As filed with the Securities and Exchange Commission on January 4, 2000
Securities Act File No. 33-850
Investment Company Act File No. 811-2239
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM N-1A
Registration Statement Under The Securities Act of 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 27 [X]
and/or
Registration Statement Under The Investment Company Act of 1940 [X]
Amendment No. 28 [X]
(Check appropriate box or boxes)
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
(Formerly the "Northstar Balance Sheet Opportunities Fund")
(Exact Name of Registrant as Specified in Charter)
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 334-3436
James M. Hennessy, Esq. Jeffrey S. Puretz, Esq.
Pilgrim Investments, Inc. Dechert Price & Rhoads
40 North Central Avenue, Suite 1200 1775 Eye Street, N.W.
Phoenix, AZ 85004 Washington, D.C. 20006
(Name and Address of Agent for Service)
-----------------
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ]75 days after filing pursuant to paragraph (a)(2)
[ ]on (date)pursuant to paragraph(a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective
date for a previously filed post-effective amendment.
================================================================================
<PAGE>
PILGRIM(SM)
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FUNDS FOR SERIOUS INVESTORS
Prospectus
Classes: A, B, C, M and T
January 4, 2000
U.S. EQUITY FUNDS
Pilgrim MagnaCap
Pilgrim LargeCap Leaders
Pilgrim Research Enhanced Index
Pilgrim Growth Opportunities
Pilgrim LargeCap Growth
Pilgrim MidCap Value
Pilgrim MidCap Opportunities
Pilgrim MidCap Growth
Pilgrim Growth + Value
Pilgrim SmallCap Opportunities
Pilgrim SmallCap Growth
Pilgrim Bank and Thrift
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth
Pilgrim International Value
Pilgrim International Core Growth
Pilgrim International SmallCap Growth
Pilgrim Emerging Markets Value
This prospectus contains important Pilgrim Emerging Countries
information about investing in the Pilgrim Asia-Pacific Equity
Pilgrim Funds. You should read it
carefully before you invest, and keep INCOME FUNDS
it for future reference. Please note Pilgrim Government Securities Income
that your investment: is not a bank Pilgrim Government Securities
deposit, is not insured or guaranteed Pilgrim Strategic Income
by the FDIC, the Federal Reserve Board Pilgrim High Yield
or any other government agency and is Pilgrim High Yield II
affected by market fluctuations. There Pilgrim High Yield III
is no guarantee that the funds will Pilgrim High Total Return
achieve their objectives. As with all Pilgrim High Total Return II
mutual funds, the Securities and Pilgrim Money Market
Exchange Commission (SEC) has not
approved or disapproved these
securities nor has the SEC judged EQUITY & INCOME FUNDS
whether the information in this Pilgrim Balanced
prospectus is accurate or adequate. Pilgrim Income & Growth
Any representation to the contrary Pilgrim Balance Sheet Opportunities
is a criminal offense. Pilgrim Convertible
<PAGE>
[GRAPHIC] These pages contain a description of each of our
funds included in this prospectus, including its
OBJECTIVE objective, investment strategy and risks.
[GRAPHIC] You'll also find:
INVESTMENT HOW THE FUND HAS PERFORMED. A chart that shows the
STRATEGY fund's financial performance for the past ten
years (or since inception, if shorter).
[GRAPHIC]
WHAT YOU PAY TO INVEST. A list of the fees and
RISKS expenses you pay -- both directly and indirectly
-- when you invest in a fund.
[GRAPHIC]
HOW THE
FUND HAS
PERFORMED
WHAT'S INSIDE
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An introduction to the
Pilgrim Funds 1
U.S. EQUITY FUNDS
Pilgrim MagnaCap 2
Pilgrim LargeCap Leaders 4
Pilgrim Research Enhanced Index 6
Pilgrim Growth Opportunities 8
Pilgrim LargeCap Growth 10
Pilgrim MidCap Value 12
Pilgrim MidCap Opportunities 14
Pilgrim MidCap Growth 16
Pilgrim Growth + Value 18
Pilgrim SmallCap Opportunities 20
Pilgrim SmallCap Growth 22
Pilgrim Bank and Thrift 24
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth 26
Pilgrim International Value 28
Pilgrim International Core Growth 30
Pilgrim International SmallCap Growth 32
Pilgrim Emerging Markets Value 34
Pilgrim Emerging Countries 36
Pilgrim Asia-Pacific Equity 38
INCOME FUNDS
Pilgrim Government Securities Income 40
Pilgrim Government Securities 42
Pilgrim Strategic Income 44
Pilgrim High Yield 46
Pilgrim High Yield II 48
Pilgrim High Yield III 50
Pilgrim High Total Return 52
Pilgrim High Total Return II 54
Pilgrim Money Market 56
EQUITY & INCOME FUNDS
Pilgrim Balanced 58
Pilgrim Income & Growth 60
Pilgrim Balance Sheet Opportunities 62
Pilgrim Convertible 64
What you pay to invest 66
Shareholder guide 73
Management of the Funds 80
Dividends, distributions and taxes 85
More information about risks 86
Financial highlights 89
Where to go for more information Backcover
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INTRODUCTION TO THE
PILGRIM FUNDS
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Risk is the potential that your investment will lose money or not earn as much
as you hope. All mutual funds have varying degrees of risk, depending on the
securities they invest in. Please read this prospectus carefully to be sure you
understand the principal risks and strategies associated with each of our Funds.
You should consult the Statement of Additional Information (SAI) for a complete
list of the risks and strategies.
[GRAPHIC]
If you have any questions about the Pilgrim Funds, please call your financial
consultant or us at 1-800-992-0180.
This prospectus is designed to help you make informed decisions about your
investments. In order to make it easy for you to find what you're looking for,
we have divided the Pilgrim Funds into four categories.
U.S. EQUITY FUNDS
Our U.S. Equity Funds focus on long-term growth by investing primarily in
domestic equities.
They may suit you if you:
* are investing for the long-term -- at least several years
* are willing to accept higher risk in exchange for long-term growth.
INTERNATIONAL EQUITY FUNDS
Pilgrim offers International Equity Funds that emphasize a growth approach to
international investing, as well as International Equity Funds that apply the
technique of "value investing". These Funds focus on long-term growth by
investing primarily in foreign equities.
They may suit you if you:
* are investing for the long-term -- at least several years
* are looking for exposure to international markets
* are willing to accept higher risk in exchange for long-term growth.
INCOME FUNDS
Pilgrim offers both aggressive and conservative Income Funds.
They may suit you if you:
* want a regular stream of income. Income Funds other than the money market
fund may suit you if you:
* want greater growth potential than a money market fund
* are willing to accept more risk than a money market fund.
EQUITY AND INCOME FUNDS
Pilgrim's Equity and Income Funds seek income and growth of capital.
They may suit you if you:
* want both regular income and capital appreciation
* are looking for growth potential, but don't feel comfortable with the level
of risk associated with the Equity Funds.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
1
<PAGE>
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U.S. Equity
Funds
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Adviser
PILGRIM MAGNACAP FUND Pilgrim Investments, Inc.
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OBJECTIVE
[GRAPHIC]
The Fund seeks growth of capital, with dividend income as a secondary
consideration.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund is managed with the philosophy that companies that can best meet the
Fund's objectives have paid increasing dividends or have had the capability to
pay rising dividends from their operations. The Fund normally invests at least
65% of its assets in equity securities of companies that meet the following
disciplined criteria:
Consistent Dividends -- A company must have paid or had the financial capability
from its operations to pay a dividend in 8 out of the last 10 years.
Substantial Dividend Increases -- A company must have increased its dividend or
had the financial capability from its operations to have increased its dividend
at least 100% over the past 10 years.
Reinvested Earnings -- Dividend payout must be less than 65% of current
earnings.
Strong Balance Sheet -- Long term debt should be no more than 25% of the
company's total capitalization or a company's bonds must be rated at least A-or
A-3.
Attractive Price -- A company's current share price should be in the lower half
of the stock's price/earnings ratio range for the past ten years, or the ratio
of the share price to its anticipated future earnings must be an attractive
value in relation to the average for its industry peer group or that of the
Standard & Poor's 500 Composite Stock Price Index.
The equity securities in which the Fund may invest include common stocks,
convertible securities, and rights or warrants. Normally, the Fund's investments
are primarily in larger companies that are included in the largest 500 U.S.
companies. The remainder of the Fund's assets may be invested in equity
securities that the adviser believes have growth potential because they
represent an attractive value. In selecting securities for the Fund,
preservation of capital is also an important consideration. Although the Fund
normally will be invested as fully as practicable in equity securities, assets
that are not invested in equity securities may be invested in high quality debt
securities. The Fund may invest up to 5% of its assets, measured at the time of
investment, in foreign securities.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
Market Trends -- from time to time, the stock market may not favor the value
securities that meet the Fund's disciplined investment criteria. Rather, the
market could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
Debt securities -- the value of debt securities may fall when interest rates
rise. Debt securities with longer maturities tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter maturities.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
2 Pilgrim MagnaCap Fund
<PAGE>
PILGRIM MAGNACAP FUND
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HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
22.46 -3.11 25.28 8.02 9.25 4.15 35.22 18.51 27.73 16.09
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 18.93%
3rd quarter 1990: down 15.99%
The Fund's year-to-date total return as of September 30, 1999 was 2.49%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Standard & Poor's 500 Composite Stock Price Index.
Average annual total returns(2)
S&P
500
Class A(3) Class B(4) Class M(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 9.40 10.26 1.56 28.58
Five years, ended
December 31, 1998 % 18.46 N/A N/A 24.05
Ten years, ended
December 31, 1998 % 15.13 N/A N/A 19.19
Since inception(7) % N/A 20.73 20.31 27.78
- - - - - - - - - ----------
(2) Class C shares of the Fund were not offered during the period ended
December 31, 1998.
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of sales charge of 3.5%.
(6) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(7) Classes B and M commenced operations on July 17, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MagnaCap Fund 3
<PAGE>
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U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM LARGECAP LEADERS FUND Pilgrim Investments, Inc.
