STATEMENT OF ADDITIONAL INFORMATION
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
May 1, 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 International Value Fund
Pilgrim Research Enhanced Index Fund
<PAGE>
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 May 1, 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 May 1, 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, 1999 (Equity Trust, SmallCap
Opportunities Fund, and Growth Opportunities Fund), the Annual Report dated
October 31, 1999 (Mayflower Trust) and the Annual Report dated June 30, 1999 and
Semi-Annual Report dated December 31, 1999 (Bank and Thrift Fund, Advisory
Funds, Investment Funds, Pilgrim Mutual Funds, and Government Securities Income
Fund) are incorporated herein by reference. Copies of the Funds' Prospectus and
Annual or Semi-Annual Reports 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................................................1
MANAGEMENT OF THE FUNDS........................................................4
INVESTMENT MANAGER FEES.......................................................17
EXPENSE LIMITATION AGREEMENTS.................................................24
RULE 12B-1 PLANS..............................................................27
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS.......................................35
INVESTMENT RESTRICTIONS.......................................................81
PORTFOLIO TRANSACTIONS.......................................................100
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................104
DETERMINATION OF SHARE PRICE.................................................110
SHAREHOLDER INFORMATION......................................................111
SHAREHOLDER SERVICES AND PRIVILEGES..........................................112
DISTRIBUTIONS................................................................114
TAX CONSIDERATIONS...........................................................115
CALCULATION OF PERFORMANCE DATA..............................................121
GENERAL INFORMATION..........................................................129
FINANCIAL STATEMENTS.........................................................131
i
<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. 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."
The Directors have approved an Agreement and Plan of Reorganization for
MidCap Value Fund that, if approved by shareholders of MidCap Value Fund, will
result in the reorganization of Pilgrim MidCap Value Fund into the Pilgrim
MagnaCap Fund series of Pilgrim Investment Funds, Inc. If the Agreement and Plan
of Reorganization is approved by shareholders, the Reorganization is expected to
occur in the summer of 2000.
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."
The Directors have approved an Agreement and Plan of Reorganization for
High Yield Fund that, if approved by shareholders of the Pilgrim Strategic
Income Fund series of Pilgrim Mutual Funds, will result in the reorganization of
Pilgrim Strategic Income Fund into the Pilgrim High Yield Fund. If the Agreement
and Plan of Reorganization is approved by shareholders, the Reorganization is
expected to occur in the summer of 2000.
1
<PAGE>
The Directors have approved an Agreement and Plan of Reorganization for
MagnaCap Fund that, if approved by shareholders of MidCap Value Fund, will
result in the reorganization of MidCap Value Fund into MagnaCap Fund. If the
Agreement and Plan of Reorganization is approved by shareholders, the
Reorganization is expected to occur in the summer of 2000.
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.
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
Strategic Income Fund that, if approved by shareholders of Strategic Income
Fund, will result in the reorganization of Strategic Income Fund into the High
Yield Fund. If the Agreement and Plan of Reorganization is approved by
shareholders, the Reorganization is expected to occur in the summer of 2000.
2
<PAGE>
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.
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 one of its series, 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 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 Mayflower Trust, were
organized in 1998.
3
<PAGE>
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
Northstar Advantage High Total Return Fund) Pilgrim High Total Return Fund
Northstar High Total Return Fund II Pilgrim High Total Return Fund II
Northstar International Value Fund Pilgrim International Value Fund
Northstar Research Enhanced Index Fund Pilgrim Research Enhanced Index Fund
</TABLE>
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 and Growth
Opportunities 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 Manager.
AL BURTON. (Age 72) 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 Manager.
PAUL S. DOHERTY. (Age 66) Director. President, of Doherty, Wallace,
Pillsbury and Murphy, P.C., Attorneys. Mr. Doherty was formerly a
Director of Tambrands, Inc. (1993 - 1998). Mr. Doherty is also a
Director and/or Trustee of each of the Funds managed by the Investment
Manager.
4
<PAGE>
ROBERT B. GOODE. (Age 69) Director. Currently retired. Mr. Goode was
formerly Chairman of American Direct Business Insurance Agency, Inc.
(1996 - 2000), 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 Manager.
ALAN L. GOSULE. (Age 59) Director. Partner, Rogers & Wells (since
1991). Mr. Gosule is a Director of F.L. Putnam Investment Management
Co., Inc, Simpson Housing Limited Partnership, Home Properties of New
York, Inc., CORE Cap, Inc. and Colonnade Partners. Mr. Gosule is also a
Director and/or Trustee of each of the Funds managed by the Investment
Manager.
*MARK LIPSON. (Age 51) Director. Formerly Chairman and Director of
Pilgrim Advisors, Inc. Director of Pilgrim Funding, Inc. Mr. Lipson was
formerly Chairman of Pilgrim Capital 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 Manager.
WALTER H. MAY. (Age 63) Director. Retired. Mr. May was formerly
Managing Director and Director of Marketing for Piper Jaffray, Inc. Mr.
May is also a Director and/or Trustee of each of the Funds managed by
the Investment Manager.
JOCK PATTON. (Age 54) Director. Private Investor. Director of Hypercom
Corporation (since January 1999), and JDA Software Group, Inc. (since
January 1999). Mr. Patton is also a Director of Buick of Scottsdale,
Inc., National Airlines, Inc., BG Associates, Inc. , BK Entertainment,
Inc., Arizona Rotorcraft, Inc. and Director and Chief Executive Officer
of Rainbow Multimedia Group, Inc. Mr. Patton was formerly Director of
Stuart Entertainment, Inc., Director of Artisoft, Inc. (August 1994 -
July 1998); 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
Manager.
DAVID W.C. PUTNAM. (Age 60) Director. President and Director of F.L.
Putnam Securities Company, Inc. and affiliates. Mr. Putnam is Director
of Anchor Investment Trusts, the Principled Equity Market Trust, and
Progressive Capital Accumulation Trust. Mr. Putnam was formerly
Director of Trust Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is
also a Director and/or Trustee of each of the Funds managed by the
Investment Manager.
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 (since 1979),
Vice-Chairman of MHI, Inc. (Massachusetts non-profit Energy Purchasers
Consortium) (since 1996), 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 Manager.
5
<PAGE>
*ROBERT W. STALLINGS. (Age 51) 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 Manager.
*JOHN G. TURNER. (Age 60) Chairman. Chairman and Chief Executive
Officer of ReliaStar Financial Corp. and ReliaStar 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 Manager.
DAVID W. WALLACE. (Age 76) Director. Chairman of FECO Engineered
Systems, Inc. Mr. Wallace is President and Director/Trustee of the
Robert R. Young Foundation, Governor of the New York Hospital, Trustee
of Greenwit Hospital and Director of UMC Electronics and Zurn
Industries, Inc. Mr. Wallace was formerly Chairman of Lone Star
Industries, Putnam Trust Company, Chairman 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 Manager.
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/Trustees serve in common as Directors/Trustees (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).
