or pay-in-kind securities. The Funds report
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,
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 Funds' 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 Funds' portfolio and carefully evaluates whether to dispose
of or retain high yield securities whose credit ratings have changed. The Funds
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
Funds' net asset values.
DERIVATIVES
The Funds may invest in derivative instruments. 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. Types of
derivatives include options, futures contracts, options on futures and forward
contracts. Derivative Instruments may be used for a variety of reasons,
including to enhance return, hedge certain market risks, or provide a substitute
for purchasing or selling particular securities. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit a Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (I.E., margin requirements) operated by
the clearing agency in order to reduce overall credit risk. As a result, unless
the clearing agency defaults, there is relatively little counterparty credit
risk associated with Derivatives purchased on an exchange. By contrast, no
clearing agency guarantees over-the-counter Derivatives. Therefore, each party
to an over-the-counter Derivative bears the risk that the counterparty will
default. Accordingly, the Funds will consider the creditworthiness of
counterparties to over-the-counter Derivatives in the same manner as they would
review the credit quality of a security to be purchased by a Fund.
Over-the-counter Derivatives are less liquid than exchange-traded Derivatives
since the other party to the transaction may be the only investor with
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sufficient understanding of the Derivative to be interested in bidding for it.
In the case of the 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 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
Advisory Funds will not engage in any other type of options transactions.
MORTGAGE-RELATED SECURITIES
The Government Securities Income Fund may invest up to 100% of its assets
and High Yield Fund may invest up to 35% of its assets in certain types of
mortgage-related securities. The Pilgrim Mutual Funds and the funds which
comprise the Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and the High Yield Fund III may also invest in 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.
The Funds indicated above 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.
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.
The Government Securities Income Fund will purchase only U.S. Government
Agency Mortgage-Backed Securities. These securities are obligations issued or
guaranteed by the U.S. Government or by one of its agencies or
instrumentalities, including but not limited to GNMA, FNMA or FHLMC. Although
their close relationship with the U.S. Government is believed to make them
high-quality securities with minimal credit risks, the U.S. Government is not
obligated by law to support either FNMA or FHLMC. However, historically there
have not been any defaults of FNMA or FHLMC issues. Mortgage-backed securities
consist of interests in underlying mortgages with maturities of up to thirty
years. However, due to early unscheduled payments of principal on the underlying
mortgages, the securities have a shorter average life and, therefore, less
volatility than a comparable thirty-year bond.
The prices of high coupon U.S. Government Agency Mortgage-Backed Securities
do not tend to rise as rapidly as those of traditional fixed-rate securities at
times when interest rates are decreasing, and tend to decline more slowly at
times when interest rates are increasing. The Government Securities Income Fund
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may purchase such securities at a premium, which means that a faster principal
prepayment rate than expected will reduce the market value of and income from
such securities, while a slower prepayment rate will tend to increase the market
value of and income from such securities.
The Funds indicated above, except the Government Securities Income Fund,
may also purchase mortgage-backed securities issued by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers that 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.
It is expected 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 Funds' investment
objectives, policies and restrictions, consider making investments in such new
types of securities.
Other types of mortgage-related securities in which the Funds may invest
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 Funds) 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 Funds
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.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
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SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the interest and a larger portion of the principal from
the Mortgage Assets, while the other classes will receive primarily interest and
only a small portion of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets, and
a rapid rate of principal payments may have a material adverse effect on such
security's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a Fund may fail to recoup
fully its initial investment in these securities. The determination of whether a
particular government-issued IO or PO backed by fixed-rate mortgages is liquid
is made by Pilgrim or a Sub-Adviser under guidelines and standards established
by the Board of Trustees. Such a security may be deemed liquid if it can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
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. 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. 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.
Each of the Mid-Cap Opportunities Fund, Growth + Value Fund, International
Value Fund, Emerging Markets Value Fund, Research Enhanced Index Fund, Income &
Growth Fund, High Total Return Fund II and High Total Return Fund III may invest
up to 5% of its net assets in Privately Issued Collateralized Mortgage-Backed
Obligations ("CMOs"), Interest Obligations ("IOs") and Principal Obligations
("POs") when Pilgrim believes that such investments are consistent with the
Fund's investment objective.
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The Pilgrim Mutual Funds, Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, Growth Opportunities Fund, Balance Sheet Opportunities
Trust, Government Securities Fund, and the High Yield Fund III may invest in
foreign mortgage-related securities. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (e.g., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans. The
Primary Fund in which the Money Market Fund invests substantially all of its
assets will not invest in foreign mortgage-related securities.
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds
invest include, but are not limited to, interests in pools of receivables, such
as credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number
of respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities. The Primary Fund in which the Money Market Fund invests
substantially all of its assets will not invest in asset-backed securities.
GNMA Certificates. Certificates of the GNMA ("GNMA Certificates") evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds, in that principal is paid back monthly as payments of principal,
including prepayments, on the mortgages in the underlying pool are passed
through to holders of GNMA Certificates representing interests in the pool,
rather than returned in a lump sum at maturity. The GNMA Certificates that the
Funds may purchase are the "modified pass-through" type.
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
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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.
SUBORDINATED MORTGAGE SECURITIES
Subordinated mortgage securities have certain characteristics and certain
associated risks. In general, the subordinated mortgage securities in which the
Funds may invest consist of a series of certificates issued in multiple classes
with a stated maturity or final distribution date. One or more classes of each
series may be entitled to receive distributions allocable only to principal,
principal prepayments, interest or any combination thereof prior to one or more
other classes, or only after the occurrence of certain events, and may be
subordinated in the right to receive such distributions on such certificates to
one or more senior classes of certificates. The rights associated with each
class of certificates are set forth in the applicable pooling and servicing
agreement, form of certificate and offering documents for the certificates.
The subordination terms are usually designed to decrease the likelihood
that the holders of senior certificates will experience losses or delays in the
receipt of their distributions and to increase the likelihood that the senior
certificate holders will receive aggregate distributions of principal and
interest in the amounts anticipated. Generally, pursuant to such subordination
terms, distributions arising out of scheduled principal, principal prepayments,
interest or any combination thereof that otherwise would be payable to one or
more other classes of certificates of such series (i.e., the subordinated
certificates) are paid instead to holders of the senior certificates. Delays in
receipt of scheduled payments on mortgage loans and losses on defaulted mortgage
loans are typically borne first by the various classes of subordinated
certificates and then by the holders of senior certificates.
In some cases, the aggregate losses in respect of defaulted mortgage loans
that must be borne by the subordinated certificates and the amount of the
distributions otherwise distributable on the subordinated certificates that
would, under certain circumstances, be distributable to senior certificate
holders may be limited to a specified amount. All or any portion of
distributions otherwise payable to holders of subordinated certificates may, in
certain circumstances, be deposited into one or more reserve accounts for the
benefit of the senior certificate holders. Since a greater risk of loss is borne
by the subordinated certificate holders, such certificates generally have a
higher stated yield than the senior certificates.
Interest on the certificates generally accrues on the aggregate principal
balance of each class of certificates entitled to interest at an applicable
rate. The certificate interest rate may be a fixed rate, a variable rate based
on current values of an objective interest index or a variable rate based on a
weighted average of the interest rate on the mortgage loans underlying or
constituting the mortgage assets. In addition, the underlying mortgage loans may
have variable interest rates.
Generally, to the extent funds are available, interest accrued during each
interest accrual period on each class of certificates entitled to interest is
distributable on certain distribution dates until the aggregate principal
balance of the certificates of such class has been distributed in full.
The amount of interest that accrues during any interest accrual period and
over the life of the certificates depends primarily on the aggregate principal
balance of the class of certificates, which, unless otherwise specified, depends
primarily on the principal balance of the mortgage assets for each such period
and the rate of payment (including prepayments) of principal of the underlying
mortgage loans over the life of the trust.
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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 Funds by investing in subordinated residential mortgage securities is
potential losses resulting from defaults by the borrowers under the underlying
mortgages. The Funds 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 Funds seek
opportunities to acquire subordinated residential mortgage securities where, in
the view of the Investment Manager, the potential for a higher yield on such
instruments outweighs any additional risk presented by the instruments. The
Investment Manager will seek to increase yield to shareholders by taking
advantage of perceived inefficiencies in the market for subordinated residential
mortgage securities.
Credit Enhancement. Credit enhancement for the senior certificates comprising a
series is provided by the holders of the subordinated certificates to the extent
of the specific terms of the subordination and, in some cases, by the
establishment of reserve funds. Depending on the terms of a particular pooling
and servicing agreement, additional or alternative credit enhancement may be
provided by a pool insurance policy and/or other insurance policies, third party
limited guaranties, letters of credit, or similar arrangements. Letters of
credit may be available to be drawn upon with respect to losses due to mortgagor
bankruptcy and with respect to losses due to the failure of a master service to
comply with its obligations, under a pooling and servicing agreement, if any, to
repurchase a mortgage loan as to which there was fraud or negligence on the part
of the mortgagor or originator and subsequent denial of coverage under a pool
insurance policy, if any. A master service may also be required to obtain a pool
insurance policy to cover losses in an amount up to a certain percentage of the
aggregate principal balance of the mortgage loans in the pool to the extent not
covered by a primary mortgage insurance policy by reason of default in payments
on mortgage loans.
Optional Termination of a Trust. A pooling and servicing agreement may provide
that the depositor and master service could effect early termination of a trust,
after a certain specified date or the date on which the aggregate outstanding
principal balance of the underlying mortgage loans is less than a specific
percentage of the original aggregate principal balance of the underlying
mortgage loans by purchasing all of such mortgage loans at a price, unless
otherwise specified, equal to the greater of a specified percentage of the
unpaid principal balance of such mortgage loans, plus accrued interest thereon
at the applicable certificate interest rate, or the fair market value of such
mortgage assets. Generally, the proceeds of such repurchase would be applied to
the distribution of the specified percentage of the principal balance of each
outstanding certificate of such series, plus accrued interest, thereby retiring
such certificates. Notice of such optional termination would be given by the
trustee prior to such distribution date.
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.
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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.
ZERO COUPON AND PAY-IN-KIND SECURITIES
The Funds may invest in zero coupon securities. The Convertible, Balanced,
and High Yield II Funds will limit their investments in such securities to 35%
of their respective net assets. 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.
The Funds may also invest in pay-in-kind securities. Pay-in-kind securities
are securities that pay interest or dividends through the issuance of additional
securities. A 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 Funds until the cash payment date or the securities mature. Under certain
circumstances, the Funds 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.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
The Advisory Funds, High Yield Fund, MagnaCap Fund, and the Pilgrim Mutual
Funds (other than the Money Market Funds) may invest in securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other similar securities representing securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. EDRs are receipts issued by a European financial
institution evidencing a similar arrangement. Generally, ADRs, in registered
form, are designed for use in the United States securities markets, and EDRs, in
bearer form, are designed for use in European securities markets.
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FOREIGN AND EMERGING MARKET SECURITIES
Each Fund, except Government Securities Fund, may invest in securities of
foreign issuers. Each of these Funds other than International Value, Emerging
Markets Value, High Yield, High Total Return II and High Total Return Funds may
invest up to 20% of its net assets in foreign securities, of which 10% of its
net assets may be invested in foreign securities that are not listed on a U.S.
securities exchange. High Yield Fund may invest up to 35% of its total assets
and High Total Return Fund II and High Total Return Fund may each invest up to
50% of its assets in foreign securities. International Value Fund and Emerging
Markets Value Fund may each invest up to 100% of its assets in securities of
foreign issuers. The Balance Sheet Opportunities Fund may invest up to 20% of
its net assets in foreign securities, of which 10% of its net assets may be
invested in foreign securities that are not listed on a U.S. securities
exchange.
The Asia-Pacific Equity Fund invests primarily, and the MagnaCap Fund may
invest up to 5% of its total assets, in certain foreign securities (including
ADRs). The International Value Fund may invest up to 25% of its assets and the
Emerging Markets Value Fund may invest greater than 65% of its assets in
securities of companies located in countries with emerging securities markets.
The 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. The Asia-Pacific Equity Fund will invest
substantially all of its assets in the equity securities of companies based in
the Asia-Pacific region. The Asia-Pacific countries include, but are not limited
to, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan
and Thailand, although the Fund will not invest in Japan and Australia.
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 a Fund is uninvested and no return is earned thereon. The
inability of the Funds to make intended security purchases due to settlement
problems could cause the Funds to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Funds due to subsequent declines in value of the
portfolio security or, if the Funds have 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 or confiscatory taxation, political or social instability, or
diplomatic developments that could affect U.S. investments in those countries.
Although the Funds will use reasonable efforts to obtain the best available
price and the most favorable execution with respect to all transactions and the
Investment Manager or Sub-Adviser 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
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governments levy withholding taxes against dividend and interest income, or may
impose other taxes. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received by the Funds 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 long-term capital appreciation
and any income earned by the Fund should be considered incidental.
The risks of investing in foreign securities may be intensified in the case
of investments in issuers domiciled or doing substantial business in emerging
markets or countries with limited or developing capital markets. Security prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of sudden adverse government action and even nationalization of businesses,
restrictions on foreign ownership, or prohibitions of repatriation of assets,
and may have less protection of property rights than more developed countries.
The economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. Transaction settlement and dividend collection procedures
may be less reliable in emerging markets than in developed markets. Securities
of issuers located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic price movements.
International Debt Securities. The Funds indicated above 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 High Yield Fund's total assets, at the time of purchase, will be invested in
securities of foreign issuers. These investments may include debt obligations
such as bonds (including sinking fund and callable bonds), debentures and notes,
together with preferred stocks, pay-in-kind securities, and zero coupon
securities.
In determining whether to invest in debt obligations of foreign issuers,
the Fund will consider the relative yields of foreign and domestic high yield
securities, the economies of foreign countries, the condition of such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. Dollar. These factors are
judged on the basis of fundamental economic criteria (e.g., relative inflation
levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. Subsequent foreign
currency losses may result in the Fund having previously distributed more income
in a particular period than was available from investment income, which could
result in a return of capital to shareholders. The Fund's portfolio of foreign
securities may include those of a number of foreign countries, or, depending
upon market conditions, those of a single country.
Investments in securities of issuers in non-industrialized countries
generally involve more risk and may be considered highly speculative. Although a
portion of the Fund's investment income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars and absorb the cost of currency fluctuations and the cost of
currency conversions. Investment in foreign securities involves considerations
and risks not associated with investment in securities of U.S. issuers. For
example, foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered under the Securities Act of
1933, as amended, the issuer does not have to comply with the disclosure
requirements of the Securities Exchange Act of 1934, as amended. The values of
foreign securities investments will be affected by incomplete or inaccurate
information available to the Investment Manager as to foreign issuers, changes
in currency rates, exchange control regulations or currency blockage,
expropriation or nationalization of assets, application of foreign tax laws
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(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.
Investing in Developing Asia-Pacific Securities Markets and Economies. The
securities markets of developing Asia-Pacific countries are not as large as the
U.S. securities markets and have substantially less trading volume, resulting in
a lack of liquidity and high price volatility. Certain markets, such as those of
China, are in only the earliest stages of development. There is also a 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. Many of such markets
also may be affected by developments with respect to more established markets in
the region, such as in Japan. Developing Asia-Pacific brokers typically are
fewer in number and less capitalized than brokers in the United States.
These factors, combined with the U.S. regulatory requirements of open-end
investment companies and the restrictions on foreign investments discussed
below, result in potentially fewer investment opportunities for Asia-Pacific
Equity Fund and may have an adverse impact on the investment performance of the
Fund. The Fund's investment restrictions permit it to invest up to 15% of its
net assets in securities that are determined by the Sub-Adviser to be illiquid.
The investment objective of the Asia-Pacific Equity Fund reflects the
belief that the economies of the developing Asia-Pacific countries will continue
to grow in such a fashion as to provide attractive investment opportunities. At
the same time, emerging economies present certain risks that do not exist in
more established economies. Especially significant is that political and social
uncertainties exist for many of the developing Asia-Pacific countries. In
addition, the governments of many of such countries, such as Indonesia, have a
heavy role in regulating and supervising the economy. Another risk common to
most such countries is that the economy is heavily export oriented and,
accordingly, is dependent upon international trade. The existence of
overburdened infrastructure and obsolete financial systems also presents risks
in certain countries, as do environmental problems. Certain economies also
depend to a significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices which, in turn, may be
affected by a variety of factors. In addition, certain developing Asia-Pacific
countries, such as the Philippines, are especially large debtors to commercial
banks and foreign governments.
Archaic legal systems in certain developing Asia-Pacific countries also may
have an adverse impact on the Asia-Pacific Equity Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain developing
Asia-Pacific countries. Similarly, the rights of investors in Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in
developing Asia-Pacific countries. For example, some of the currencies of
developing Asia-Pacific countries have experienced devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries face serious exchange constraints. In
addition, as mentioned above, governments of many developing Asia-Pacific
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector.
In certain cases, the government owns or controls many companies, including
the largest in the country. Accordingly, government actions in the future could
have a significant effect on economic conditions in developing Asia-Pacific
countries, which could affect private sector companies and the Asia-Pacific
Equity Fund, as well as the value of securities in the Fund's portfolio.
In addition to the relative lack of publicly available information about
developing Asia-Pacific issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
are applicable to U.S. companies, inflation accounting rules in some developing
Asia-Pacific countries require, for companies that keep accounting records in
the local currency, for both tax and accounting purposes, that certain assets
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and liabilities be restated on the company's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits for certain developing Asia-Pacific
companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the
Asia-Pacific Equity Fund incurring additional costs and delays in providing
transportation and custody services for such securities outside such countries,
if possible.
As a result, the Sub-Adviser of the Asia-Pacific Equity Fund may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular developing Asia-Pacific
country. The Fund may invest in countries in which foreign investors, including
the Sub-Adviser of the Fund, have had no or limited prior experience.
Restrictions on Foreign Investments. Some developing countries prohibit or
impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as a Fund. As
illustrations, certain countries may require governmental approval prior to
investments by foreign persons or limit the amount of investment by foreign
persons in a particular company or limit the investment by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms (including price) than securities of the company available for purchase by
nationals. Certain countries may restrict investment opportunities in issuers or
industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain
developing countries, as well as limitations on such investments, also may have
an adverse impact on the operations of a Fund that invests in such countries.
For example, the Fund may be required in certain of such countries to invest
initially through a local broker or other entity and then have the shares
purchased re-registered in the name of the Fund. Re-registration may in some
instances not be able to occur on timely basis, resulting in a delay during
which a Fund may be denied certain of its rights as an investor, including
rights as to dividends or to be made aware of certain corporate actions. There
also may be instances where a Fund places a purchase order but is subsequently
informed, at the time of re-registration, that the permissible allocation of the
investment to foreign investors has been filled, depriving the Fund of the
ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with respect to a
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. A Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. No more than 15% of a Fund's net assets may be comprised, in the
aggregate, of assets that are (i) subject to material legal restrictions on
repatriation or (ii) invested in illiquid securities. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect certain aspects of the operations of the Fund. For example, funds may
be withdrawn from the People's Republic of China only in U.S. or Hong Kong
dollars and only at an exchange rate established by the government once each
week.
