STATEMENT OF ADDITIONAL INFORMATION
October 31, 1996
PILGRIM GOVERNMENT SECURITIES INCOME FUND
Two Renaissance Square, Suite 1200
40 North Central Avenue
Phoenix, Arizona 85004
(800) 331-1080
Pilgrim Government Securities Income Fund, the sole series of Pilgrim Government
Securities Income Fund, Inc. (the "Fund"), is a diversified, open-end management
investment company seeking high current income, consistent with liquidity and
preservation of capital.
This document is not the Prospectus of the Fund and should be read in
conjunction with that Prospectus dated October 31, 1996, which may be obtained
without charge upon written request to the address above or by calling (800)
331-1080.
TABLE OF CONTENTS
Page
Investment Objective And Policies................................ 2
Investment Restrictions.......................................... 7
Directors And Officers........................................... 8
Principal Shareholders.......................................... 11
Investment Management........................................... 12
Distributor..................................................... 13
Pilgrim America Group............................................ 13
Distribution Plan............................................... 14
Execution Of Portfolio Transactions............................. 16
Additional Purchase and Redemption Information.................. 17
Determination of Share Price.................................... 21
Shareholder Services And Privileges............................. 21
Distributions................................................... 24
Tax Considerations............................................... 24
Performance Information......................................... 26
General Information............................................. 28
Custodian....................................................... 28
Independent Auditors............................................ 28
Legal Counsel................................................... 28
Financial Statements............................................ 28
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INVESTMENT OBJECTIVE AND POLICIES
As described in the Fund's Prospectus, the Fund is a diversified, open-end
management investment company seeking high current income consistent with
liquidity and preservation of capital. There can be no assurance that the Fund's
objective will be attained.
U.S. Government Securities
The Fund's investment objective and the investment policies described in the
first paragraph of the description of the Fund in the prospectus under "The
Funds' Investment Objectives and Policies", "Government Securities Income Fund"
are fundamental and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund.
The U.S. Government securities which may be purchased by the Fund include (1)
U.S. Treasury obligations such as Treasury Bills (maturities of one year or
less), Treasury Notes (maturities of one to ten years) and Treasury Bonds
(generally maturities of greater than ten years) and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities ("Agency
Securities") which are supported by any of the following: (a) the full faith and
credit of the U.S. Treasury, such as obligations of the Government National
Mortgage Association ("GNMA"), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the U.S. Treasury, such as obligations
of the Federal National Mortgage Association, or (c) the credit of the agency or
instrumentality, such as obligations of the Federal Home Loan Mortgage
Corporation.
The Fund may invest in 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. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro rata share of monthly payments (including
any principal prepayments) made by the individual borrowers on the pooled
mortgaged loans, net of any fees paid to the guarantor of such securities and
the services of the underlying mortgage loans. GNMA, FNMA and FHLMC each
guarantee timely distributions of interest to certificate holders. GNMA and FNMA
guarantee timely distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the underlying mortgage
loan; however, FHLMC Gold Participation Certificates now guarantee timely
payment of monthly principal reductions. 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. When interest rates fall, high prepayments could
force the Fund to reinvest principal at a time when investment opportunities are
not attractive. The value of U.S. Government Agency Mortgage-Backed Securities,
like other traditional debt instruments, will tend to move in a direction
opposite to that of interest rates.
The Fund purchases primarily fixed-rate securities, including but not limited to
high coupon U.S. Government Agency Mortgage-Backed Securities, which provide a
higher coupon at the time of purchase than the then prevailing market rate
yield. 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 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.
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The composition and weighted average maturity of the Fund's portfolio will vary
from time to time, based upon the determination of Pilgrim America Investments,
Inc. (the "Investment Manager") of how best to further the Fund's investment
objective. The Fund may invest in Government securities of all maturities,
short-term, intermediate-term and long-term.
GNMA Certificates or "Ginnie Maes" are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration.
The Fund will purchase only GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal and interest on GNMA Certificates of
the "modified pass-through" type is guaranteed by GNMA.
The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return on the greater part of principal invested far in advance of
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As the prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of a single-family dwelling mortgage with 25-to-30 year maturity, the type
of mortgage which backs the vast majority of GNMA Certificates, is approximately
12 years. It is therefore customary practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest paid
on the VA-guaranteed or FHA-insured mortgages underlying the Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.
Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.
FNMA Mortgage Securities are pass-through mortgage-backed securities that are
issued by FNMA, a U.S. Government sponsored corporation owned by private
stockholders. FNMA mortgage securities are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. In addition, FNMA Mortgage Securities may include any
obligations of, or instruments issued by or fully guaranteed as to principal and
interest by, FNMA.
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FHLMC Mortgage Securities are mortgage-backed securities representing interests
in residential mortgage loans pooled by FHLMC, a U.S. Government sponsored
corporation. FHLMC mortgage securities are guaranteed as to timely payment of
interest and ultimate collection of principal but are not backed by the full
faith and credit of the U.S. Government. ln addition, FHLMC Mortgage Securities
may include any obligations of, or instruments issued by or fully guaranteed as
to principal and interest by, FHLMC.
Portfolio Turnover Rate
The annual rate of the Fund's portfolio turnover during the fiscal years ended
June 30, 1994, 1995 and 1996 was 402%, 299%, and 170% respectively. The Fund
places no restrictions on portfolio turnover and it may sell any portfolio
security without regard to the period of time it has been held.
Delayed Delivery Transactions
The Fund may, from time to time, purchase securities on a "delayed delivery" or
"when-issued" basis, which means that, while the Fund has ownership rights to
the securities, delivery and payment for the securities normally takes place 15
to 45 days after the date of the transaction. The payment obligation and the
interest rate that will be received on the securities are each fixed at the time
the buyer enters into the commitment. The 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 separate account of
the Fund consisting of cash and/or liquid assets equal to the amount of the
above commitments will be maintained at the Fund's Custodian Bank. For the
purpose of determining the adequacy of the assets in the account, the deposited
assets will be valued at market. If the market value of such assets declines,
additional cash or assets will be placed in the account on a daily basis so that
the market value of the account will equal the amount of such commitments by the
Fund.
Securities purchased on a delayed delivery basis and the securities held in the
Fund's portfolio are subject to changes in market value based upon changes in
the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, to the extent that the Fund remains substantially fully
invested at the same time that it has purchased securities on a delayed delivery
basis, which it would normally expect to do, there will be greater fluctuations
in the Fund's net asset value than if it solely set aside cash to pay for the
securities when delivered.
When the time comes to pay for the securities acquired on a delayed delivery
basis, the Fund will meet its obligations from the available cash flow, sale of
the securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
Depending on market conditions, the Fund could experience fluctuations in share
price as a result of delayed delivery or when-issued purchases. In addition, the
Fund may, at any time, sell certain of its portfolio securities on a delayed
delivery or when-issued basis. In such cases the Fund will not receive payment
for these securities until they are delivered to the purchaser, normally 15 to
45 days later.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities in an amount up to 33-1/3% of total Fund assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made with any companies affiliated with the Investment
Manager. The borrower at all times during the loan must maintain with the Fund
cash or cash equivalent collateral or provide to the Fund an irrevocable letter
of credit equal in value to at least 100% of the value of the securities
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loaned. During the time portfolio securities are on loan, the borrower pays the
Fund any interest paid on such securities, and the Fund may invest the cash
collateral and earn additional income, or it may receive an agreed-upon amount
of interest income from the borrower who has delivered equivalent collateral or
a letter of credit. Loans are subject to termination at the option of the Fund
or the borrower at any time. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker.