COMPENSATION OF DIRECTORS/TRUSTEES
The following tables set forth information regarding compensation of
Directors/Trustees 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, 1999, as applicable. Officers of the Companies and Directors/Trustees 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/Trustees," the number in parentheses indicates the total number of
boards in the fund complex on which the Director/Trustees served during that
fiscal year.
6
<PAGE>
COMPENSATION TABLE*
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Aggregate Aggregate
Compensation Compensation Compensation Aggregate Compensation Compensation
From Pilgrim From Smallcap From Growth Compensation From From
Name of Mutual Opportunities Opportunities From Equity Mayflower Advisory
Person, Position Funds(1)(5)(6) Fund(2)(6) Fund(2)(6) Trust(2)(6) Trust(4)(3)(6) Funds(1)
---------------- -------------- ---------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Dann V. Angeloff(7) $25,000 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
Former Director
Walter E. Auch(8) $20,476 N/A N/A N/A N/A $89
Former Director/
Advisory Officer
Mary A. $1,476 $385 $385 $385 N/A $1,248
Baldwin(9)(10)
Director
John P. Burke $1,476 N/A N/A N/A N/A $1,248
Former Director
(9)(11)
Al Burton(9)(10) $1,476 $385 $385 $385 N/A $1,248
Director
Theodore J. $24,000 N/A N/A N/A N/A N/A
Coburn(7)
Former Director
Darlene Deremer(7) $21,000 N/A N/A N/A N/A N/A
Former Director
Paul S. Doherty (9) N/A $1,491 $1,493 $1,375 $8,086 N/A
(12) Director
Bruce S. Foerster N/A N/A N/A N/A N/A $600
Former Director (13)
Robert B. Goode, Jr. N/A $1,453 $1,455 $1,337 $7,817 N/A
Director (9)(12)
Alan S. Gosule (9)(12) N/A $1,346 $1,346 $1,346 $6,731 N/A
Director
George F. Keane(7) $23,000 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
Former Director
Total
Aggregate Pension or Compensation
Compensation Retirement From
Aggregate Aggregate From Benefits Estimated Registrant
Compensation Compensation Government Accrued Annual and Fund
From From Bank Securities as Part of Benefits Complex Paid
Name of Investment and Thrift Income Fund Upon to
Person, Position Funds(1) Fund(1) Fund(1) Expenses Retirement Directors(2)
---------------- -------- ------- ------- -------- ---------- ------------
Dann V. Angeloff(7) 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 None N/A $22,000
Former Director (1 board)
Walter E. Auch(8) $643 $553 $26 N/A N/A $21,787
Former Director/ (6 boards)
Advisory Officer
Mary A. $8,028 $8,422 $388 N/A N/A $19,241
Baldwin(9)(10) (13 boards)
Director
John P. Burke $8,028 $8,422 $388 N/A N/A $19,562
Former Director (6 boards)
(9)(11)
Al Burton(9)(10) $8,028 $8,422 $388 N/A N/A $20,717
Director (13 boards)
Theodore J. N/A N/A N/A None N/A $24,000
Coburn(7) (1 board)
Former Director
Darlene Deremer(7) N/A N/A N/A None N/A $21,000
Former Director (1 board)
Paul S. Doherty (9) N/A N/A N/A N/A N/A $12,445
(12) Director (13 boards)
Bruce S. Foerster $3,434 $4,222 $134 N/A N/A $8,390
Former Director (13) (5 boards)
Robert B. Goode, Jr. N/A N/A N/A N/A N/A $12,062
Director (9)(12) (13 boards)
Alan S. Gosule (9)(12) N/A N/A N/A N/A N/A $10,769
Director (13 boards)
George F. Keane(7) 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 None N/A $18,000
Former Director (1 board)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Aggregate Aggregate
Compensation Compensation Compensation Aggregate Compensation Compensation
From Pilgrim From Smallcap From Growth Compensation From From
Name of Mutual Opportunities Opportunities From Equity Mayflower Advisory
Person, Position Funds(1)(5)(6) Fund(2)(6) Fund(2)(6) Trust(2)(6) Trust(4)(3)(6) Funds(1)
---------------- -------------- ---------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Lipson N/A $0 $0 $0 $0 N/A
Director (9)(12)(14)
Walter H. May (9)(12) N/A $1,491 $1,493 $1,375 $8,087 N/A
Jock Patton (9)(10) 1,476 $385 $385 $385 N/A $1,229
Director
David W.C. Putnam N/A $1,353 $1,321 $1,062 $7,466 N/A
Director (9)(12)
John R. Smith (9)(12) N/A $1,491 $1,493 $1,375 $8,086 N/A
Director
Robert W. Stallings $0 $0 $0 $0 N/A $0
(9)(10)(14)
Director
John G. Turner N/A $0 $0 $0 $0 N/A
(9)(12)(14)
Director
David W. Wallace(9)(12) N/A $1,392 $1,359 $1,100 $7,735 N/A
Charles E. Young(7) $23,000 N/A N/A N/A N/A N/A
Former Director
Total
Aggregate Pension or Compensation
Compensation Retirement From
Aggregate Aggregate From Benefits Estimated Registrant
Compensation Compensation Government Accrued Annual and Fund
From From Bank Securities as Part of Benefits Complex Paid
Name of Investment and Thrift Income Fund Upon to
Person, Position Funds(1) Fund(1) Fund(1) Expenses Retirement Directors(2)
---------------- -------- ------- ------- -------- ---------- ------------
Mark L. Lipson N/A N/A N/A N/A N/A $0
Director (9)(12)(14) (13 boards)
Walter H. May (9)(12) N/A N/A N/A N/A N/A $12.446
(13 boards)
Jock Patton (9)(10) $7,883 $8,291 $381 N/A N/A $20.415
Director (13 boards)
David W.C. Putnam N/A N/A N/A N/A N/A $11.202
Director (9)(12) (13 boards)
John R. Smith (9)(12) N/A N/A N/A N/A N/A $12.445
Director (13 boards)
Robert W. Stallings $0 $0 $0 N/A N/A $0
(9)(10)(14) (13 boards)
Director
John G. Turner N/A N/A N/A N/A N/A $0
(9)(12)(14) (13 boards)
Director
David W. Wallace(9)(12) N/A N/A N/A N/A N/A $11.586
(13 boards)
Charles E. Young(7) 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, 1999.
(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.
8
<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. He
resigned as Trustee effective October 29, 1999.
(9) Also serves as a member of the Board of Trustees of the Pilgrim Prime Rate
Trust. Mr. Burke served as a member of the Board of Trustees of Pilgrim
Prime Rate Trust until October 29, 1999. Mr. Foerster served as a member of
the Board of Trustees of Pilgrim Prime Rate Trust until September 30, 1998.
(10) Elected a Trustee or non-voting advisory board member of SmallCap
Opportunities Fund, Growth Opportunities Fund, Equity Trust and Mayflower
Trust 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.