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OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies that the adviser believes are leaders in their
industries. The adviser considers whether these companies have a sustainable
competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. For this Fund, a company with a market capitalization (outstanding
shares multiplied by price per share) of over $5 billion is considered to be a
large company, although the Fund may also invest to a limited degree in
companies that have a market capitalization between $1 billion and $5 billion.
The equity securities in which the Fund may invest include common stock,
convertible securities, preferred stock, American Depositary Receipts, and
warrants. The Fund normally invests as fully as practicable (at least 80%) in
equity securities.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies. The Fund also may invest in small and medium-sized companies,
which may be more susceptible to price swings because they have fewer financial
resources, more limited product and market diversification, and many are
dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
Inability to Sell Securities -- securities of smaller companies trade in lower
volume and may be less liquid than securities of larger, more established
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
4 Pilgrim LargeCap Leaders Fund
<PAGE>
PILGRIM LARGECAP LEADERS FUND
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HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.07 20.15 20.08
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to November 1, 1998, the Fund's investment policies were different in
that they emphasized large company value stocks without necessarily
emphasizing industry leaders. Pilgrim Investments has been the Fund's
investment adviser since the Fund commenced operations; however, prior to
November 1, 1997, the Fund was managed by a sub-adviser.
Best and worst quarterly performance during this period:
4th quarter 1998: up 24.58%
3rd quarter 1998: down 12.86%
The Fund's year-to-date total return as of September 30, 1999 was 5.45%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Standard & Poor's 500 Composite Stock Price Index.
Average annual total returns(3)
S&P
500
Class A(4) Class B(5) Class M(6) Index(7)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 13.16 14.33 15.43 28.58
Since inception(8) % 18.67 19.28 18.93 28.77
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(3) Class C shares of the Fund were not offered during the period ended
December 31, 1998.
(4) Reflects deduction of sales charge of 5.75%.
(5) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(6) Reflects deduction of sales charge of 3.5%.
(7) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(8) The Fund commenced operations on September 1, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim LargeCap Leaders Fund 5
<PAGE>
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U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
Pilgrim Advisors, Inc.
Sub-Adviser
J.P. Morgan Investment
PILGRIM RESEARCH ENHANCED INDEX FUND Management
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OBJECTIVE
[GRAPHIC]
The Fund seeks capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in large companies that make up the S&P 500 Index.
Based on extensive research regarding projected company earnings and dividends,
a valuation model ranks companies in each industry group according to their
relative value. Using this valuation model, the portfolio managers select stocks
for the Fund. Within each industry, the Fund modestly overweights stocks that
are ranked as undervalued or fairly valued while modestly underweighting or not
holding stocks that appear overvalued. Industry by industry, the fund's assets
are invested so that the fund's industry sector allocations and market cap
weightings closely parallel those of the S&P 500.
By owning a large number of stocks within the S&P 500, with an emphasis on those
that appear undervalued or fairly valued, and by tracking the industry
weightings and other characteristics of that index, the Fund seeks returns that
modestly exceed those of the S&P 500 over the long term with virtually the same
level of volatility.
Under normal market conditions, the Fund invests at least 80% of its total
assets in common stocks included in the S&P 500. It may also invest in other
common stocks not included in the S&P 500. The fund may also invest in certain
higher-risk investments, including derivatives (generally these investments will
be limited to S&P 500 options).
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies. The portfolio managers try to remain fully invested in
companies included in the S&P 500, and generally do not change this strategy
even temporarily, which could make the Fund more susceptible to poor market
conditions.
Market Trends -- from time to time, the stock market may not favor the large
company securities that are ranked as undervalued or fairly valued in which the
Fund invests. Rather, the market could favor small company stocks,
growth-oriented HERE IT ISFund invests. Rather, the market could favor small
company stocks, growth-oriented stocks, or may not favor equities at all.
Risks of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
6 Pilgrim Research Enhanced Index Fund
<PAGE>
PILGRIM RESEARCH ENHANCED INDEX FUND
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HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
This Fund does not have a performance history because it was formed on December
30, 1998.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Research Enhanced Index Fund 7
<PAGE>
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U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM GROWTH OPPORTUNITIES FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
This Fund seeks long-term growth of capital.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in common stock of U.S. companies that the portfolio
manager feels have above average prospects for growth.
Under normal market conditions, the Fund invests at least 65% of its total
assets in securities purchased on the basis of the potential for capital
appreciation. These securities may be from large-cap, mid-cap or small-cap
companies.
The portfolio managers use a "top down" disciplined investment process, which
includes extensive database screening, frequent fundamental research,
identification and implementation of a trend-oriented approach in structuring
the portfolio and a sell discipline. The portfolio managers seek to invest in
companies expected to benefit most from major social, economic and technological
trends that are likely to shape the future of business and commerce over the
next three to five years, and attempt to provide a framework for identifying the
industries and companies expected to benefit most. This top down approach is
combined with rigorous fundamental research (a bottoms up approach) to guide
stock selection and portfolio structure.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
portfolio manager feels have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to price swings than larger companies
because they have fewer financial resources, more limited product and market
diversification and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks, or may not favor equities at all.
Inability to Sell Securities -- securities of smaller companies trade in lower
volume and may be less liquid than securities of larger, more established
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
8 Pilgrim Growth Opportunities Fund
<PAGE>
PILGRIM GROWTH OPPORTUNITIES FUND
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HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's shares from year to
year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
24.90 -4.59 38.75 8.70 11.01 -7.01 25.05 20.54 23.59 23.61
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did. The figures shown for 1996 to 1998
provide performance for Class A shares of the Fund. The figures shown for
the years 1989 to 1995 provide performance for Class T shares of the Fund,
revised to reflect expenses of Class A shares.
Best and worst quarterly performance during this period:
4th quarter 1998: up 31.33%
3rd quarter 1998: down 15.25%
The Fund's year-to-date total return as of September 30, 1999 was 38.93%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Standard & Poor's 500 Composite Stock Price Index.
Average annual total returns
<TABLE>
<CAPTION>
S&P
500
Class A(2) Class B(3) Class C(4) Class T(5) Index(6)
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
One year, ended
December 31, 1998 % 16.49 17.69 21.90 18.79 28.58
Five years, ended
December 31, 1998 % N/A N/A N/A 15.76 24.05
Ten years, ended
December 31, 1998 % N/A N/A N/A 14.96 19.19
Since inception of
Classes A, B, and C(7) % 20.27 21.16 21.50 N/A 28.56
Since inception of
Class T(7) % N/A N/A N/A 13.50 17.80
</TABLE>
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects deduction of a deferred sales charge of 4% for the 1 year return.
(6) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(7) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Growth Opportunities Fund 9
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM LARGECAP GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover signs of "change at the margin" -- positive business
developments which are not yet fully reflected in a company's stock price.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. In the sub-adviser's opinion, the bottom 10% of the Index includes
companies with capitalizations less than $3.9 billion. Capitalization of
companies in the Index will change with market conditions.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund invests primarily in equity securities
of larger companies, which sometimes have more stable prices than smaller
companies.
Market Trends -- from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
10 Pilgrim LargeCap Growth Fund
<PAGE>
PILGRIM LARGECAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
59.45
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
4th quarter 1998: up 37.87%
3rd quarter 1998: down 8.50%
The Fund's year-to-date total return as of September 30, 1999 was 35.42%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Russell 1000 Growth Index.
Average annual total returns
Russell
1000
Growth
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 50.26 53.68 57.34 38.71
Since inception(7) % 39.24 40.46 44.12 44.57
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 4%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those companies among the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth.
(7) The Fund commenced operations on July 21, 1997.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim LargeCap Growth Fund 11
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM MIDCAP VALUE FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests as fully as practicable (at least 80% of its assets)
in equity securities of medium-sized U.S. companies. The Fund will normally
invest at least 65% of its assets in equity securities of companies that meet
the following disciplined criteria, which are intended to identify companies
that are attractive values:
Consistent Dividends -- The company must have paid or had the financial
capability from its operations to pay a dividend in its last five fiscal years.
Strong Balance Sheet -- If the company has debt that is rated, that debt is
rated investment grade by a nationally recognized rating agency. If the company
does not have debt that is rated, the company's long-term debt to capitalization
ratio is below 25%.
Reinvested Earnings -- The company currently pays out in dividends less than 65%
of current earnings, or less than the dividend payout as a percentage of current
earnings of at least half of the medium-sized companies in similar industries.
Attractive Price -- The ratio of the stock's price to the next fiscal year's
anticipated earnings is less than the corresponding ratio for at least half of
the medium-sized companies in similar industries.
The Fund considers a company to be medium-sized if it has a market
capitalization between $1 billion and $8 billion. The equity securities in which
the Fund may invest include common stock, convertible securities, preferred
stock and warrants.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests in medium-sized
companies, which may be more susceptible to price swings than larger companies,
but usually tend to have less volatile price swings than smaller companies.
Securities of medium-size companies may be more susceptible to price swings than
larger companies because they have fewer financial resources, more limited
product and market diversification and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the mid-cap
value securities that meet the Fund's disciplined investment criteria. Rather,
the market could favor growth-oriented stocks or large or small company stocks,
or may not favor equities at all.
Inability to Sell Securities -- securities of mid-size companies trade in lower
volume and may be less liquid than securities of larger, more established
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
12 Pilgrim MidCap Value Fund
<PAGE>
PILGRIM MIDCAP VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
29.56 21.87 4.89
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to October 1, 1999, the Fund's investment policies were different in
that they emphasized midcap value stocks without employing the current
disciplined selection criteria. Pilgrim Investments has been the Fund's
investment adviser since the Fund commenced operations; however, prior to
October 1, 1999, the Fund was managed by a sub-adviser.
Best and worst quarterly performance during this period:
1st quarter 1998: up 13.87%
3rd quarter 1998: down 13.94%
The Fund's year-to-date total return as of September 30, 1999 was -15.28%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of two broad measures of market
performance -- the Russell Midcap Index and the Russell Midcap Value Index.