Dollar Roll Transactions
In order to enhance portfolio returns and manage prepayment risks, the Fund may
engage in dollar roll transactions with respect to mortgage securities issued by
GNMA, FNMA and FHLMC. In a dollar roll transaction, the 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 the
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.
Pairing-Off Transactions
The Fund engages in a pairing-off transaction when the Fund commits to purchase
a security at a future date ("delayed delivery" or "when issued"), and then
prior to the predetermined settlement date, the Fund "pairs-off" the purchase
with a sale of the same security prior to, or on, the original settlement date.
At all times when the Fund has an outstanding commitment to purchase securities,
cash and/or liquid assets equal to the value of the outstanding purchase
commitments will be segregated from general investible funds and marked to the
market daily.
When the time comes to pay for the securities acquired on a delayed delivery
basis, the Fund will meet its obligations from the available cash flow, sale of
the securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
Whether a pairing-off transaction produces a gain for the Fund, depends upon the
movement of interest rates. If interest rates decrease, then the money received
upon the sale of the same security will be greater than the anticipated amount
needed at the time the commitment to purchase the security at the future date
was entered. 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.
Repurchase Agreements
The Fund may enter into repurchase agreements involving U.S. Government
securities. Under a repurchase agreement, the Fund acquires a debt instrument
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate
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effective for the period of time during which the Fund's money is invested. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price including accrued interest earned on
the underlying U.S. Government securities. The instruments held as collateral
are valued daily, and as the value of instruments declines, the Fund will
require additional collateral. If the seller defaults, the Fund might incur a
loss or delay in the realization of proceeds if the value of the collateral
securing the repurchase agreement declines and it might incur disposition costs
in liquidating the collateral. Repurchase agreements will be made only with U.S.
Government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. The Investment Manager will monitor
the value of the collateral to ensure that it meets or exceeds the repurchase
price. In all cases, the Investment Manager must find the creditworthiness of
the other party to the transaction satisfactory before execution. The Fund will
make payment for securities it receives as collateral only upon physical
delivery or evidence of book entry transfer to the account of its Custodian
Bank. Repurchase agreements are considered by the staff of the Securities and
Exchange Commission to be loans by the Fund. The Fund may not enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 10% of the value of the Fund's total assets would be invested in such
repurchase agreements.
Reverse Repurchase Agreements
The 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 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.
Borrowing
The Fund may borrow up to 10% of the value of its total assets for temporary or
emergency purposes. 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. Under the Investment Company Act of 1940, the 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. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities or the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
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The 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.
Risk Factors
Whether a reverse repurchase agreement or dollar-roll transaction produces a
gain for the 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 the 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
the Fund's yield in the manner described above; however, such transactions also
increase the Fund's risk to capital and may result in a shareholder's loss of
principal.
Whether a pairing-off transaction produces a gain for the Fund depends upon the
movement of interest rates. If interest rates decrease, then the money received
upon the sale of the same security will be greater than the anticipated amount
needed at the time the commitment to purchase the security at the future date
was entered. Consequently, the Fund will experience a gain. However, if interest
rates increase, than the money received upon the sale of the 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
1. Purchase any securities other than obligations issued or
guaranteed by the United States Government or its agencies, some
of which may be subject to repurchase agreements. There is no
limit on the amount of the Fund's assets that may be invested in
the securities of any one issuer of such obligations.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and
policies, (b) to the extent the entry into a repurchase agreement
is deemed to 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
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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.
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.
DIRECTORS AND OFFICERS
The Board of Directors of the Fund is elected by the shareholders. The Board has
responsibility for the overall management of the Fund, including general
supervision and review of its investment activities. The Directors, in turn,
elect the Officers of the Fund who are responsible for administering the
day-to-day
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operations of the Fund. Current Directors and Officers, and their affiliations
and principal occupations during the past five years, are:
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 55.) Director. Realtor, The Prudential Arizona Realty, for more than
the last five years. Ms. Baldwin is also Treasurer, United States Olympic
Committee, and formerly was on the teaching staff at Arizona State University.
Ms. Baldwin also is a director or trustee of each of the funds managed by the
Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 68.)
Director. President of Al Burton Productions, for more than the last five years.
Formerly, Executive Producer, Castle Rock Entertainment. Mr. Burton also is a
director or trustee of each of the funds managed by the Investment Manager.
Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida 33140.
(Age 55.) Director. President, South Beach Capital Markets Advisory Corporation
(since January 1995). Mr. Foerster was formerly Managing Director, U.S. Equity
Syndicates Desk, Lehman Brothers (June 1992 - December 1994) and Managing
Director, Equity Transactions Group/Equity Syndicate, PaineWebber Incorporated
(September 1984 - May 1992). Mr. Foerster also is a director or trustee of each
of the funds managed by the Investment Manager.
Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 49.) Director.
President, StockVal, Inc. (1992 - present); director and co-owner, StockVal,
Inc. (1982 - present); director of Artisoft, Inc. Mr. Patton was formerly a
partner and director of the law firm of Streich, Lang, P.A. (1972 - 1992). Mr.
Patton is also a director or trustee of each of the funds managed by the
Investment Manager.
*Robert W. Stallings, Two Renaissance Square, 12th Floor, 40 North Central
Avenue, Phoenix, Arizona 85004. (Age 47.) Chairman, Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim America
Group, Inc. ("Pilgrim America Group") and a director of Pilgrim America
Securities, Inc. and Pilgrim America Investments, Inc. (since December 1994).
Chairman, Chief Executive Officer and President of Pilgrim America Masters
Series, Inc., Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America
Investment Funds, Inc. and Pilgrim America Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Express America Holdings Corporation
(since August 1990) and Express America Mortgage Corporation (since May 1991)
and President of Express America Holdings Corporation and Express America
Mortgage Corporation (since December 1993). Mr. Stallings formerly was Chairman
and Chief Executive Officer of First Western Partners, Inc., a consulting and
management services firm to financial institutions and private investors
(February 1990 - December 1991) and Chairman and Chief Executive Officer of
Western Savings & Loan Assoc. (April 1989 - February 1990). Mr. Stallings also
is a director or trustee of each of the funds managed by the Investment Manager.
* Interested person of the Fund, as defined in the Investment Company Act of
1940, as amended.
The Fund pays each Director who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $20,000; (ii) $1,500 per quarterly
and special Board meeting; (iii) $500 per committee meeting; (iv) $100 per
special telephonic meeting; and (v) out of pocket expenses. During the fiscal
year ended June 30, 1996, the Fund paid an aggregate of $2,866 to the Directors.
The pro rata share paid by the Fund is based on the Fund's average net assets as
a percentage of the average net assets of all the funds managed by the
Investment Manager for which the Directors serve in common as
directors/trustees.
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Compensation of Directors
The following table sets forth information regarding compensation of Directors
by the Fund and other funds managed by the Investment Manager for the fiscal
year ended June 30, 1996. Officers of the Fund and Directors who are interested
persons of the Fund do not receive any compensation from the Fund or any other
fund managed by the Investment Manager. In the column headed "Total Compensation
From Registrant and Fund Complex Paid to Directors," the number in parentheses
indicates the total number of boards in the fund complex on which the Director
serves.