9
<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).
10
<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 PORTFOLIO MANAGER.
(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 MANAGER.
(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 PORTFOLIO MANAGER.
(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, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER.
(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 PORTFOLIO MANAGER. (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 PORTFOLIO MANAGER. (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 PORTFOLIO MANAGER. (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).
11
<PAGE>
MAYFLOWER TRUST
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER.
(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 PORTFOLIO MANAGER. (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 PORTFOLIO MANAGER. (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 PORTFOLIO MANAGER. (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 PORTFOLIO MANAGER. (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).
12
<PAGE>
PRINCIPAL SHAREHOLDERS
As of April 5, 2000, the Directors/Trustees 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 Percentage
Fund Address Ownership of Class of Fund
---- ------- --------- -------- -------
<S> <C> <C> <C> <C>
Pilgrim IFTC Cust Class C 6.58% 0.45750%
LargeCap Albert Skarzynski Record Holder
Leaders Fund 136 Hawthorne Dr.
Fairfield, CT 06432-1101
Pilgrim Loretta and Susan Weber Ttees Class C 5.05% 0.35102%
LargeCap Joyce Weber Family Trust Record Holder
Leaders Fund 25 Cartwright St Apt 4D
Bridgeport, CT 06604-2018
Pilgrim Marianne Glazer Succ-Ttee Class C 5.94% 0.11619%
MidCap Dennis Glazer Short Term Tr Record Holder
Value Fund 5219 Beechgrove Ave NE
Canton, OH 44705-3119
Pilgrim PaineWebber FBO Class C 36.50% 0.71382%
MidCap Steven and Cindy Friedman JTWROS Record Holder
Value Fund 27655 Middlebelt
Farmington Hills, MI 48334-5029
Pilgrim Donald Pels Class Q 31.47% 0.85886
MidCap 375 Park Ave, Ste 3305 Record Holder
Growth Fund New York, NY 10152-3399
Pilgrim Suntrust Bank Central FL Ttee FBO Class Q 18.13% 0.40869%
SmallCap Akerman Senterfitt & Edison Record Holder
Growth Fund c/o Fascorp Record Keeper
8515 E Orchard Road
Englewood, CO 80111-5037
Pilgrim Suntrust Bank Central FL Ttee FBO Class Q 15.34% 0.34588%
SmallCap Hubbard Construction Emp PSP & 401K Record Holder
Growth Fund c/o Fascorp Record Keeper
8515 E Orchard Road
Englewood, CO 80111-5037
Pilgrim Susan Rand Class Q 9.75% 0.21992%
SmallCap PO Box 452 Record Holder
Growth Fund Salisbury, CT 06068-0452
Pilgrim Virg & Co Class Q 85.91% 0.91882%
International C/o Wells Fargo Bank Record Holder
Value Fund PO Box 9800 Mac E2151-028
Calabasas, CA 91372-0800
Pilgrim Trust Company of America Class A 8.54% 2.44400%
International 7103 S Revere Pkwy Record Holder
Core Growth Englewood, CO 80112-3936
Fund
Pilgrim PaineWebber FBO Class A 7.73% 2.21191%
International Thomas Sloan Record Holder
Core Growth 705 Sunset Drive
Fund Greensboro, NC 27408-6414
Pilgrim PaineWebber FBO Class C 5.65% 1.65299%
International Arnold Richman Record Holder
Core Growth 218 North Charles St, Ste 500
Fund Baltimore, MD 21201-4019
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Class and
Type of Percentage Percentage
Fund Address Ownership of Class of Fund
---- ------- --------- -------- -------
<S> <C> <C> <C> <C>
Pilgrim PaineWebber FBO Class A 7.48% 3.39196%
Emerging Margo Schwartz Retained Annuity Tr Record Holder
Markets Larry Schwartz Ttee
Value Fund 19 Rural Drive
Scarsdale, NY 10583-7734
Pilgrim Asia Interra Clearing Services FBO Class A 11.86% 5.34343%
Pacific Equity Ronald Sandler & Perle Ann Kagan Record Holder
Fund 100 Oxford Dr. #902
Pilgrim Asia Conti Investments LLC Class A 6.72% 3.03001%
Pacific Equity C/o Continental Grain Co. Record Holder
Fund Attn: Mary Greenebaum
277 Park Ave
New York, NY 10172-0003
Pilgrim McDonald Investments Inc Cust Class C 13.87% 0.37371%
Government Joseph Nemeth IRA Record Holder
Securities 1424 Echo Lane
Income Fund Bloomfield, MI 48302-1939
Pilgrim McDonald & Co Securities FBO Class C 24.16% 0.65096%
Government Joseph Nemeth Record Holder
Securities 1424 Echo Lane
Income Fund Bloomfield, MI 48302-1939
Pilgrim First Clearing Corp Cust Class M 5.55% 0.02768%
Government Charles Banks IRA Record Holder
Securities 4723 East 138th Terrace
Income Fund Grandview, MO 64030-3682
Pilgrim George & Florence Leslie Tr Class M 8.07% 0.04024%
Government Leslie Family Trust Record Holder
Securities PO Box 70400
Income Fund Pasadena, CA 91117-7400
Pilgrim Prudential Securities FBO Class M 27.42% 0.13662%
Government Dr Antonio Aguirre Record Holder
Securities Zeisselstr 8
Income Fund 60318 Frankfort, Germany
Pilgrim Prudential Securities FBO Class M 8.62% 0.04296%
Government Kathleen Doyle Record Holder
Securities PO Box 333
Income Fund Laclede, ID 83841-0333
Pilgrim PaineWebber Cust FBO Class M 6.84% 0.03411%
Government Larry Randolph Record Holder
Securities PO Box 3321
Income Fund Weehawken, NJ 07087-8154
Pilgrim Eastern Bank & Trust FBO Class A 13.42% 3.14586%
Strategic Munksjo Paper 401K Record Holder
Income Fund 217 Essex St
Salem, MA 01970-3792
Pilgrim Dain Rauscher Inc FBO Class A 8.18% 1.91741%
Strategic Tamara Ford-McGowen Record Holder
Income Fund 5233 Palomar Lane
Dallas, TX 75229-6409
Pilgrim Wachovia Securities FBO Class C 6.06% 2.09241%
Strategic 288-00397-10 Record Holder
Income Fund PO Box 1220
Charlotte, NC 28201-1220
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Class and
Type of Percentage Percentage
Fund Address Ownership of Class of Fund
---- ------- --------- -------- -------
<S> <C> <C> <C> <C>
Pilgrim High New Life Corp of America FBO Class A 5.84% 1.65111%
Yield Fund Norvell Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Olde Discount FBO #09005070 Class C 5.99% 0.10289%
Yield Fund 751 Griswold St Record Holder
Detriot, MI 48226-3224
Pilgrim High Prudential Securities Inc FBO Class C 5.10% 0.08755%
Yield Fund Major III LP A/C #2 PMB#916 Record Holder
12555 Biscayne Blvd
North Miami, FL 33181-2522
Pilgrim High Farzin Hatami Class M 5.48% 0.25516%
Yield Fund 1010 Beethoven Common #301 Record Holder
Fremont, CA 94538-4627
Pilgrim High New Life Corp of America FBO Class C 8.90% 0.11226%
Yield Fund II Norvell Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Prudential Securities FBO Class A 6.58% 0.84319%
Total Return Richard Simon Ttee Record Holder
II Fund Richard Simon Rev Trust
Aventura, FL 33180-2566
Pilgrim Dawn & Co. Class A 20.35% 12.08282%
Money C/o Webster Trust Record Holder
Market Fund 346 Main St
Kensington, CT 06037-2652
Pilgrim FMCO Class A 18.57% 11.02608%
Money C/o The Huntington National Bank Record Holder
Market Fund 1 Financial Plz
Holland, MI 49423-9166
Pilgrim Trust Company of America Class A 9.74% 5.78031%
Money 7103 S Revere Pkwy Record Holder
Market Fund Englewood, CO 80112-3936
Pilgrim Salomon Smith Barney Inc FBO Class C 15.08% 2.34502%
Money #00119616243 Record Holder
Market Fund 333 West 34th St, 3rd Floor