Average annual total returns(3)
Russell
Russell Midcap
Midcap Value
Class A(4) Class B(5) Class M(6) Index(7) Index(8)
---------- ---------- ---------- -------- --------
One year, ended
December 31, 1998 % -1.15 -0.75 0.63 10.10 5.08
Since inception(9) % 15.53 16.07 15.70 18.85 19.43
- - - - - - - - - ----------
(3) Class C shares of the Fund were not offered during the period ended
December 31, 1998.
(4) Reflects deduction of sales charge of 5.75%.
(5) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(6) Reflects deduction of a sales charge of 3.5%.
(7) The Russell Midcap Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000 Index.
(8) The Russell MidCap Value Index measures the performance of companies in the
Russell Midcap Index with lower book-to-price ratios and lower forecasted
growth values.
(9) Classes A, B and M commenced operations on September 1, 1995. Class C
commenced operations on May 24, 1999.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Value Fund 13
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM MIDCAP OPPORTUNITIES FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
This Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in the common stocks of mid-sized U.S. companies that
the portfolio managers feel have above average prospects for growth. For this
Fund, mid-sized companies are companies with market capitalizations that fall
within the range of companies in the S&P MidCap 400 Index. As of November 30,
1999, the market capitalization of companies in the S&P MidCap 400 ranged from
$195 million to $23 billion. The market capitalization range will change as the
range of the companies included in the S&P MidCap 400 changes.
The portfolio managers use a "top-down" disciplined investment process, which
includes extensive database screening, frequent fundamental research,
identification and implementation of a trend-oriented approach in structuring
the portfolio and a sell discipline. The portfolio managers seek to invest in
companies expected to benefit most from the major social, economic and
technological trends that are likely to shape the future of business and
commerce over the next three to five years, and attempt to provide a framework
for identifying the industries and companies expected to benefit most. This
top-down approach is combined with rigorous fundamental research (a bottoms-up
approach) to guide stock selection and portfolio structure.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
portfolio manager feels have the potential for growth, which may give the Fund a
higher risk of price volatility than a Fund that emphasizes other styles, such
as a value-oriented style. The Fund invests in medium-sized companies, which may
be more susceptible to price swings than larger companies because they have
fewer financial resources, more limited product and market diversification, and
may be dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large or small company stocks, or may not favor
equities at all.
Inability to Sell Securities -- securities of mid-size companies usually trade
in lower volume and may be less liquid than securities of larger, more
established companies. The Fund could lose money if it cannot sell a security at
the time and price that would be most beneficial to the Fund.
14 Pilgrim MidCap Opportunities Fund
<PAGE>
PILGRIM MIDCAP OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
This Fund does not have a performance history because it was formed on August
20, 1998.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Opportunities Fund 15
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM MIDCAP GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of medium-sized U.S. companies, and at least 75% of its total
assets in common stocks.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. In the sub-adviser's opinion, the middle 90%
includes companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in medium-sized companies,
which may be more susceptible to price swings than larger companies because they
have fewer financial resources and more limited product and market
diversification, but usually tend to have less volatile price swings than
smaller companies.
Market Trends -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large or small company stocks, or may not favor
equities at all.
Inability to Sell Securities -- securities of mid-size companies trade in lower
volume and may be less liquid than securities of larger, more established
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
16 Pilgrim MidCap Growth Fund
<PAGE>
PILGRIM MIDCAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-11.00 37.64 15.84 15.88 14.14
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
4th quarter 1998: up 25.23%
3rd quarter 1998: down 17.73%
The Fund's year-to-date total return as of September 30, 1999 was 21.46%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Russell Midcap Growth Index.
Average annual total returns
Russell
Midcap
Growth
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 7.60 8.29 12.44 17.86
Five years, ended
December 31, 1998 % 12.09 N/A 12.75 17.34
Since inception of
Classes A and C(7) % 13.18 N/A 13.66 17.99
Since inception
of Class B(7) % N/A 18.26 N/A 21.07
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a sales charge of 1% for the 1 year return.
(6) The Russell Midcap Growth Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000 Index.
(7) Classes A and C commenced operations on April 19, 1993. Class B commenced
operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Growth Fund 17
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
Pilgrim Advisors, Inc.
Sub-Adviser
PILGRIM GROWTH + VALUE FUND Navellier Fund Management, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in a diversified portfolio of equity securities,
including common and preferred stock, warrants and convertible securities. The
Fund invests in common stock of companies the portfolio manager identifies as
either growth or value companies through quantitative analysis. Growth companies
have above average earnings or sales growth and higher price to earnings ratios.
Value companies are temporarily undervalued or out of favor, and tend to have
lower price to book ratios relative to price and higher returns on equity. The
percentage of Fund assets allocated to the two different kinds of companies
varies depending on the portfolio manager's assessment of economic conditions
and investment opportunities.
Under normal market conditions, the Fund invests at least 65% of its total
assets in securities purchased on the basis of the potential for capital
appreciation. These securities may be from large-cap, mid-cap, or small-cap
companies.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund's performance will be affected
if the portfolio manager makes an inaccurate assessment of economic conditions
and investment opportunities, and chooses growth companies that do not grow as
quickly as hoped, or value companies that continue to be undervalued by the
market. Although the sub-adviser invests in value companies to decrease
volatility, these investments may also lower the Fund's performance. The Fund's
investments in smaller and mid-sized companies may be more susceptible to price
swings than investments in larger companies because they have fewer financial
resources, more limited product and market diversification and many are
dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the mix of
growth and value securities in which the Fund invests. Rather, the market could
favor growth stocks to the exclusion of value stocks, or favor value stocks to
the exclusion of growth stocks, or may not favor equities at all.
Inability to Sell Securities -- securities of smaller and mid-sized companies
usually trade in lower volume and may be less liquid than securities of larger,
more established companies. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
Changes in Interest Rates -- the value of the Fund's convertible securities may
fall when interest rates rise. Convertibles with longer durations tend to be
more sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
Credit Risk -- the Fund could lose money if the issuer of a convertible security
is unable to meet its financial obligations or goes bankrupt.
18 Pilgrim Growth + Value Fund
<PAGE>
PILGRIM GROWTH + VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
18.10 17.72
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 29.15%
3rd quarter 1998: down 16.34%
The Fund's year-to-date total return as of September 30, 1999 was 31.08%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Russell 2000 Index.
Average annual total returns
Russell
2000
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 10.93 11.77 15.68 -2.54
Since inception(6) % 12.09 13.22 14.41 9.99
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Russell 2000 Index is an unmanaged index that measures the performance
of securities of smaller U.S. companies.
(6) The Fund commenced operations on November 18, 1996.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Growth + Value Fund 19
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM SMALLCAP OPPORTUNITIES FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests at least 65% of its total assets in the common stock of
smaller, lesser-known U.S. companies that the portfolio manager believes have
above average prospects for growth. For this Fund, smaller companies are those
with market capitalizations that fall within the range of companies in the
Russell 2000 Index, which is an index that measures the performance of small
companies. The market capitalization range will change as the range of the
companies included in the Russell 2000 changes. The median market capitalization
of companies held by the Fund as of September 30, 1999 was $1.1 billion.
The portfolio manager uses a "top-down" disciplined investment process, which
includes extensive database screening, frequent fundamental research,
identification and implementation of a brand-oriented approach in structuring
the portfolio and a sell discipline. The portfolio manager seeks to invest in
companies expected to benefit most from the major social, economic and
technological trends that are likely to shape the future of business and
commerce over the next three to five years, and attempts to provide a framework
for identifying the industries and companies expected to benefit most. This
top-down approach is combined with rigorous fundamental research (a bottom-up
approach) to guide stock selection and portfolio structure.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
portfolio manager feels have above average prospects for growth, which may give
the Fund a higher risk of price volatility than a Fund that emphasizes other
styles, such as a value-oriented style. The Fund invests in smaller companies,
which may be more susceptible to price swings than larger companies because they
have fewer financial resources, more limited product and market diversification
and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the small
sized growth securities in which the Fund invests. Rather, the market could
favor value-oriented stocks or large company stocks, or may not favor equities
at all.
Inability to Sell Securities -- securities of smaller companies usually trade in
lower volume and may be less liquid than securities of larger, more established
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
20 Pilgrim SmallCap Opportunities Fund
<PAGE>
PILGRIM SMALLCAP OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's shares from year to
year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
24.90 -4.59 38.75 8.70 11.01 -7.01 25.05 20.54 23.59 23.61
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did. The figures shown for the years
1996 to 1998 provide performance for Class A shares of the Fund. The
figures shown for the years 1989 to 1995 provide performance for Class T
shares of the Fund, revised to reflect expenses of Class A shares.
Best and worst quarterly performance during this period:
4th quarter 1998: up 28.84%
3rd quarter 1998: down 24.07%
The Fund's year-to-date total return as of September 30, 1999 was 46.88%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Russell 2000 Index.
<TABLE>
<CAPTION>
Average annual total returns
Russell
2000
Class A(2) Class B(3) Class C(4) Class T(5) Index(6)
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
One year, ended
December 31, 1998 % 1.42 1.84 5.81 2.94 -2.54
Five years, ended
December 31, 1998 % N/A N/A N/A 8.75 11.87
Ten years, ended
December 31, 1998 % N/A N/A N/A 13.88 12.92
Since inception for
Classes A, B, and C(7) % 12.93 13.62 14.00 N/A 14.83
Since inception
for Class T(7) % N/A N/A N/A 10.20 11.33
</TABLE>
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects deduction of a deferred sales charge of 4% for the 1 year return.
(6) The Russell 2000 Index is an unmanaged index that measures the performance
of securities of small companies.
(7) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim SmallCap Opportunities Fund 21
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM SMALLCAP GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of small U.S. companies, and at least 75% of its total assets
in common stocks.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. In the sub-adviser's opinion, the middle 90% includes companies
with capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small-cap companies, which
may be more susceptible to price swings than larger companies because they have
fewer financial resources, more limited product and market diversification and
many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
22 Pilgrim SmallCap Growth Fund
<PAGE>
PILGRIM SMALLCAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-4.03 34.87 18.27 11.24 3.68
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
4th quarter 1998: up 26.90%
3rd quarter 1998: down 23.64%
The Fund's year-to-date total return as of September 30, 1999 was 26.25%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Russell 2000 Growth Index.