<TABLE>
<CAPTION>
Compensation Table
Fiscal Year Ended June 30, 1996
<S> <C> <C> <C> <C>
Pension or Total
Retirement Compensation
Benefits Estimated From
Aggregate Accrued Annual Registrant
Compensation As Part of Benefits and Fund
from Fund Upon Complex Paid
Name of Person, Position Registrant Expenses Retirement to Directors
Mary A. Baldwin, Director (1)(3)...... $ 728 N/A N/A $ 23,800
(5 boards)
Al Burton, Director (2)(3)............ $ 728 N/A N/A $ 23,800
(5 boards)
Bruce S. Foerster, Director (1)(3).... $ 728 N/A N/A $ 23,900
(5 boards)
Jock Patton, Director (3)(4).......... $ 681 N/A N/A $ 22,400
(5 boards)
Robert W. Stallings, Director and
Chairman (1)(5)..................... $ 0 N/A N/A $ 0 (5 boards)
<FN>
1 Current Board member, term commencing April 7, 1995.
2 Board member since 1985.
3 Member of Audit Committee.
4 Current Board member, term commencing August 28, 1995.
5 "Interested person", as defined in the Investment Company Act of 1940. As
an interested person of the Fund, Mr. Stallings will not receive any
compensation as a director.
</FN>
</TABLE>
Officers
James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 39.) Vice Chairman (since December 1994) and Executive Vice
President (since April 1995) of Pilgrim America Group, and Pilgrim America
Investments, Inc. and a director (since December 1994) and Assistant Secretary
(since January 1995) of Pilgrim America Securities, Inc. Executive Vice
President of Pilgrim America Masters Series, Inc., Pilgrim America Bank and
Thrift Fund, Inc., Pilgrim America Prime Rate Trust and Pilgrim America
Investment Funds, Inc. (since April 1995). Vice Chairman and Chief Financial
Officer of Express America Holdings Corporation (since December 1993) and
President and Chief Financial Officer of Express America Holdings Corporation
(May 1991 - December 1993). Mr. Reis is also Vice Chairman (since December 1993)
of Express
- 10 -
<PAGE>
America Mortgage Corporation and formerly was President (May 1991 - December
1993), and he was also the President and Chief Financial Officer of First
Western Partners, Inc. (February 1990 - December 1991).
Stanley Vyner, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 47.) Mr. Vyner has served as President and Chief Executive Officer
for Pilgrim America Investments, Inc. since August, 1996, Executive Vice
President of Pilgrim America Group since August, 1996, and Executive Vice
President of Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America
Investment Funds, Inc., and Pilgrim America Masters Series, Inc. since July
1996. He served as Chief Executive Officer of HSBC Asset Management Americas,
Inc. until December, 1995, and prior to that was the Chief Executive Officer of
HSBC Life Assurance Co., the largest provider of retirement services in Hong
Kong, where Mr. Vyner Worked for nearly 11 years. An actuary by profession, Mr.
Vyner earned his Honors Degree in Economics from Edinburgh University, UK.
He is a Fellow of the Faculty of Actuaries.
James M. Hennessy, Senior Vice President and Secretary
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 47.) Senior Vice President and Secretary, Express America Holdings
Corporation, Pilgrim America Group, Pilgrim America Investments, Inc., and
Pilgrim America Securities, Inc. (since April 1995). Senior Vice President and
Secretary, Pilgrim America Masters Series, Inc., Pilgrim America Bank and Thrift
Fund, Inc., Pilgrim America Prime Rate Trust, and Pilgrim America Investment
Funds, Inc. (since April 1995). Senior Vice President, Express America Mortgage
Corporation (June 1992 - August 1994). Mr. Hennessy was also the President of
Beverly Hills Securities Corp. (January 1990 - June 1992).
Michael J. Roland, CPA, Senior Vice President and Treasurer
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 38.) Senior Vice President and Chief Financial Officer of Pilgrim
America Group, Pilgrim America Investments, Inc. and Pilgrim America Securities,
Inc. (since April 1995). Senior Vice President and Treasurer of Pilgrim America
Masters Series, Inc., Pilgrim America Bank and Thrift Fund, Inc., Pilgrim
America Investment Funds, Inc. and Pilgrim America Prime Rate Trust (since April
1995). From July 1994 through December 1994, Partner at the consulting firm of
Corporate Savings Group in Newport Beach, California. From 1992 to June 1994,
Vice President of Pacific Financial Asset Management Corp. Funds in Newport
Beach, California. From 1988 to 1992, Director of Financial Reporting for
Pacific Mutual Life Insurance Company in Newport Beach, California.
PRINCIPAL SHAREHOLDERS
As of September 30, 1996, the Directors and Officers of the Fund owned less than
1% of any class of the Fund's outstanding shares. As of September 30, 1996, to
the knowledge of management, no person owned beneficially or of record more than
5% of the outstanding shares of any class of the Fund, except with respect to
the Class A shares of the Fund, Merrill Lynch, Pierce, Fenner & Smith Inc., P.O.
Box 45286, Jacksonville, Florida 32232-5622, owned 17.73% of the shares and
Illinois Trust Company, for the benefit of Cook County Employees Annuity and
Benefit Fund, 209 W. Jackson Blvd., Chicago, Illinois 60606- 6905, owned 9.81%
of the shares. With respect to the Class B shares of the Fund, Prudential
Securities Inc., 108 Gardiner Street, Lynn, Massachusetts 01905-1717, owned
6.04% of the shares; Prudential Securities Inc., 6 Los Gatos Blvd., Los Gatos,
California 95032-6120, owned 7.78% of the shares; Prudential Securities Inc., 3
Beverly Road, Commack, New York 11725-1701, owned 32.68% of the shares;
Donaldson Lufkin Jurrette Securities Corporation Inc., P.O. Box 2052, Jersey
City, New Jersey 07303-2052, owned 13.46% of the shares; and Stephen J. Beny and
Laurie Beny, 10855 E. Mission Lane, Scottsdale, Arizona 85259-5946, owned 5.83%
of the shares. With respect to the Class M shares, Investors Fiduciary Trust
Company ("IFTC") as custodian, 7743 Davis Circle, Omaha, Nebraska 68134, owned
29.41% of the shares, and IFTC, as Custodian, 3611 36th Street, Lubbock, Texas
79413-2237, owned 66.47% of the shares.
- 11 -
<PAGE>
INVESTMENT MANAGEMENT
Investment management and administrative services are provided to the Fund by
the Investment Manager, pursuant to an Investment Management Agreement (the
"Agreement") dated April 7, 1995. Pursuant to the Agreement, the Investment
Manager furnishes the Fund with investment advice and investment management and
administrative services with respect to the Fund's assets, including the making
of specific recommendations as to the purchase and sale of portfolio securities,
furnishes office space and most personnel needed by the Fund, and in general
superintends and manages the Fund's investments subject to the ultimate
supervision and direction of the Fund's Board of Directors.
As compensation for the foregoing services, the Investment Manager is paid
monthly a fee equal to 0.50% per annum of the average daily net assets of the
Fund on the first $500 million of net assets. The annual rate is reduced to
0.45% on net assets from $500 million to $1 billion and to 0.40% on net assets
in excess of $1 billion. Pursuant to the terms of the Investment Management
Agreement, the Investment Manager will reimburse the Fund to the extent that the
gross operating costs and expenses of that Fund, excluding any interest, taxes,
brokerage commissions, amortization of organizational expenses, extraordinary
expenses, and distribution (Rule 12b-1) fees on Class B and Class M shares in
excess of an annual rate of .25% of the average daily net assets of these
classes, exceed 1.50% of the Fund's average daily net asset value for the first
$40 million of net assets and 1.00% of average daily net assets in excess of $40
million for any one fiscal year. This reimbursement policy cannot be changed
unless the agreement is amended, which would require shareholder approval.