In certain countries, banks or other financial institutions may be among
the leading companies or have actively traded securities. The 1940 Act restricts
each Fund's investments in any equity securities of an issuer that, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities," as defined by the rules thereunder. The provisions may
restrict the Fund's investments in certain foreign banks and other financial
institutions.
Foreign Currency Risks. Currency risk is the risk that changes in foreign
exchange rates will affect, favorably or unfavorably, the U.S. dollar value of
foreign securities. In a period when the U.S. dollar generally rises against
foreign currencies, the returns on foreign stocks for a U.S. investor will be
diminished. By contrast, in a period when the U.S. dollar generally declines,
the returns on foreign securities will be enhanced. Unfavorable changes in the
relationship between the U.S. dollar and the relevant foreign currencies,
therefore, will adversely affect the value of a Fund's shares.
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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.
Foreign Currency Exchange Transactions. Because the Funds that invest in foreign
securities may buy and sell securities denominated in currencies other than the
U.S. Dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. Dollar, the Funds may enter into foreign currency exchange
transactions to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. Dollar. The Funds either enter into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or uses forward foreign currency contracts
to purchase or sell foreign currencies. Asia-Pacific Equity Fund may not invest
more than 5% of its assets (taken at market value at the time of investment) in
forward foreign currency contracts.
A forward foreign currency exchange contract is an agreement to exchange
one currency for another -- for example, to exchange a certain amount of U.S.
Dollars for a certain amount of Korean Won -- at a future date. Forward foreign
currency contracts are included in the group of instruments that can be
characterized as derivatives. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the prices
of these securities should decline.
Although these transactions tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of these securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. Use of currency
hedging techniques may also be limited by management's need to protect the
status of the Fund as a regulated investment company under the Code.
FOREIGN BANK OBLIGATIONS
Through its investment in the Primary Fund, the Money Market Fund invests
in obligations of foreign banks and foreign branches of U.S. banks. Obligations
of foreign banks and foreign branches of U.S. banks involve somewhat different
investment risks from those affecting obligations of U.S. banks, including the
possibilities that liquidity could be impaired because of future political and
economic developments; the obligations may be less marketable than comparable
obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes
on interest income payable on those obligations; foreign deposits may be seized
or nationalized; foreign governmental restrictions (such as foreign exchange
controls) may be adopted which might adversely affect the payment of principal
and interest on those obligations; and the selection of those obligations may be
more difficult because there may be less publicly available information
concerning foreign banks. In addition, the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. In that connection, foreign banks
are not subject to examination by any U.S. government agency or instrumentality.
SOVEREIGN DEBT SECURITIES
Certain Funds may invest in sovereign debt securities issued by governments
of foreign countries. The sovereign debt in which the Funds may invest may be
rated below investment grade. These securities usually offer higher yields than
higher rated securities but are also subject to greater risk than higher rated
securities.
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BRADY BONDS
Brady bonds represent a type of sovereign debt. These obligations were
created under a debt restructuring plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady, in which foreign entities issued these
obligations in exchange for their existing commercial bank loans. Brady Bonds
have been issued by Argentina, Brazil, Costa Rica, the Dominican Republic,
Mexico, the Philippines, Uruguay and Venezuela, and may be issued by other
emerging countries.
RISKS OF INVESTING IN FOREIGN SECURITIES
Investments in foreign securities involve certain inherent risks, including
the following:
Market Characteristics. Settlement practices for transactions in foreign markets
may differ from those in United States markets, and may include delays beyond
periods customary in the United States. Foreign security trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
Transactions in options on securities, futures contracts, futures options
and currency contracts may not be regulated as effectively on foreign exchanges
as similar transactions in the United States, and may not involve clearing
mechanisms and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and procedures
and margin requirements than in the United States. The value of a Fund's
positions may also be adversely impacted by delays in its ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States.
Legal and Regulatory Matters. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
Taxes. The interest payable on certain of the Funds' foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
Costs. The expense ratios of the Funds are likely to be higher than those of
investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign company,
the Investment Manager or Sub-Adviser considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located. The
extent to which a Fund will be invested in foreign companies and countries and
depository receipts will fluctuate from time to time within the limitations
described in the Prospectus, depending on the Investment Manager's or
Sub-Adviser's assessment of prevailing market, economic and other conditions.
SECURITIES SWAPS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may enter into securities swaps, a technique primarily used to
indirectly participate in the securities market of a country from which a Fund
would otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
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underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS
Each Fund (other than the Money Market Fund, Advisory Funds, Investment
Funds, Bank and Thrift Fund, and Government Securities Income Fund) is
authorized to purchase put and call options with respect to securities which are
otherwise eligible for purchase by the Fund and with respect to various stock
indices subject to certain restrictions. The Advisory Funds may only purchase
put options on portfolio securities. Put and call options are derivative
securities traded on United States and foreign exchanges, including the American
Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange,
Pacific Stock Exchange and New York Stock Exchange. Except as indicated in
"Non-Hedging Strategic Transactions," the Funds will engage in trading of such
derivative securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Manager or Sub-Adviser perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it protects
against significant downward price movement while it allows full participation
in any upward movement. If the Fund holds a stock which the Investment Manager
or Sub-Adviser believes has strong fundamentals, but for some reason may be weak
in the near term, the Fund may purchase a put option on such security, thereby
giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, is the
amount by which the Fund hedges against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the premium paid for
the put option less any amount for which the put may be sold reduces the profit
the Fund realizes on the sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Manager or Sub-Adviser believes there is an active secondary market
to facilitate closing transactions.
WRITING CALL OPTIONS
Each Fund (other than the Money Market Fund, Investment Funds, Bank and
Thrift Fund, and Government Securities Income Fund) may write covered call
options. A call option is "covered" if a Fund owns the security underlying the
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call or has an absolute right to acquire the security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by the
Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after it has been notified
of the exercise of an option.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund generally offsets, in whole or in part, any loss to the Fund resulting from
the repurchase of a call option.
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. A Fund
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). In connection with
these special arrangements, the Fund intends to establish standards for the
creditworthiness of the primary dealers with which it may enter into OTC Option
contracts and those standards, as modified from time to time, will be
implemented and monitored by the Investment Manager. Under these special
arrangements, the Fund will enter into contracts with primary dealers that
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a repurchase price 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.
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STOCK INDEX OPTIONS.
Each Fund (other than the Money Market Fund, Investment Funds, Bank and
Thrift Fund, and Government Securities Income Fund) may also purchase put and
call options with respect to the S&P 500 and other stock indices. The Funds may
purchase such options as a hedge against changes in the values of portfolio
securities or securities which it intends to purchase or sell, or to reduce
risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain
risks not found in stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Manager's or Sub-Adviser's ability to predict
correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if circumstances disrupt trading of certain
stocks included in the index, such as if trading were halted in a substantial
number of stocks included in the index. If this happens, the Fund could not be
able to close out options which it had purchased, and if restrictions on
exercise were imposed, the Fund might be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Funds purchase put or
call options only with respect to an index which the Investment Manager or
Sub-Adviser believes includes a sufficient number of stocks to minimize the
likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS
There are several risks associated with transactions in options on
securities and indices. Options may be more volatile than the underlying
instruments and, therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves. There are also significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objective.
In addition, a liquid secondary market for particular options may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of option of underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events. The extent to
which a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign option exchanges do not afford to participants many of
the protections available in United States option exchanges. For example, there
may be no daily price fluctuation limits in such exchanges or markets, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, a Fund as an option writer could lose amounts substantially
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in excess of its initial investment, due to the margin and collateral
requirements typically associated with such option writing. See "Dealer Options"
below.
LIMITS ON USE OF OPTIONS
A Fund may not purchase or sell options if more than 25% of its net assets
would be hedged. The Funds may write covered call options and secured put
options to seek to generate income or lock in gains on up to 25% of their net
assets.
DEALER OPTIONS
The Funds indicated above may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While the Funds might look to a clearing corporation to exercise
exchange-traded options, if a Fund purchases a dealer option it must rely on the
selling dealer to perform if the Fund exercises the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund can realize the value of a dealer
option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used as cover until the option expires or is exercised. In the
event of insolvency of the other party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, because a Fund must maintain a secured position with respect to any
call option on a security it writes, the Fund may not sell the assets which it
has segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities at a
time when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. A Fund
may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option. With
that exception, however, the Fund will treat dealer options as subject to the
Fund's limitation on illiquid securities. If the Commission changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may buy or sell put and call options on foreign currencies. A put
or call option on a foreign currency gives the purchaser of the option the right
to sell or purchase a foreign currency at the exercise price until the option
expires. The Funds use foreign currency options separately or in combination to
control currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of a put
option and the simultaneous sale of call option on the same currency with the
same expiration date but with different exercise (or "strike") prices.
Generally, the put option will have an out-of-the-money strike price, while the
call option will have either an at-the-money strike price or an in-the-money
strike price. Foreign currency options are derivative securities. Currency
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options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Funds to reduce foreign currency risk using
such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
The Funds that invest in foreign securities may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fix number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
Each of the Funds (other than the Money Market Fund, Advisory Funds,
MagnaCap Fund, Bank and Thrift Fund, and the Government Securities Income Fund)
may invest in futures contracts and in options on futures contracts as a hedge
against changes in market conditions or interest rates. As a general rule, no
Fund will purchase or sell futures if, immediately thereafter, more than 25% of
its net assets would be hedged.
Financial Futures Contracts and Related Options. A 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. The
Fund could 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. 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.
A Fund may purchase or sell any financial futures contracts which are
traded on a recognized exchange or board of trade. Financial futures contracts
consist of interest rate futures contracts and securities index futures
contracts. A public market presently exists in interest rate futures contracts
covering long-term U.S. Treasury bonds, U.S. Treasury notes, three-month U.S.
Treasury bills and GNMA certificates. Securities index futures contracts are
currently traded with respect to the Standard & Poor's 500 Composite Stock Price
Index and such other broad-based stock market indices as the New York Stock
Exchange Composite Stock Index and the Value Line Composite Stock Price Index. A
clearing corporation associated with the exchange or board of trade on which a
financial futures contract trades assumes responsibility for the completion of
transactions and also guarantees that open futures contracts will be performed.
An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, the interest rate securities
called for in the contract at a specified future time and at a specified price.
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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 a 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 segregate
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
segregated 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 Funds 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 High Yield Fund may not purchase or sell financial futures
contracts or related options if, immediately thereafter, the sum of the amount
of initial margin deposits on the Fund's existing futures and related options
positions and the premiums paid for related options would exceed 2% of the
market value of the Fund's total assets after taking into account unrealized
profits and losses on any such contracts. No Fund of the Pilgrim Mutual Funds
may purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. Those Funds also
may not purchase or sell futures or purchase related options if, immediately
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thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets. 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 segregated with the Fund's custodian bank to
collateralize fully the position and thereby ensure that it is not leveraged.
The extent to which a 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.
Risks Relating to Options and Futures Contracts. The purchase of options
involves certain risks. If a put option purchased by a Fund is not sold when it
has remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price, the Fund will lose its entire
investment in the option. Also, where a put option is purchased to hedge against
price movements in a particular security, the price of the put option may move
more or less than the price of the related security. There can be no assurance
that a liquid market will exist when a Fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are imposed on the
options markets, a Fund may be unable to close out a position. 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. A 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 have 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 Funds 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 return of
the Fund for the period may be less than if it had not engaged in the hedging
transaction.
The use of futures contracts 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 a 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
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time because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures that would not be offset by
a reduction in the price of the securities purchased.
The market prices of futures contracts may be affected if participants in
the futures market elect to close out their contracts through off-setting
transactions rather than to meet margin deposit requirements. In such a case,
distortions in the normal relationship between the cash and futures markets
could result. Price 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 a 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 a 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.
INDEX WARRANTS
The Research Enhanced Index Fund may purchase put warrants and call
warrants whose values vary depending on the change in the value of one or more
specified securities indices ("Index Warrants"). Index Warrants are generally
issued by banks or other financial institutions and give the holder the right,
at any time during the term of the warrant, to receive upon exercise of the
warrant a cash payment from the issuer, based on the value of the underlying
index at the time of exercise. In general, if the value of the underlying index
rises above the exercise price of the Index Warrant, the holder of a call
warrant will be entitled to receive a cash payment from the issuer upon
exercise, based on the difference between the value of the index and the
exercise price of the warrant; if the value of the underlying index falls, the
holder of a put warrant will be entitled to receive a cash payment from the
issuer upon exercise, based on the difference between the exercise price of the
warrant and the value of the index. The holder of a warrant would not be
entitled to any payments from the issuer at any time when, in the case of a call
warrant, the exercise price is greater than the value of the underlying index,
or, in the case of a put warrant, the exercise price is less than the value of
the underlying index. If the Research Enhanced Index Fund were not to exercise
an Index Warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant. The Research Enhanced Index Fund
will normally use Index Warrants in a manner similar to its use of options on
securities indices. The risks of the Fund's use of Index Warrants are generally
similar to those relating to its use of index options. Unlike most index
options, however, Index Warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution that issues the warrant. Also, Index Warrants
generally have longer terms than index options. Although the Research Enhanced
Index Fund will normally invest only in exchange-listed warrants, Index Warrants
are not likely to be as liquid as certain index options backed by a recognized
clearing agency. In addition, the terms of Index Warrants may limit the Fund's
ability to exercise the warrants at such time, or in such quantities, as the
Fund would otherwise wish to do.
FOREIGN CURRENCY FUTURES CONTRACTS
Each Fund (other than the Money Market Fund, Advisory Funds, MagnaCap Fund,
Bank and Thrift Fund, and the Government Securities Income Fund) may use foreign
currency future contracts for hedging purposes. A foreign currency futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
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German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The Funds
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks related to the use of futures as a hedging device.
One risk arises because of the imperfect correlation between movements in the
price of the futures contract and movements in the price of the securities which
are the subject of the hedge. The price of the future may move more or less than
the price of the securities being hedged. If the price of the future moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, a Fund would be in a better position than if
it had not hedged at all. If the price of the securities being hedged has moved
in a favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Manager or Sub-Adviser
believes that over time the value of a diversified portfolio will tend to move
in the same direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before a 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 instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement in
the stock index or cash market due to certain market distortions. All
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the index or cash market and
futures markets. In addition, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. As a result of price distortions in the futures
market and the imperfect correlation between movements in the cash market and
the price of securities and movements in the price of futures, a correct
forecast of general trends by the Investment Manager or Sub-Adviser may still
not result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
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movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment Manager's or
Sub-Adviser's ability to predict correctly movements in the direction of the
market. For example, if the Fund hedges against the possibility of a decline in
the market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
INTEREST RATE AND CURRENCY SWAPS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may enter into interest rate and currency swap transactions and
purchase or sell interest rate and currency caps and floors, and may enter into
currency swap cap transactions. An interest rate or currency swap involves an
agreement between a Fund and another party to exchange payments calculated as if
they were interest on a specified ("notional") principal amount (e.g., an
exchange of floating rate payments by one party for fixed rate payments by the
other). An interest rate cap or floor entitles the purchaser, in exchange for a
premium, to receive payments of interest on a notional principal amount from the
seller of the cap or floor, to the extent that a specified reference rate
exceeds or falls below a predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each swap is accrued on a daily basis, and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess is maintained in a segregated
account by the Trust's custodian. If a Fund enters into a swap on other than a
net basis, or sells caps or floors, the Fund maintains a segregated account in
the full amount accrued on a daily basis of the Fund's obligations with respect
to the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap market
has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
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swap documentation, and the Investment Manager or Sub-Adviser has determined
that the swap market has become relatively liquid. Swap transactions do not
involve the delivery of securities or other underlying assets or principal, and
the risk of loss with respect to such transactions is limited to the net amount
of payments that the Fund is contractually obligated to make or receive. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed; accordingly, they are less liquid than swaps, and caps
and floors purchased by a Fund are considered to be illiquid assets.
INTEREST RATE SWAPS
As indicated above, an interest rate swap is a contract between two
entities ("counterparties") to exchange interest payments (of the same currency)
between the parties. In the most common interest rate swap structure, one
counterparty agrees to make floating rate payments to the other counterparty,
which in turn makes fixed rate payments to the first counterparty. Interest
payments are determined by applying the respective interest rates to an agreed
upon amount, referred to as the "notional principal amount." In most such
transactions, the floating rate payments are tied to the London Interbank
Offered Rate, which is the offered rate for short-term Eurodollar deposits
between major international banks. As there is no exchange of principal amounts,
an interest rate swap is not an investment or a borrowing.
CROSS-CURRENCY SWAPS
A cross-currency swap is a contract between two counterparties to exchange
interest and principal payments in different currencies. A cross-currency swap
normally has an exchange of principal at maturity (the final exchange); an
exchange of principal at the start of the swap (the initial exchange) is
optional. An initial exchange of notional principal amounts at the spot exchange
rate serves the same function as a spot transaction in the foreign exchange
market (for an immediate exchange of foreign exchange risk). An exchange at
maturity of notional principal amounts at the spot exchange rate serves the same
function as a forward transaction in the foreign exchange market (for a future
transfer of foreign exchange risk). The currency swap market convention is to
use the spot rate rather than the forward rate for the exchange at maturity. The
economic difference is realized through the coupon exchanges over the life of
the swap. In contrast to single currency interest rate swaps, cross-currency
swaps involve both interest rate risk and foreign exchange risk.
SWAP OPTIONS
The Funds indicated above may invest in swap options. A swap option is a
contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts at some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or
American-style (exercisable during a designated period). The right pursuant to a
swap option must be exercised by the right holder. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.
CAPS AND FLOORS
The Funds indicated above may invest in interest rate caps and floors and
currency swap cap transactions. An interest rate cap is a right to receive
periodic cash payments over the life of the cap equal to the difference between
any higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate move
above the strike. An interest rate floor is the right to receive periodic cash
payments over the life of the floor equal to the difference between any lower
actual level of interest rates in the future and a specified strike (or "floor")
level. The floor buyer purchases protection for a floating rate move below the
strike. The strikes are typically based on the three-month LIBOR (although other
indices are available) and are measured quarterly. Rights arising pursuant to
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both caps and floors are exercised automatically if the strike is in the money.
Caps and floors eliminate the risk that the buyer fails to exercise an
in-the-money option.
RISKS ASSOCIATED WITH SWAPS
The risks associated with interest rate and currency swaps and interest
rate caps and floors are similar to those described above with respect to dealer
options. In connection with such transactions, a Fund relies on the other party
to the transaction to perform its obligations pursuant to the underlying
agreement. If there were a default by the other party to the transaction, the
Fund would have contractual remedies pursuant to the agreement, but could incur
delays in obtaining the expected benefit of the transaction or loss of such
benefit. In the event of insolvency of the other party, the Fund might be unable
to obtain its expected benefit. In addition, while each Fund will seek to enter
into such transactions only with parties which are capable of entering into
closing transactions with the Fund, there can be no assurance that a Fund will
be able to close out such a transaction with the other party, or obtain an
offsetting position with any other party, at any time prior to the end of the
term of the underlying agreement. This may impair a Fund's ability to enter into
other transactions at a time when doing so might be advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS
A Fund's options, futures and swap transactions will generally be entered
into for hedging purposes -- to protect against possible changes in the market
values of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchase or
sale of particular securities. However, in addition to the hedging transactions
referred to above, the Strategic Income Fund may enter into options, futures and
swap transactions to enhance potential gain in circumstances where hedging is
not involved. Each Fund's net loss exposure resulting from transactions entered
into for each purposes will not exceed 5% of the Fund's net assets at any one
time and, to the extent necessary, the Fund will close out transactions in order
to comply with this limitation. Such transactions are subject to the limitations
described above under "Options," "Futures Contracts," and "Interest Rate and
Currency Swaps."