Average annual total returns
Russell
2000
Growth
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -2.26 -1.96 2.12 1.23
Five years, ended
December 31, 1998 % 10.71 N/A 11.37 10.22
Since inception for
Classes A and C(7) % 11.38 N/A 12.03 10.87
Since inception
for Class B(7) % N/A 14.46 N/A 12.72
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Russell 2000 Growth Index is an unmanaged index that measures the
performance of securities of smaller U.S. companies with
greater-than-average growth orientation.
(7) Classes A and C commenced operations on December 27, 1993. Class B
commenced operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim SmallCap Growth Fund 23
<PAGE>
- - - - - - - - - -------------
U.S. Equity
Funds
- - - - - - - - - -------------
Adviser
PILGRIM BANK AND THRIFT FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund primarily seeks long-term capital appreciation; a secondary objective
is income.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of national and state-chartered banks (other than
money center banks), thrifts, and the holding or parent companies of such
depository institutions, and in savings accounts of mutual thrifts that may
allow the Fund to participate in stock conversions of the mutual thrift. This
policy may only be changed with approval of the shareholders of the Fund. The
equity securities described above include common stocks, convertible securities
(including convertible preferred stock) and warrants, but do not include
non-convertible preferred stocks or adjustable rate preferred stocks.
The Fund may invest up to 35% of its total assets in equity securities,
including preferred stocks or adjustable rate preferred stocks, of other types
of issuers, including money center banks, other financial services companies,
and companies that are not in financial services industries, and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) of any maturity that are either issued or
guaranteed by the United States Government or an agency thereof or issued by a
corporation or other issuer and rated in one of the top four categories by
Moody's (Baa and better) or S&P (BBB and better) or similarly rated by another
nationally recognized rating organization. The Fund may invest up to 10% of its
assets in securities of other investment companies.
The adviser emphasizes a value approach, and selects securities that are
undervalued relative to the market and have potential for future growth,
including securities of institutions that the adviser believes are well
positioned to take advantage of investment opportunities in the banking and
thrift industries.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- The value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in small- to
medium-sized companies, which may be more susceptible to price swings than
larger companies.
Market Trends -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks or large company stocks, or may not favor equities at
all.
Risks of Concentration -- because the Fund's investments are concentrated in the
banking and thrift industries, the value of the Fund may be subject to greater
volatility than a fund with a portfolio that is less concentrated. If securities
of banks and thrifts as a group falls out of favor, the Fund could underperform
funds that focus on other types of companies.
24 Pilgrim Bank and Thrift Fund
<PAGE>
PILGRIM BANK AND THRIFT FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.79 -18.14 49.49 32.36 7.79 -1.89 49.69 41.10 64.86 -1.83
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
Best and worst quarterly performance during this period:
3rd quarter 1997: up 16.43%
3rd quarter 1990: down 20.36%
The Fund's year-to-date total return as of September 30, 1999 was -14.58%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of three broad measures of market
performance -- the S&P 500 Index, the S&P Major Regional Banks Index and the
NASDAQ 100 Financial Index.
Average annual total returns(2)
S&P
Major NASDAQ
S&P Regional 100
Class Class 500 Banks Financial
A(3) B(4) Index(5) Index(6) Index(7)
---- ---- -------- -------- --------
One year, ended
December 31, 1998 % -7.48 -7.27 28.58 10.42 -1.09
Five years, ended
December 31, 1998 % 25.89 N/A 24.05 23.77 21.98
Ten years, ended
December 31, 1998 % 20.90 N/A 19.19 21.41 N/A
Since inception
of Class B(8) % N/A 4.29 26.34 15.84 7.92
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 4%, respectively, for
1 year and since inception returns.
(5) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(6) The S&P Major Regional Banks Index is an unmanaged index that measures the
performance of securities of major regional banks in the S&P 500 Index.
(7) The NASDAQ 100 Financial Index is an unmanaged index that measures the
performance of securities of the 100 largest financial companies traded on
NASDAQ.
(8) Class B shares commenced operations on October 17, 1997.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Bank and Thrift Fund 25
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM WORLDWIDE GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries, one of
which may be the U.S.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. The Fund may invest in
companies located in countries with emerging securities markets when the
sub-adviser believes they present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
In allocating the Fund's assets, the sub-adviser attempts to identify securities
of countries that are expected to provide the best opportunities for meeting the
Fund's investment objective.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund may also invest in small and
medium-sized companies, which may be more susceptible to greater price swings
than larger companies because they may have fewer financial resources, more
limited product and market diversification and many may be dependent on a few
key managers.
Market Trends -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks, or may not favor equities at all.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Inability to Sell Securities -- securities of foreign companies may trade in
lower volume and may be less liquid than securities of U.S. companies. The Fund
could lose money if it cannot sell a security at the time and price that would
be most beneficial to the Fund.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
26 Pilgrim Worldwide Growth Fund
<PAGE>
PILGRIM WORLDWIDE GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2.45 14.74 17.92 17.28 37.34
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
4th quarter 1998: up 26.87%
3rd quarter 1998: down 13.43%
The Fund's year-to-date total return as of September 30, 1999 was 26.96%
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI World Index.
Average annual total returns
MSCI
World
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 29.43 31.68 35.39 22.78
Five years, ended
December 31, 1998 % 16.04 N/A 16.70 13.94
Since inception of
Classes A and C(7) % 16.61 N/A 17.09 13.62
Since inception
of Class B(7) % N/A 21.12 N/A 16.21
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Morgan Stanley Capital International World (MSCI World) Index is an
unmanaged index that measures the performance of over 1,400 securities
listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand and
the Far East.
(7) Classes A and C commenced operations on April 19, 1993. Class B commenced
operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Worldwide Growth Fund 27
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Advisors, Inc.
Sub-Adviser
Brandes Investments
PILGRIM INTERNATIONAL VALUE FUND Partners L.P.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in foreign companies with market capitalizations
greater than $1 billion, but it may hold up to 25% of its assets in companies
with smaller market capitalizations.
The portfolio managers apply the technique of "value investing" by seeking
stocks that their research indicates are priced below their long-term value.
The Fund holds common stocks, preferred stocks, American, European and Global
depository receipts, as well as convertible securities.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in securities of companies located in at least three countries other than
the U.S. The Fund may invest up to the greater of:
* 20% of its assets in any one country or industry, or,
* 150% of the weighting of the country or industry in the MSCI EAFE Index, as
long as the Fund meets any industry concentration or diversification
requirements under the Investment Company Act.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund's investments may be
affected by the following additional risks:
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies. However, the Fund may also invest in small and medium-sized
companies, which may be more susceptible to price swings than larger companies
because they have fewer financial resources, more limited product and market
diversification and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the
value-oriented stocks that the Fund invests in. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
Inability to Sell Securities -- securities of smaller companies and some foreign
companies may trade in lower volume and may be less liquid than securities of
larger, more established companies or U.S. companies. The Fund could lose money
if it cannot sell a security at the time and price that would be most beneficial
to the Fund.
28 Pilgrim International Value Fund
<PAGE>
PILGRIM INTERNATIONAL VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total return (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
15.23 17.86 13.46
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 18.81%
3rd quarter 1998: down 14.73%
The Fund's year-to-date total return as of September 30, 1999 was 21.67%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI EAFE Index.
Average annual total returns
MSCI
EAFE
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 6.90 7.73 11.76 20.00
Since inception of
Classes A and C(6) % 13.63 N/A 14.70 11.24
Since inception
of Class B(6) % N/A 12.04 N/A 13.09
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%
(3) Reflects deduction of deferred sales charge of 5% and 4%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Morgan Stanley Capital International Europe Australasia Far East (MSCI
EAFE) Index is an unmanaged index that measures the performance of
securities listed on exchanges in markets in Europe, Australia and the Far
East.
(6) Classes A and C commenced operations on March 6, 1995. Class B commenced
operations on April 18, 1997.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim International Value Fund 29
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM INTERNATIONAL CORE GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers.
The Fund invests primarily in large capitalized companies ("large cap stocks")
located worldwide. In the opinion of the sub-adviser large cap stocks are those
whose stock market capitalizations are predominantly in the top 75% of publicly
traded companies as measured by stock market capitalizations in over 50
countries. The market capitalization ranges of the various countries' large cap
stocks may vary greatly due to fluctuating currency values, differences in the
size of the respective economies, and movements in the local stock markets.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. The Fund may
invest in companies located in countries with emerging securities markets when
the sub-adviser believes they present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
In allocating the Fund's assets, the sub-adviser attempts to identify securities
of countries that are expected to provide the best opportunities for meeting the
Fund's investment objective.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in large companies, which
sometimes have more stable prices than smaller companies.
Market Trends -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities at
all.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
30 Pilgrim International Core Growth Fund
<PAGE>
PILGRIM INTERNATIONAL CORE GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.92
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
1st quarter 1998: up 17.16%
3rd quarter 1998: down 14.91%
The Fund's year-to-date total return as of September 30, 1999 was 15.70%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI EAFE Index.
Average annual total returns
MSCI
EAFE
Class A(3) Class B(4) Class C(5) Index(6)
------------ ------------ ------------ ----------
One year, ended
December 31, 1998 % 13.93 15.31 19.20 20.00
Since inception(7) % 16.44 18.85 20.47 12.66
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Morgan Stanley Capital International Europe Australasia Far East (MSCI
EAFE) Index is an unmanaged index that measures the performance of
securities listed on exchanges in markets in Europe, Australia and the Far
East.
(7) The Fund commenced operations on February 28, 1997.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim International Core Growth Fund 31
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM INTERNATIONAL SMALLCAP GROWTH FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers.