New York, NY 10001
Pilgrim CIBC World Markets Corp FBO Class C 23.70% 3.68640%
Money #076-12096-18 Record Holder
Market Fund Church Street Station
New York, NY 10008-3484
Pilgrim CIBC World Markets Corp FBO Class C 7.59% 1.18012%
Money #076-11325-13 Record Holder
Market Fund Church Street Station
New York, NY 10008-3484
Pilgrim Trust Company of America Class Q 10.34% 1.23237%
Convertible 7103 S Revere Pkwy Record Holder
Fund Englewood, CO 80112-3936
Pilgrim Knauss Family LLC Class Q 7.25% 0.86471%
Convertible PO Box 1108 Record Holder
Fund Carefree, AZ 85377-1108
</TABLE>
15
<PAGE>
INVESTMENT MANAGERS
The Investment Manager for the Funds is Pilgrim Investments, Inc.
("Pilgrim Investments" or the "Investment Manager"). Prior to April 30, 2000,
Pilgrim Advisors, Inc. ("Pilgrim Advisors", formerly Northstar Investment
Management Corporation) served as investment adviser to certain of the Funds. On
April 30, 2000, Pilgrim Advisors, an indirect wholly-owned subsidiary of
ReliaStar, merged with Pilgrim Investments. Pilgrim Advisors and Pilgrim
Investments were sister companies and share certain resources and investment
personnel.
The Investment Manager, subject to the authority of the
Directors/Trustees of the Funds, serves as investment manager to the Funds and
has overall responsibility for the management of each Funds' portfolio, 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, and Convertible
Fund, 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. 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. The Investment Manager oversees the
investment management of the Sub-Advisers for the Funds which are managed by a
Sub-Adviser.
Pilgrim Investments, Inc. is registered as an investment adviser with
the SEC and serves as an investment adviser to registered investment companies
(or series thereof), as well as privately managed accounts. As of February 29,
2000, Investment Manager and its affiliate Pilgrim Advisors had assets under
management of approximately $16.6 billion. Pilgrim Investments, Inc. is a
wholly-owned subsidiary of ReliaStar Financial Corp. (NYSE:RLR). Through its
subsidiaries, ReliaStar Financial Corp. offers individuals and institutions life
insurance and annuities, employee benefits products and services, life and
health reinsurance, retirement plans, mutual funds, bank products and personal
finance education.
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).
16
<PAGE>
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
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 average
Growth Fund 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 average
Growth Fund 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 Fund* 0.50% of average net assets if the Fund has not
invested substantially all of its assets in another
investment company, 0.15% 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)
- ----------
* The Money Markey 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.
17
<PAGE>
Series Annual Investment Management Fee
- ------ --------------------------------
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 1/12 of 1.25% of the Fund's average daily net assets
Fund* 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 the
Income Fund 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
SmallCap Opportunities 0.75% of the Fund's average daily net assets
Fund
MidCap Opportunities 1.00% of the Fund's average daily net assets
Fund
Growth Opportunities 0.75% of the Fund's average daily net assets
Fund
Growth + Value Fund 1.00% of the Fund's average daily net assets
International Value 1.00% of the Fund's average daily net assets
Fund
Emerging Markets 1.00% of the Fund's average daily net assets
Value Fund
Research Enhanced 0.70% of the Fund's average daily net assets
Index Fund
High Total Return 0.75% of the Fund's average daily net assets
Fund II
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).
18
<PAGE>
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/Trustees, 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").
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/Trustees 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 Investments 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 Investments 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 Investments. 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 Investments 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
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. Fees payable under the Sub-Advisory Agreements accrue daily and
are paid monthly by Pilgrim Investments. 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.
19
<PAGE>
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments 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 Investments 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 Investments. J.P. Morgan's address is 522 Fifth Avenue, New
York, New York 10036.
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 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 Directors
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
- ------ -----------------------
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 0.625% of the Fund's average net assets
Fund
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 average
Growth Fund 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 average
Growth Fund 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
20
<PAGE>
Series Annual Sub-Advisory Fee
- ------ -----------------------
Growth + Value Fund 0.50% of the Fund's average daily net assets
International Value 0.50% of the Fund's average daily net assets
Fund
Emerging Markets Fund 0.50% of the Fund's average daily net assets
Research Enhanced 0.20% of the Fund's average daily net assets
Index Fund
Asia-Pacific Equity 1/12 of .50% of the Fund's average daily net assets
Fund
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.
FORMER SUB-ADVISER FOR SMALLCAP OPPORTUNITIES FUND. Navellier Fund Management,
Inc. ("Navellier") served as Sub-Adviser to SmallCap Opportunities Fund through
July, 1998. For the fiscal years ended December 31, 1997 and 1998, the
Investment Manager paid portfolio management fees to Navellier of $1,498,283 and
$789,408, respectively.
FORMER SUB-ADVISER FOR SMALLCAP GROWTH FUND AND MIDCAP GROWTH FUND.
Nicholas-Applegate Capital Management ("NACM") served as Sub-Adviser to SmallCap
Growth Fund and MidCap Growth Fund through March 31, 2000. For the fiscal period
of April 1, 1999 to June 30, 1999, the Investment Manager paid portfolio
management fees to NACM of $157,474 with respect to the SmallCap Growth Fund and
$105,229 with respect to the MidCap Growth Fund. Prior to May 24, 1999, NACM was
the investment adviser of the Funds, and neither the Funds nor NACM paid
portfolio management fees.
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, SmallCap Opportunities Fund and Growth Opportunities Fund. 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
21
<PAGE>
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.