The Fund pays its own operating expenses, which are not assumed by the
Investment Manager, including the fees of its custodian, transfer and
shareholder servicing agent; cost of pricing and calculating its daily net asset
value and of maintaining its books of account required by the 1940 Act;
expenditures in connection with meetings of the Fund's Directors and
shareholders, except those called to accommodate the Investment Manager; fees
and expenses of Directors who are not affiliated with or interested persons of
the Investment Manager; salaries of personnel of the Investment Manager involved
in placing orders for the execution of the Fund's portfolio transactions,
shareholder servicing and in maintaining registration of Fund shares under state
securities laws; insurance premiums on property or personnel of the Fund that
inure to its benefit; costs of preparing and printing reports, proxy statements
and prospectuses of the Fund for distribution to its shareholders; legal
auditing and accounting fees; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under Federal
and applicable state securities laws; and all other expenses in connection with
the issuance, registration and transfer of its shares. Under the Agreement, the
Fund is required to pay for the salaries of any officers employed directly by
the Fund. However, no such officers have ever been employed by the Fund nor is
it the current intention of the Fund to employ any such officers.
The Investment Manager will reduce its aggregate fees for any fiscal year, or
reimburse the Fund, to the extent required so that the Fund's expenses do not
exceed the expense limitations applicable to the Fund under the securities laws
or regulations of those states or jurisdictions in which the Fund's shares are
registered or qualified for sale. Currently, the most restrictive of such
expense limitations would require the Investment Manager to reduce its
respective fees, or to reimburse the Fund, to the extent required so that the
Fund's expenses, as described above, for any fiscal year do not exceed 2.50% of
the first $30 million of the Fund's average daily net assets, 2.00% of the next
$70 million of the Fund's average net assets and 1.50% of the Fund's remaining
average net assets. Expenses for purposes of this expense limitation include the
management fee, but exclude distribution expenses, brokerage commissions and
fees, taxes, interest and extraordinary expenses such as litigation, paid or
incurred by the Fund. In addition, the Fund has been granted a variance that
permits it to exclude certain shareholder servicing expenses from this
limitation. The Fund's expense limitation may change to reflect changes in the
expense limitations of the state having the most restrictive limitation in which
shares of the fund are registered for sale. For the fiscal year ended June 30,
1996, and the fiscal period April 7, 1995 to June 30, 1995, the Fund paid
management fees to the current Investment Manager of approximately $208,689 and
$50,647, respectively. For the fiscal period July 1, 1994 to April 7, 1995 and
the fiscal year ended June 30, 1994, the Fund paid management fees to the former
manager of approximately $196,785 and $379,900, respectively. During the period
of April 7, 1995 to June 30, 1995, the Fund made no reimbursements to the
current Investment Manager for the costs of personnel involved with
recordkeeping and daily net asset value calculations, portfolio trading,
shareholder servicing, and state securities regulation and compliance. During
the period of July 1, 1994 to April 7, 1995 and the fiscal year ended June 30,
1994, the Fund reimbursed the former manager approximately $2,195 and $3,000,
respectively,
- 12 -
<PAGE>
for the costs of personnel involved with recordkeeping and daily net asset value
calculations, portfolio trading, shareholder servicing, and state securities
regulation and compliance.
The Agreement will continue in effect for an initial period of two years and
thereafter from year to year so long as such continuation is approved at least
annually by (1) the Board of Directors or the vote of a majority of the
outstanding voting securities of the Fund, and (2) a majority of the Directors
of the Fund who are not interested persons of any party to the Agreement, cast
in person at a meeting called for the purpose of voting on such approval. The
Agreement may be terminated at any time, without penalty, by either the Fund or
the Investment Manager upon sixty (60) days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
The use of the name "Pilgrim" in the Fund's name is pursuant to a license
granted by the Investment Manager, and in the event the Agreement is terminated,
the Fund has agreed to amend its corporate name to remove the reference to
"Pilgrim".
DISTRIBUTOR
Shares of the Fund are distributed by Pilgrim America Securities, Inc. (the
"Distributor") pursuant to a Distribution Agreement between the Fund and the
Distributor. The Distribution Agreement requires the Distributor to use its best
efforts on a continuing basis to solicit purchases of shares of the Fund. The
Fund and the Distributor have agreed to indemnify each other against certain
liabilities. At the discretion of the Distributor, all sales charges may at
times be reallowed to an authorized dealer ("Authorized Dealer"). The
Distribution Agreement will remain in effect for two years and from year to year
thereafter only if its continuance is approved annually by a majority of the
Board of Directors who are not parties to such agreement or "interested persons"
of any such party and must be approved either by votes of a majority of the
Directors or a majority of the outstanding voting securities of the Fund. See
the Prospectus of the Fund for information on how to purchase and sell shares of
the Fund, and the charges and expenses associated with an investment.
For the fiscal years ended June 30, 1994, 1995 and 1996, total commissions
allowed to other dealers under the Fund's underwriting arrangements were
approximately $20,000, $4,010, and $128,009, respectively. For the fiscal year
ended June 30, 1996, and the fiscal period April 7, 1995 to June 30, 1995, the
current Distributor retained approximately $56 and $324 or approximately 0.04%
and 7.05%, respectively, of the total commissions assessed on shares of the
Fund. For the period July 1, 1994 to April 7, 1995 and the fiscal year ended
June 30, 1994, the former distributor retained approximately $512 and $5,200, or
approximately 11.15% and 20.6%, respectively, of the total commissions assessed
on purchases of the Fund. The sales commissions allowed by the Distributor to
selling dealers on the sale of new Fund shares are not an expense of the Fund
and have no effect on the Fund's net asset value.
PILGRIM AMERICA GROUP
The Investment Manager and the Distributor are wholly-owned subsidiaries of
Pilgrim America Group, a Delaware corporation, which in turn is a wholly-owned
subsidiary of Express America Holdings Corporation ("Express America"), a
Delaware corporation the shares of which are traded on the NASDAQ National
Market System. Express America is a holding company that through its
subsidiaries engages in the financial services business, focusing primarily on
the business of providing investment advisory, administrative and distribution
services to mutual funds and closed-end investment companies. The Investment
Manager also acts as the investment manager to Pilgrim America Masters Series,
Inc., Pilgrim America MagnaCap Fund, Pilgrim America High Yield Fund, open-end
investment companies, and to Pilgrim America Bank and Thrift Fund, Inc. and
Pilgrim America Prime Rate Trust, closed-end investment companies. As of October
31, 1996, the Investment Manager had assets under management of approximately
$1.9 billion.