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may invest in an illiquid or restricted security if the
Investment Manager or Sub-Adviser believes that it presents an attractive
investment opportunity, except that MagnaCap Fund may not invest in restricted
securities. Generally, a security is considered illiquid if it cannot be
disposed of within seven days. Its illiquidity might prevent the sale of such a
security at a time when a Sub-Adviser might wish to sell, and these securities
could have the effect of decreasing the overall level of a Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, requiring the Funds to rely on judgments that may
be somewhat subjective in determining value, which could vary from the amount
that a Fund could realize upon disposition.
Each Fund (except MagnaCap 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 Funds' decision
to dispose of these securities and the time when the Funds are 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 Funds pursuant to Rule 144A) may be negotiated at the time such
securities are purchased by the Funds. 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 Funds would be permitted to sell
them. Thus, the Funds may not be able to obtain as favorable a price as that
prevailing at the time of the decision to sell. The Funds may also acquire
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securities through private placements. Such securities may have contractual
restrictions on their resale, which might prevent their resale by the Funds at a
time when such resale would be desirable. Securities that are not readily
marketable will be valued by the Funds in good faith pursuant to procedures
adopted by the Company's Board of Directors.
Restricted securities, including private placements, are subject to legal
or contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Funds' procedures, restricted securities
could be treated as liquid. However, some restricted securities may be illiquid
and restricted securities that are treated as liquid could be less liquid than
registered securities traded on established secondary markets. The Funds may not
invest more than 15% of its net assets in illiquid securities, measured at the
time of investment. Each Fund will adhere to a more restrictive investment
limitation on its investments in illiquid or restricted securities as required
by the securities laws of those jurisdictions where shares of the Funds are
registered for sale.
The Emerging Countries Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the Fund treats foreign
securities whose principal market is abroad as not subject to the investment
limitation on securities subject to legal or contractual restrictions on resale.
OTHER INVESTMENT COMPANIES
Certain Funds may invest in other investment companies ("Underlying
Funds"). Each Fund may not (i) invest more than 10% of its total assets in
Underlying Funds, (ii) invest more than 5% of its total assets in any one
Underlying Fund, or (iii) purchase greater than 3% of the total outstanding
securities of any one Underlying Fund. The Funds (except the Money Market Fund)
may also make indirect foreign investments through other investment companies
that have comparable investment objectives and policies as the Funds. In
addition to the advisory and operational fees a Fund bears directly in
connection with its own operation, the Fund would also bear its pro rata
portions of each other investment company's advisory and operational expenses.
Investment Companies that Invest in Senior Loans. Certain Funds may invest in
investment companies that invest primarily in interests in variable or floating
rate loans or notes ("Senior Loans"). Senior Loans in most circumstances are
fully collateralized by assets of a corporation, partnership, limited liability
company, or other business entity. Senior Loans vary from other types of debt in
that they generally hold a senior position in the capital structure of a
borrower. Thus, Senior Loans are generally repaid before unsecured bank loans,
corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders.
Substantial increases in interest rates may cause an increase in loan
defaults as borrowers may lack resources to meet higher debt service
requirements. The value of a Fund's assets may also be affected by other
uncertainties such as economic developments affecting the market for Senior
Loans or affecting borrowers generally.
Senior Loans usually include restrictive covenants which must be maintained
by the borrower. Under certain interests in Senior Loans, an investment company
investing in a Senior Loan may have an obligation to make additional loans upon
demand by the borrower. Senior Loans, unlike certain bonds, usually do not have
call protection. This means that interests, while having a stated one to
ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
Credit Risk. Information about interests in Senior Loans generally is not
be in the public domain, and interests are generally not currently rated by any
nationally recognized rating service. Senior Loans are subject to the risk of
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nonpayment of scheduled interest or principal payments. Issuers of Senior Loans
generally have either issued debt securities that are rated lower than
investment grade, or, if they had issued debt securities, such debt securities
would likely be rated lower than investment grade. However, unlike other types
of debt securities, Senior Loans are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments
on Senior Loans, an investment company investing in that Senior Loan could
experience a reduction in its income, and would experience a decline in the
market value of the particular Senior Loan so affected, and may experience a
decline in the NAV or the amount of its dividends. In the event of a bankruptcy
of the borrower, the investment company could experience delays or limitations
with respect to its ability to realize the benefits of the collateral securing
the Senior Loan.
Collateral. Senior Loans typically will be secured by pledges of collateral
from the borrower in the form of tangible assets and intangible assets. In some
instances, an investment company may invest in Senior Loans that are secured
only by stock of the borrower or its subsidiaries or affiliates. The value of
the collateral may decline below the principal amount of the Senior Loan
subsequent to an investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
there is a risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized.
Limited Secondary Market. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
Senior Loans may be illiquid. In addition, Senior Loans generally require the
consent of the borrower prior to sale or assignment. These consent requirements
may delay or impede a fund's ability to sell Senior Loans. In addition, because
the secondary market for Senior Loans may be limited, it may be difficult to
value Senior Loans. Market quotations may not be available and valuation may
require more research than for liquid securities. In addition, elements of
judgment may play a greater role in the valuation, because there is less
reliable, objective data available.
Hybrid Loans. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). With
Hybrid Loans, a fund may not possess a senior claim to all of the collateral
securing the Hybrid Loan. Hybrid Loans also may not include covenants that are
typical of Senior Loans, such as covenants requiring the maintenance of minimum
interest coverage ratios. As a result, Hybrid Loans present additional risks
besides those associated with traditional Senior Loans, although they may
provide a relatively higher yield. Because the lenders in Hybrid Loans waive or
forego certain loan covenants, their negotiating power or voting rights in the
event of a default may be diminished. As a result, the lenders' interests may
not be represented as significantly as in the case of a conventional Senior
Loan. In addition, because an investment company's security interest in some of
the collateral may be subordinate to other creditors, the risk of nonpayment of
interest or loss of principal may be greater than would be the case with
conventional Senior Loans.
Subordinated and Unsecured Loans. Certain investment companies may invest
in subordinated and unsecured loans. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans.
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,
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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.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Manager or Sub-Adviser, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
mutually agreed upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio security). Securities subject to repurchase agreements will be held by
the Custodian or in the Federal Reserve/Treasury Book-Entry System or an
equivalent foreign system. The seller under a repurchase agreement will be
required to maintain the value of the underlying securities at not less than
102% (100% for the Money Market Fund) of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund holding
the repurchase agreement will suffer a loss to the extent that the proceeds from
a sale of the underlying securities is less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans under the Investment Company
Act.
Pursuant to an Exemptive Order under Section 17(d) and Rule 17d-1 obtained
by the SmallCap Opportunities, Growth Opportunities, Balance Sheet
Opportunities, and the High Yield III Funds, on March 5, 1991, such Funds may
deposit uninvested cash balances into a single joint account to be used to enter
into repurchase agreements.
As an alternative to using repurchase agreements, the funds which comprise
the Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and High Yield Fund III may, from time to time, invest up to 5% of its
assets in money market investment companies sponsored by a third party for
short-term liquidity purposes. Such investments are subject to the
non-fundamental investment limitations described herein.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL TRANSACTIONS
The Government Securities Income Fund and the funds which comprise the
Pilgrim Mutual Funds, Mayflower Trust, Equity Trust, SmallCap Opportunities
Fund, Growth Opportunities Fund, Balance Sheet Opportunities Trust, Government
Securities Fund, and High Yield Fund III may enter into reverse repurchase
agreement transactions. Such transactions involve the sale of U.S. Government
securities held by the Fund, with an agreement that the Fund will repurchase
such securities at an agreed upon price and date. The Fund will employ reverse
repurchase agreements when necessary to meet unanticipated net redemptions so as
to avoid liquidating other portfolio investments during unfavorable market
conditions. At the time it enters into a reverse repurchase agreement, the Fund
will place in a segregated custodial account cash and/or liquid assets having a
dollar value equal to the repurchase price. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act"). Reverse repurchase agreements, together with other permitted borrowings,
may constitute up to 33 1/3% of the Fund's total assets. Under the 1940 Act, the
Fund is required to maintain continuous asset coverage of 300% with respect to
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities or the Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances) which may or may not exceed
the income received from the securities purchased with borrowed funds.
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In order to enhance portfolio returns and manage prepayment risks,
Government Securities Income Fund and the funds which comprise the Pilgrim
Mutual Funds, Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and High Yield Fund III may engage in dollar roll transactions with
respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar roll
transaction, a Fund sells a mortgage security held in the portfolio to a
financial institutional such as a bank or broker-dealer, and simultaneously
agrees to repurchase a substantially similar security (same type, coupon and
maturity) from the institution at a later date at an agreed upon price. The
mortgage securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories. 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 a Fund enters into a dollar roll
transaction, cash and/or liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
with its custodian at the trade date. These securities are marked daily and are
maintained until the transaction is settled.
Whether a reverse repurchase agreement or dollar-roll transaction produces
a gain for a Fund depends upon the "costs of the agreements" (e.g., a function
of the difference between the amount received upon the sale of its securities
and the amount to be spent upon the purchase of the same or "substantially the
same" security) and the income and gains of the securities purchased with the
proceeds received from the sale of the mortgage security. If the income and
gains on the securities purchased with the proceeds of the agreements exceed the
costs of the agreements, then a Fund's net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains on such
securities purchased fail to exceed the costs of the structure, net asset value
will decline faster than otherwise would be the case. Reverse repurchase
agreements and dollar-roll transactions, as leveraging techniques, may increase
a Fund's yield in the manner described above; however, such transactions also
increase a Fund's risk to capital and may result in a shareholder's loss of
principal.
PARTICIPATION INTERESTS
The High Yield 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each 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
(up to 30% of the value of the total assets in the case of the International
Value and the Emerging Markets Value Funds). No lending may be made with any
companies affiliated with the Investment Manager. The Funds may lend securities
only to financial institutions such as banks, broker/ dealers and other
recognized institutional investors in amounts up to 30% of the Fund's total
assets. These loans earn income for the Funds and are collateralized by cash,
securities or letters of credit. The Funds might experience a loss if the
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financial institution defaults on the loan. Loans by the Primary Fund in which
the Money Market Fund invests will not exceed 25% of the Fund's total assets.
The borrower at all times during the loan must maintain with the Fund cash
or cash equivalent collateral or provide to the Funds 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 Funds
any interest paid on such securities, and the Funds 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 Funds
or the borrower at any time. The Funds 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. 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.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Each Fund may invest in loan participations and loan assignments. A Fund's
investment in loan participations typically will result in the Fund having a
contractual relationship only with the Lender and not with the borrower. The
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participations and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any right of set-off against the borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund may be subject to the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower.
When a Fund purchases a loan assignment from Lenders, it will acquire
direct rights against the borrowers on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and a Fund's ability to dispose
of particular assignments or participations when necessary to meet redemptions
of Fund shares, to meet the Fund's liquidity needs or when necessary in response
to a specific economic event, such as deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for assignments and
participations also may make it more difficult for a Fund to value these
securities for purposes of calculating its net asset value.
PAIRING-OFF TRANSACTIONS
Government Securities Income Fund engages in a pairing-off transaction when
the Fund commits to purchase a security at a future date ("delayed delivery" or
"when issued"), and then prior to the predetermined settlement date, 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, cash and/or liquid assets equal to the value
of the outstanding purchase commitments will be segregated from general
investible funds and marked to the market daily.
When the time comes to pay for the securities acquired on a delayed
delivery basis, Government Securities Income 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).
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Whether a pairing-off transaction produces a gain for Government Securities
Income 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. Consequently, the Fund
will experience a gain. However, if interest rates increase, than 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. Consequently, the Fund will experience a loss.
The Pilgrim Mutual Funds and the Mayflower Trust, Equity Trust, Balance
Sheet Opportunities Fund, Government Securities Fund, and High Yield Fund III
may enter into To Be Announced ("TBA") sale commitments wherein the unit price
and the estimated principal amount are established upon entering into the
contract, with the actual principal amount being within a specified range of the
estimate. A Fund will enter into TBA sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, the Fund will maintain, in a segregated account, cash or marketable
securities in an amount sufficient to meet the purchase price. Unsettled TBA
sale commitments are valued at current market value of the underlying
securities. If the TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, the Fund realizes a gain or loss on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the Fund delivers securities under the commitment, the Fund
realizes a gain or loss from the sale of the securities, based upon the unit
price established at the date the commitment was entered into.
FLOATING OR VARIABLE RATE INSTRUMENTS
The Funds that comprise the Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, Growth Opportunities Fund, Balance Sheet Opportunities Fund,
Government Securities Fund, and High Yield Fund III may purchase floating or
variable rate bonds, which normally provide that the holder can demand payment
of the obligation on short notice at par with accrued interest. Such bonds are
frequently secured by letters of credit or other credit support arrangements
provided by banks. Floating or variable rate instruments provide for adjustments
in the interest rate at specified intervals (weekly, monthly, semiannually,
etc.). A Fund would anticipate using these bonds as cash equivalents, pending
longer term investment of its funds. Other longer term fixed-rate bonds, with a
right of the holder to request redemption at certain times (often annually,
after the lapse of an intermediate term), may also be purchased by a Fund. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates), while providing greater opportunity
than comparable intermediate term bonds since the Fund may retain the bond if
interest rates decline. By acquiring these kinds of bonds, a Fund obtains the
contractual right to require the issuer of the security, or some other person
(other than a broker or dealer), to purchase the security at an agreed upon
price, which right is contained in the obligation itself rather than in a
separate agreement with the seller or some other person.
A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss. When a Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
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SHORT SALES
The Pilgrim Mutual Funds, Mayflower Trust, Mid-Cap Value Fund, Equity
Trust, SmallCap Opportunities Fund, Growth Opportunities Fund, Balance Sheet
Opportunities Fund, Government Securities Fund, and the High Yield Fund III, may
make short sales of securities they own or have the right to acquire at no added
cost through conversion or exchange of other securities they own (referred to as
short sales "against the box") and short sales of securities which they do not
own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security generally from
the broker through which the short sale is made) in order to make delivery to
the buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with the
broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share tends to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although a Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, a Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a technique
to hedge against market risks when the Investment Manager or Sub-Adviser
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund's
long position would be reduced by a gain in the short position. The extent to
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which such gains or losses in the long position are reduced will depend upon the
amount of securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and any
such collateral required to be deposited with a broker in connection with the
sale (not including the proceeds from the short sale), which difference is
adjusted daily for changes in the value of the securities sold short. The total
value of the cash, U.S. Government securities or other liquid debt or equity
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. Each Fund will comply with these requirements. In addition, as a
matter of policy, the Trust's Board of Trustees has determined that no Fund will
make short sales of securities or maintain a short position if to do so could
create liabilities or require collateral deposits and segregation of assets
aggregating more than 25% of the Fund's total assets (no more than 5% for the
Mid-Cap Value Fund), taken at market value.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
INVESTMENT TECHNIQUES AND PROCESSES
The investment techniques and processes used by the Sub-Adviser for the
Pilgrim Mutual Funds, which it has used in managing institutional portfolios for
many years, are described generally in the Funds' prospectus of the Funds it
manages. In making decisions with respect to equity securities for the Funds,
growth over time(R) is the Sub-Adviser's underlying goal. It's how the
Sub-Adviser built its reputation. Over the past ten years, the Sub-Adviser has
built a record as one of the finest performing investment managers in the United
States. It has successfully delivered growth over time to many institutional
investors, pension plans, foundations, endowments and high net worth
individuals. The Sub-Adviser's methods have proven their ability to achieve
growth over time through a variety of investment vehicles.
The Sub-Adviser emphasizes growth over time through investment in
securities of companies with earnings growth potential. The Sub-Adviser's style
is a "bottom-up" growth approach that focuses on the growth prospects of
individual companies rather than on economic trends. It builds portfolios stock
by stock. The Sub-Adviser's decision-making is guided by three critical
questions: Is there a positive change? Is it sustainable? Is it timely? The
Sub-Adviser uses these three factors because it focuses on discovering positive
developments when they first show up in an issuer's earnings, but before they
are fully reflected in the price of the issuer's securities. The Sub-Adviser is
always looking for companies that are driving change and surpassing analysts'
expectations. It seeks to identify companies poised for rapid growth. The
Sub-Adviser focuses on recognizing successful companies, regardless of their
capitalization or whether they are domestic or foreign companies.
DIVERSIFICATION
Each Fund (other than the Money Market Fund) is "diversified" within the
meaning of the Investment Company Act. In order to qualify as diversified, a
Fund must diversify its holdings so that at all times at least 75% of the value
of its total assets is represented by cash and cash items (including
receivables), securities issued or guaranteed as to principal or interest by the
United States or its agencies or instrumentalities, securities of other
investment companies, and other securities (for this purpose other securities of
any one issuer are limited to an amount not greater than 5% of the value of the
total assets of the Fund and to not more than 10% of the outstanding voting
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securities of the issuer). The Primary Institutional Fund in which the Money
Market Fund will invest substantially all of its assets is a non-diversified
fund. However, the Primary Institutional Fund intends to comply with the
diversification requirement of Rule 2a-7 under the Investment Company Act which
generally limits a money-market fund to investing no more than 5% of its total
assets in the securities, except U.S. government securities, of any one issuer.
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Sub-Adviser in
approximately equal amounts, and the Investment Manager or Sub-Adviser attempts
to stay fully invested within the applicable percentage limitations set forth in
the Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Manager or Sub-Adviser sells the securities
of one of the issuers currently included in the portfolio.
BORROWING
Each Advisory Fund may borrow money from banks solely for temporary or
emergency purposes, but not in an amount exceeding one-third of the value of its
total assets. The Pilgrim Mutual Funds may each borrow up to 20% (other than the
Money Market Fund which is limited to 5%). MagnaCap Fund and High Yield Fund may
borrow from banks solely for temporary or emergency purposes, but not in an
amount exceeding 5% of the value of its total assets. Bank and Thrift Fund may
borrow, only in an amount up to 15% of its total assets to obtain such
short-term credits as are necessary for the clearance of securities
transactions. Government Securities Income Fund may borrow money from banks
solely for temporary or emergency purposes, but not in an amount in excess of
10% of the value of its total assets.
For the Government Securities Income Fund, no additional investment may be
made while any such borrowings are in excess of 5% of total assets. For purposes
of this investment restriction, the Fund's entry into reverse repurchase
agreements and dollar-rolls and delayed delivery transactions, including those
relating to pair-offs, shall not constitute borrowings. Such borrowings,
together with reverse repurchase agreements, may constitute up to 33% of the
Fund's total assets. The Government Securities Income Fund may not mortgage,
pledge or hypothecate its assets, except to the extent necessary to secure
permitted borrowings and to the extent related to the deposit of assets in
escrow in connection with the Fund's purchasing of securities on a forward
commitment or delayed delivery basis, entering into reverse repurchase
agreements and engaging in dollar-roll transactions.