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 BY 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 $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
LargeCap Leaders Fund 300,494 286,830 N/A 174,325 N/A
MidCap Value Fund 670,780 678,816 N/A 250,512 N/A
Asia Pacific Equity Fund 303,920 553,589 N/A 773,252 N/A
High Yield Fund 2,176,246 977,868 N/A 332,032 N/A
Bank and Thrift Fund(3) 5,893,806 2,446,063 N/A 2,361,103 N/A
MagnaCap Fund 3,200,909 2,846,061 N/A 2,157,744 N/A
Government Securities Income Fund 189,816 144,487 N/A 170,619 N/A
</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.
22
<PAGE>
(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.
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID BY 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(2)
---------- ---------- ---------- ---------- ---------- ----------
<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
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 AND GROWTH OPPORTUNITIES FUND
DURING FISCAL YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees Fees
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SmallCap Opportunities Fund $1,915,854 $ 255,447 $2,033,840 $ 392,303 $2,341,067 $ 266,145
MidCap Opportunities Fund(1),(2) $ 483,746 $ 48,903 73,797 7,380 N/A N/A
Growth Opportunities Fund(1) $1,865,457 $ 248,728 1,541,921 239,970 1,412,949 136,648
</TABLE>
- ----------
(1) Does not reflect expense reimbursement of $37,687 for the MidCap
Opportunities Fund for the year ended December 31, 1998; and expense
reimbursement of $10,635 for the Growth Opportunities Fund for the year
ended December 31, 1997.
(2) The MidCap Opportunities Fund commenced operations on August 20, 1998.
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
23
<PAGE>
(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, 1999, 1998, and 1997, the
SmallCap Opportunities Fund paid the following subadvisory fees:
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 agreements 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:
<TABLE>
<CAPTION>
Fund Class A Class B Class C Class M Class Q Class T
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund 2.00% 2.75% N/A 2.50% N/A N/A
SmallCap Growth Fund 1.95% 2.60% 2.60% N/A 1.50% N/A
MidCap Growth Fund 1.60% 2.25% 2.25% N/A 1.25% N/A
MidCap Value Fund 1.75% 2.50% 2.50% 2.25% 1.75% N/A
LargeCap Growth Fund 1.60% 2.25% 2.25% N/A 1.25% N/A
LargeCap Leaders Fund 1.75% 2.50% 2.50% 2.25% 1.75% N/A
Convertible Fund 1.60% 2.25% 2.25% N/A 1.25% N/A
Balanced Fund 1.60% 2.25% 2.25% N/A 1.25% 1.75%
Strategic Income Fund 0.95% 1.35% 1.35% N/A 0.85% N/A
High Yield Fund II 1.10% 1.75% 1.75% N/A 1.00% 1.40%
Emerging Countries Fund 2.25% 2.90% 2.90% N/A 1.90% N/A
Worldwide Growth Fund 1.85% 2.50% 2.50% N/A 1.60% N/A
International SmallCap Growth Fund 1.95% 2.60% 2.60% N/A 1.65% N/A
International Core Growth Fund 1.95% 2.60% 2.60% N/A 1.65% N/A
Money Market Fund 1.50% 2.25% 2.25% N/A N/A N/A
High Yield Fund 1.10% 1.85% 1.85% 1.60% 1.10% N/A
</TABLE>
24
<PAGE>
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 Fund 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 Fund, 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 Funds, excluding distribution fees,
interest, taxes, brokerage and extraordinary expenses, up to 0.75%.
The voluntary fee reductions are as follows:
<TABLE>
<CAPTION>
June 30 March 31
---------- ------------------------------------
Fund 1999(1) 1999 1998 1997
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
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:
25
<PAGE>
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 1.10% 1.85% 1.85% 1.60% 1.10%
termination of Agreement
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)
fees on Class B and Class M shares in excess of an annual rate of 0.25% of the
average daily net assets of these classes, exceed 1.50% of 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/Trustees who are not parties to such agreement or "interested persons"
of any such party and must be approved either by votes of a majority of the
Directors/Trustees 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; $0 with respect to Class B shares; and $247,753 with respect to
Class C shares.
26
<PAGE>
For the fiscal year ended December 31, 1999, 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, and Growth Opportunities Fund: with $120,758 respect to Class A
shares; $0 with respect to Class B shares; $12,665 with respect to Class C
shares; and $637 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 and Class T
shares in amounts as set forth in the following table. The Funds do not have a
12b-1 Plan with respect to the Institutional Class.
<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
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
</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
27
<PAGE>
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% (0.75% 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 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, and Class T Shares.
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/Trustees of each Fund, including all of the Directors/Trustees 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/Trustees,
including a majority of the Directors/Trustees 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/Trustees be committed to the Directors/Trustees who are not interested
28
<PAGE>
persons. Each Rule 12b-1 Plan and any distribution or service agreement may be
terminated as to a Fund at any time, without any penalty, by such
Directors/Trustees or by a vote of a majority of 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/Trustees has
determined that differing distribution arrangements in connection with the sale
of new shares of a Fund is necessary and appropriate in order to meet the needs
of different potential investors. Therefore, the Board of Directors/Trustees,
including those Directors/Trustees who are not interested persons of the
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 material amendments to a Plan or any distribution or service agreement shall
be approved by the Directors/Trustees who are not interested persons of the
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/Trustees 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, 1999, 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 ........................ $ 82,907 $ 86,194 $ 51,021
Commissions Paid ......................... 1,500 10,976 45,766
Marketing, RMM, & Convention Expense ..... 57,408 63,833 42,170
-------- -------- --------
Total .................................... 141,815 161,003 138,957
MIDCAP OPPORTUNITIES FUND
Salaries/Overides ........................ $ 4,199 $ 2,218 $ 2,007
Commissions Paid ......................... 1,260 0 7,613
Marketing, RMM, & Convention Expense ..... 21,708 15,431 15,539
-------- -------- --------
Total .................................... 27,167 17,649 25,159
GROWTH OPPORTUNITIES FUND
Salaries/Overides ........................ $ 88,477 $ 29,860 $ 8,253
Commissions Paid ......................... 2,760 404 21,466
Marketing, RMM, & Convention Expense ..... 45,769 17,028 9,261
-------- -------- --------
Total .................................... 137,006 47,292 38,980
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 1,205 1,080 1,003
Miscellaneous ...................... 852 626 561 521
TOTAL .............................. 11,397 8,375 7,503 6,972
29
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- --------------------- -------- -------- -------- --------
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
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
30
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- --------------------- -------- -------- -------- --------
BALANCED FUND
Advertising ........................ $ 17 $ 11 $ 5 $ 0
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 $ 45,963
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
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
31
<PAGE>
Distribution Expenses Class A Class B Class C
- --------------------- ---------- ---------- ----------
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
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.
32
<PAGE>
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, and certain Funds did not offer
Class T shares until January 4, 2000):
<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
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
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Distribution Expenses Class A Class B Class C Class M Class Q
- --------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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, Pilgrim Mutual Funds had a Distribution Plan
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:
Fund Name 12b-1 Payments
--------- --------------
International Core Growth Fund $ 174,064
Worldwide Growth Fund 822,399
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 Advisory
Funds, Investment Funds, Bank and Thrift, Government Securities Income and
Pilgrim Mutual 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.