- 13 -
<PAGE>
On May 16, 1991, Express America Acquired a now discontinued mortgage banking
operation from the Resolution Trust Corporation ("RTC") following a competitive
bidding process. On December 8, 1995, the RTC filed a complaint in the United
States District Court of Arizona against Express America, its Chief Executive
Officer, who is also Chairman and an officer of the Fund, its Chief Financial
Officer, who is also an officer of the Fund, and others, including Smith Barney,
Harris Upham & Co., Incorporated and Rauscher Pierce Refsnes, Inc. The RTC's
complaint alleges various irregularities in the bidding process and the closing
of the acquisition. The RTC has asked for at least $20 million in actual damages
and at least $60 million in punitive damages from all defendants. Express
America and the officers have advised the Fund that they believe they have
meritorious defenses to the claims brought by the RTC, and that the litigation
is unlikely to have a material adverse effect on the operations of the
Investment Manager.
DISTRIBUTION PLAN
The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). The Fund
intends to operate the Rule 12b-1 Plan in accordance with its terms and the
National Association of Securities Dealers, Inc. ("NASD") rules concerning sales
charges. Under the Rule 12b-1 Plan, the Distributor may be entitled to payment
each month in connection with the offering, sale, and shareholder servicing of
Class A, Class B, and Class M shares in amounts not to exceed the following:
with respect to Class A shares at an annual rate of up to 0.35% of the average
daily net assets of the Class A shares of the Fund; with respect to Class B
shares at an annual rate of up to 1.00% of the average daily net assets of the
Class B shares of the Fund; and with respect to Class M shares at an annual rate
of up to 1.00% of the average daily net assets of the Class M shares of the
Fund. The Board of Directors has approved under the Rule 12b-1 Plan payments of
the following amounts to the Distributor will be made each month in connection
with the offering, sale, and shareholder servicing of Class A, Class B, and
Class M shares as follows: (i) with respect to Class A shares at an annual rate
equal to 0.25% of the average daily net assets of the Class A shares of the
Fund; (ii) with respect to Class B shares at an annual rate equal to 1.00% of
the average daily net assets of the Class B shares of the Fund; and (iii) with
respect to Class M shares at an annual rate equal to 0.75% of the average daily
net assets of the Class M shares of the Fund. Of these amounts, fees equal to an
annual rate of 0.25% of the average daily net assets of the Fund are for
shareholder servicing for each of the classes.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for both distribution and shareholder servicing at the annual
rate of 0.25%, 0.25%, and 0.40% of the Fund's average daily net assets of Class
A, Class B, and Class M shares, respectively, that are registered in the name of
that Authorized Dealer as nominee or held in a shareholder account that
designates that Authorized Dealer as the dealer of record. Rights to these
ongoing payments begin to accrue in the 13th month following a purchase of Class
A or B shares and in the 1st month following a purchase of Class M shares. These
fees may be used to cover the expenses of the Distributor primarily intended to
result in the sale of Class A, Class B, and Class M shares of the Fund,
including payments to Authorized Dealers for selling shares of the Fund and for
servicing shareholders of these classes of the Fund. Activities for which these
fees may be used include: preparation and distribution of advertising materials
and sales literature; expenses of organizing and conducting sales seminars;
overhead of the Distributor; printing of prospectuses and statements of
additional information (and supplements thereto) and reports for other than
existing shareholders; payments to dealers and others that provide shareholder
services; and costs of administering the Rule 12b-1 Plan.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of the Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates. The Distributor will be
reimbursed for its actual expenses incurred under the Rule 12b-1 Plan with
respect to the Class A shares. With respect to the Class B shares and Class M
shares, the Distributor will receive payment without regard to actual
distribution expenses it incurs.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plan
also recognizes that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Fund's shares and other funds
managed by the Investment Manager. In some instances,
- 14 -
<PAGE>
additional compensation or promotional incentives may be offered to dealers that
have sold or may sell significant amounts of shares during specified periods of
time. Such compensation and incentives may include, but are not limited to,
cash, merchandise, trips and financial assistance to dealers in connection with
pre-approved conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and lodging)
incurred by sales personnel and members of their families, or other invited
guests, to various locations for such seminars or training programs, seminars
for the public, advertising and sales campaigns regarding the Fund or other
funds managed by the Investment Manager and/or other events sponsored by
dealers.
The Rule 12b-1 Plan has been approved by the Board of Directors, including all
the Directors who are not interested persons of the Fund as defined in the 1940
Act, and by the Fund's shareholders. Each Rule 12b-1 Plan must be renewed
annually by the Board of Directors, including a majority of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such Directors be committed to the Directors who are not
interested persons. The Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Directors or by a vote of a majority of the Fund's outstanding shares on 60
days' written notice. The Distributor or any Authorized Dealer may also
terminate its respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Directors has determined that
differing distribution arrangements in connection with the sale of new shares of
the Fund is necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Directors, including those
Directors who are not interested persons of the Fund, concluded that, in the
exercise of their reasonable business judgment and in light of their fiduciary
duties, there is a reasonable likelihood that the Rule 12b-1 Plan, as tailored
to each class of the Fund, will benefit the Fund and the shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement to its
sharesholders shall be approved by the Directors who are not interested persons
of the Fund, cast in person at a meeting called for the purpose of voting on any
such amendment.
The Distributor is required to report in writing to the Board of Directors at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of the Fund's Class A shares for the fiscal year
ended June 30, 1996 were $513,842, including expenses for: advertising -
$19,453; salaries and commissions -
$293,163; printing, postage, and handling - $68,968; brokers' servicing fees -
$93,611; and miscellaneous and other promotional activities - $38,647. Total
distribution expenses incurred by the Distributor for the costs of promotion and
distribution of the Fund's Class B shares for the fiscal year ended June 30,
1996 were $1,445, including expenses for: advertising -- $64; salaries and
commissions -- $753; printing, postage, and handling -- $226; brokers' servicing
fees -- $220; and miscellaneous and other promotional activities -- $182. Total
distribution expenses incurred by the Distributor for the costs of promotion and
distribution of the Fund's Class M shares for the fiscal year ended June 30,
1996 were $0. Of the total amount incurred by the Distributor during the last
year, $210,257 was for the costs of personnel of the Distributor and its
affiliates involved in the promotion and distribution of the Fund's shares.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no
- 15 -
<PAGE>
longer be able to avail themselves of any automatic investment or other service
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the portfolio of the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Investment Manager determines, subject
to the instructions of and review by the Board of Directors of the Fund, which
securities are to be purchased and sold by the Fund and which brokers or dealers
are to be eligible to execute its portfolio transactions.
In placing portfolio transactions, the Fund will use its best efforts to choose
a broker or dealer capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services available will be considered in making these determinations, such as
the size of the order, the difficulty of execution, the operational facilities
of the firm involved, the firm's risk in positioning a block of securities, and
other factors. In those instances where it is reasonably determined that more
than one broker or dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
brokers or dealers that supply research and statistical information to the Fund
and/or the Investment Manager, and provide other services in addition to
execution services. The Investment Manager considers such information, which is
in addition to and not in lieu of the services required to be performed by the
Investment Manager under its Agreement with the Fund, to be useful in varying
degrees but of indeterminable value. In selecting a broker or dealer, the
Investment Manager may also take into consideration the sale of the Fund's
shares.
Purchases of portfolio securities also may be made directly from issuers or from
underwriters. Where possible, purchase and sale transactions will be effected
through dealers (including banks) that specialize in the types of securities
that the Fund will be holding, unless better executions are available elsewhere.
Dealers and underwriters usually act as principal 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 that has provided such research or other services as mentioned
above.
The 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.
Investment decisions for the Fund are made independently from those of other
funds in the Pilgrim America Group. Nevertheless, it is possible, that at times
identical securities will be acceptable for more than one of such funds.