Under the Investment Company Act of 1940, each Fund is required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint.
When a Fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. If a Fund makes additional
investments while borrowings are outstanding, this may be construed as a form of
leverage.
Leveraging by means of borrowing may exaggerate the effect of any increase
or decrease in the value of portfolio securities or the Fund's net asset value,
and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
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INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS -- THE ADVISORY FUNDS
The Funds have adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. None of the Funds may:
(1) invest in a security if, with respect to 75% of the total assets, more
than 5% of the total assets (taken at market value at the time of such
investment) would be invested in the securities of any one issuer,
except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities;
(2) invest in a security if, with respect to 75% of its assets, it would
hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any one issuer, except securities
issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities;
(3) invest in a security if more than 25% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of companies primarily engaged in any one industry, except
that this restriction does not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities
(or repurchase agreements with respect thereto);
(4) lend any funds or other assets, except that a Fund may, consistent
with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the SEC and any guidelines established
by the Board of Directors;
(5) borrow money or pledge, mortgage, or hypothecate its assets, (a)
except that a Fund may borrow from banks, but only if immediately
after each borrowing and continuing thereafter there is asset coverage
of 300%; and (b) and except that the following shall not be considered
a pledge, mortgage, or hypothecation of a Fund's assets for these
purposes: entering into reverse repurchase agreements; transactions in
options, futures, options on futures, and forward currency contracts;
the deposit of assets in escrow in connection with the writing of
covered put and call options; and the purchase of securities on a
"when-issued" or delayed delivery basis; collateral arrangements with
respect to initial or variation margin and other deposits for futures
contracts, options on futures contracts, and forward currency
contracts;
(6) issue senior securities, except insofar as a Fund may be deemed to
have issued a senior security by reason of borrowing money in
accordance with that Fund's borrowing policies, and except for
purposes of this investment restriction, collateral or escrow
arrangements with respect to the making of short sales, purchase or
sale of futures contracts or related options, purchase or sale of
forward currency contracts, writing of stock options, and collateral
arrangements with respect to margin or other deposits respecting
futures contracts, related options, and forward currency contracts are
not deemed to be an issuance of a senior security;
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(7) act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, a Fund may be
deemed to be an underwriter under the federal securities laws;
(8) purchase or sell real estate (other than marketable securities
representing interests in, or backed by, real estate or securities of
companies that deal in real estate or mortgages).
The Funds are 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). Unless otherwise indicated, a Fund may not:
(1) invest in securities that are illiquid if, as a result of such
investment, more than 15% of the total assets of the Fund (taken at
market value at the time of such investment) would be invested in such
securities;
(2) invest in companies for the purpose of exercising control or
management;
(3) purchase or sell physical commodities or commodities contracts (which,
for purposes of this restriction, shall not include foreign currency
or forward foreign currency contracts), except any Fund may engage in
interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or securities,
and options on such futures contracts;
(4) invest directly in interests in oil, gas or other mineral exploration
or development programs or mineral leases (other than marketable
securities of companies engaged in the business of oil, gas, or other
mineral exploration).
(5) invest more than 5% of its total assets in warrants, whether or not
listed on the New York or American Stock Exchanges, including no more
than 2% of its total assets which may be invested in warrants that are
not listed on those exchanges. Warrants acquired by a Fund in units or
attached to securities are not included in this restriction;
(6) purchase securities of issuers which are restricted from being sold to
the public without registration under the Securities Act of 1933
(unless such securities are deemed to be liquid under the Company's
Liquidity Procedures) if by reason of such investment the Fund's
aggregate investment in such securities will exceed 10% to the Fund's
total assets;
(7) invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years;
(8) invest in puts, calls, straddles, spreads or any combination thereof
if, as a result of such investment, more than 5% of the total assets
of the Fund (taken at market value at the time of such investment)
would be invested in such securities;
(9) loan portfolio securities unless collateral values are continuously
maintained at no less than 100% by "marking to market" daily;
(10) invest in real estate limited partnerships.
Other non-fundamental policies include the following: each Fund may not
purchase securities on margin; make short sales, except for short sales "against
the box," or purchase or retain in its portfolio any security if an officer or
Director of the Company or the Investment Manager or any Sub-Adviser 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.
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INVESTMENT RESTRICTIONS -- THE MAGNACAP FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. 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. The Fund also may not invest more than 5% of its total assets
in securities of companies which, including predecessors, have not had a record
of at least three years of continuous operations, and may not invest in any
restricted securities.
INVESTMENT RESTRICTIONS -- THE SMALLCAP
OPPORTUNITIES FUND, GROWTH OPPORTUNITIES FUND,
GOVERNMENT SECURITIES FUND, AND HIGH YIELD III FUND
The Funds have adopted investment restrictions numbered 1 through 12 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of such Fund's outstanding voting shares. Investment
restrictions numbered 13 through 21 are not fundamental policies and may be
changed by vote of a majority of the Trust's Board members at any time. Each
Fund may not:
(1) Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset
coverage of 300% for all borrowings;
(2) Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets
would be invested in that issuer, or the Fund would own or hold more
than 10% of the outstanding voting securities of the issuer; PROVIDED,
HOWEVER, that up to 25% of the Fund's total assets may be invested
without regard to these limitations;
(3) Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the Fund
may be deemed to be an underwriter;
(4) Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities);
(5) Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily
marketable securities that are secured by interest in real estate or
issued by companies that deal in real estate, including real estate
investment and mortgage investment trusts; and (b) engage in financial
futures contracts and related options, as described herein and in the
Fund's Prospectus;
(6) Make loans, except that each of these Funds may: (a) invest in
repurchase agreements, and (b) loan its portfolio securities in
amounts up to one-third of the market or other fair value of its total
assets;
(7) Issue senior securities, except as appropriate to evidence
indebtedness that it is permitted to incur, provided that the deposit
or payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered the
issuance of senior securities;
(8) Borrow money in excess of 5% of its total assets (taken at market
value);
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(9) Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in
connection with futures contracts and related options is not
considered a pledge or hypothecation of assets);
(10) Purchase more than 10% of the voting securities of any one issuer,
except U.S. government securities;
(11) Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that
cannot be disposed of within the normal course of business at
approximately the amount at which the Fund has valued the securities,
excluding restricted securities that have been determined by the
Trustees of the Fund (or the persons designated by them to make such
determinations) to be readily marketable;
(12) Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S.
government securities and obligations issued or guaranteed by any
foreign government or its agencies or instrumentalities, if such
purchase would cause the investments of a Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market value;
(13) Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities (the deposit or payment by a Fund of initial
or maintenance margin in connection with futures contracts or related
options is not considered the purchase of a security on margin);
(14) Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total
assets in options transactions, other than options on futures
contracts;
(15) Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the
Fund, and premiums paid on related options held by the Fund, does not
exceed more than 5% of the Fund's total assets, unless the transaction
meets certain "bona fide hedging", criteria (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5%);
(16) Invest in securities of any issuer if any officer or Trustee of the
Fund or any officer or director of Pilgrim owns more than 1/2 of 1% of
the outstanding securities of the issuer, and such officers, directors
and Trustees own in the aggregate more than 5% of the securities of
such issuer;
(17) Invest in interests in oil, gas or other mineral exploration or
development programs, (although it may invest in issuers that own or
invest in such interests);
(18) Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer
results from such purchase, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets;
(19) Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in
other investment companies;
(20) Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the
Fund's net assets or if warrants that are not listed on the New York
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or American Stock Exchanges or on an exchange with comparable listing
requirements, taken at the lower of cost or market value, would
represent more than 2% of the value of the Fund's net assets (for this
purpose, warrants attached to securities will be deemed to have no
value); or
(21) Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in
kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions.
INVESTMENT RESTRICTIONS -- THE MIDCAP OPPORTUNITIES FUND
The Fund has adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting shares. Investment restrictions numbered 12 through 15 are not
fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Fund may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up
to 10% of its net assets for temporary purposes but only if,
immediately after such borrowing there is asset coverage of 300%, and
(b) enter into transactions in options, futures, and options on
futures and other transactions not deemed to involve the issuance of
senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (the Fund may purchase marketable securities of companies
that deal in real estate or interests therein, including real estate
investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to
brokers or dealers or other financial institutions not affiliated with
the Fund or Pilgrim, subject to conditions established by Pilgrim),
and may purchase or hold participations in loans, in accordance with
the investment objectives and policies of the Fund, as described in
the current Prospectus and SAI of the Fund;
(6) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(7) Sell short, except that the Fund may enter into short sales against
the box;
(8) Invest more than 25% of its assets in any one industry or related
group of industries;
(9) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(10) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
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(11) Borrow money in excess of 10% of its net assets for temporary
purposes;
(12) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that the Fund may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(13) Make an investment for the purpose of exercising control over
management;
(14) Invest more than 15% of its net assets in illiquid securities; or
(15) Borrow any amount in excess of 10% of the Fund's assets, other than
for temporary emergency or administrative purposes. In addition, the
Fund will not make additional investments when its borrowings exceed
5% of total assets.
INVESTMENT RESTRICTIONS -- THE GROWTH + VALUE FUND
The Fund has adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 12 through 15 are
not fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Fund may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but
only if, immediately after such borrowing there is asset coverage of
300%, and (b) enter into transactions in options, futures, and options
on futures and other transactions not deemed to involve the issuance
of senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities
of companies that deal in real estate or interests therein, including
real estate investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to
brokers or dealers or other financial institutions not affiliated with
the Fund or Pilgrim, subject to conditions established by Pilgrim)
(See "Lending Portfolio Securities" in this SAI), and may purchase or
hold participations in loans, in accordance with the investment
objectives and policies of the Fund, as described in the cur-rent
Prospectus and SAI of the Fund;
(6) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(7) Sell short, except that these Funds may enter into short sales against
the box;
(8) Invest more than 25% of its assets in any one industry or related
group of industries;
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(9) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(10) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(11) Borrow money except to the extent permitted under the 1940 Act;
(12) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that these Funds may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(13) Make an investment for the purpose of exercising control over
management;
(14) Invest more than 15% of its net assets in illiquid securities; or
(15) Borrow any amount in excess of 10% of their respective assets, other
than for temporary emergency or administrative purposes. In addition,
the Fund will not make additional investments when its borrowings
exceed 5% of total assets.
INVESTMENT RESTRICTIONS -- THE INTERNATIONAL
VALUE FUND AND THE EMERGING MARKETS VALUE FUND
The Funds have adopted investment restrictions numbered 1 through 6 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 7 through 12 are not
fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Funds may not:
(1) Issue senior securities, except to the extent permitted under the 1940
Act, borrow money or pledge its assets, except that the Fund may
borrow on an unsecured basis from banks for temporary or emergency
purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (not including the amount borrowed), provided
that it will not make investments while borrowings are in excess of 5%
of the value of its total assets are outstanding;
(2) Act as underwriter (except to the extent the Fund may be deemed to be
an underwriter in connection with the sale of securities in its
investment portfolio);
(3) Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than
U.S. government securities), except that the Fund reserves the right
to invest all of its assets in shares of another investment company;
(4) Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell
securities which are secured by real estate, securities of companies
which invest or deal in real estate and securities issued by real
estate investment trusts);
(5) Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts for
hedging purposes to the extent permitted under applicable federal and
state laws and regulations and except that the Fund may engage in
foreign exchange forward contracts;
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(6) Make loans (except for purchases of debt securities consistent with
the investment policies of the Fund and except for repurchase
agreements);
(7) Make short sales of securities or maintain a short position, except
for short sales against the box;
(8) Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions;
(9) Write put or call options, except that the Fund may (i) write covered
call options on individual securities and on stock indices; (ii)
purchase put and call options on securities which are eligible for
purchase by the Fund and on stock indices; and (iii) engage in closing
transactions with respect to its options writing and purchases, in all
cases subject to applicable federal and state laws and regulations;
(10) Purchase any security if as a result the Fund would then hold more
than 10% of any class of voting securities of an issuer (taking all
common stock issues as a single class, all preferred stock issues as a
single class, and all debt issues as a single class), except that the
Fund reserves the right to invest all of its assets in a class of
voting securities of another investment company;
(11) Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment
company's voting securities or make any other investment in other
investment companies except as permitted by federal and state law,
except that the Fund reserves the right to invest all of its assets in
another investment company;
(12) Invest more than 15% of its net assets in illiquid securities.
INVESTMENT RESTRICTIONS -- THE RESEARCH ENHANCED INDEX FUND
The Fund has adopted investment restrictions numbered 1 through 8 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting shares. Investment restrictions numbered 9 through 14 are not fundamental
policies and may be changed by vote of a majority of the Trust's Board members
at any time. The Fund may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up
to 33 1/3% of its net assets for temporary purposes but only if,
immediately after such borrowing there is asset coverage of 300%, and
(b) enter into transactions in options, futures, and options on
futures and other transactions not deemed to involve the issuance of
senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real estate, including real estate limited
partnerships (the Fund may purchase marketable securities of companies
that deal in real estate or interests therein, including real estate
investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33 1/3% of net assets at the time the loan is made,
to brokers or dealers or other financial institutions not affiliated
with the Fund or Pilgrim, subject to conditions established by
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Pilgrim) (See "Lending Portfolio Securities" in this SAI), and may
purchase or hold participations in loans, in accordance with the
investment objectives and policies of the Fund, as described in the
current Prospectus and SAI of the Fund;
(6) Invest more than 25% of its assets in any one industry;
(7) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(8) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(9) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(10) Sell short, except that the Fund may enter into short sales against
the box;
(11) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that the Fund may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act, rules
thereunder or any order pursuant thereto or by any state in which
shares of the Fund are registered;
(12) Make an investment for the purpose of exercising control over
management;
(13) Invest more than 15% of its net assets in illiquid securities; or
(14) Borrow any amount in excess of 33 1/3% of the Fund's assets, other
than for temporary emergency or administrative purposes.
As a fundamental policy, this Fund may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
this Fund does not intend to borrow any amount in excess of 10% of its assets,
and would do so only for temporary emergency or administrative purposes. In
addition, to avoid the potential leveraging of assets, this Fund will not make
additional investments when its borrowings, including those investment
techniques which are regarded as a form of borrowing, are in excess of 5% of
total assets. If this Fund should determine to expand its ability to borrow
beyond the current operating policy, the Fund's Prospectus would be amended and
shareholders would be notified.
In addition to the above noted investment policies, the Research Enhanced
Index Fund's Sub-Adviser intends to monitor the sector and security weightings
of its portfolio relative to the composition of the S&P 500 Index. In that
regard, the Sub-Adviser intends to manage the Fund so that its sector weightings
and securities holdings closely approximate the sector and securities weightings
of the Index. As noted in the prospectus, the Sub-Adviser may vary modestly the
weightings of portfolio securities so that index securities that appear to be
overvalued may be underweighted and securities that may appear to be
underweighted may be overvalued. Steps will be taken periodically to rebalance
positions consistent with maintaining reasonable transaction costs and
reasonable weightings relative to the Index. While the Fund seeks to modestly
outperform the S&P 500 Index, the Fund expects that its returns will have a
coefficient correlation of 0.90% or better to the S&P 500 Index.
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INVESTMENT RESTRICTIONS -- THE INCOME & GROWTH FUND,
HIGH TOTAL RETURN FUND II, AND THE HIGH TOTAL RETURN FUND
The Funds have adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 12 through 17 are
not fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Funds may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but
only if, immediately after such borrowing there is asset coverage of
300%, and (b) enter into transactions in options, futures, and options
on futures and other transactions not deemed to involve the issuance
of senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities
of companies that deal in real estate or interests therein, including
real estate investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Funds may, however, lend
portfolio securities, up to 33% of net assets at the time the loan is
made, to brokers or dealers or other financial institutions not
affiliated with the Funds or Pilgrim, subject to conditions
established by Pilgrim) (See "Lending Portfolio Securities" in this
SAI), and may purchase or hold participations in loans, in accordance
with the investment objectives and policies of the Fund, as described
in the current Prospectus and SAI of the Fund;
(6) Participate in any joint trading accounts;
(7) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(8) Sell short, except that these Funds may enter into short sales against
the box;
(9) Invest more than 25% of its assets in any one industry or related
group of industries;
(10) Purchase a security (other than U.S. government obligations) if, as a
result, more than 5% of the value of total assets of the Fund would be
invested in securities of a single issuer;
(11) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(12) Invest in a security if, as a result of such investment, more than 5%
of its total assets (taken at market value at the time of such
investment) would be invested in securities of issuers (other than
issuers of federal agency obligations) having a record, together with
predecessors or unconditional guarantors, of less than three years of
continuous operation;
(13) Purchase securities of other investment companies, except in
connection with a- merger, consolidation or sale of assets, and except
that these Funds may purchase shares of other investment companies,
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subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(14) Purchase or retain securities of any issuer if 5% of the securities of
such issuer are owned by those officers and directors or trustees of
the Fund or of Pilgrim who each own beneficially more than 1/2 of 1%
of its securities;
(15) Make an investment for the purpose of exercising control over
management;
(16) Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities, including securities subject to
legal or contractual restrictions on resale (which may include private
placements and those 144A securities for which the Trustees, pursuant
to procedures adopted by the Fund, have not determined there is a
liquid secondary market), repurchase agreements maturing in more than
seven days, options traded over the counter that a Fund has purchased,
securities being used to cover options a Fund has written, securities
for which market quotations are not readily available, or other
securities that, legally or in the Adviser's or Trustees' opinion, may
be deemed illiquid; or
(17) Invest in interests in oil, gas or other mineral exploration
development programs (including oil, gas or other mineral leases).
As a fundamental policy, these Funds may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non- fundamental) policy,
these Funds do not intend to borrow any amount in excess of 10% of their
respective assets, and would do so only for temporary emergency or
administrative purposes. In addition, to avoid the potential leveraging of
assets, neither of these Funds will make additional investments when its
borrowings, including those investment techniques which are regarded as a form
of borrowing, are in excess of 5% of total assets. If any of these three Funds
should determine to expand its ability to borrow beyond the current operating
policy, the Fund's Prospectus would be amended and shareholders would be
notified.
In addition to the restrictions described above, each of these Funds may,
from time to time, agree to additional investment restrictions for purposes of
compliance with the securities laws of those foreign jurisdictions where that
Fund intends to offer or sell its shares.