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OTHER EXPENSES
In addition to the management fee and other fees described previously,
each Fund pays other expenses, such as legal, audit, transfer agency and
custodian out-of-pocket fees, proxy solicitation costs, and the compensation of
Directors/Trustees who are not affiliated with the Investment Manager. Most Fund
expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, the Rule 12b-1 Plan fees for each class of shares are
charged proportionately only to the outstanding shares of that class.
CODE OF ETHICS
The Funds have adopted a Code of Ethics governing personal trading
activities of all Directors/Trustees, officers of the Funds and persons who, in
connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Funds or obtain information pertaining
to such purchase or sale. The Code is intended to prohibit fraud against a Fund
that may arise from personal trading. Personal trading is permitted by such
persons subject to certain restrictions; however they are generally required to
pre-clear all security transactions with the Funds' Compliance Officer or her
designee and to report all transactions on a regular basis. The Sub-Advisers
have adopted their own Codes of Ethics to govern the personal trading activities
of their personnel.
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.
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.
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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.
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).
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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 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.
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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 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
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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
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.
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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.
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
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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.
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
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"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.
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
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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
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
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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.
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.
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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 Total Return Fund II, 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 --
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.
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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/Trustees 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
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
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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
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.
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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, and
Growth Opportunities Fund 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 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
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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.
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
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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.
The Pilgrim Mutual Funds, Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, and Growth Opportunities Fund 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.
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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
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.
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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.
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
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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.
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
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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 Fund) 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.
FOREIGN AND EMERGING MARKET SECURITIES
Each 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 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
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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 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.
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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
(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,
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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 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
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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.
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
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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.
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.
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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
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
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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 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
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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.
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
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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 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
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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 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.
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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.
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.
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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
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.
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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
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
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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 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
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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
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
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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
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.
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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
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.
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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
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.
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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
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.
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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,
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 and Growth Opportunities 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, each of the funds
which comprise the Mayflower Trust, Equity Trust, SmallCap Opportunities Fund,
and Growth Opportunities Fund, 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 each of the funds which
comprise the Pilgrim Mutual Funds, Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, and Growth Opportunities Fund, 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
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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.
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, and
Growth Opportunities Fund, 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.
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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
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
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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).
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.
Pilgrim Mutual Funds, Mayflower Trust and Equity Trust, 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, and Growth Opportunities Fund 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
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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.
SHORT SALES
The Pilgrim Mutual Funds, Mayflower Trust, Mid-Cap Value Fund, Equity
Trust, SmallCap Opportunities Fund, and Growth Opportunities Fund 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
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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
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 Directors/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 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.
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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
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
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(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.
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
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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;
(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.
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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.
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
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techniques, and except for purposes of this investment restriction,
collateral, escrow, or margin or other deposits with respect to the
making of short sales, the purchase or sale of futures contracts or
related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to
be an issuance of a senior security.
The Fund is also subject to the following restrictions and policies
that are not fundamental and may, therefore, be changed by the Board of
Directors without shareholder approval. The Fund will limit its investments in
warrants, valued at the lower of cost or market, to 5% of its net assets.
Included within that amount, but not to exceed 2% of the Fund's net assets, may
be warrants that are not listed on the New York or American Stock Exchange. The
Fund will not engage in the purchase or sale of real estate or real estate
limited 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, AND GROWTH 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. 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
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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%);
(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;
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(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.
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;
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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 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);
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(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;
(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);
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(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;
(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);
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(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
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
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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.
INVESTMENT RESTRICTIONS -- 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 18 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) Purchase a debt security if, as a result, more than 10% of the
outstanding principal amount of the issuer's debt securities would be
held by the Fund, except that this restriction does not apply to
securities issued or guaranteed by the US. Government or its agencies
or instrumentalities.
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(13) 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;
(14) 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;
(15) 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;
(16) Make an investment for the purpose of exercising control over
management;
(17) 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
(18) 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.
As a non-fundamental restriction, High Yield Total Return Fund II and
High Yield Total Return Fund may not purchase a debt security if, as a result,
more than 10% of any class of debt securities would be held by the Fund.
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 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).
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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.
(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.
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(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.
(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 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:
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(1) Issue senior securities. Good faith hedging transactions and similar
investment strategies will not be treated as senior securities for
purposes of this restriction so long as they are covered in accordance
with applicable regulatory requirements and are structured consistent
with current SEC interpretations.
(2) Underwrite securities of other issuers.
(3) Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies,
indexes and options on futures contracts or indexes and currencies
underlying or related to any such futures contracts.
(4) Make loans to persons except (a) through the purchase of a portion of
an issue of publicly distributed bonds, notes, debentures and other
evidences of indebtedness customarily purchased by institutional
investors, (b) by the loan of its portfolio securities in accordance
with the policies described under "Lending of Portfolio Securities,"
or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
(5) Purchase the securities of another investment company or investment
trust, except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
(6) Purchase any securities on margin or effect a short sale of a
security. (This restriction does not preclude the Fund from obtaining
such short-term credits as may be necessary for the clearance of
purchases and sales of its portfolio securities.)
(7) Buy securities from or sell securities to its investment
adviser or principal distributor or any of their affiliates or
any affiliates of its Directors, as principal.
(8) Buy, lease or hold real property except for office purposes. (This
restriction does not preclude investment in marketable securities of
companies engaged in real estate activities.)
(9) As to 75% of the value of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer (other
than the United States Government) or acquire more than 10% of the
outstanding voting securities of any one issuer; but as to the
remaining 25% of its total assets, it retains freedom of action.
(10) Borrow money except from banks for temporary or emergency purposes and
not for investment purposes, and then only in amounts not in excess of
5% of the value of its total assets.
(11) Invest in the securities of any company that, including its
predecessors, has not been in business for at least three years.
(12) Invest more than 25% of the value of its total assets in any one
industry.
(13) Invest in securities of any one issuer for the purpose of exercising
control or management.
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
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positions that are covered by cash or securities; (iv) have more than 5% of its
assets invested in equity securities of issuers that are not readily marketable
and securities of issuers that have been in operation for less than three years;
and (v) invest any part of its total assets in real estate or interests in real
estate, excluding readily marketable securities and real estate used for office
purposes; commodities, other than precious metals not to exceed 10% of the
Fund's total assets; commodity futures contracts or options other than as
permitted by investment companies qualifying for an exemption from the
definition of commodity pool operator; or interests in commodity pools or oil,
gas or other mineral exploration or development programs.
The 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
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deemed within a single class regardless of maturities, priorities,
coupon rates, series, designations, conversion rights, security or
other differences.
(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.