However, in such event the position of each fund in the same issuer may vary and
the length of time that each fund may choose to hold its investment in the same
issuer may likewise vary. To the extent any of these funds 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. Similarly, if any of such funds simultaneously
purchases or sells the same security, each day's transaction in such security
will be averaged as to price and allocated between such funds. It is recognized
that in some cases this system could have a detrimental effect on the price or
value of the security insofar as the Fund is concerned.
A broker or dealer utilized by the Investment Manager may furnish statistical,
research and other information or services that are deemed by the Investment
Manager to be beneficial to a Fund's investment programs. Research services
received from brokers supplement the Investment Manager's own research, and may
include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities, markets,
specific industry groups and individual companies; information on political
developments; portfolio management strategies; performance information on
securities and information concerning prices of securities; and information
supplied by specialized services to the Investment Manager and to the Fund's
Board Members with
- 16 -
<PAGE>
respect to the performance, investment activities and fees and expenses of other
mutual funds. Such information may be communicated electronically, orally or in
written form. Research services may also include providing equipment used to
communicate research information, arranging meetings with management of
companies and providing access to consultants who supply research information.
The outside research assistance is useful to the Investment Manager since the
brokers utilized by the Investment Manager as a group tend to follow a broader
universe of securities and other matters than the Investment Manager's staff can
follow. In addition, this research provides the Investment Manager with a
diverse perspective on financial markets. Research services that are provided to
the Investment Manager by brokers are available for the benefit of all accounts
managed or advised by the Investment Manager. In some cases, the research
services are available only from the broker providing such services. In other
cases, the research services may be obtainable from alternative sources in
return for cash payments. The Investment Manager is of the opinion that because
the broker research supplements, rather than replaces, its research, the receipt
of such research does not tend to decrease its expenses, but tends to improve
the quality of its investment advice. However, to the extent that the Investment
Manager would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Investment
Manager could be considered to have been reduced accordingly. Certain research
services furnished by brokers or dealers may be useful to the Investment Manager
with respect to clients other than a specific Fund. The Investment Manager is of
the opinion that this material is beneficial in supplementing the Investment
Manager's research and analysis; and, therefore, it may benefit a Fund by
improving the quality of the investment advice. The advisory fees paid by a Fund
are not reduced because the Investment Manager receives such services.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Fund's
transfer agent, Investors Fiduciary Trust Company ("Transfer Agent"), plus, for
Class A and Class M shares, a varying sales charge depending upon the class of
shares purchased and the amount of money invested, as set forth in the
Prospectus. The Distributor may, from time to time, at its discretion, allow the
selling dealer to retain 100% of such sales charge, and such dealer may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended. The Distributor, at its expense, may also provide additional
promotional incentives to dealers in connection with sales of shares of the Fund
and other funds managed by the Investment Manager. In some instances, such
incentives may be made available only to dealers whose representatives have sold
or are expected to sell significant amounts of such shares. The incentives may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by qualifying registered representatives and members of their
families to locations within or outside of the United States, merchandise or
other items. Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of any state.
Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.
Special Purchases at Net Asset Value
Class A or Class M shares of the Fund may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
shares of the Fund (or shares of other funds managed by the Investment Manager
in accordance with the terms of such privileges established for such funds)
within the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent, or be postmarked, within 90 days after the date
of redemption. This privilege may only be
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used once per calendar year. Payment must accompany the request and the purchase
will be made at the then current net asset value of the Fund. Such purchases may
also be handled by a securities dealer who may charge a shareholder for this
service. If the shareholder has realized a gain on the redemption, the
transaction is taxable and any reinvestment will not alter any applicable
Federal capital gains tax. If there has been a loss on the redemption and a
subsequent reinvestment pursuant to this privilege, some or all of the loss may
not be allowed as a tax deduction depending upon the amount reinvested, although
such disallowance is added to the tax basis of the shares acquired upon the
reinvestment.
Class A or M shares may also be purchased at net asset value by any person who
can document that Fund shares were purchased with proceeds from the redemption
(within the previous 90 days) of shares from any unrelated mutual fund on which
a sales charge was paid or which were subject, at any time, to a contingent
deferred sales change.
Class A or Class M shares of the Fund may also be purchased at net asset value
by any charitable organization or any state, county, or city, or any
instrumentality, department, authority or agency thereof that has determined
that the Fund is a legally permissible investment and that is prohibited by
applicable investment law from paying a sales charge or commission in connection
with the purchase of shares of any registered management investment company (an
"eligible authority"). If an investment by an eligible authority at net asset
value is made though a dealer who has executed a selling group agreement with
respect to the Fund (or the other funds in the Pilgrim America Group), the
Distributor may pay the selling firm 0.25% of the amount invested.
Shareholders of Pilgrim America General Money Market Shares who acquired their
shares by using all or a portion of the proceeds from the redemption of Class A
or Class M shares of the Fund or other funds in the Pilgrim America Group may
reinvest such amount plus any shares acquired through dividend reinvestment in
Class A or Class M shares of the Fund at its current net asset value, without a
sales charge.
Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers or affiliated corporations thereof or any trust,
pension, profit-sharing or other benefit plan for such persons, broker-dealers,
for their own accounts or for members of their families (defined as current
spouse, children, parents, grandparents, uncles, aunts, siblings, nephews,
nieces, step-relations, relations at-law, and cousins) employees of such
broker-dealers (including their immediate families) and discretionary advisory
accounts of the Investment Manager may purchase Class A or Class M shares of the
Fund at net asset value without a sales charge. Such purchaser may be required
to sign a letter stating that the purchase is for his own investment purposes
only and that the securities will not be resold except to the Fund. The Fund
may, under certain circumstances, allow registered investment advisers to make
investments on behalf of their clients at net asset value without any commission
or concession.
Class A or M shares may also be purchased at net asset value by certain fee
based registered investment advisers, trust companies and bank trust departments
under certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another Participating Fund or from Pilgrim America Prime Rate
Trust.
Letters of Intent and Rights of Accumulation
An investor may immediately qualify for a reduced sales charge on a purchase of
Class A or Class M shares of the Fund or any fund in the Pilgrim America Group
which offers Class A shares, Class M shares or shares with front-end sales
charges, by completing the Letter of Intent section of the Shareholder
Application in the Prospectus (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for
the reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one Fund in the Pilgrim America
Group will be effective only after notification to the Distributor that the
investment qualifies for a discount. The shareholder's holdings in the
Investment Manager's funds
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<PAGE>
(excluding Pilgrim America General Money Market Shares) acquired within 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
of sales charge until the Letter of Intent is fulfilled. Any redemptions made by
the shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less redemption)
during the period.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application in the Prospectus. A
minimum initial investment equal to 25% of the intended total investment is
required. An amount equal to 5.75% of the total intended purchase will be held
in escrow, 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 at the Pilgrim America Group will be included in the total
shares owned as reflected on the monthly statement; income and capital gain
distributions on the escrow shares will be paid directly to the investor. The
escrow shares will not be available for redemption by the investor until the
Letter of Intent has been completed, or the higher sales charge paid. If the
total purchases, less redemptions, equal the amount specified under the Letter,
the shares in escrow will be released. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by the Distributor and the dealer with whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before, and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the applicable offering price. If the total purchases, less
redemptions, are less than the amount specified under the Letter, the investor
will remit to the Distributor an amount equal to the difference in dollar amount
of sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single account in the name of the investor or to the investor's order. If
within 10 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of shares in escrow to realize
such difference will be made. If the proceeds from a total redemption are
inadequate, the investor will be liable to the Distributor for the difference.