INVESTMENT RESTRICTIONS -- THE BALANCE SHEET OPPORTUNITIES FUND
The Funds have adopted investment restrictions numbered 1 through 12 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of such Fund's outstanding voting shares. Investment
restrictions numbered 13 through 21 are not fundamental policies and may be
changed by vote of a majority of the Trust's Board members at any time. The Fund
may not:
(1) Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset
coverage of 300% for all borrowings;
(2) Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets
would be invested in that issuer, or the Fund would own or hold more
than 10% of the outstanding voting securities of the issuer; PROVIDED,
HOWEVER, that up to 25% of the Fund's total assets may be invested
without regard to these limitations;
(3) Underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities, the Fund
may be deemed to be an underwriter;
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(4) Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities);
(5) Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily
marketable securities that are secured by interest in real estate or
issued by companies that deal in real estate, including real estate
investment and mortgage investment trusts; and (b) engage in financial
futures contracts and related options, as described herein and in the
Fund's Prospectus;
(6) Make loans, except that each of these Funds may: (a) invest in
repurchase agreements, and (b) loan its portfolio securities in
amounts up to one-third of the market or other fair value of its total
assets;
(7) Issue senior securities, except as appropriate to evidence
indebtedness that it is permitted to incur, provided that the deposit
or payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered the
issuance of senior securities;
(8) Borrow money in excess of 5% of its total assets (taken at market
value);
(9) Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in
connection with futures contracts and related options is not
considered a pledge or hypothecation of assets);
(10) Purchase more than 10% of the voting securities of any one issuer,
except U.S. Government securities;
(11) Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that
cannot be disposed of within the normal course of business at
approximately the amount at which the Fund has valued the securities,
excluding restricted securities that have been determined by the
Trustees of the Fund (or the persons designated by them to make such
determinations) to be readily marketable;
(12) Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S.
Government securities and obligations issued or guaranteed by any
foreign government or its agencies or instrumentalities, if such
purchase would cause the investments of a Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market value;
(13) Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities (the deposit or payment by a Fund of initial
or maintenance margin in connection with futures contracts or related
options is not considered the purchase of a security on margin);
(14) Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total
assets in options transactions, other than options on futures
contracts;
(15) Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the
Fund, and premiums paid on related options held by the Fund, does not
exceed more than 5% of the Fund's total assets, unless the transaction
meets certain "bona fide hedging," criteria (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5%);
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(16) Invest in securities of any issuer if any officer or Trustee of the
Fund or any officer or director of Pilgrim owns more than 1/2 of 1% of
the outstanding securities of the issuer, and such officers, directors
and trustees own in the aggregate more than 5% of the securities of
such issuer;
(17) Invest in interests in oil, gas or other mineral exploration or
development programs, (although it may invest in issuers that own or
invest in such interests);
(18) Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer
results from such purchase, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets;
(19) Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in
other investment companies;
(20) Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the
Fund's net assets or if warrants that are not listed on the New York
or American Stock Exchanges or on an exchange with comparable listing
requirements, taken at the lower of cost or market value, would
represent more than 2% of the value of the Fund's net assets (for this
purpose, warrants attached to securities will be deemed to have no
value); or
(21) Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in
kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions.
In addition to the restrictions described above, the Fund may, from time to
time, agree to additional investment restrictions for purposes of compliance
with the securities laws of those state and foreign jurisdictions where that
fund intends to offer or sell its shares.
INVESTMENT RESTRICTIONS -- THE PILGRIM MUTUAL FUNDS
The Funds have adopted the following fundamental policies that cannot be
changed without the affirmative vote of a majority of the outstanding shares of
the appropriate Fund (as defined in the Investment Company Act).
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In addition,
no Fund:
(1) May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities
of such issuer, except that up to 25% of a Fund's total assets may be
invested without regard to this restriction and a Fund will be
permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund.
This restriction also does not apply to investments by a Fund in
securities of the U.S. Government or any of its agencies and
instrumentalities.
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(2) May purchase more than 10% of the outstanding voting securities, or of
any class of securities, of any one issuer, or purchase the securities
of any issuer for the purpose of exercising control or management,
except that a Fund will be permitted to invest all or a portion of its
assets in another diversified, open-end management investment company
with substantially the same investment objective, policies and
restrictions as the Fund.
(3) May invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that a
Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions
as the Fund. This restriction does not apply to investments by a Fund
in securities of the U.S. Government or its agencies and
instrumentalities or to investments by the Money Market Fund in
obligations of domestic branches of U.S. banks and U.S. branches of
foreign banks which are subject to the same regulation as U.S. banks.
(4) May purchase or sell real estate. However, a Fund may invest in
securities secured by, or issued by companies that invest in, real
estate or interests in real estate.
(5) May make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter
into repurchase agreements. Each Fund reserves the authority to make
loans of its portfolio securities in an aggregate amount not exceeding
30% of the value of its total assets. This restriction does not apply
to the Money Market Fund.
(6) May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total
assets at the time of the borrowing, provided that, pursuant to the
Investment Company Act, a Fund may borrow money if the borrowing is
made from a bank or banks and only to the extent that the value of the
Fund's total assets, less its liabilities other than borrowings, is
equal to at least 300% of all borrowings (including proposed
borrowings), and provided, further that the borrowing may be made only
for temporary, extraordinary or emergency purposes or for the
clearance of transactions in amounts not exceeding 20% of the value of
the Fund's total assets at the time of the borrowing. If such asset
coverage of 300% is not maintained, the Fund will take prompt action
to reduce its borrowings as required by applicable law.
(7) May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness
permitted by restriction 6 above. This restriction shall not prohibit
the Funds from engaging in options, futures and foreign currency
transactions, and shall not apply to the Money Market Fund.
(8) May underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
(9) May invest more than 15% (10% in the case of the Money Market Fund) of
the value of its net assets in securities that at the time of purchase
are illiquid.*
(10) May purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that a Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of securities.
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(11) May engage in short sales (other than the MidCap Growth, SmallCap
Growth, Worldwide Growth, International Core Growth, International
SmallCap Growth, Strategic Income and High Yield II Funds), except
that a Fund may use such short-term credits as are necessary for the
clearance of transactions.
(12) May invest in securities of other investment companies, except (a)
that a Fund will be permitted to invest all or a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions
as the Fund; (b) in compliance with the Investment Company Act and
applicable state securities laws, or (c) as part of a merger,
consolidation, acquisition or reorganization involving the Fund.
(13) May issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Funds from engaging in short sales, options, futures and
foreign currency transactions.
(14) May enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest
in stock index, currency and financial futures contracts and related
options in accordance with any rules of the Commodity Futures Trading
Commission.
(15) May purchase or write options on securities, except for hedging
purposes (except in the case of the Strategic Income Fund, which may
do so for non-hedging purposes) and then only if (i) aggregate
premiums on call options purchased by a Fund do not exceed 5% of its
net assets, (ii) aggregate premiums on put options purchased by a Fund
do not exceed 5% of its net assets, (iii) not more than 25% of a
Fund's net assets would be hedged, and (iv) not more than 25% of a
Fund's net assets are used as cover for options written by the Fund.
This restriction does not apply to the Money Market Fund.
- ----------
* For the LargeCap Growth, MidCap Growth, Worldwide Growth, Emerging
Countries, High Yield II and Balanced Funds, as of the date of this
Statement of Additional Information this investment restriction reads: "May
invest more than 15% of the value of its net assets in securities that at
the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid." At a Meeting of Shareholders on May 21, 1999, a
change to this investment restriction was approved by the shareholders of
all Funds except the LargeCap Growth, MidCap Growth, Worldwide Growth,
Emerging Countries, High Yield II and Balanced Funds. The Meeting has been
adjourned with respect to those Funds, and upon shareholder approval the
investment restriction will be changed as described above.
For purposes of investment restriction number 5, the Trust considers the
restriction to prohibit the Funds from entering into instruments that have the
character of a loan, I.E., instruments that are negotiated on a case-by-case
basis between a lender and a borrower. The Trust considers the phrase "publicly
distributed debt instruments" in that investment restriction to include, among
other things, registered debt securities and unregistered debt securities that
are offered pursuant to Rule 144A under the Securities Act of 1933. As a result,
the Funds may invest in such securities. Further, the Trust does not consider
investment restriction number 5 to prevent the Funds from investing in
investment companies that invest in loans.
INVESTMENT RESTRICTIONS -- THE HIGH YIELD FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. 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.
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(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.
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. Notwithstanding the restrictions above, the High
Yield Fund will not, so long as its shares are registered for sale in the State
of South Dakota: (i) have more than 10% of its total assets invested in
securities of issuers that the Fund is restricted from selling to the public
without registration under the Securities Act of 1933, as amended; (ii) have
more than 10% of its total assets invested in real estate investment trusts or
investment companies; (iii) have more than 5% of its assets invested in options,
financial futures or stock index futures, other than hedging positions or
positions that are covered by cash or securities; (iv) have more than 5% of its
assets invested in equity securities of issuers that are not readily marketable
and securities of issuers that have been in operation for less than three years;
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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 High Yield 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 High Yield 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.
INVESTMENT RESTRICTIONS -- THE BANK AND THRIFT FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(1) Invest more than 25% of its total assets in any industry or group of
related industries other than the banking and thrift industries,
except for temporary or defensive positions.
(2) Borrow, except that it may borrow in an amount up to 15% of its total
assets to obtain such short-term credits as are necessary for the
clearance of securities transactions.
(3) Invest in repurchase agreements maturing in more than 7 days, if as a
result of such investment more than 10% of the Fund's total assets
would be invested in such repurchase agreements.
(4) Purchase securities for which there are legal or contractual
restrictions on resale, if as a result of such purchase more than 10%
of the Fund's total assets would be invested in such securities.
(5) Invest more than 5% of the value of its net assets in marketable
warrants to purchase common stock.
(6) Purchase securities of any one issuer, other than U.S. Government
securities, if immediately after such purchase more than 5% of the
value of the Fund's total assets would be invested in such issuer or
the Fund would own more than 10% of the outstanding voting securities
of an issuer or more than 10% of any class of securities of an issuer,
except that up to 25% of the Fund's total assets may be invested
without regard to the restrictions in this Item 6. For this purpose,
all outstanding bonds and other evidences of indebtedness shall be
deemed within a single class regardless of maturities, priorities,
coupon rates, series, designations, conversion rights, security or
other differences.
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(7) Act as an underwriter of securities of other issuers, except, to the
extent that it may be deemed to act as an underwriter in certain cases
when disposing of restricted securities (See also Item 4 above.).
(8) Purchase or sell real estate, commodities, commodity futures
contracts, or oil or gas exploration or development programs; or sell
short, or write, purchase, or sell straddles, spreads or combinations
thereof.
(9) Make loans, except that the Fund may purchase or hold Debt Securities
in accordance with its investment policies and objectives.
(10) Purchase securities on margin or hypothecate, mortgage or pledge any
of its assets except for the purpose of securing borrowings permitted
by Item 2 above and then only in an amount up to 15% of the value of
the Fund's total assets at the time of borrowing.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval. Appropriate
notice will be given of any changes in these restrictions made by the Board of
Directors. The Fund may not:
(11) Participate on a joint or joint and several basis in any trading
account in securities.
(12) Purchase securities of any issuer for the purposes of exercising
control or management, except in connection with a merger,
consolidation, acquisition or reorganization.
(13) Invest more than 5% of the Fund's total assets in securities of any
issuer which, together with its predecessors, has been in continuous
operation less than three years.
(14) Purchase or retain the securities of any issuer if those officers or
Directors of the Fund or officers or Directors of the Investment
Manager who each own beneficially more than 1/2 of 1% of the
securities of that issuer together own more than 5% of the securities
of such issuer.
(15) Invest in illiquid securities if, as a result, more than 15% of the
Fund's net assets would be invested in such securities.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in a percentage from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing restrictions.
INVESTMENT RESTRICTIONS -- THE GOVERNMENT SECURITIES INCOME FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(1) Purchase any securities other than obligations issued or guaranteed by
the United States Government or its agencies, some of which may be
subject to repurchase agreements. There is no limit on the amount of
the Fund's assets that may be invested in the securities of any one
issuer of such obligations.
(2) Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) to the extent the entry into a repurchase agreement is deemed to
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be a loan or (c) by the loan of its portfolio securities in accordance
with the policies described under "Investment Objective and Policies."
(3) (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total
assets (at the lower of cost or fair market value). No additional
investment may be made while any such borrowing are in excess of
5% of total assets. For purposes of this investment restriction,
the entry into reverse repurchase agreements, dollar-rolls and
delayed delivery transactions, including those relating to
pair-offs, shall not constitute borrowing.
(b) Mortgage, pledge or hypothecate any of its assets except to the
extent necessary to secure permitted borrowing and to the extent
related to the deposit of assets in escrow in connection with (i)
the purchase of securities on a forward commitment or delayed
delivery basis, and (ii) reverse repurchase agreements and
dollar-rolls.
(c) Borrow money, including the entry into reverse repurchase
agreements and dollar roll transactions and purchasing securities
on a delayed delivery basis, if, as a result of such borrowing,
more than 33-1/3 of the total assets of the Fund, taken at market
value at the time of such borrowing, is derived from borrowing.
For purposes of this limitation, a delay between purchase and
settlement of a security that occurs in the ordinary course for
the market on which the security is purchased or issued is not
considered a purchase of a security on a delayed delivery basis.
(4) Purchase securities on margin, sell securities short or participate on
a joint or joint and several basis in any securities trading account.
(Does not preclude the Fund from obtaining such short-term credit as
may be necessary for the clearance of purchases and sales of its
portfolio securities.)
(5) Underwrite any securities, except to the extent the Fund may be deemed
to be an underwriter in connection with the sale of securities held in
its portfolio.
(6) Buy or sell interests in oil, gas or mineral exploration or
development programs, or purchase or sell commodities, commodity
contracts or real estate. (Does not preclude the purchase of GNMA
mortgage-backed certificates.)
(7) Purchase or hold securities of any issuer, if, at the time of purchase
or thereafter, any of the Officers and Directors of the Fund or its
Investment Manager own beneficially more than 1/2 of 1%, and such
Officers and Directors holding more than 1/2 of 1% together own
beneficially more than 5%, of the issuer's securities.
(8) Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of
assets.
(9) 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 not invest more than 5% of the net
assets of the Fund in warrants, whether or not listed on the New York or
American Stock Exchanges, including no more than 2% of its total assets which
may be invested in warrants that are not listed on those exchanges. Warrants
acquired by the Fund in units or attached to securities are not included in this
restriction. The Fund will not, so long as its shares are registered in the
State of Texas, invest in oil, gas, or other mineral leases or real estate
limited partnership interests. The Fund will not make loans to others, unless
collateral values are continuously maintained at no less than 100% by "marking
to market" daily.
OPERATING RESTRICTIONS - FOR THE PILGRIM MUTUAL FUNDS
As a matter of operating (not fundamental) policy adopted by the Board of
Trustees of the Trust, no Fund:
(1) May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships,
although a Fund may invest in the securities of companies which invest
in or sponsor such programs.
(2) May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount
not less than 100% of the value of the loaned securities by marking to
market daily.
PRIMARY FUND RESTRICTIONS FOR THE PILGRIM MUTUAL FUNDS
The following are the fundamental operating restrictions of the Primary
Fund in which the Money Market Fund invests substantially all of its assets:
The Primary Institutional Fund cannot:
1. borrow money except as a temporary or emergency measure and not in an
amount to exceed 5% of the market value of its total assets;
2. issue senior securities except in compliance with the Investment
Company Act;
3. act as an underwriter with respect to the securities of others except
to the extent that, in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter under federal
securities law;
4. concentrate investments in any particular industry except to the
extent that its investments are concentrated exclusively in U.S.
government securities and bank obligations, including obligations of
foreign branches of domestic banks where the domestic parent would be
unconditionally liable in the event that the foreign branch failed to
pay on its instruments for any reason, and Municipal Obligations or
instruments secured by such obligations;
5. purchase, sell or otherwise invest in real estate or commodities or
commodity contracts;
6. lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
7. sell any security short or write, sell or purchase any futures
contract or put or call option; and
8. make investments on a margin basis.
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Notwithstanding the foregoing investment restrictions, the Primary
Institutional Fund may invest substantially all of its assets in another
open-end investment company with substantially the same investment objective as
the Primary Institutional Fund.
PRIMARY INSTITUTIONAL FUND OPERATING RESTRICTIONS
As a matter of operating (non-fundamental policy) the Primary Institutional
Fund may not:
1. invest for the purpose of exercising control.
In addition to the restrictions described above, each of these funds may,
from time to time, agree to additional investment restrictions for purposes of
compliance with the securities laws of those foreign jurisdictions where the
Fund intends to offer or sell its shares.
PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement or
Sub-Advisory Agreement authorizes the Investment Manager or Sub-Adviser to
select the brokers or dealers that will execute the purchase and sale of
investment securities for each Fund. In all purchases and sales of securities
for the portfolio of a Fund, the primary consideration is to obtain the most
favorable price and execution available. Pursuant to the Investment Management
Agreements and Portfolio Management Agreements Sub-Advisory Agreements, each
Investment Manager or Sub Advisor determines, subject to the instructions of and
review by the Board of Directors of the Fund, which securities are to be
purchased and sold by the Funds 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 an Investment Manager or Sub-Adviser, a
better price and execution can otherwise be obtained by using a broker for the
transaction.
In placing portfolio transactions, each Investment Manager or Sub-Adviser
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. With respect to Bank and
Thrift Fund, such other Factors would include the firm's ability to engage in
transactions in shares of banks and thrifts that are not listed on an organized
stock exchange. The Investment Managers or Sub-Adviser will seek to obtain the
best commission rate available from brokers that 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 a Fund, the Investment Manager, and/or the
Sub-Adviser, and provide other services in addition to execution services. Each
Investment Manager or Sub-Adviser considers such information, which is in
addition to and not in lieu of the services required to be performed by the
Investment Manager or Sub-Adviser to be useful in varying degrees, but of
indeterminable value. Consistent with this policy, portfolio transactions may be
executed by brokers affiliated with the Pilgrim Group or any of the Investment
Managers or Sub-Advisers, 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. The placement of
portfolio brokerage with broker-dealers who have sold shares of a Fund is
subject to rules adopted by the National Association of Securities Dealers, Inc.
("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 Funds' general policy to seek first to
obtain the most favorable price and execution available, in selecting a broker
to execute portfolio transactions for a Fund, the Fund may also give weight to
the ability of a broker to furnish brokerage and research services to the Fund,
the Investment Manager or the Sub-Adviser, even if the specific services were
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not imputed to the Fund and were useful to the Investment Manager and/or
Sub-Adviser 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 or Sub-Adviser to be reasonable in relation to the value of
the brokerage and research services provided by such broker.
Purchases of securities for a Fund also may be made directly from issuers
or from underwriters. Where possible, purchase and sale transactions will be
effected through dealers which specialize in the types of securities which the
Fund will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate
for other clients served by that Fund's Investment Manager or Sub-Adviser. If
the purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Investment
Manager or Sub-Adviser is considered at or about the same time, transactions in
such securities will be allocated among the Fund and the Investment Manager's or
Sub-Adviser's other clients in a manner deemed fair and reasonable by the
Investment Manager or Sub-Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by a
Investment Manager or Sub-Adviser, and the results of such allocations, are
subject to periodic review by the Board of Directors. To the extent any of Funds
seek 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. It is recognized that in some
cases this system could have a detrimental effect on the price or value of the
security insofar as a specific Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Investment Manager, except for any sales of portfolio securities that may
legally be made pursuant to a tender offer, in which event the Investment
Manager will offset against its management fee a part of any tender fees that
may be legally received and retained by an affiliated broker-dealer.