The Fund invests primarily in smaller-capitalized companies ("small cap stocks")
located worldwide. In the opinion of the Fund's sub-adviser, small cap stocks
are those whose stock market capitalizations are predominantly in the bottom 25%
of publicly traded companies as measured by stock market capitalizations in over
50 countries. The market capitalization ranges of the various countries' small
cap stocks may vary greatly due to fluctuating currency values, differences in
the size of the respective economies, and movements in the local stock markets.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. The Fund may invest in
companies located in countries with emerging securities markets when the
sub-adviser believes they present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small companies, which may
be more susceptible to greater price swings than larger companies because they
may have fewer financial resources, more limited product and market
diversification and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Inability to Sell Securities -- securities of smaller and foreign companies
trade in lower volume and may be less liquid than securities of larger U.S.
companies. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
32 Pilgrim International SmallCap Growth Fund
<PAGE>
PILGRIM INTERNATIONAL SMALLCAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.51 17.58 13.46 35.57
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
1st quarter 1998: up 24.53%
3rd quarter 1998: down 15.35%
The Fund's year-to-date total return as of September 30, 1999 was 44.73%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Salomon EPAC EM Index.
Average annual total returns
Salomon
EPAC
EM
Class A(3) Class B(4) Class C(5) Index(6)
------------ ------------ ------------ ----------
One year, ended
December 31, 1998 % 27.79 29.83 33.89 14.14
Since inception of
Classes A and C(7) % 13.00 N/A 13.71 3.71
Since inception
of Class B(7) % N/A 18.31 N/A 1.67
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Salomon EPAC Extended Market (Salomon EPAC EM) Index is an unmanaged
index that measures the performance of securities of smaller-capitalization
companies in 22 countries excluding the U.S. and Canada.
(7) Classes A and C commenced operations on August 31, 1994. Class B commenced
operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim International SmallCap Growth Fund 33
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Advisors, Inc.
Sub-Adviser
Brandes Investment
PILGRIM EMERGING MARKETS VALUE FUND Partners, L.P.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in companies located in countries with emerging
markets, including companies that may be smaller and lesser-known.
The portfolio managers apply the technique of "value investing" by seeking
stocks that their research indicates are priced below their long-term value.
The Fund may invest in common stocks, preferred stocks, American, European and
Global depositary receipts, shares of closed-end investment companies, as well
as convertible securities.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in securities of companies located in countries with emerging markets.
Countries with emerging markets include those countries that are generally
considered to be emerging market countries by the international financial
community. The Fund may invest up to the greater of:
* 20% of its assets in any one country or industry, or,
* 150% of the weighting of the country or industry in the MSCI EMF Index, as
long as the Fund meets any industry concentration or diversification
requirements under the Investment Company Act.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund's investments may be
affected by the following additional risks:
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. For emerging market countries, the risks may be greater,
partly because emerging market countries may be less politically and
economically stable than other countries. It may also be more difficult to buy
and sell securities in emerging market countries.
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund may invest in smaller companies,
which may be more susceptible to price swings than larger companies because they
have fewer financial resources, more limited product and market diversification
and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the
value-oriented stocks that the Fund invests in. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
Inability to Sell Securities -- securities of smaller and emerging market
companies trade in lower volume and may be less liquid than securities of
companies in larger, more established markets. The Fund could lose money if it
cannot sell a security at the time and price that would be most beneficial to
the Fund.
34 Pilgrim Emerging Markets Value Fund
<PAGE>
PILGRIM EMERGING MARKETS VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total return (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-22.58
- - - - - - - - - ----------
(1) These figures are as of December 31, 1998. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 16.95%
2nd quarter 1998: down 24.79%
The Fund's year-to-date total return as of September 30, 1999 was 35.26%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI EMF Index.
Average annual total return
MSCI
EMF
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998(6) % -27.03 -26.88 -24.02 -27.52
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%
(3) Reflects deduction of deferred sales charge of 5% for the 1 year return.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Morgan Stanley Capital International Emerging Markets Free (MSCI EMF)
Index is an unmanaged index that measures the performance of securities
listed on exchanges in developing nations throughout the world.
(6) The Fund commenced operations on January 1, 1998.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Emerging Markets Value Fund 35
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM EMERGING COUNTRIES FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests at least 65% of its total assets in equity securities of
issuers located in at least three countries with emerging securities markets --
that is, countries with securities markets which are, in the opinion of the
sub-adviser, emerging as investment markets but have yet to reach a level of
maturity associated with developed foreign stock markets. The sub-adviser
currently selects portfolio securities from an investment universe of
approximately 6,000 foreign issuers in over 35 emerging markets.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. The
Fund may invest at least 35% of its assets in U.S. companies.
The Fund's sub-adviser emphasizes a growth approach, and seeks issuers in the
early stages of development believed to be undergoing a basic change in
operations.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a Fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than larger
companies because they may have fewer financial resources, more limited product
and market diversification and many are dependent on a few key managers.
Market Trends -- from time to time, the stock market may not favor the growth
securities in which the Fund invests, or may not favor equities at all.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. Investments in emerging market countries are generally
riskier than other kinds of foreign investments, partly because emerging market
countries may be less politically and economically stable than other countries.
It may also be more difficult to buy and sell securities in emerging market
countries.
Inability to Sell Securities -- securities of emerging market companies trade in
lower volume and may be less liquid than securities of companies in larger, more
established markets. The Fund could lose money if it cannot sell a security at
the time and price that would be most beneficial to the Fund.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
36 Pilgrim Emerging Countries Fund
<PAGE>
PILGRIM EMERGING COUNTRIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.34 27.50 9.44 -22.19
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
2nd quarter 1995: up 15.01%
3rd quarter 1998: down 26.06%
The Fund's year-to-date total return as of September 30, 1999 was 28.99%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI EMF Index.
Average annual total returns
MSCI
EMF
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -26.67 -26.05 -22.98 -27.52
Since inception of
Classes A and C(7) % 0.96 N/A 1.45 -13.31
Since inception
of Class B(7) % N/A 1.48 N/A -11.89
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(5) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(6) The Morgan Stanley Capital International Emerging Markets Free (MSCI EMF)
Index is an unmanaged index that measures the performance of securities
listed on exchanges in developing nations throughout the world.
(7) Classes A and C commenced operations on November 28, 1994. Class B
commenced operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Emerging Countries Fund 37
<PAGE>
- - - - - - - - - -------------
International
Equity Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
HSBC Asset Management
(Americas), Inc. and HSBC
Asset Management (Hong
PILGRIM ASIA-PACIFIC EQUITY FUND Kong) Limited
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in equity securities
listed on stock exchanges in countries in the Asia-Pacific region or issued by
companies based in this region. Asia-Pacific countries in which the Fund invests
include, but are not limited to, China, Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand, but do not include Japan and
Australia. The equity securities in which the Fund may invest include common
stock, convertible securities, preferred stock, warrants, American Depositary
Receipts, European Depositary Receipts and other depositary receipts.
The Fund is managed using the investment philosophy that the sub-adviser, HSBC
Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Limited
(HSBC), uses in managing private Asia-Pacific portfolios. HSBC bases investment
decisions on a disciplined approach that takes into consideration the following
factors: a macroeconomic overview of the region, specific country analysis,
setting target country weightings, evaluation of industry sectors within each
country, and selection of specific stocks. In selecting specific securities, the
sub-adviser emphasizes a value approach that seeks growth at a reasonable price.
This approach involves analysis of such fundamental factors as absolute rates of
change of earnings growth, earnings growth relative to the market and industry,
quality of earnings and stability of earnings growth, quality of management and
product line, interest rate sensitivity and liquidity of the stock.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: the country in which the issuer was organized; the
country in which the principal securities market for that issuer is located; the
country in which the issuer derives at least 50% of its revenues or profits from
goods produced or sold, investments made, or services performed; or the country
in which at least 50% of the issuer's assets are located.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
Market Trends -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Risks of the Asia-Pacific Region -- the Asia-Pacific region includes countries
in various stages of economic development, including emerging market countries.
In 1997 and 1998, securities markets in Asian countries suffered significant
downturns and volatility, and currencies lost value in relation to the U.S.
dollar. Currency devaluation in any one country may have a significant effect on
the entire region. Increased political or social unrest in some or all Asian
countries could cause further economic and market uncertainty.
Risks of Concentration -- because the Fund concentrates on a single region of
the world, the Fund's performance may be more volatile than that of a Fund that
invests globally. If Asia-Pacific securities fall out of favor, it may cause the
Fund to underperform funds that focus on other types of stocks.
Inability to Sell Securities -- securities of emerging market companies trade in
lower volume and may be less liquid than securities of companies in larger, more
established markets. The Fund could lose money if it cannot sell a security at
the time and price that would be most beneficial to the Fund.
38 Pilgrim Asia-Pacific Equity Fund
<PAGE>
PILGRIM ASIA-PACIFIC EQUITY FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.46 -43.73 -15.51
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 23.32%
4th quarter 1997: down 33.22%
The Fund's year-to-date total return as of September 30, 1999 was 32.23%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the MSCI Far East ex-Japan Index.
Average annual total returns
MSCI
Far East
Free
ex-Japan
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -20.37 -20.57 -19.26 -7.39
Since inception(6) % -19.55 -19.51 -19.47 -15.47
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of sales charge of 3.5% for the 1 year return.
(5) The Morgan Stanley Capital International Far East Free ex-Japan (MSCI Far
East Free ex-Japan) Index is an unmanaged index that measures the
performance of securities listed on exchanges in the Far East markets
excluding Japan.
(6) The Fund commenced operations on September 1, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Asia-Pacific Equity Fund 39
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM GOVERNMENT SECURITIES INCOME FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks high current income, consistent with liquidity and preservation
of capital.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests at least 70% of its total assets in securities issued
or guaranteed by the U.S. Government and the following agencies or
instrumentalities of the U.S. Government: the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct
obligations of the U.S. Treasury and mortgage-backed securities. The Fund may
fall below the 70% threshold due to changes in the value of the Fund's holdings
or the sale of securities to meet redemptions, in which case the Fund will
purchase only U.S. Government securities until the 70% level is restored. The
remainder of the Fund's assets may be invested in securities issued by other
agencies and instrumentalities of the U.S. Government and in instruments
collateralized by securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The foregoing policies are fundamental and may
not be changed without shareholder approval.