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(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
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
Institutional 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 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 or Sub-Advisory Agreements, each
Investment Manager or Sub Advisor determines, subject to the instructions of and
review by the Board of Directors/Trustees 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 the Investment Manager or a
Sub-Adviser, a better price and execution can otherwise be obtained by using a
broker for the transaction.
In placing portfolio transactions, the 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 Manager 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. The 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 the Investment Manager
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
not imputed to the Fund and were useful to the Investment Manager and/or
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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 the Investment Manager or Sub-Adviser, and the results of such
allocations, are subject to periodic review by the Board of Directors/Trustees.
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.
Brokerage commissions paid by each Fund for previous fiscal
years/periods are as follows:
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<TABLE>
<CAPTION>
June 30 March 31
------------------------ ------------------------
1999 1999 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
For The Fiscal Years Ended June 30
----------------------------------
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
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.
For the Fiscal Years Ended December 31
--------------------------------------
1999 1998 1997
---- ---- ----
SmallCap Opportunities Fund ........ $ 429,651 $957,784 $874,698
Mid-Cap Opportunities Fund ......... 144,341 54,968 N/A
Growth Opportunities Fund .......... 1,091,033 423,680 169,066
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 Manager. The Investment Manager 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
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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-Goldman 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. The holdings
of such brokers and dealers were as follows as of October 31, 1999: Research
Enhanced Index - Goldman Sachs ($923,000).
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
after market 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, 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.
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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. Each
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 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.
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The officers, directors/trustees and bona fide full-time employees of
each 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. Each 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.
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
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<PAGE>
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.
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
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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
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
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.
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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.
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.
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CDSC SCHEDULE FOR SHARES OF THE EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND,
GROWTH OPPORTUNITIES FUND, AND MAYFLOWER TRUST 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:
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
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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.
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
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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 and Class C. It is expected, however, that the per share net asset value
of the classes will tend to converge immediately after the payment of dividends
or distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.
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.
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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.
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.
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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.
(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.
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(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.
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.
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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.
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
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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
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
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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.
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.
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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.
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.
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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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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:
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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
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.
Current yield for the Money Market Fund will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular seven-day period, less a pro rata share of Fund expenses accrued over
that period (the "base period"), and stated as a percentage of the investment at
the start of the base period (the "base period return"). The base period return
is then annualized by multiplying by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. "Effective yield" for
the Money Market Fund assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with the
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The current and effective seven-day average yields as of December 31,
1999 for the Money Market Fund were 3.46% and 3.52%, respectively, for each
class (Class A, Class B and Class C).
Quotations of yield for the other Funds 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")
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<PAGE>
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:
6
Yield= 2[(a-b+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.
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.
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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 I, 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 December 31, 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>
High Total Return Fund II......... 12.17% 12.07% 12.06% N/A N/A N/A
High Total Return Fund ........... 12.59% 12.52% 12.50% N/A N/A N/A
High Yield Fund II ............... 10.21% 9.89% 9.97% N/A 10.66% N/A
Convertible Fund ................. 1.63% 1.14% 1.14% N/A 1.83% N/A
Strategic Income Fund ............ 7.31% 7.28% 7.31% N/A 7.73% N/A
Balanced Fund .................... 3.43% 2.98% 2.99% N/A 3.74% N/A
High Yield Fund .................. 10.62% 10.37% 10.35% 10.31% 13.90% N/A
</TABLE>
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
December 31, 1999 (October 31, 1999 for Emerging Markets Value Fund, Growth +
Value Fund, High Total Return Fund, High Total Return Fund II, 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 December 31, 1999, is as
follows:
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<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ------------ ----
<S> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund(1)
Class A 64.46% N/A N/A -3.80% 9/1/95
Class B 68.00% N/A N/A -3.72% 9/1/95
Class M 67.37% N/A N/A -3.86% 9/1/95
LargeCap Leaders Fund(1)
Class A 12.12% N/A N/A 18.68% 9/1/95
Class B 13.19% N/A N/A 19.18% 9/1/95
Class C N/A N/A N/A 7.72% 6/17/99
Class M 14.10% N/A N/A 18.73% 9/1/95
Class Q N/A N/A N/A N/A 11/17/99
MidCap Value Fund(1)
Class A -12.66% N/A N/A 9.77% 9/1/95
Class B -12.56% N/A N/A 10.11% 9/1/95
Class C N/A N/A N/A -9.95% 6/2/99
Class M -10.94% N/A N/A 9.78% 9/1/95
Class Q N/A N/A N/A N/A 11/17/99
MagnaCap Fund(2)
Class A 5.77% 20.24% 14.13% 12.84% 8/30/73
Class B 6.46% N/A N/A 18.74% 7/17/95
Class C N/A N/A N/A 5.04% 6/17/99