Purchases and sales of fixed income securities will usually be principal
transactions. Such securities often will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. Each Fund may also
purchase such securities in underwritten offerings and will, on occasion,
purchase securities directly from the issuer. Generally, fixed income securities
are traded on a net basis and do not involve brokerage commissions. The cost of
executing fixed income securities transactions consists primarily of dealer
spreads and underwriting commissions.
In purchasing and selling fixed income securities, it is the policy of each
Fund to obtain the best results, while taking into account the dealer's general
execution and operational facilities, the type of transaction involved and other
factors, such as the dealer's risk in positioning the securities involved. While
Pilgrim generally seeks reasonably competitive spreads or commissions, the Funds
will not necessarily pay the lowest spread or commission available.
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Brokerage commissions paid by each Fund for each of the last three fiscal
years are as follows:
June 30 March 31
--------------------- --------------------
1999 1999 1998 1997
---- ---- ---- ----
International Core Growth Fund $337,039 $1,150,595 $ 464,615 $ 24,643
Worldwide Growth Fund 390,084 1,166,321 1,065,153 970,564
International SmallCap Growth Fund 247,580 873,671 745,259 692,326
Emerging Countries Fund 1,036,293 3,945,783 3,634,338 1,427,861
LargeCap Growth Fund 58,467 115,558 30,907 4,620
MidCap Growth Fund 344,683 1,291,517 1,809,755 1,139,938
SmallCap Growth Fund 156,586 974,722 1,002,867 987,245
Convertible Fund 15,340 158,049 130,017 114,243
Balanced Fund 38,023 25,782 43,966 35,105
Strategic Income Fund 3,257 0 100 0
Money Market Fund N/A N/A N/A N/A
FOR THE FISCAL YEARS ENDED JUNE 30, 1999
----------------------------------------
1999 1998 1997
Asia-Pacific Equity Fund $203,029 $302,383 $320,036
MidCap Value Fund 364,903 16,687 146,795
LargeCap Leaders Fund 551,028 50,835 56,375
MagnaCap Fund 300,524 456,000 600,000
High Yield Fund 0 0 0
Bank and Thrift Fund (1) 584,160 316,000 90,000
Government Securities Income Fund 0 0 0
- ----------
(1) For the Bank and Thrift Fund, for the years ended December 31, 1997 and the
six-month period ended June 30, 1998.
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Growth + Value Fund..................... $374,786 $339,495 $170,986
International Value Fund(1)............. 1,316,582 995,910 421,452
Emerging Markets Value Fund(2).......... 47,474 33,868 N/A
Research Enhanced Index Fund(3)......... 103,616 N/A N/A
Income & Growth Fund.................... 300,236 93,492 507,638
High Total Return Fund II............... 5,659 -- --
High Total Return Fund.................. 26,963 -- 222
- ----------
(1) Prior to April 21, 1997, the International Value Fund was operated as the
Brandes International Fund, a series of the Brandes Investment Trust, and
distributed by Worldwide Value Distributors, L.L.C.
(2) Pilgrim Emerging Markets Value Fund Commenced operations on January 1,
1998.
(3) Pilgrim Research Enhanced Index Fund commenced operations on December 30,
1998.
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1999 1998 1997
---- ---- ----
SmallCap Opportunities Fund................ $429,651 $957,784 $874,698
Mid-Cap Opportunities Fund(1).............. 144,341 54,968 N/A
Growth Opportunities Fund.................. 1,091,033 423,680 169,066
Balance Sheet Opportunities Fund........... 41,493 13,025 81,371
Government Securities Fund................. 139,503 193,230 --
High Yield Fund III........................ 14,268 -- --
Of the total commissions paid during the fiscal period ended June 30, 1999,
$692,683 (16%) were paid to firms which provided research, statistical or other
services to the Investment Adviser. The Investment Adviser has not separately
identified a portion of such commissions as applicable to the provision of such
research, statistical or otherwise.
During the three months period ended June 30, 1999, the following Funds (or
their predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: Worldwide Growth Fund-Goldman Sachs Group; MidCap Growth Fund-Donaldson
Lufkin & Jenrette; Convertible Fund-Merrill Lynch & Co., Morgan Stanley Dean
Witter Discover Co.; Balanced Fund-Donaldson Lufkin & Jenrette, Goldman Sachs
Group, Merrill Lynch & Co., Morgan Stanley Dean Witter Discover & Co.; Strategic
Income-Donaldson Lufkin & Jenrette, J.P. Morgan & Co., Goldman Sachs Group,
Morgan Stanley Dean Witter Discover & Co.; LargeCap Growth Fund-Godlman Sachs
Group. The holdings of securities of such brokers and dealers were as follows as
of June 30, 1999: Worldwide Growth Fund-Goldman Sachs Group ($3,872,600);
Convertible Fund-Merrill Lynch & Co. ($4,288,288); Morgan Stanley Dean Witter
Discover Co. ($7,328,441); Balanced Fund-Donaldson Lufkin & Jenrette ($248,135),
Merrill Lynch & Co. ($150,051), Morgan Stanley Dean Witter Discover & Co.
($421,616), Goldman Sachs Group ($155,772); Strategic Income-Donaldson Lufkin &
Jenrette ($480,120), J.P. Morgan & Co. ($621,224), Morgan Stanley Dean Witter
Discover & Co. ($202,361), Goldman Sachs Group ($233,658); LargeCap Growth
Fund-Goldman Sachs Group ($2,528,750); MidCap Growth Fund-Donaldson Lufkin &
Jenrette ($2,096,700).
As of October 31, 1999, the following Funds held securities of their
regular brokers or dealers: Research Enhanced Index-Goldman-Sachs, Income Growth
- - First Union Corp. The holdings of such brokers and dealers were as follows as
of October 31, 1999: Research Enhanced Index - Goldman Sachs ($923,000); Income
and Growth - First Union Corp. ($2,645,994).
ABOUT THE MONEY MARKET FUND
With respect to the Primary Fund in which the Money Market Fund invests its
assets, Reserve Management Company, Inc. is responsible for decisions to buy and
sell securities, broker-dealer selection and negotiation of commission rates. As
investment securities transactions made by the Primary Fund are normally
principal transactions at net prices, the Primary Fund does not normally incur
brokerage commissions. Purchases of securities from underwriters involve a
commission or concession paid by the issuer to the underwriter and aftermarket
transactions with dealers involve a spread between the bid and asked prices. The
Primary Fund has not paid any brokerage commissions during the past three fiscal
years.
The Primary Fund's policy of investing in debt securities maturing within
13 months results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a material, adverse effect
upon the net asset value ("NAV") or yield of the Primary Fund.
Subject to the overall supervision of the officers of the Primary Fund and
the Board of Trustees, Reserve Management Company, Inc. places all orders for
the purchase and sale of the Primary Fund's investment securities. In general,
in the purchase and sale of investment securities, Reserve Management Company,
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Inc. will seek to obtain prompt and reliable execution of orders at the most
favorable prices and yields. In determining best price and execution, Reserve
Management Company, Inc. may take into account a dealer's operational and
financial capabilities, the type of transaction involved, the dealer's general
relationship with Reserve Management Company, Inc., and any statistical,
research, or other services provided by the dealer to Reserve Management
Company, Inc. To the extent such non-price factors are taken into account the
execution price paid may be increased, but only in reasonable relation to the
benefit of such non-price factors to the Primary Fund as determined by Reserve
Management Company, Inc. Brokers or dealers who execute investment securities
transactions may also sell shares of the Primary Fund; however, any such sales
will be neither a qualifying nor disqualifying factor in the selection of
brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Primary Fund and other investment companies
managed by Reserve Management Company, Inc., the transactions are allocated as
to amount in accordance with each order placed for each fund. However, Reserve
Management Company, Inc. may not always be able to purchase or sell the same
security on identical terms for all investment companies affected.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased,
redeemed or exchanged appears in the Prospectus under "Shareholder Guide."
Shares of the Funds are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Company'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.
Certain investors may purchase shares of the Funds 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 a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Sub-Adviser intends to retain the security in the Fund as an investment.
Assets so purchased by a 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 Company 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 Funds may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
Shares of a Fund (or shares of other funds managed by the Investment Manager in
accordance with the terms of such privileges established for such funds) within
the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent, or be postmarked, within 90 days after the date
of redemption. This privilege may only be used once per calendar year. Payment
must accompany the request and the purchase will be made at the then current net
asset value of the Fund. Such purchases may also be handled by a securities
dealer who may charge a shareholder for this service. If the shareholder has
realized a gain on the redemption, the transaction is taxable and any
reinvestment will not alter any applicable Federal capital gains tax. If there
has been a loss on the redemption and a subsequent reinvestment pursuant to this
privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
Class A Shares of the Funds may also be purchased at net asset value by any
person who can document that Fund shares were purchased with proceeds from the
redemption (within the previous 90 days) of shares from any unaffiliated mutual
fund on which a sales charge was paid or which were subject at any time to a
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CDSC, and the Distributor has determined in its discretion that the unaffiliated
fund invests primarily in the same types of securities as the Pilgrim Fund
purchased.
Additionally, Class A or Class M Shares of the Funds may also be purchased
at net asset value by any charitable organization or any state, county, or city,
or any instrumentality, department, authority or agency thereof that has
determined that a Fund is a legally permissible investment and that is
prohibited by applicable investment law from paying a sales charge or commission
in connection with the purchase of shares of any registered management
investment company ("an eligible governmental authority"). If an investment by
an eligible governmental authority at net asset value is made though a dealer
who has executed a selling group agreement with respect to the Company (or the
other open-end Pilgrim Funds) the Distributor may pay the selling firm 0.25% of
the Offering Price.
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 other open-end Pilgrim Funds distributed by the Distributor
may reinvest such amount plus any shares acquired through dividend reinvestment
in Class A or Class M Shares of a Fund at its current net asset value, without a
sales charge.
The officers, directors and bona fide full-time employees of the Company
and the officers, directors and full-time employees of the Investment Manager,
any Sub-Adviser, the Distributor, any service provider to a Fund 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 or any Sub-Adviser,
may purchase Class A or Class M Shares of a Fund at net asset value without a
sales charge. Such purchaser may be required to sign a letter stating that the
purchase is for his own investment purposes only and that the securities will
not be resold except to the Fund. The Company may, under certain circumstances,
allow registered investment adviser's 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 open-end fund managed by the Investment Manager or from
Pilgrim Prime Rate Trust.
Class A or Class M shares may also be purchased without a sales charge by
(i) shareholders who have authorized the automatic transfer of dividends from
the same class of another Pilgrim Fund distributed by the Distributor or from
Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies
and bank trust departments investing in Class A shares on their own behalf or on
behalf of their clients, provided that the aggregate amount invested in any one
or more Funds, during the 13 month period starting with the first investment,
equals at least $1 million; (iii) broker-dealers, who have signed selling group
agreements with the Distributor, and registered representatives and employees of
such broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles, aunts,
siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv)
broker-dealers using third party administrators for qualified retirement plans
who have entered into an agreement with the Pilgrim Funds or an affiliate,
subject to certain operational and minimum size requirements specified from
time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or
broker-dealer charges an account management fee ("wrap accounts"); and (vi) any
registered investment company for which Pilgrim Investments, Inc. serves as
adviser.
Shares of the MagnaCap Fund are acquired at net asset value by Investors
Fiduciary Trust Company, Kansas City, Missouri, as Custodian for Pilgrim
Investment Plans, a unit investment trust for the accumulation of shares of the
Fund. As of June 30, 1999, less than 2% of the Fund's then total outstanding
shares were held by said Custodian for the account of such plan holders.
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The Funds may terminate or amend the terms of these sales charge waivers at
any time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION
An investor may immediately qualify for a reduced sales charge on a
purchase of Class A or Class M shares of any of the Funds 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 investment in the Pilgrim Funds will be effective only after
notification to the Distributor that the investment qualifies for a discount.
The shareholder's holdings in the Investment Manager's funds (excluding Pilgrim
General Money Market Shares) acquired within 90 days before the Letter of Intent
is filed will be counted towards completion of the Letter of Intent but will not
be entitled to a retroactive downward adjustment of sales charge until the
Letter of Intent is fulfilled. Any redemptions made by the shareholder during
the 13-month period will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge as specified below,
depending upon the amount actually purchased (less redemption) during the
period.
An investor acknowledges and agrees to the following provisions by
completing the Letter of Intent section of the Shareholder Application in the
Prospectus. A minimum initial investment equal to 25% of the intended total
investment is required. An amount equal to the maximum sales charge or 5.75% of
the total intended purchase will be held in escrow at Pilgrim Funds, in the form
of shares, in the investor's name to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The shares in
escrow will be included in the total shares owned as reflected on the monthly
statement; income and capital gain distributions on the escrow shares will be
paid directly by the investor. The escrow shares will not be available for
redemption by the investor until the Letter of Intent has been completed, or the
higher sales charge paid. If the total purchases, less redemptions, equal the
amount specified under the Letter, the shares in escrow will be released. If the
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by the Distributor and the dealer with
whom purchases were made pursuant to the Letter of Intent (to reflect such
further quantity discount) on purchases made within 90 days before, and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the applicable offering price.
If the total purchases, less redemptions, are less than the amount specified
under the Letter, the investor will remit to the Distributor an amount equal to
the difference in dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the redemption of an appropriate number of shares
in escrow to realize such difference will be made. If the proceeds from a total
redemption are inadequate, the investor will be liable to the Distributor for
the difference. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the Investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the Distributor as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the purpose of paying any additional sales charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the proceeds as directed by the Distributor. The investor or the
securities dealer must inform the Transfer Agent or the Distributor that this
Letter is in effect each time a purchase is made.
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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 open-end funds
distributed by the Distributor (excluding Pilgrim General Money Market Shares)
can be combined with a current purchase to determine the reduced sales charge
and applicable offering price of the current purchase. The reduced sales charge
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 accounts for the benefit of
a child under the Uniform gift to Minors Act, (iv) a trustee or other fiduciary
of a single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies' registered investment advisors, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
The reduced sales charge also apply on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.
Shares of the 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.
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.
REDEMPTIONS
Payment to shareholders for shares redeemed will be made within seven days
after receipt by the Fund's Transfer Agent of the written request in proper
form, except that a Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
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, an investor may incur brokerage costs in
converting such securities to cash. However, each Company 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
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redemption. In the event a 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, each Fund
Company reserves the right, upon 30 days written notice, to redeem, at net asset
value (less any applicable deferred sales charge), the shares of any shareholder
whose account has a value of less than $1,000 in the Fund, other than as a
result of a decline in the net asset value per share. Before the Fund redeems
such shares and sends the proceeds to the shareholder, it will notify the
shareholder that the value of the shares in the account is less than the minimum
amount and will allow the shareholder 30 days to make an additional investment
in an amount that will increase the value of the account to at least $1,000
before the redemption is processed. This policy will not be implemented where a
Fund has previously waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of the portfolio securities
at the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may
be subject to a CDSC. Shareholders will be charged a CDSC if certain of those
shares are redeemed within the applicable time period as stated in the
prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares, or (iii) were exchanged for
shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares
upon (i) the death or permanent disability of a shareholder, or (ii) in
connection with mandatory distributions from an Individual Retirement Account
("IRA") or other qualified retirement plan. The CDSC or redemption fee will be
waived in the case of a redemption of shares following the death or permanent
disability of a shareholder if the redemption is made within one year of death
or initial determination of permanent disability. The waiver is available for
total or partial redemptions of shares owned by an individual or an individual
in joint tenancy (with rights of survivorship), but only for redemptions of
shares held at the time of death or initial determination of permanent
disability. The CDSC or redemption fee will also be waived in the case of a
total or partial redemption of shares in connection with any mandatory
distribution from a tax-deferred retirement plan or an IRA. The waiver does not
apply in the case of a tax-free rollover or transfer of assets, other than one
following a separation from services, except that a CDSC or redemption fee may
be waived in certain circumstances involving redemptions in connection with a
distribution from a qualified employer retirement plan in connection with
termination of employment or termination of the employer's plan and the transfer
to another employer's plan or to an IRA. The shareholder must notify the Fund
either directly or through the Distributor at the time of redemption that the
shareholder is entitled to a waiver of CDSC or redemption fee. The waiver will
then be granted subject to confirmation of the shareholder's entitlement. The
CDSC or redemption fee, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered investment advisors,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients. These waivers may be changed at any time.
REINSTATEMENT PRIVILEGE
If you sell Class B, Class C or Class T shares of a Pilgrim Fund, you may
reinvest some or all of the proceeds in the same share class within 90 days
without a sales charge. Reinstated Class B, Class C and Class T shares will
retain their original cost and purchase date for purposes of the CDSC. The
amount of any CDSC also will be reinstated. To exercise this privilege, the
written order for the purchase of shares must be received by the Transfer Agent
or be postmarked within 90 days after the date of redemption. This privilege can
be used only once per calendar year. If a loss is incurred on the redemption and
the reinstatement privilege is used, some or all of the loss may not be allowed
as a tax deduction.
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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, except that Class B Shares
acquired initially through Funds that were part of the Nicholas-Applegate Mutual
Funds at the time of purchase will convert after seven years from the date of
original purchase. The conversion of Class B shares into Class A shares is
subject to the continuing availability of an opinion of counsel or an Internal
Revenue Service ("IRS") ruling, if the Investment Manager deems it advisable to
obtain such advice, to the effect that (1) such conversion will not constitute
taxable events for federal tax purposes; and (2) the payment of different
dividends on Class A and Class B shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Internal
Revenue Code of 1986. The Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. The conversion will be effected
at the relative net asset values per share of the two Classes.
CDSC SCHEDULE FOR SHARES OF THE EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND,
GROWTH OPPORTUNITIES FUND, MAYFLOWER TRUST, BALANCE SHEET OPPORTUNITIES FUND,
GOVERNMENT SECURITIES FUND, AND THE HIGH YIELD FUND III PURCHASED BEFORE
NOVEMBER 1, 1999
Effective November 1, 1999, the above listed Funds adopted a new CDSC
schedule, as set forth in the prospectus. Class B shares of those Funds
purchased before November 1, 1999 are subject to the following contingent sales
deferred change schedule:
Years After You CDSC As A Percentage
Bought The Shares of Amount Redeemed
----------------- ------------------
1st Year 5.00%
2nd Year 4.00%
3rd Year 3.00%
4th Year 2.00%
5th Year 2.00%
After 5 Years --
DEALER COMMISSIONS AND OTHER INCENTIVES
In connection with the sale of shares of the Funds, the Distributor may pay
Authorized Dealers of record a sales commission as a percentage of the purchase
price. In connection with the sale of Class A and Class M shares, the
Distributor will reallow to Authorized Dealers of record from the sales charge
on such sales the following amounts:
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EQUITY FUNDS
Dealers' Reallowance as a Percentage of Offering Price
------------------------------------------------------
Amount of Transaction Class A Class M
- --------------------- ------- -------
Less than $50,000 5.00% 3.00%
$50,000 - $99,999 3.75% 2.00%
$100,000 - $249,999 2.75% 1.00%
$250,000 - $499,000 2.00% 1.00%
$500,000 - $999,999 1.75% None
$1,000,000 and over See below None
INCOME FUNDS
Dealers' Reallowance as a Percentage of Offering Price
------------------------------------------------------
Amount of Transaction Class A Class M
- --------------------- ------- -------
Less than $50,000 4.25% 3.00%
$50,000 - $99,999 4.00% 2.00%
$100,000 - $249,999 3.00% 1.25%
$250,000 - $499,000 2.25% 1.00%
$500,000 - $999,999 1.75% None
$1,000,000 and over See below None
The Distributor may pay to Authorized Dealers out of its own assets
commissions on shares sold in Classes A, B and C, at net asset value, which at
the time of investment would have been subject to the imposition of a contingent
deferred sales charge ("CDSC") if redeemed. There is no sales charge on
purchases of $1,000,000 or more of Class A shares. However, such purchases may
be subject to a CDSC, as disclosed in the Prospectus. The Distributor will pay
Authorized Dealers of record commissions at the rates shown in the table below
for purchases of Class A shares that are subject to a CDSC:
Dealer Commission as a Percentage
Amount of Transaction of Amount Invested
--------------------- ---------------------------------
$1,000,000 to $2,499,000 1.00%
$2,500,000 to $4,999,999 0.50%
$5,000,000 and over 0.25%
Also, the Distributor will pay out of its own assets a commission of 1% of
the amount invested for purchases of Class A shares of less than $1 million by
qualified employer retirement plans with 50 or more participants.