The Fund may invest in securities of any maturity; however, the Fund is expected
to have a dollar-weighted average duration within a range of 20% above or below
that of the Lehman Intermediate Treasury Index. As of September 30, 1999, the
dollar-weighted average duration of the Lehman Intermediate Treasury Index was
3.05 years. The adviser determines the composition of the Fund's portfolio on
the basis of its judgment of existing market conditions, such as the general
direction of interest rates, trends in creditworthiness, expected inflation,
supply and demand of fixed income securities, and other factors. The Fund may
enter into reverse repurchase agreements, dollar roll transactions or pairing
off transactions. The Fund does not invest in highly leveraged derivatives, such
as swaps, interest-only or principal-only stripped mortgage-backed securities,
or interest rate futures contracts.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- the value of the Fund's investments may fall when
interest rates rise. This Fund may be particularly sensitive to interest rates
because it primarily invests in U.S. government securities. Debt securities with
longer durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than debt securities with shorter durations.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is subject
to less credit risk than the other income funds because it principally invests
in debt securities issued or guaranteed by the U.S. Government, its agencies and
government sponsored enterprises.
Prepayment Risk -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
40 Pilgrim Government Securities Income Fund
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.92 8.03 11.90 7.46(8) 4.71 -3.61 14.51 2.56 7.85 5.61
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
2nd quarter 1989: up 7.76%
1st quarter 1994: down 2.66%
The Fund's year-to-date total return as of September 30, 1999 was -0.88%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of two broad measures of market
performance -- the Lehman Brothers/Mortgage Government Index and the Lehman
Brothers Intermediate Treasury Index.
Average annual total returns(2)
Lehman Lehman
Gov't/ Intermediate
Class Class Class Mortgage Treasury
A(3) B(4) M(5) Index(6) Index(7)
----- ----- ----- -------- ------------
One year, ended
December 31, 1998 % 0.63 -0.15 1.66 6.98 8.62
Five years, ended
December 31, 1998 % 4.20 N/A N/A 5.98 6.45
Ten years, ended
December 31, 1998(8) % 6.56 N/A N/A 7.38 8.34
Since inception of
Classes B and M(9) % N/A 4.42 4.50 7.24 7.20
- - - - - - - - - ----------
(2) Class C and T shares of the Fund were not offered during the period ended
December 31, 1998.
(3) Reflects deduction of sales charge of 4.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
(5) Reflects deduction of a sales charge of 3.25%.
(6) The Lehman Brothers Government/Mortgage Index is an unmanaged index that
measures the performance of U.S. Government agencies and instrumentalities,
as well as mortgage pass-through instruments issued by FNMA, FHLMC and
GNMA.
(7) The Lehman Brothers Intermediate Treasury Index is an unmanaged index that
measures the performance of U.S. Treasuries with maturities of under 10
years. Information on the Lehman Intermediate Index is presented because
effective May 24, 1999, the Fund seeks an average portfolio duration within
+/-20% of the duration of that Index. Previously, the Fund's average
portfolio maturity was generally longer.
(8) The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would
have been had the Fund adhered to its borrowing restriction.
(9) Classes B and M commenced operations on July 17, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Government Securities Income Fund 41
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM GOVERNMENT SECURITIES FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks high current income and conservation of principal.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in debt obligations issued or guaranteed by the U.S.
government or its agencies and instrumentalities. Depending on interest rates
and market opportunities, the portfolio manager selects U.S. government
securities that generally have short and intermediate terms to maturity. The
average duration of the Fund will generally be three to four years.
Under normal conditions, the Fund holds at least 65% of its total assets in
securities supported by the full faith and credit of the U.S. Government. No
more than 20% of its assets may be in securities issued by a single
instrumentality or agency not supported by the full faith and credit of the U.S.
Government. It may also invest in mortgage-backed, zero coupon securities and
other securities, including derivatives. Derivatives in which the Fund may
invest include financial futures contracts, such as interest rate futures
contracts.
PENDING MERGER -- Subject to shareholder approval, the Fund's Board of Trustees
has approved the reorganization of the Fund into Pilgrim Government Securities
Income Fund. You could therefore ultimately hold shares of that fund.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an invesment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- the Fund's performance is significantly affected by
changes in interest rates. The value of the Fund's investments -- particularly
those with longer duration -- may fall when interest rates rise. This Fund may
be particularly sensitive to interest rates because it primarily invests in U.S.
Government securities. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
debt securities with shorter durations. The Fund's performance will also be
affected if the portfolio manager makes an inaccurate assessment of economic
conditions and projected changes in interest rates.
Credit risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund is
subject to less credit risk than other income funds because it principally
invests in debt securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. However, the Fund may also invest in
mortgage-backed and zero coupon securities, which involve greater credit risk
and potential volatility. Zero coupon securities are particularly sensitive to
changes in interest rates.
Prepayment risk -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields, which would reduce performance.
Risks of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
42 Pilgrim Government Securities Fund
<PAGE>
PILGRIM GOVERNMENT SECURITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's shares from year to
year.
Year by year total return (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.92 8.03 11.90 7.46(8) 4.71 -3.61 14.51 2.56 7.85 5.61
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did. The figures shown for the years
1996 to 1998 provide performance for Class A shares of the Fund. The
figures shown for the years 1989 to 1995 provide performance for Class T
shares of the Fund, revised to reflect expenses for Class A shares.
Best and worst quarterly performance during this period:
4th quarter 1995: up 8.51%
1st quarter 1994: down 8.12%
The Fund's year-to-date total return as of September 30, 1999 was -1.53%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Intermediate Treasury Index.
<TABLE>
<CAPTION>
Average annual total return
Lehman
Intermediate
U.S.
Government
Class A(2) Class B(3) Class C(4) Class T(5) Index(5)
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
One year, ended
December 31, 1998 % 0.22 -0.44 3.37 0.90 8.62
Five years, ended
December 31, 1998 % N/A N/A N/A 4.59 6.45
Ten years, ended
December 31, 1998 % N/A N/A N/A 8.52 8.34
Since inception of
Classes A, B, and C(7) % 5.11 5.36 5.78 N/A 6.99
Since inception
of Class T(4) % N/A N/A N/A 7.06 8.17
</TABLE>
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 4.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects deduction of a deferred sales charge of 4% for the 1 year return.
(6) The Lehman Brothers Intermediate U.S. Government Index is an unmanaged
index that measures the performance of U.S. Treasury bonds and U.S.
Government agency bonds.
(7) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Government Securities Fund 43
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM STRATEGIC INCOME FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum total return.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated in one of
the top four categories by a nationally recognized statistical rating agency, or
of comparable quality if unrated. These securities include bonds, notes,
mortgage-backed and asset-backed securities with rates that are fixed, variable
or floating. The Fund may invest up to 40% of its total assets in high yield
debt securities, commonly known as "junk bonds." There is no minimum credit
rating for high yield debt securities in which the Fund may invest. The "total
return" sought by the Fund consists of income earned on the Fund's investments,
plus capital appreciation, if any, which generally arises from decreases in
interest rates or improving credit fundamentals for a particular sector or
security.
The Fund may invest in debt securities of any maturity; however, the average
portfolio duration of the Fund will generally range from two to eight years. The
Fund may invest up to 30% of its total assets in securities payable in foreign
currencies. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The Fund does not invest in interest-only or principal-only
stripped mortgage-backed securities.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund may
be subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Inability to Sell Securities -- high yield securities may be less liquid than
higher quality investments. A security in the lowest rating categories, that is
unrated, or whose credit rating has been lowered may be particularly difficult
to sell. Foreign securities and mortgage-related and asset-backed debt
securities may be less liquid than other debt securities. The Fund could lose
money if it cannot sell a security at the time and price that would be most
beneficial to the Fund.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
Risks of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
44 Pilgrim Strategic Income Fund
<PAGE>
PILGRIM STRATEGIC INCOME FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Institutional Class
shares from year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.92 8.03 11.90 7.46(8) 4.71 -3.61 14.51 2.56 7.85 5.61
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999 a different adviser managed the Fund. Because Class
A, Class B and Class C shares were first offered in 1998, the returns in
the bar chart are based upon the performance of the Institutional Class
shares of the Fund, which are no longer offered, for prior periods. Class
A, Class B and Class C shares, after adjustment for class expenses, would
have had substantially similar returns because Institutional Class shares
were invested in the same portfolio of securities.
Best and worst quarterly performance during this period:
4th quarter 1996: up 3.84%
1st quarter 1996: down 0.72%
The Fund's year-to-date total return as of September 30, 1999 was -1.95%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Aggregate Bond Index.
Average annual total returns
Lehman
Aggregate
Institutional Bond
Class(3) Index(4)
-------- --------
One year, ended
December 31, 1998 % 2.78 8.67
Since inception(5) % 6.61 8.20
- - - - - - - - - ----------
(3) This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, because Classes A, B and C of the Fund did not
have a full year's performance as of December 31, 1998. Please see footnote
(2) to the bar chart above.
(4) The Lehman Aggregate Bond Index is an unmanaged index that measures the
performance of fixed income securities that are similar, but not identical,
to those in the Fund's portfolio.
(5) The Fund commenced operations on August 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Strategic Income Fund 45
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM HIGH YIELD FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as "junk bonds," are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. There is no minimum credit rating for high yield securities in which the
Fund may invest. The Fund may invest in debt securities of any maturity. In
selecting securities for the Fund, preservation of capital is a consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage-related securities and
participation interests and assignments in floating rate loans and notes. The
Fund may also invest up to 10% of its assets in foreign debt securities of any
rating. The Fund may invest in financial futures and related options to attempt
to hedge risk, although the Fund has not invested in such instruments since
Pilgrim Investments, Inc. became the adviser in 1995 through the date of this
prospectus.
In selecting equity securities, the adviser uses a "bottom-up" analysis that
focuses on individual companies and assesses the company's valuation, financial
condition, management, competitiveness, and other factors.
Differences Between the Fund and High Yield Fund II -- While both Funds invest
primarily in high yield securities, the High Yield Fund normally emphasizes
bonds with stronger credit ratings in the high yield bond universe. Thus, of the
two Funds, High Yield Fund II normally presents the potential for higher income,
but with potentially higher credit risk and volatility.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield (or "junk bond") debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns. The Fund is also subject to credit risk
through its investment in floating rate loans.