Class M 7.74% N/A N/A 18.32% 7/17/95
Class Q N/A N/A N/A 0.81% 11/17/99
High Yield Fund(3)
Class A -5.86% 7.44% 8.56% 9.37% 7/1/74
Class B -6.35% N/A N/A 5.72% 7/17/95
Class C N/A N/A N/A -3.14% 5/27/99
Class M -4.92% N/A N/A 5.51% 7/17/95
Class Q N/A N/A N/A -0.73% 6/17/99
Bank and Thrift Fund(4)
Class A -23.50% 21.20% 15.70% 13.58% 1/24/86
Class B -23.00% N/A N/A -6.74% 10/20/97
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ------------ ----
<S> <C> <C> <C> <C> <C>
Government Securities Income Fund(5)
Class A -5.86% 4.73% 5.14% 6.28% 1/1/85
Class B -6.56% N/A N/A 3.18% 7/17/95
Class C N/A N/A N/A 0.04% 6/11/99
Class M -4.86% N/A N/A 3.08% 7/17/95
Class Q N/A N/A N/A N/A 11/17/99
Class T N/A N/A N/A N/A
International Core Growth Fund
Class A 57.13% 32.97% 2/28/97
Class B 60.45% 34.36% 2/28/97
Class C 64.56% 34.74% 2/28/97
Class Q 66.97% 36.19% 2/28/97
Worldwide Growth Fund
Class A 72.95% 30.39% N/A 24.78% 4/19/93
Class B 77.26% N/A N/A 32.79% 5/31/95
Class C 81.35% 31.11% N/A 25.09% 4/19/93
Class Q 83.79% N/A N/A 33.83% 8/31/95
International SmallCap Growth Fund
Class A 109.14% 31.89% N/A 28.22% 8/31/94
Class B 115.22% N/A N/A 35.89% 5/31/95
Class C 119.11% 32.30% N/A 28.68% 8/31/94
Class Q 121.97% N/A N/A 38.48% 8/31/95
Emerging Countries Fund
Class A 65.74% 13.85% N/A 12.58% 11/28/94
Class B 69.71% N/A N/A 14.66% 5/31/95
Class C 73.71% 14.38% N/A 12.89% 11/28/94
Class Q 76.30% N/A N/A 15.20% 8/31/95
LargeCap Growth Fund
Class A 85.11% N/A N/A 60.23% 7/21/97
Class B 90.23% N/A N/A 62.51% 7/21/97
Class C 94.18% N/A N/A 63.11% 7/21/97
Class Q 96.93% N/A N/A 64.48% 7/21/97
MidCap Growth Fund
Class A 86.22% 31.47% N/A 22.99% 4/19/93
Class B 91.31% N/A N/A 32.47% 5/31/95
Class C 95.29% 32.23% N/A 23.31% 4/19/93
Class Q 98.50% 33.44% N/A 30.35% 6/30/94
SmallCap Growth Fund
Class A 79.04% 26.94% N/A 21.74% 12/27/93
Class B 83.85% N/A N/A 28.04% 5/31/95
Class C 87.89% 27.70% N/A 22.20% 12/27/93
Class Q 90.58% N/A N/A 26.47% 8/31/95
</TABLE>
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<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ------------ ----
<S> <C> <C> <C> <C> <C>
Convertible Fund
Class A 41.54% 25.14% N/A 20.33% 4/19/93
Class B 44.19% N/A N/A 26.67% 5/31/95
Class C 48.20% 25.81% N/A 20.60% 4/19/93
Class Q 50.44% N/A N/A 26.88% 8/31/95
Balanced Fund
Class A 2.25% N/A N/A
Class B 3.51% N/A N/A 13.37% 4/19/93
Class C 6.89% N/A N/A 16.42% 5/31/95
Class Q 8.69% N/A N/A 13.67% 4/19/93
Class T N/A N/A N/A 15.91% 8/31/95
High Yield II Fund
Class A 1.07% N/A N/A
Class B 0.53% N/A N/A -0.18% 3/27/98
Class C 4.38% N/A N/A -0.06% 3/27/98
Class Q 6.03% N/A N/A 1.97% 3/27/98
Class T N/A N/A N/A 2.68% 3/27/98
Strategic Income Fund
Class A -5.83% N/A N/A -1.74% 7/27/98
Class B -6.15% N/A N/A -1.29% 7/27/98
Class C -2.46% N/A N/A 1.31% 7/27/98
Class Q -0.97% N/A N/A 1.90% 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
</TABLE>
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<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ------------ ----
<S> <C> <C> <C> <C> <C>
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
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
Class B 132.73% N/A N/A 34.05% 6/5/95
Class C 140.24% N/A N/A 34.71% 6/5/95
Class T 144.12% N/A N/A 34.83% 6/5/95
Class I 141.51% 31.45% 22.11% 16.73% 2/3/86
Class T N/A N/A N/A 126.05% 4/1/99
MidCap Opportunities Fund
Class A 91.56% N/A N/A 94.20% 8/20/98
Class B 96.73% N/A N/A 99.54% 8/20/98
Class C 100.16% N/A N/A 101.26% 8/20/98
Class I 103.08% N/A N/A 103.19% 8/20/98
Growth Opportunities Fund
Class A 82.14% N/A N/A 33.48% 6/5/95
Class B 86.84% N/A N/A 34.17% 6/5/95
Class C 90.90% N/A N/A 34.34% 6/5/95
Class T 87.72% 33.98% 20.05% 17.86% 2/3/86
Class I 93.87% N/A N/A 48.91% 3/31/97
</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
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.
(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.
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<PAGE>
Reports and promotional literature may also contain the following
information: (i) a description of the gross national or domestic product and
populations, including but not limited to age characteristics, of various
countries and regions in which a Fund may invest, as compiled by various
organizations, and projections of such information; (ii) the performance of
worldwide equity and debt markets; (iii) the capitalization of U.S. and foreign
stock markets prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial organization; (iv)
the geographic distribution of a Fund's portfolio; (v) the major industries
located in various jurisdictions; (vi) the number of shareholders in the Funds
or other Pilgrim Funds and the dollar amount of the assets under management;
(vii) descriptions of investing methods such as dollar-cost averaging, best
day/worst day scenarios, etc.; (viii) comparisons of the average price to
earnings ratio, price to book ratio, price to cash flow and relative currency
valuations of the Funds and individual stocks in a Fund's portfolio, appropriate
indices and descriptions of such comparisons; (ix) quotes from the Sub-Adviser
of a Fund or other industry specialists; (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Sub-Advisers, Pilgrim Capital, Pilgrim
Group, Inc. or affiliates of the Company, the Investment Manager, the
Sub-Advisers, Pilgrim Capital or Pilgrim Group, Inc. including: (i) performance
rankings of other funds managed by the Investment Manager or a Sub-Adviser, or
the individuals employed by the Investment Manager or a Sub-Adviser who exercise
responsibility for the day-to-day management of a Fund, including rankings of
mutual funds published by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., or other rating services, companies, publications or
other persons who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number of clients, or
assets under management; (iii) information regarding the acquisition of the
Pilgrim Funds by Pilgrim Capital; (iv) the past performance of Pilgrim Capital
and Pilgrim Group, Inc.; (v) 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, and Mayflower Trust, 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/Trustees can elect 100% of
the Directors/Trustees if they choose to do so, and in such event the holders of
the remaining shares voting for the election of Directors/Trustees will not be
able to elect any person or persons to the Board of Directors/Trustees.
Generally, there will not be annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing
Directors/Trustees unless and until such time as less than a majority of the
Directors/Trustees holding office have been elected by shareholders, at which
time the Directors/Trustees then in office will call a shareholders' meeting for
the election of Directors/Trustees. Shareholders may, in accordance with a
Fund's charter, cause a meeting, of shareholders to be held for the purpose of
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<PAGE>
voting on the removal of Directors/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
Directors/Trustees will continue to hold office and appoint successor
Directors/Trustees.
The Board of Directors/Trustees 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/Trustees 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/Trustees of the Company by written notice to
shareholders of such series or class. Shareholders may remove Directors/Trustees
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, Growth Opportunities 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.
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, 1177 Avenue of the Americas, New York, New York
10036, acts as independent auditors for the SmallCap Opportunities Fund, Growth
Opportunities Fund, Equity Trust, and Mayflower Trust.
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.
130
<PAGE>
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, and Growth Opportunities Fund,
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.
DECLARATION OF TRUST
The Equity Trust, SmallCap Opportunities Fund, Growth Opportunities
Fund, and Mayflower Trust are organized as Massachusetts business trusts. The
Declaration of Trust of each of these Funds provides that obligations of the
Fund are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trust or its investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Fund shall be enforceable against the assets and property of such
Fund only, and not against the assets or property of any other Fund or the
investors therein.
FINANCIAL STATEMENTS
The financial statements from the Funds' June 30, 1999 Annual Reports
and December 31, 1999 Semi-Annual Report (for Bank and Thrift Fund, Advisory
Funds, Investment Funds, Pilgrim Mutual Funds, and Government Securities Income
Fund), and December 31, 1999 (which includes Equity Trust, SmallCap
Opportunities Fund, and Growth Opportunities Fund), 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.
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