The Distributor will pay out of its own assets a commission of 4% of the
amount invested for purchases of Class B shares subject to a CDSC. For purchases
of Class C shares subject to a CDSC, the Distributor may pay out of its own
assets a commission of 1% of the amount invested of each Fund other than
Strategic Income Fund and 0.75% of the amount invested of Strategic Income Fund.
The Distributor may, from time to time, at its discretion, allow a selling
dealer to retain 100% of a sales charge, and such dealer may therefore be deemed
an "underwriter" under the Securities Act of 1933, as amended. The Distributor,
at its expense, may also provide additional promotional incentives to dealers.
The incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualifying registered representatives
and members of their families to locations within or outside of the United
States, merchandise or other items. For more information on incentives, see
"Management of the Funds -- 12b-1 Plans" in this Statement of Additional
Information.
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DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each
class of each 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 mean between the last reported
bid and asked prices on the valuation day. Portfolio securities underlying
traded call options written by the High Yield Fund will be valued at their
market price as determined above; however, the current market value of the
option written by the High Yield 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. This involves
valuing a security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Fund would receive if it sold the instrument. See "How
Net Asset Value is Determined" in the Prospectus. The mortgage securities held
in a Fund's portfolio will be valued at the mean between the most recent bid and
asked prices as obtained from one or more dealers that make markets in the
securities when over-the counter market quotations are readily available.
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 a
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 a 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 a 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 a class of a Fund's net asset value, all class-specific
liabilities incurred or accrued are deducted from the class' net assets. The
resulting net assets are divided by the number of shares of the class
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,
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Class C 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 regular trading on the New York Stock Exchange will be confirmed at the next
computed offering price as described in the Prospectus.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Fund will not normally be
issued to shareholders. The Transfer Agent will maintain an account for each
shareholder upon which the registration and transfer of shares are recorded, and
any transfers shall be reflected by bookkeeping entry, without physical
delivery.
The Transfer Agent will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
Each Company reserves the right, if conditions exist that make cash
payments undesirable, to honor any request for redemption or repurchase order
with respect to shares of a Fund by making payment in whole or in part in
readily marketable securities chosen by the Fund and valued as they are for
purposes of computing the Fund's net asset value (redemption-in-kind). If
payment is made in securities, a shareholder may incur transaction expenses in
converting theses securities to cash. Each Company has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which a Fund is
obligated to redeem shares with respect to any one shareholder during any 90-day
period solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund at the beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds provide a Pre-Authorized
Investment Program for the convenience of investors who wish to purchase shares
of a 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 Funds. 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 a 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 a 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 a 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 a Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Funds.) The annual contract maintenance fee may be
waived from time to time. For further details, including the right to appoint a
successor Custodian, see the Plan and Custody Agreements as provided by the
Company. Employers who wish to use shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
INDIVIDUAL RETIREMENT ACCOUNTS
Investors having earned income are eligible to purchase shares of a Fund
under an IRA pursuant to Section 408(a) of the Internal Revenue Code. An
individual who creates an IRA may contribute annually certain dollar amounts of
earned income, and an additional amount if there is a non-working spouse. Simple
IRA plans that employers may establish on behalf of their employees are also
available. Roth IRA plans that enable employed and self-employed individuals to
make non-deductible contributions, and, under certain circumstances, effect
tax-free withdrawals, are also available. Copies of a model Custodial Account
Agreement are available from the Distributor. Investors Fiduciary Trust Company,
Kansas City, Missouri, will act as the Custodian under this model Agreement, for
which it will charge the investor an annual fee of $12.00 for maintaining the
Account (such fee is in addition to the normal custodial charges paid by the
Funds). Full details on the IRA are contained in an IRS required disclosure
statement, and the Custodian will not open an IRA until seven (7) days after the
investor has received such statement from the Company. An IRA using shares of a
Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are
also available. Section 403(b) plans are arrangements by a public school
organization or a charitable, educational, or scientific organization that is
described in Section 501(c)(3) of the Internal Revenue Code under which
employees are permitted to take advantage of the federal income tax deferral
benefits provided for in Section 403(b) of the Code. It is advisable for an
investor considering the funding of any retirement plan to consult with an
attorney or to obtain advice from a competent retirement plan consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES
As discussed in the Prospectus, the telephone redemption and exchange
privileges are available for all shareholder accounts; however, retirement
accounts may not utilize the telephone redemption privilege. The telephone
privileges may be modified or terminated at any time. The privileges are subject
to the conditions and provisions set forth below and in the Prospectus.
(1) Telephone redemption and/or exchange instructions received in good
order before the pricing of a Fund on any day on which the New York
Stock Exchange is open for business (a "Business Day"), but not later
than 4:00 p.m. eastern time, will be processed at that day's closing
net asset value. For each exchange, the shareholder's account may be
charged an exchange fee. There is no fee for telephone redemption;
however, redemptions of Class A and Class B shares may be subject to a
contingent deferred sales charge (See "Redemption of Shares" in the
Prospectus).
(2) Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
(3) Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
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(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 sixty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(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.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make periodic withdrawals from your account in any fixed
amount in excess of $100 ($1,000 in the case of Class Q) to yourself, or to
anyone else you properly designate, as long as the account has a current value
of at least $10,000 ($250,000 in the case of Class Q). To establish a systematic
cash withdrawal, complete the Systematic Withdrawal Plan section of the Account
Application. To have funds deposited to your bank account, follow the
instructions on the Account Application. You may elect to have monthly,
quarterly, semi-annual or annual payments. Redemptions are normally processed on
the fifth day prior to the end of the month, quarter or year. Checks are then
mailed or proceeds are forwarded to your bank account on or about the first of
the following month. You may change the amount, frequency and payee, or
terminate the plan by giving written notice to the Transfer Agent. A Systematic
Withdrawal Plan may be modified at any time by the Fund or terminated upon
written notice by the relevant Fund.
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During the withdrawal period, you may purchase additional shares for
deposit to your account, subject to any applicable sales charge, if the
additional purchases are equal to at least one year's scheduled withdrawals, or
$1,200 ($12,000 in the case of Class Q), whichever is greater. There are no
separate charges to you under this Plan, although a CDSC may apply if you
purchased Class A, B or C shares. Shareholders who elect to have a systematic
cash withdrawal must have all dividends and capital gains reinvested. As shares
of a Fund are redeemed under the Plan, you may realize a capital gain or loss
for income tax purposes.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting
both income dividends and capital gains distributions, if any, in additional
shares of a respective class of a Fund at the then current net asset value, with
no sales charge. The Funds' management believes that most investors desire to
take advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and its shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and shareholders are
advised to consult their own tax advisers with respect to the particular
federal, state, local and foreign tax consequences to them of an investment in
the Funds. This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations issued thereunder, and judicial and
administrative authorities as in effect on the date of this Statement of
Additional Information, all of which are subject to change, which change may be
retroactive.
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each 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
loans, 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 is 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 a 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.
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The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a 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 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, each Fund currently
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 a 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 a Fund as capital gain dividends are not eligible for the
dividends-received deduction and will generally be taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been held by a shareholder, and are not eligible for the dividends-received
deduction. Net capital gains from assets held for one year or less will be taxed
as ordinary income. Generally, dividends and distributions are taxable to
shareholders, whether received in cash or reinvested in shares of a Fund. Any
distributions that are not from a 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 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.
Distributions by a 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 as 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 a 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
Certain debt securities acquired by a 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 would be subject to the distribution
requirements of the Code.
Some of the debt securities may be purchased by a 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
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discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivable or accrues expenses or other liabilities denominated in a
foreign currency and the time a Fund actually collects such receivable 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 a
Fund's net investment income to be distributed to its shareholders as ordinary
income.
PASSIVE FOREIGN INVESTMENT COMPANIES
A 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 is
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 a Fund held the PFIC stock. A Fund itself will be subject to
tax on the portion, if any, of the excess distribution that is allocated to that
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 as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a 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 may be available that involves marking to market the Funds' 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; any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are 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 a Fund from sources within foreign countries may be
subject to withholding and other income or similar taxes imposed by such
countries. If more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, that Fund
will be eligible and may elect to "pass through" to the Fund's shareholders the
amount of foreign income and similar taxes paid by that Fund. Pursuant to this
election, a shareholder will be required to include in gross income (in addition
to taxable dividends actually received) his pro rata share of the foreign taxes
paid by a Fund, and will be entitled either to deduct (as an itemized deduction)
his pro rata share of foreign income and similar taxes in computing his taxable
income or to use it as a foreign tax credit against his U.S. federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each shareholder will be
notified within 60 days after the close of the relevant Fund's taxable year
whether the foreign taxes paid by the Fund will "pass through" for that year.
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Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of a Fund's income flows through to its shareholders. With respect to a
Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by a Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund. The foreign tax credit limitation rules do not apply to certain
electing individual taxpayers who have limited creditable foreign taxes and no
foreign source income other than passive investment-type income. The foreign tax
credit is eliminated with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Fund are held by the Fund or the
shareholders, as the case may be, for less than 16 days (46 days in the case of
preferred shares) during the 30-day period (90-day period for preferred shares)
beginning 15 days (45 days for preferred shares) before the shares become
ex-dividend. Foreign taxes may not be deducted in computing alternative minimum
taxable income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by a Fund will be treated as United States
source income.
OPTIONS AND HEDGING TRANSACTIONS
The taxation of equity options (including options on narrow-based stock
indices) and over-the-counter options on debt securities is governed by Code
Section 1234. Pursuant to Code Section 1234, with respect to a put or call
option that is purchased by a Fund, if the option is sold, any resulting gain or
loss will be a capital gain or loss, and will be short-term or long term,
depending upon the holding period of the option. If the option expires, the
resulting loss is a capital loss and is short-term or long-term, depending upon
the holding period of the option. If the option is exercised, the cost of the
option, in the case of a call option, is added to the basis of the purchased
security and, in the case of a put option, reduces the amount realized on the
underlying security in determining gain or loss.
Certain options and financial contracts in which the Funds 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 a 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 a 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 a Fund. In addition, losses
realized by a 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 a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a 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.
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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 as 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, a 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 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.
Requirements relating to each Fund's tax status as a regulated investment
company may limit the extent to which a Fund will be able to engage in
transactions in options and foreign currency forward contracts.
SHORT SALES AGAINST THE BOX
If a Fund sells short "against the box," unless certain constructive sale
rules (discussed above) apply, it may realize a capital gain or loss upon the
closing of the sale. Such gain or loss generally will be long- or short-term
depending upon the length of time the Fund held the security which it sold
short. In some circumstances, short sales may have the effect of reducing an
otherwise applicable holding period of a security in the portfolio. The
constructive sale rule, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully under "Options and Hedging Transactions" above.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future Treasury regulations may apply similar
treatment to other transactions with respect to property that becomes
substantially worthless.
OTHER INVESTMENT COMPANIES
It is possible that by investing in other investment companies, a Fund may
not be able to meet the calendar year distribution requirement and may be
subject to federal income and excise tax. The diversification and distribution
requirements applicable to each Fund may limit the extent to which each Fund
will be able to invest in other investment companies.
SALE OR OTHER DISPOSITION 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, 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 a 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 a Fund's
shares held by the shareholder for six months or less will be treated for
federal income tax purposes as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the shareholder with respect
to such shares.
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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
Each 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 a Fund with the shareholder's correct taxpayer identification
number or social security number and to make such certifications as a Fund may
require, (2) the IRS notifies the shareholder or a 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 is not subject to backup withholding. Any
amounts withheld may be credited against the shareholder's federal income tax
liability.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder. If the income from the Fund is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends (including distributions of any net short term capital gains) will be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon
the gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares of
the Fund, and distributions of net long term capital gains that are designated
as capital gain dividends. If the income from the Fund is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then ordinary
income dividends, capital gain dividends and any gains realized upon the sale of
shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
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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 a Fund.
PURCHASES IN-KIND OF THE INTERNATIONAL VALUE FUND
Investors may, subject to the approval of the International Value Fund, the
Investment Manager and Brandes, purchase shares of the International Value Fund
with liquid securities that are eligible for purchase by the Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Investment Manager or Brandes intends to retain the securities in the
Fund as an investment. The Fund reserves the right amend or terminate this
practice at any time.
REDEMPTIONS
The right to redeem shares may be suspended and payment therefor postponed
during periods when the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or, if permitted by rules of the SEC, during
periods when trading on the Exchange is restricted, during any emergency that
makes it impracticable for any Fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by
order of the SEC for the protection of investors. Furthermore, the Transfer
Agent will not mail redemption proceeds until checks received for shares
purchased have cleared, but payment will be forwarded immediately upon the funds
becoming available. Shareholders will be subject to the applicable deferred
sales charge, if any, for their shares at the time of redemption.
The contingent deferred sales charge will be waived with respect to Class T
shares in the following instances: (i) any partial or complete redemption of
shares of a shareholder who dies or becomes disabled, so long as the redemption
is requested within one year of death or the initial determination of
disability; (ii) any partial or complete redemption in connection with
distributions under Individual Retirement Accounts ("IRAs") or other qualified
retirement plans in connection with a lump sum or other form of distribution
following retirement within the meaning of Section 72(t)(2)(A) (iv) or (v) of
the Code, disability or death, or after attaining the age of 59 1/2 in the case
of an IRA, Keogh Plan or custodial account pursuant to Section 403(b)(7) of the
Code, or on any redemption that results from a tax free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code or Section 4979(f)
of the Code; (iii) redemptions effected pursuant to the Funds' right to
liquidate a shareholder's account if the aggregate net asset value of the shares
held in the account is less than $500; (iv) redemptions effected by (A)
employees of The Advest Group, Inc. ("AGI") and its subsidiaries, (B) IRAs,
Keogh plans and employee benefit plans for those employees, and (C) spouses and
minor children of those employees, so long as orders for shares are placed on
behalf of the spouses or children by the employees; (v) redemptions effected by
accounts managed by investment advisory subsidiaries of AGI registered under the
Investment Advisers Act of 1940; and (vi) redemptions in connection with
exchanges of Fund Class T shares, including shares of the Class T account of the
Money Market Portfolio.
EXCHANGES
The following conditions must be met for all exchanges among the Funds and
the Money Market Portfolio: (i) the shares that will be acquired in the exchange
(the "Acquired Shares") are available for sale in the shareholder's state of
residence; (ii) the Acquired shares will be registered to the same shareholder
account as the shares to be surrendered (the "Exchanged Shares"); (iii) the
Exchanged Shares must have been held in the shareholder's account for at least
30 days prior to the exchange; (iv) except for exchanges into the Money Market
Portfolio, the account value of the Fund whose shares are to be acquired must
equal or exceed the minimum initial investment amount required by that Fund
after the exchange is implemented; and (v) a properly executed exchange request
has been received by the Transfer Agent.
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Each Fund reserves the right to delay the actual purchase of the Acquired
Shares for up to five business days if it determines that it would be
disadvantaged by an immediate transfer of proceeds from the redemption of
Exchanged Shares. Normally, however, the redemption of Exchanged Shares and the
purchase of Acquired Shares will take place on the day that the exchange request
is received in proper form. Each Fund reserves the right to terminate or modify
its exchange privileges at any time upon prominent notice to shareholders. Such
notice will be given at least 60 days in advance. It is the policy of Pilgrim to
discourage and prevent frequent trading by shareholders among the Funds in
response to market fluctuations. Accordingly, in order to maintain a stable
asset base in each Fund and to reduce administrative expenses borne by each
Fund, Pilgrim reserves the right to reject any exchange request.
CONVERSION FEATURE
Class B and Class T shares of each Fund will automatically convert to Class
A shares without a sales charge at the relative net asset values of each of the
classes after eight years from the acquisition of the Class B or Class T shares,
and as a result, will thereafter be subject to the lower distribution fee (but
same service fee) under the Class A Rule 12b-1 plan for each Fund.
CALCULATION OF PERFORMANCE DATA
Each 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 a 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, a 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).
Prior to October 17, 1997, the Bank and Thrift Fund operated as a
closed-end investment company. Upon conversion of the Fund to an open-end
investment company on October 17, 1997, all outstanding shares of Common Stock
of the Fund were designated as Class A shares. Performance information for the
period prior to October 17, 1997 reflects the performance of the Fund as a
closed-end fund. Performance information presented by the Fund for all periods
is restated to reflect the current maximum front-end sales load payable by the
Class A shares of the Fund. Performance information for the period prior to
October 17, 1997 has not been adjusted to reflect annual Rule 12b-1 fees of
Class A shares plus additional expenses incurred in connection with operating as
131
<PAGE>
an open-end investment company. Performance would have been lower if adjusted
for these charges and expenses. Performance information for all periods after
October 17, 1997 reflects Class A's annual Rule 12b-1 fees and other expenses
associated with open-end investment companies.
Government Securities Income Fund earned income and realized capital gains
as a result of entering into reverse repurchase agreements during the six-month
period from July to December 1992 that caused the Fund to exceed its 10%
investment restriction on borrowing. Therefore, the Fund's performance was
higher than it would have been had the Fund adhered to its borrowing
restriction.
Quotations of yield for a 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
Yield= 2[(----- +1) -1]
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.
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.
A 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.
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<PAGE>
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, including any applicable contingent deferred
sales charge.
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, a Fund may compare the performance of its Class A, Class B, Class C,
Class M, Class Q, and Class T shares with that of other mutual funds as listed
in the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results. Prior to October
17, 1997, the Bank and Thrift Fund was rated as a closed-end fund, which had a
different fee structure. Fee structures are incorporated into certain ratings.
If the Fund had been rated using the fee structure of an open-end fund, ratings
for those periods may have been different.