Changes in Interest Rates -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Inability to Sell Securities -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial. A security whose
credit rating has been lowered may be particularly difficult to sell.
Risks of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security, and the risk of loss due to changes in
interest rates. The use of certain derivatives may also have a leveraging
effect, which may increase the volatility of the Fund. The use of derivatives
may reduce returns for the Fund.
Price Volatility -- Equity securities face market, issuer and other risks, and
their values may go up and down, sometimes rapidly and unpredictably. Market
risk is the risk that securities may decline in value due to factors affecting
securities markets generally or particular industries. Issuer risk is the risk
that the value of a security may decline for reasons relating to the issuer.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories or exchanges than those in the U.S., and
foreign controls on investment.
46 Pilgrim High Yield Fund
<PAGE>
PILGRIM HIGH YIELD FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.87 -9.49 29.44 16.19 18.52 -1.55 17.71 15.76 14.98 -2.96
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
1st quarter 1991: up 14.83%
3rd quarter 1998: down 7.91%
The Fund's year-to-date total return as of September 30, 1999 was -0.07%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Brothers High Yield Bond Index.
Average annual total returns(2)
Lehman
High Yield
Bond
Class A(3) Class B(4) Class M(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -7.60 -8.02 -6.58 1.87
Five years, ended
December 31, 1998 % 7.36 N/A N/A 8.57
Ten years, ended
December 31, 1998 % 8.88 N/A N/A 10.55
Since inception(7) % N/A 7.75 7.69 8.91
- - - - - - - - - ----------
(2) Class C shares of the Fund were not offered during the period ended
December 31, 1998.
(3) Reflects deduction of sales charge of 4.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
(5) Reflects deduction of a sales charge of 3.25%.
(6) The Lehman Brothers High Yield Bond Index is an unmanaged index that
measures the performance of fixed-income securities that are similar, but
not identical, to those in the Fund's portfolio.
(7) Classes B and M commenced operations on July 17, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Yield Fund 47
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM HIGH YIELD FUND II Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks a high level of current income and capital growth.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
high yield, lower rated debt securities, which are commonly referred to as "junk
bonds," and convertible securities rated below investment grade (i.e., lower
than the four highest rating categories) by a nationally recognized statistical
rating agency, or of comparable quality if unrated. There is no limit on either
the portfolio maturity or the acceptable rating of securities bought by the
Fund. Securities may bear rates that are fixed, variable or floating. The Fund
may invest up to 35% of its total assets in equity securities of U.S. and
foreign companies, including securities of companies in emerging markets. In
selecting equity securities, the adviser uses a "bottom-up" analysis that
focuses on individual companies and assesses the company's valuation, financial
condition, management, competitiveness, and other factors.
The Fund is not restricted to investments in companies of any particular size,
but currently intends to invest principally in companies with market
capitalization above $100 million at the time of purchase. The Fund may also use
options, futures contracts and interest rate and currency swaps as hedging
techniques or to help seek the Fund's investment objectives.
Differences Between the Fund and High Yield Fund
While both Funds invest primarily in high yield securities, the High Yield Fund
normally emphasizes bonds with stronger credit ratings in the high yield bond
universe. Thus, of the two Funds, High Yield Fund II normally presents the
potential for higher income, but with potentially higher credit risk and
volatility.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
Changes in Interest Rates -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long term
maturities. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the owners of the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Inability to Sell Securities -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security in the lowest rating categories, that is unrated, or whose credit
rating has been lowered may be particularly difficult to sell. Valuing less
liquid securities involves greater exercise of judgment and may be more
subjective than valuing securities using market quotes.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign banks or
securities depositories than those in the U.S., and foreign controls on
investment. Investments in emerging markets countries are generally riskier than
other kinds of foreign investments, partly because emerging market countries may
be less politically and economically stable than other countries. It may also be
more difficult to buy and sell securities in emerging market countries.
Risk of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
Price Volatility -- equity securities face market, issuer and other risks, and
their values may go up and down, sometimes rapidly and unpredictably. Market
risk is the risk that securities may decline in value due to factors affecting
securities markets generally or particular industries. Issuer risk is the risk
that the value of a security may decline for reasons relating to the issuer.
48 Pilgrim High Yield Fund II
<PAGE>
PILGRIM HIGH YIELD FUND II
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Institutional Class
shares from year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.05 4.69
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999 a different adviser managed the Fund. Because Class
A, Class B and Class C shares were first offered in 1998, the returns in
the bar chart are based upon the performance of Institutional Class shares
of the Fund, which is no longer offered, for prior periods. Class A, Class
B and Class C shares, after adjustment for class expenses, would have had
substantially similar returns because Institutional Class shares were
invested in the same portfolio of securities.
Best and worst quarterly performance during this period:
3rd quarter 1997: up 8.30%
3rd quarter 1998: down 7.14%
The Fund's year-to-date total return as of September 30, 1999 was 2.61%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the First Boston High Yield Index.
Average annual total returns
First
Boston
Institutional High
Class(3) Index(4)
-------- --------
One year, ended
December 31, 1998 % -0.32 .58
Since inception(5) % 12.92 8.43
- - - - - - - - - ----------
(3) This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, because Classes A, B and C of the Fund did not
have a full year's performance as of December 31, 1998. See the footnote
(2) to the bar chart above. Class T shares of the Fund were not offered
during the period ended December 31, 1998.
(4) The First Boston High Yield Index is an unmanaged index that measures the
performance of fixed income securities similar, but not identical, to those
in the Fund's portfolio.
(5) The Fund commenced operations on July 31, 1996.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Yield Fund II 49
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM HIGH YIELD FUND III Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks high current income.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in long-term and intermediate-term fixed income
securities, with emphasis on high-yield, lower-rated corporate debt instruments
(junk bonds) of domestic and foreign issuers.
Under normal market conditions, the Fund invests at least 65% of its total
assets in high-yield bonds rated below investment grade. It can hold up to 100%
of its assets in debt securities rated as low as Ca by Moody's or CC by S&P or
in securities that aren't rated but that the adviser considers to be of
equivalent quality, and up to 1% of its assets in bonds in the lowest rating
categories. It may invest up to 35% of its net assets in foreign issuers, but
only 10% can be in securities that are not listed on a U.S. securities exchange.
The Fund may also hold up to 25% of its assets in equity or equity-related HERE
IT ISexchange. The Fund may also hold up to 25% of its assets in equity or
equity-related instruments, such as preferred stocks, convertible securities and
rights and warrants associated with debt instruments.
PENDING MERGER -- Subject to shareholder approval, the Fund's Board of Trustees
has approved the reorganization of the Fund into Pilgrim High Yield Fund II. You
could therefore ultimately hold shares of that fund.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- the Fund's performance is significantly affected by
changes in interest rates. The value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds, because it normally invests
primarily in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
Inability to Sell Securities -- high-yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
Risk of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
50 Pilgrim High Yield Fund III
<PAGE>
PILGRIM HIGH YIELD FUND III
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's shares from year to
year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-14.24 46.84 27.93 19.24 -1.83 14.06 14.74 11.17 2.25
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did. The figures shown for the years
1996 to 1998 provide performance for Class A shares of the Fund. The
figures shown for the years 1990 to 1995 provide performance for Class T
shares of the Fund, revised to reflect expenses of Class A shares.
Best and worst quarterly performance during this period:
1st quarter 1991: up 16.09%
3rd quarter 1990: down 11.71%
The Fund's year-to-date total return as of September 30, 1999 was -1.52%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Brothers High Yield Bond Index.
Average annual total returns
<TABLE>
<CAPTION>
Lehman
High Yield
Bond
Class A(2) Class B(3) Class C(4) Class T(5) Index(6)
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
One year, ended
December 31, 1998 % -2.65 -3.37 0.46 -1.94 1.87
Five years, ended
December 31, 1998 % N/A N/A N/A 7.52 8.57
Since inception
of Classes A, B,
and C(7) % 7.47 7.67 8.15 N/A 9.06(8)
Since inception of
Class T(7) % N/A N/A N/A 9.97 10.62
</TABLE>
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 4.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects deduction of a deferred sales charge of 4% for the 1 year return.
(6) The Lehman Brothers High Yield Bond Index is an unmanaged index that
measures the performance of fixed-income securities that are similar, but
not identical, to those in the Fund's portfolio.
(7) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on May 30, 1989.
(8) Index return is for period beginning May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Yield Fund III 51
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM HIGH TOTAL RETURN FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks high income and capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in higher-yielding, lower-rated bonds (junk bonds) to
achieve high current income with potential for capital growth.
Under normal market conditions, the Fund invests at least 65% of its total
assets in high-yielding, lower-rated U.S. dollar-denominated debt securities of
any maturity of U.S. and foreign issuers. It may also invest up to 35% of its
total assets in securities denominated in foreign currencies. It may invest up
to 50% of its assets in securities of foreign issuers, including 35% in emerging
market debt. Most of the debt securities the Fund invests in are lower-rated and
considered speculative, including bonds in the lowest rating categories and
unrated bonds. It can invest up to 10%, and can hold up to 25%, of its assets in
securities rated below Caa by Moody's or CCC by S&P. It also holds debt
securities that pay fixed, floating or adjustable interest rates and may hold
pay-in-kind securities and discount obligations, including zero coupon
securities, and mortgage-related or asset-backed debt securities.
The Fund may also invest in equity or equity-related securities, such as common
stock, preferred stock, convertible securities and rights and warrants attached
to debt instruments.
In selecting equity securities, the adviser uses a "bottom-up" analysis that
focuses on individual companies and assesses the company's valuation, financial
condition, management, competitiveness, and other factors.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- The Fund's performance is significantly affected by
changes in interest rates. The value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with longer durations. Debt securities
with longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter durations.