In the event of a total redemption of the account prior to fulfillment of the
Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor. By
completing the Letter of Intent section of the Shareholder Application, an
investor grants to the Distributor a security interest in the shares in escrow
and agrees to irrevocably appoint the Distributor as his attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due and authorizes the Transfer
Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as
directed by the Distributor. The investor or the securities dealer must inform
the Transfer Agent or the Distributor that this Letter is in effect each time a
purchase is made.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other funds distributed by
the Distributor (excluding Pilgrim America General Money Market Shares) can be
combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase. The reduced sales charge
applies to quantity purchases made at one time or on a cumulative basis over any
period of time by (i) an investor, (ii) the investor's spouse and children under
the age of majority, (iii) the investor's custodian accounts for the benefit of
a child under the Uniform Gifts to Minors Act, (iv) a trustee or other fiduciary
of a single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies, registered investment advisers, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
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<PAGE>
The reduced sales charge also applies on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.
Shares of the Fund and other funds of the Pilgrim America Group (excluding
Pilgrim America General Money Market Shares) purchased and owned of record or
beneficially by a corporation, including employees of a single employer (or
affiliates thereof) including shares held by its employees, under one or more
retirement plans, can be combined with a current purchase to determine the
reduced sales charge and applicable offering price of the current purchase,
provided such transactions are not prohibited by one or more provisions of the
Employee Retirement Income Security Act or the Internal Revenue Code.
Individuals and employees should consult with their tax advisors concerning the
tax rules applicable to retirement plans before investing.
Redemptions
Payment to shareholders for shares redeemed will be made within three days after
receipt by the Fund's Transfer Agent of the written request in proper form,
except that the Fund may suspend the right of redemption or postpone the date of
payment as to the Fund during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
(the "Commission") or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the Commission making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the Commission may
permit for the protection of the Fund's shareholders. At various times, the Fund
may be requested to redeem shares for which it has not yet received good
payment. Accordingly, the Fund may delay the mailing of a redemption check until
such time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Fund reserves
the right, upon 30 days' written notice, to redeem, at net asset value (less any
applicable deferred sales charge), the shares of any shareholder whose account
has a value of less than $1,000 in the Fund, other than as a result of a decline
in the net asset value per share. Before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount that will
increase the value of the account to at least $1,000 before the redemption is
processed. This policy will not be implemented where the Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Conversion of Class B Shares
A shareholder's Class B shares will automatically convert to Class A shares in
the Fund on the first business day of the month in which the eighth anniversary
of the issuance of the Class B shares occurs, together with a pro rata portion
of all Class B shares representing dividends and other distributions paid in
additional Class B shares. The conversion of Class B shares into Class A shares
is subject to the continuing availability of an opinion of counsel or an
Internal Revenue Service ("IRS") ruling to the effect that (1) such conversion
will not constitute taxable events for federal tax purposes; and (2) the payment
of different dividends on Class A and Class B shares does not result in the
Fund's dividends or distributions constituting "preferential
- 20 -
<PAGE>
dividends" under the Internal Revenue Code of 1986. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of the Fund's
shares will be determined once daily as of the close of trading on the New York
Stock Exchange (4:00 p.m. New York time) during each day on which that Exchange
is open for trading. As of the date of this Statement of Additional Information,
the New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market. The mortgage
securities held in the 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 Fund. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation.
In computing the Fund's net asset value, all liabilities incurred or accrued are
deducted from the Fund's total assets. The resulting net assets are divided by
the number of shares of the Fund outstanding at the time of the valuation and
the result (adjusted to the nearest cent) is the net asset value per share.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting daily
expense accruals of the higher distribution fees applicable to Class B and Class
M shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.
Orders received by dealers prior to the close of trading on the New York Stock
Exchange will be confirmed at the offering price computed as of the close of
trading on that Exchange provided the order is received by the Distributor prior
to its close of business that same day (normally 4:00 P.M. Pacific time). It is
the responsibility of the dealer to insure that all orders are transmitted
timely to the Fund. Orders received by dealers after the close of trading on the
New York Stock Exchange will be confirmed at the next computed offering price as
described in the Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Fund provides a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of the Fund
on a regular basis. Such a Program may be started with an initial investment
($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no
obligation to continue. The Program may be terminated without penalty at any
time by the investor or the Fund. The minimum investment requirements may be
waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
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<PAGE>
For investors purchasing shares of the Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of the Fund on
a periodic basis, the Fund may, in lieu of furnishing confirmations following
each purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of the Fund will not be issued
unless the shareholder requests them in writing.
Self-Employed and Corporate Retirement Plans
For self-employed individuals and corporate investors that wish to purchase
shares of the Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Fund.) The annual contract maintenance charge may
be waived from time to time. For further details, including the right to appoint
a successor Custodian, see the Plan and Custody Agreements as provided by the
Fund. Employers who wish to use shares of the Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
Individual Retirement Accounts
Investors having earned income are eligible to purchase shares of the Fund under
an Individual Retirement Account ("IRA") pursuant to Section 408(a) of the
Internal Revenue Code. An individual who creates an IRA may contribute annually
certain dollar amounts of earned income, and an additional amount if there is a
non-working spouse. Copies of a model Custodial Account Agreement are available
from the Distributor. Investors Fiduciary Trust Company, Kansas City, Missouri,
will act as the Custodian under this model Agreement, for which it will charge
the investor an annual fee of $12.00 for maintaining the Account (such fee is in
addition to the normal custodial charges paid by the Fund). Full details on the
IRA are contained in an Internal Revenue Service required disclosure statement,
and the Custodian will not open an IRA until seven (7) days after the investor
has received such statement from the Fund. An IRA using shares of the Fund may
also be used by employers who have adopted a Simplified Employee Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are also
available. Section 403(b) plans are arrangements by a public school organization
or a charitable, educational, or scientific organization that is described in
Section 501(c)(3) of the Internal Revenue Code under which employees are
permitted to take advantage of the federal income tax deferral benefits provided
for in Section 403(b) of the Code.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant.
Telephone Redemption and Exchange Privileges
As discussed in the Prospectus, the telephone redemption and exchange privileges
are available for all shareholder accounts; however, retirement accounts may not
utilize the telephone redemption privilege. The telephone privileges may be
modified or terminated at any time. The privileges are subject to the conditions
and provisions set forth below and in the Prospectus.
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<PAGE>
1. Telephone redemption and/or exchange instructions received in good order
before the pricing of a Fund on any day on which the New York Stock
Exchange is open for business (a "Business Day"), but not later than 4:00
p.m. eastern time, will be processed at that day's closing net asset value.
For each exchange, the shareholder's account may be charged an exchange
fee. There is no fee for telephone redemption; however, redemptions of
Class A and Class B shares may be subject to a contingent deferred sales
charge (See "Redemption of Shares" in the Prospectus).
2. Telephone redemption and/or exchange instructions should be made by dialing
1-800-992-0180.
3. Pilgrim America Group will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim America Group:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on the
registration. This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to the
address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the address of
record at any one time is $50,000.
(e) The minimum amount which can be liquidated and sent to a predetermined
bank account is $5,000.
5. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Pilgrim America Fund being acquired.
6. Any new account established through the exchange privilege will have the
same account information and options except as stated in the Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but must
be forwarded to Pilgrim America and deposited into your account before any
transaction may be processed.
8. If a portion of the shares to be exchanged are held in escrow in connection
with a Letter of Intent, the smallest number of full shares of the Pilgrim
America Fund to be purchased on the exchange having the same aggregate net
asset value as the shares being exchanged shall be substituted in the
escrow account. Shares held in escrow may not be redeemed until the Letter
of Intent has expired and/or the appropriate adjustments have been made to
the account.
9. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Funds' then-current
prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or longer until the
check used to purchase the shares being redeemed has been paid by the bank
upon which it was drawn.
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<PAGE>
DISTRIBUTIONS
The policy of the Fund is to pay monthly dividends from its net investment
income. Distributions of any net realized long-term capital gains will be made
annually following its fiscal year ending on June 30.
The Fund's shareholders have the privilege of reinvesting both ordinary income
dividends and capital gain dividends, if any, in additional full or fractional
shares of the same class at the then current net asset value without a sales
charge. The Fund's 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 Fund 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 the Fund is made
upon the condition and understanding that the Transfer Agent is automatically
appointed to receive the dividends and distributions upon all shares in the
shareholder's account and to reinvest them in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the
reinvestment date. A shareholder may still at any time after a purchase of Fund
shares request that dividends and/or capital gains distributions be paid to him
in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in the Fund.
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must,
among other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loaned, gains from the sale or
other disposition of stock or securities and gains from the sale or other
disposition of foreign currencies, or other income (including gains from
options, futures contracts and forward contracts) derived with respect to the
Fund's business of investing in stocks, securities or currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of the
following assets held for less than three months: (i) stock and securities, (ii)
options, futures and forward contracts (other than options, futures and forward
contracts on foreign currencies), and (iii) foreign currencies (and options,
futures and forward contracts on foreign currencies) which are not directly
related to the Fund's principal business of investing in stocks and securities
(or options and futures with respect to stock or securities); (c) diversify its
holdings so that, at the end of each quarter, (i) at least 50% of the value of
the Fund's total assets is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets in invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer or of any two or more issuers
that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses; and (d) distribute at least 90% of
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) each taxable year.
The status of the Fund as a regulated investment company does not involve
government supervision of management or of their investment practices, or
policies. As a regulated investment company, the Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes as
dividends to its shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the Fund
intends to make distributions in accordance with the calendar year distribution
requirement.
Distributions
Dividends of investment company taxable income (including net short-term capital
gains) are taxable to shareholders as ordinary income. Distributions of
investment company taxable income may be eligible for the corporate
dividends-received deduction
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<PAGE>
to the extent attributable to the Fund's dividend income from U.S. corporations
and if other applicable requirements are met. However, the alternative minimum
tax applicable to corporations may reduce the benefit of the dividends-received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends are taxable to shareholders as long-term capital gains,
regardless of the length of time the Fund's shares have been hold by a
shareholder, and are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to shareholders, whether
received in cash or reinvested in shares of the Fund. Any distributions that are
not from the Fund's investment company taxable income or net capital gain may be
characterized as a return of capital to shareholders or in some cases, as
capital gain. Shareholders will be notified annually as to the federal tax
status of dividends and distributions they receive and any tax withheld thereon.
Dividends, including capital gain dividends, declared in October, November or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by the Fund reduce the net asset value of the Fund shares. Should
a distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain an described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by the Fund. The price of shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.
Original Issue Discount/Market Discount
Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount that accrues on a debt
security in a given year generally is treated for federal income tax purposes as
interest and, therefore, such income would be subject to the distribution
requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
Sale of Shares
Upon the sale or exchange of his shares, a shareholder will realize a taxable
gain or loss depending upon his basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and generally will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a-period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of the Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions or capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after
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the date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
Backup Withholding
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he in not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.
Other Taxes
Distributions also may be subject to state, local and foreign taxes. Certain
states may exempt from state tax Fund dividends attributable to interest earned
on U.S. Treasury securities. U.S. tax rules applicable to foreign investors may
differ significantly from those outlined above. This discussion does not purport
to deal with all of the tax consequences applicable to shareholders.
Shareholders are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
The Fund may, from time to time, include "total return" or "yield" in
advertisements or reports to shareholders or prospective investors. Quotations
of average annual total return will be expressed in terms of the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5 and 10 years (up to the life of the Fund), calculated pursuant to the
following formula which is prescribed by the Commission:
P(1 + T)n = ERV
where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
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<PAGE>
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and d = the maximum offering
price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
The Fund may also from time to time advertise its yield based on a 30-day or
90-day period ended on a date other than the most recent balance sheet included
in the Fund's Registration Statement, computed in accordance with the yield
formula described above, as adjusted to conform with the differing period for
which the yield computation is based.
Any quotation of performance stated in terms of yield (whether based on a 30-day
or 90-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Additional Performance Quotations
Advertisements of total return will always show a calculation that includes the
effect of the maximum sales charge but may also show total return without giving
effect to that charge. Because these additional quotations will not reflect the
maximum sales charge payable, these performance quotations will be higher than
the performance quotations that reflect the maximum sales charge.
Total returns and yields are based on past results and are not necessarily a
prediction of future performance.
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<PAGE>
Performance Comparisons
In reports or other communications to shareholders or in advertising material,
the Fund may compare the performance of its Class A, Class B, and Class M shares
with that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc. or similar
independent services that monitor the performance of mutual funds or with other
appropriate indexes of investment securities. In addition, certain indexes may
be used to illustrate historic performance of select asset classes. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Money and The Wall Street Journal. If the Fund compares its
performance to other funds or to relevant indexes, the Fund's performance will
be stated in the same terms in which such comparative data and indexes are
stated, which is normally total return rather than yield. For these purposes the
performance of the Fund, as well as the performance of such investment companies
or indexes, may not reflect sales charges, which, if reflected, would reduce
performance results.
The average annual rate of return of the Class A shares of the Fund for the one,
five, and ten year periods ended June 30, 1996 was -1.60%, 4.60%, and 6.18%,
respectively. The average total return for the Class B and Class M Shares for
the period from commencement of operations (July 17, 1995) through June 30,
1996, was -2.80% and -0.85%, respectively.
GENERAL INFORMATION
The Fund's authorized capital stock consists of 5,000,000,000 shares. 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. The Board of Directors may classify or reclassify any unissued shares 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.
CUSTODIAN
The cash and securities owned by the Fund are held by Investors Fiduciary Trust
Company, Kansas City, Missouri, as Custodian, which takes no part in the
decisions relating to the purchase or sale of the Fund's portfolio securities.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 725 South Figueroa Street, Los Angeles, California,
90017, acts as independent auditors for the Fund.
LEGAL COUNSEL
Legal matters for the Fund are passed upon by Dechert Price & Rhoads, 1500 K
Street, N.W., Washington, D.C. 20005.
FINANCIAL STATEMENTS
The Financial Statements for the year ended June 30, 1996 are incorporated
herein by reference from the Fund's 1996 Annual Report to Shareholders dated
June 30, 1996. Copies of the Fund's Annual Report may be obtained without charge
by contacting the Fund at Two Renaissance Square, Suite 1200, 40 North Central
Avenue, Phoenix, Arizona 85004, (800) 331-1080.
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