The yield for the various classes of Pilgrim fixed income funds for the
month ended June 30, 1999 (October 31, 1999 for Mayflower Trust) was as follows:
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income & Growth Fund ........... 1.70% 1.09% 1.23% N/A N/A N/A
Government Securities Fund ..... 5.65% 5.24% 5.18% N/A N/A 5.60%
High Yield Fund III ............ 8.98% 8.69% 8.67% N/A N/A 9.06%
High Total Return Fund II ...... 11.38% 11.20% 11.19% N/A N/A N/A
High Total Return Fund ......... 11.46% 11.28% 11.28% N/A N/A N/A
Balance Sheet Opportunities Fund 2.41% 1.88% 1.87% N/A N/A 2.09%
High Yield Fund ................ 9.71% 9.45% 9.43% 9.36% N/A N/A
Convertible Fund ............... 1.72% 1.19% 1.19%% N/A 1.93% N/A
Strategic Income Fund .......... 5.19% 5.30% 5.30% N/A 5.80% N/A
Balanced Fund .................. 1.88% 1.34% 1.36% N/A 2.09% N/A
High Yield Fund II ............. 9.82% 9.69% 9.75% N/A 10.72% N/A
</TABLE>
133
<PAGE>
The average annual total returns, including sales charges, for each class
of shares of each Fund for the one-five-and ten-year periods ended June 30, 1999
(October 31, 1999 for Emerging Markets Value Fund, Growth + Value Fund, High
Total Return Fund, High Total Return Fund II, Income & Growth Fund,
International Value Fund, and Research Enhanced Index Fund), if applicable, and
for classes that have not been in operation for ten years, the average annual
total return from for the period from commencement of operations to June 30,
1999, is as follows:
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception(1) Inception Date
------ ------ ------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund(1)
Class A 52.64% N/A N/A (9.46%) 9/1/95
Class B 55.64% N/A N/A (9.53%) 9/1/95
Class C N/A N/A N/A N/A N/A
Class M 55.04% N/A N/A (9.46%) 9/1/95
LargeCap Leaders Fund(1)
Class A 13.70% N/A N/A 19.41% 9/1/95
Class B 14.71% N/A N/A 19.89% 9/1/95
Class C N/A N/A N/A 1.30% 6/17/99
Class M 15.83% N/A N/A 19.56% 9/1/95
MidCap Value Fund(1)
Class A (4.83%) N/A N/A 14.53% 9/1/95
Class B (4.41%) N/A N/A 14.91% 9/1/95
Class C N/A N/A N/A 1.43% 6/2/99
Class M (3.06%) N/A N/A 14.61% 9/1/95
MagnaCap Fund(2)
Class A 9.27% 19.87% 14.84% 13.06% 8/30/73
Class B 10.12% N/A N/A 20.62% 7/17/95
Class C N/A N/A N/A 3.07% 6/17/99
Class M 11.40% N/A N/A 20.25% 7/17/95
High Yield Fund(3)
Class A (10.10%) 7.77% 8.56% 9.66% 7/1/74
Class B (10.50%) N/A N/A 6.92% 7/17/95
Class C N/A N/A N/A (0.66%) 5/27/99
Class M (8.88%) N/A N/A 6.91% 7/17/95
Class Q N/A N/A N/A 0.34% 6/17/99
Bank and Thrift Fund(4)
Class A (13.87%) 24.32% 18.66% 15.83% 1/24/86
Class B (13.73%) N/A N/A 2.18% 10/20/97
Government Securities Income Fund(5)
Class A (2.93%) 4.78% 5.54% 6.53% 1/1/85
Class B (3.70%) N/A N/A 3.50% 7/17/95
Class C N/A N/A N/A 0.55% 6/11/99
Class M (1.96%) N/A N/A 3.57% 7/17/95
</TABLE>
134
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception(1) Inception Date
------ ------ ------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
International Core Growth Fund
Class A 0.02% N/A N/A 18.14% 2/28/97
Class B 0.45% N/A N/A 19.52% 2/28/97
Class C 4.47% N/A N/A 20.26% 2/28/97
Class Q 6.47% N/A N/A 21.65% 2/28/97
Worldwide Growth Fund
Class A 29.96% 20.47% N/A 19.27% 4/19/93
Class B 32.05% N/A N/A 25.06% 5/31/95
Class C 36.05% 21.16% N/A 19.66% 4/19/93
Class Q 38.25% N/A N/A 25.62% 8/31/95
International SmallCap Growth Fund
Class A 15.79% N/A N/A 16.38% 8/31/94
Class B 16.96% N/A N/A 22.04% 5/31/95
Class C 20.98% N/A N/A 16.94% 8/31/94
Class Q 23.04% N/A N/A 23.83% 8/31/95
Emerging Countries Fund
Class A 6.68% N/A N/A 7.41% 11/28/94
Class B 7.44% N/A N/A 9.04% 5/31/95
Class C 11.43% N/A N/A 7.81% 11/28/94
Class Q 13.57% N/A N/A 9.24% 8/31/95
LargeCap Growth Fund
Class A 60.73% N/A N/A 49.59% 7/21/97
Class B 64.49% N/A N/A 51.83% 7/21/97
Class C 68.26% N/A N/A 53.21% 7/21/97
Class Q 70.98% N/A N/A 54.53% 7/21/97
MidCap Growth Fund
Class A 17.96% 19.71% N/A 15.62% 4/19/93
Class B 19.36% N/A N/A 21.79% 5/31/95
Class C 23.33% 20.44% N/A 16.02% 4/19/93
Class Q 25.52% 21.45% N/A 21.45% 6/30/94
SmallCap Growth Fund
Class A 13.23% 18.90% N/A 14.69% 12/27/93
Class B 14.36% N/A N/A 18.93% 5/31/95
Class C 18.36% 19.59% N/A 15.21% 12/27/93
Class Q 20.78% N/A N/A 16.67% 8/31/95
Convertible Fund
Class A 16.74% 18.10% N/A 16.80% 4/19/93
Class B 18.09% N/A N/A 21.92% 5/31/95
Class C 22.02% 18.74% N/A 17.14% 4/19/93
Class Q 24.23% N/A N/A 21.79% 8/31/95
</TABLE>
135
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception(1) Inception Date
------ ------ ------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Balanced Fund
Class A 9.24% 17.03% N/A 14.04% 4/19/93
Class B 10.23% N/A N/A 17.96% 5/31/95
Class C 14.23% 17.65% N/A 14.42% 4/19/93
Class Q 16.22% N/A N/A 17.39% 8/31/95
High Yield II Fund
Class A (3.91%) N/A N/A (1.76%) 3/27/98
Class B (4.18%) N/A N/A (1.32%) 3/27/98
Class C (0.52%) N/A N/A 1.56% 3/27/98
Class Q (0.38%) N/A N/A 0.58% 3/27/98
Strategic Income Fund
Class A N/A N/A N/A (2.61%) 7/27/98
Class B N/A N/A N/A (3.04%) 7/27/98
Class C N/A N/A N/A 1.22% 7/27/98
Class Q N/A N/A N/A 2.54% 7/27/98
Growth + Value Fund
Class A 78.34% N/A N/A 24.17% 11/18/96
Class B 82.95% N/A N/A 25.12% 11/18/96
Class C 86.85% N/A N/A 25.75% 11/18/96
International Value Fund
Class A 24.98% N/A N/A 16.52% 3/06/95
Class B 26.55% N/A N/A 18.21 4/18/97
Class C 30.50% N/A N/A 17.24 3/06/95
Emerging Markets Value Fund
Class A 33.33% N/A N/A 1.38% 1/1/98
Class B 35.41% N/A N/A 1.85% 1/1/98
Class C 39.49% N/A N/A 3.87% 1/1/98
Research Enhanced Index Fund
Class A N/A N/A N/A 5.00% 12/30/98
Class B N/A N/A N/A 5.90% 12/30/98
Class C N/A N/A N/A 9.90% 12/30/98
Class I N/A N/A N/A 11.70% 12/30/98
Income & Growth Fund
Class A 5.58% 10.01% N/A 8.73% 11/8/93
Class B 7.12% 10.27% N/A 8.22% 2/9/94
Class C 10.29% 10.54% N/A 8.98% 3/21/94
High Total Return Fund
Class A (6.57%) 4.40% N/A 3.11% 11/8/93
Class B (6.93%) 4.41% N/A 2.22% 2/9/94
Class C (3.12%) 4.77% N/A 2.77% 3/21/94
</TABLE>
136
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception(1) Inception Date
------ ------ ------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
High Total Return Fund II
Class A (7.73%) N/A N/A 1.01% 1/31/97
Class B (8.36%) N/A N/A 1.19% 1/31/97
Class C (4.65%) N/A N/A 2.17% 1/31/97
SmallCap Opportunities Fund
Class A 15.40% N/A N/A 17.59% 6/5/95
Class B 16.56% N/A N/A 18.20% 6/5/95
Class C 20.54% N/A N/A 18.47% 6/5/95
Class T 17.66% 15.91% 14.74% 11.63% 2/3/86
Class I N/A N/A N/A 14.38% 4/1/99
Mid-Cap Opportunities Fund
Class A N/A N/A N/A 62.21% 8/20/98
Class B N/A N/A N/A 67.00% 8/20/98
Class C N/A N/A N/A 70.50% 8/20/98
Class I N/A N/A N/A 72.70% 8/20/98
Growth Opportunities Fund
Class A 35.74% N/A N/A 28.38% 6/5/95
Class B 37.96% N/A N/A 29.09% 6/5/95
Class C 42.23% N/A N/A 29.29% 6/5/95
Class T 39.03% 24.04% 17.78% 16.52% 2/3/86
Class I 44.49% N/A N/A 36.03% 3/31/97
Government Securities Fund
Class A (5.10%) N/A N/A 3.82% 6/5/95
Class B (5.63%) N/A N/A 3.99% 6/5/95
Class C (2.05%) N/A N/A 4.34% 6/5/95
Class T (4.55%) 6.36% 7.51% 6.57% 2/3/86
High Yield Fund III
Class A (6.56%) N/A N/A 6.59% 6/5/95
Class B (7.14%) N/A N/A 6.72% 6/5/95
Class C (3.48%) N/A N/A 7.09% 6/5/95
Class T (5.77%) 7.89% 9.61% 9.47% 5/30/89
Balance Sheet Opportunities Fund
Class A 1.34% N/A N/A 13.55% 6/5/95
Class B 2.01% N/A N/A 14.12% 6/5/95
Class C 6.07% N/A N/A 14.44% 6/5/95
Class T 3.27% 14.19% 11.55% 10.72% 2/3/86
</TABLE>
- ----------
(1) Class A, B and M shares of Asia-Pacific Equity Fund, the LargeCap Leaders
Fund, and MidCap Value Fund commenced on September 1, 1995. The inception
date for Class A, B and C shares of the Growth + Value Fund is November 18,
1997. The inception date for Class A and C shares of the International
Value Fund is March 6, 1995; the inception date for Class B shares of the
international Value Fund is April 18, 1997. The inception date for Class A,
B and C shares of the Emerging Markets Value Fund is January 1, 1998. The
inception date for Class A, B and C shares of the Research Enhanced Index
Fund is December 30, 1998. The inception date of Class A. B and C shares of
the Income & Growth Fund and High Total Return Fund is November 8, 1993,
February 9, 1994 and March 21, 1994, respectively. The inception date for
Class A, B and C shares of the High Total Return Fund 11 is January 31,
1997.
(2) Class B and M shares of MagnaCap Fund commenced operations on July 17,
1995.
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<PAGE>
(3) Class B and M shares of High Yield commenced operations on July 17, 1995.
(4) Class B shares of Bank and Thrift Fund commenced operations on October 20,
1997.
(5) Class B and M shares of Government Securities Income commenced operations
on July 17, 1995. Government Securities Income Fund earned income and
realized capital gains as a result of entering into reverse repurchase
agreements during the six-month period from July to December 1992 that
caused the Fund to exceed its 10% investment restriction on borrowing.
Therefore, the Fund's performance was higher than it would have been had
the Fund adhered to its borrowing restriction.
No performance information is provided for the Money Market Fund because it
had not yet commenced operations as of June 30, 1999.
Reports and promotional literature may also contain the following
information: (i) a description of the gross national or domestic product and
populations, including but not limited to age characteristics, of various
countries and regions in which a Fund may invest, as compiled by various
organizations, and projections of such information; (ii) the performance of
worldwide equity and debt markets; (iii) the capitalization of U.S. and foreign
stock markets prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial organization; (iv)
the geographic distribution of a Fund's portfolio; (v) the major industries
located in various jurisdictions; (vi) the number of shareholders in the Funds
or other Pilgrim Funds and the dollar amount of the assets under management;
(vii) descriptions of investing methods such as dollar-cost averaging, best
day/worst day scenarios, etc.; (viii) comparisons of the average price to
earnings ratio, price to book ratio, price to cash flow and relative currency
valuations of the Funds and individual stocks in a Fund's portfolio, appropriate
indices and descriptions of such comparisons; (ix) quotes from the Sub-Adviser
of a Fund or other industry specialists; (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Sub-Advisers, Pilgrim Capital, Pilgrim
Group, Inc. or affiliates of the Company, the Investment Manager, the
Sub-Advisers, Pilgrim Capital or Pilgrim Group, Inc. including: (i) performance
rankings of other funds managed by the Investment Manager or a Sub-Adviser, or
the individuals employed by the Investment Manager or a Sub-Adviser who exercise
responsibility for the day-to-day management of a Fund, including rankings of
mutual funds published by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., or other rating services, companies, publications or
other persons who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number of clients, or
assets under management; (iii) information regarding the acquisition of the
Pilgrim Funds by Pilgrim Capital; (iv) the past performance of Pilgrim Capital
and Pilgrim Group, Inc.; (v) 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 authorized capital stock of the Advisory Funds consists of
1,000,000,000 shares having par value of $.01 per share. The authorized capital
stock of Pilgrim Investment Funds, Inc. consists of 500,000,000 shares of $.10
par value each, of which 200,000,000 shares are classified as shares of MagnaCap
Fund, 200,000,000 shares are classified as shares of the High Yield Fund, and
100,000,000 are not classified. The authorized capital stock of the Bank and
Thrift Fund, Inc. consists of 100,000,000 shares of common stock having a par
value of $0.00/per share. Holders of shares of the Advisory Funds and Bank and
Thrift Fund have one vote for each share held, and a proportionate fraction of a
vote for each fraction of a share held. The authorized capital stock of the
Government Securities Income Fund, Inc. consists of 50,000,000 shares. The
authorized capital of the Pilgrim Mutual Funds, Equity Trust, SmallCap
Opportunities Fund, Growth Opportunities Fund, Mayflower Trust, Balance Sheet
138
<PAGE>
Opportunities Fund, Government Securities Fund, and High Yield Fund II is in
each case an unlimited number of shares of beneficial interest. 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. There will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with a Fund's charter, cause a meeting, of shareholders to be held
for the purpose of voting on the removal of Trustees. Meetings of the
shareholders will be called upon written request of shareholders holding in the
aggregate not less than 10% of the outstanding shares of the affected Fund or
class having voting rights. Except as set forth above and subject to the 1940
Act, the Trustees will continue to hold office and appoint successor Trustees.
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 International Core Growth, Worldwide
Growth, International SmallCap Growth and Emerging Countries Funds are held by
Brown Brothers Harriman, 40 Water Street, Boston, Massachusetts 02109-3661, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
The cash and securities owned by the Mayflower Trust, Pilgrim Equity Trust,
Balance Sheet Opportunities, Government Securities, Growth Opportunities, High
Yield Fund III, and SmallCap Opportunities Funds are held by State Street, One
Heritage Drive, North Quincy, MA 02171, as Custodian, which takes no part in the
decisions relating to the purchase or sale of a Fund's portfolio securities.
The cash and securities owned by each other 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 a Fund's portfolio securities.
LEGAL COUNSEL
Legal matters for each Company are passed upon by Dechert Price & Rhoads,
1775 Eye Street, N.W., Washington, D.C. 20006.
139
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP, 355 South Grand Avenue, Los Angeles, California 90071, acts as
independent auditors for Advisory Funds, Investment Funds, Bank and Thrift Fund,
Government Securities Income Fund and the Pilgrim Mutual Funds.
PricewaterhouseCoopers LLP, 1301 Avenue of the Americas, New York, New York
10019, acts as independent auditors for the SmallCap Opportunities Fund, Growth
Opportunities Fund, Equity Trust, Mayflower Trust, Balance Sheet Opportunities
Fund, Government Securities Fund and High Yield Fund III.
OTHER INFORMATION
Each Company is registered with the SEC as an open-end management
investment company. Such registration does not involve supervision of the
management or policies of the Company by any governmental agency. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in each Company's Registration Statement filed with the SEC and copies
of this information may be obtained from the SEC upon payment of the prescribed
fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statement audited by independent
certified public accountants.
REPORTS TO SHAREHOLDERS
The fiscal year of the Funds which comprise the Mayflower Trust ends on
October 31. The fiscal year of the Funds which comprise the Bank and Thrift
Fund, Advisory Funds, Investment Funds, Pilgrim Mutual Funds, and the Government
Securities Income Fund, ends on June 30. The fiscal year of Funds which comprise
the Equity Trust, SmallCap Opportunities Fund, Growth Opportunities Fund,
Balance Sheet Opportunities Fund, Government Securities Fund, and the High Yield
Fund III ends on December 31. Each Fund will send financial statements to its
shareholders at least semiannually. An annual report containing financial
statements audited by the independent accountants will be sent to shareholders
each year.
YEAR 2000 COMPLIANCE
The services provided to the Funds by the Investment Manager, the
Sub-Advisers, the Administrator and the Funds' other service providers are
dependent on those service providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative
implication on handling securities trades, pricing and account services. The
Investment Manager, the Sub-Advisers, the Administrator and the Funds' other
service providers are taking steps that each believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that they use.
Although there can be no assurances, the Funds believe these steps will be
sufficient to avoid any material adverse impact on the Funds. The costs or
consequences of incomplete or untimely resolution of the Year 2000 Issue are
unknown to the Investment Manager, Sub-Advisers, Administrator and the Funds'
other service providers at this time but could have a material adverse impact on
the operations of the Funds and the Investment Manager, Sub-Advisers,
Administrator and the Funds' other service providers. Further, there can be no
assurances, that the systems of the companies in which the Funds invest will be
timely converted or that the value of such investments will not be adversely
affected by the Year 2000 Issue.
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DECLARATION OF TRUST
The Equity Trust, SmallCap Opportunities Fund, Growth Opportunities Fund,
Mayflower Trust, Balance Sheet Opportunities Fund, Government Securities Fund,
and High Yield Fund III are organized as Massachusetts business trusts. The
Declaration of Trust of each of these Funds provides that obligations of the
Fund are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trust or its investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Fund shall be enforceable against the assets and property of such
Fund only, and not against the assets or property of any other Fund or the
investors therein.
FINANCIAL STATEMENTS
The financial statements from the Funds' June 30, 1999 Annual Reports (for
Bank and Thrift Fund, Advisory Funds, Investment Funds, Pilgrim Mutual Funds,
and Government Securities Income Fund), December 31, 1998 Annual Report and June
30, 1999 Semi-Annual Report (Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Fund, Government Securities
Fund, and High Yield Fund III), and October 31, 1999 Annual Report (for
Mayflower Trust) are incorporated herein by reference. Copies of the Funds'
Annual and Semi-Annual Reports may be obtained without charge by contacting
Pilgrim Funds at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004,
(800) 992-0180. There are no financial statements for the Money Market Fund at
this time.
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