The value of the Fund's high-yield and zero coupon securities are particularly
sensitive to changes in interest rates.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is subject
to more credit risk than many other income funds, because it invests in
high-yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true for bonds in the lowest rating category and
unrated bonds, and during periods of economic uncertainty or economic downturns.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Inability to Sell Securities -- high-yield securities may be less liquid than
higher quality investments. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund. A security in the lowest rating
categories, that is unrated, or whose credit rating has been lowered may be
particularly difficult to sell. Valuing less liquid securities involves greater
exercise of judgement and may be more subjective than valuing securities using
market quotes.
Risk of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
The Fund may invest in midcap and smallcap companies, which may be more
susceptible to price swings than larger companies because they have fewer
financial resources, more limited product and market diversification, and many
are dependent on a few key managers.
52 Pilgrim High Total Return Fund
<PAGE>
PILGRIM HIGH TOTAL RETURN FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-8.57 21.17 15.70 11.44 -7.96
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
3rd quarter 1997: up 7.40%
3rd quarter 1998: down 13.76%
The Fund's year-to-date total return as of September 30, 1999 was -4.52%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Brothers High Yield Bond Index.
<TABLE>
<CAPTION>
Average annual total returns
Lehman
High Yield
Bond
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
One year, ended
December 31, 1998 % -12.26 -12.77 -9.38 1.87
Five years, ended
December 31, 1998 % 4.62 N/A N/A 8.57
Since inception of Class A(6) % 5.03 N/A N/A 8.65
Since inception of Class B(6) % N/A 4.05 N/A 8.25(7)
Since inception of Class C(6) % N/A N/A 4.90 9.50(8)
</TABLE>
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 4.75%.
(3) Reflects deduction of deferred sales charge of 5% and 2%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Lehman Brothers High Yield Bond Index is an unmanaged index that
measures the performance of fixed-income securities that are similar, but
not identical, to those in the Fund's portfolio.
(6) Class A commenced operations on November 8, 1993. Classes B and C commenced
operations on February 9, 1994 and March 21, 1994, respectively.
(7) Index return is for period beginning January 31, 1994.
(8) Index return is for period beginning March 31, 1994.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Total Return Fund 53
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM HIGH TOTAL RETURN FUND II Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks high income and capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in higher-yielding, lower-rated bonds (junk bonds) to
achieve high current income with potential for capital growth.
Under normal market conditions, the Fund invests at least 65% of its total
assets in high-yielding, lower-rated U.S. dollar-denominated debt securities of
U.S. and foreign issuers. It may also invest up to 35% of its total assets in
securities denominated in foreign currencies. It may invest up to 50% of its
assets in securities of foreign issuers, including 35% in emerging market debt.
Most of the debt securities the Fund invests in are lower-rated and considered
speculative, including bonds in the lowest rating categories and unrated bonds.
It can invest up to 10%, and can hold up to 25%, of its assets in securities
rated below Caa by Moody's or CCC by S&P. It also holds debt securities that pay
fixed, floating or adjustable interest rates and may hold pay-in-kind securities
and discount obligations, including zero coupon securities, and mortgage-related
or asset-backed debt securities.
The Fund may also invest in equity or equity-related securities, such as common
stock, preferred stock, convertible securities and rights and warrants attached
to debt instruments. In selecting equity securities, the adviser uses a
"bottom-up" analysis that focuses on individual companies and assesses the
company's valuation, financial condition, management, competitiveness, and other
factors.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Changes in Interest Rates -- The Fund's performance is significantly affected by
changes in interest rates. The value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with longer maturities. Debt securities
with longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter durations.
The value of the Fund's high yield and zero coupon securities are particularly
sensitive to changes in interest rates.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is subject
to more credit risk than many other income funds, because it invests in
high-yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true for bonds in the lowest rating catergories and
unrated bonds, and during periods of economic uncertainty or economic downturns.
Inability to Sell Securities -- high yield securities may be less liquid than
higher quality investments. An unrated bond, a bond in the lowest rating
catorgories, or a security whose credit rating has been lowered may be
particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Risk of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging market
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
54 Pilgrim High Total Return Fund II
<PAGE>
PILGRIM HIGH TOTAL RETURN FUND II
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-2.93
- - - - - - - - - ----------
(1) These figures are as of December 31, 1998. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
2nd quarter 1997: up 8.89%
3rd quarter 1998: down 8.44%
The Fund's year-to-date total return as of September 30, 1999 was -3.96%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lehman Brothers High Yield Bond Index.
Average annual total returns
Lehman
High Yield
Bond
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -7.61 -8.04 -4.49 1.87
Since inception(6) % 5.18 5.20 7.24 6.96
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 4.75%.
(3) Reflects deduction of deferred sales charge of 5% and 4%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Lehman Brothers High Yield Bond Index is an unmanaged index that
measures the performance of fixed-income securities that are similar, but
not identical, to those in the Fund's portfolio.
(6) The Fund commenced operations on January 31, 1997.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Total Return Fund II 55
<PAGE>
- - - - - - - - - -------------
Income
Funds
- - - - - - - - - -------------
Adviser
PILGRIM MONEY MARKET FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks to provide as high a level of current income as is consistent
with the preservation of capital and liquidity.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests all of its assets in Class A shares of the Primary
Institutional Fund, a series of Reserve Institutional Trust, a registered
open-end management investment company, rather than directly in a portfolio of
securities. In turn, the Primary Institutional Fund seeks to provide as high a
level of current income as is consistent with the preservation of capital and
liquidity. This structure is different from that of other Pilgrim Funds and many
other investment companies, which directly acquire and manage their own
portfolio of securities.
The Primary Institutional Fund seeks to achieve its investment objective by
investing in instruments issued by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"); high quality deposit-type
obligations, such as negotiable certificates of deposit and time deposits,
bankers' acceptances and letters of credit of domestic, foreign banks and
foreign branches of foreign banks, savings and loan associations and savings
banks; other short-term instruments of similar quality; and instruments fully
collateralized by such obligations. The dollar weighted average portfolio
maturity of the Fund will not exceed 90 days.
The Primary Institutional Fund may invest in obligations of U.S. banking
institutions that are insured by the Federal Deposit Insurance Corporation. The
Primary Institutional Fund may also invest in obligations of foreign branches of
both U.S. banks and foreign banks (Eurodollars). Investment in foreign banks
will be limited to those located in Australia, Canada, Western Europe and Japan
and which, at the time of investment, have more than $25 billion (or the
equivalent in other currencies) in total assets and which, in the opinion of the
Primary Institutional Fund's investment adviser, are of comparable quality to
the obligations of U.S. banks which may be purchased by the Primary
Institutional Fund. The Primary Institutional Fund may also invest in municipal
obligations, the interest on which is not exempt from federal income taxation.
The Primary Institutional Fund may also engage in repurchase agreements and
periodically lend securities on a short-term basis to banks, brokers and dealers
(but not individuals) and receive as collateral cash or securities issued by the
U.S. Government or its agencies or instrumentalities (or any combination
thereof). The value of the securities loaned cannot exceed 25% of the Primary
Institutional Fund's total assets.
The Primary Institutional Fund may invest, without limitation, in U.S.
Government Securities and in instruments secured or collateralized by U.S.
Government Securities. The Primary Institutional Fund will not invest more than
10% of its net assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven (7) days after notice and will not
concentrate more than 25% of its total assets in securities of issuers in a
single industry, except that it may invest more than 25% of its assets in bank
obligations. In addition, the Primary Institutional Fund will not invest more
than 5% of its assets in the securities of any single issuer (except U.S.
Government Securities or repurchase agreements). The Primary Institutional Fund
may borrow money for extraordinary or emergency purposes but not in an amount
exceeding 5% of its total assets.
The Primary Institutional Fund uses the amortized cost method of valuation to
help the Fund maintain a stable $1.00 share price. Of course, there is no
guarantee that the Fund will be able to maintain a $1.00 share price.
Since the Fund invests substantially all of its assets in another investment
company, the fund could be considered a feeder fund in an arrangement resembling
a master/feeder structure.
Investment of the Fund's assets in the Class A shares of the Primary
Institutional Fund is not a fundamental policy of the Fund and a shareholder
vote is not required for the Fund to withdraw its investment in the Primary
Institutional Fund.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
The Fund is subject to the risks associated with investing in debt securities.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
The Fund may be affected by these other risks by virtue of its investment in the
Primary Institutional Fund:
Changes in Interest Rates -- money market funds like the Fund are subject to
less interest rate risk than other income funds because they invest in debt
securities with a remaining maturity not greater than 397 days. Still, the value
of the Fund's investment may fall when interest rates rise.
Credit Risk -- money market funds like the Fund are subject to less credit risk
than other income funds because they invest in short-term debt securities of the
highest quality. Still, the Fund could lose money if the issuer of a debt
security is unable to meet its financial obligations or goes bankrupt.
U.S. Government Securities -- some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government Securities
may be subject to price declines in the securities due to changing interest
rates. If an obligation, such as obligations issued by the Federal National
Mortgage
56 Pilgrim Money Market Fund
<PAGE>
PILGRIM MONEY MARKET FUND
- - - - - - - - - --------------------------------------------------------------------------------
Association, the Student Loan Marketing Association, the Federal Home Loan Bank
and the Federal Home Loan Mortgage Corporation is supported only by the credit
of the agency or instrumentality issuing the obligation, the investor must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Securities directly supported by the full faith and credit of the
United States have less credit risk.
Risk of Concentration in Banking Obligations -- the risks of concentrating in
investments in the banking industry include credit risk, interest rate risks,
and regulatory risk (the impact of state or federal legislation and
regulations).
Because the Fund invests all of its assets in another registered management
investment, company, the Fund and its shareholders will bear the investment
advisory fees and expenses of the Fund and the other registered management
investment company in which it invests with the result that the Fund's expenses
may be higher than those of other money market funds which invest directly in
money market instruments. The Fund is also designed for investors who desire a
short-term investment and may not be appropriate for those investors desiring a
long-term investment.
- - - - - - - - - ----------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
This Fund does not have a performance history because it was formed on July 1,
1999.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Money Market Fund 57
<PAGE>
- - - - - - - - - -------------
Equity &
Income Funds
- - - - - - - - - -------------
Adviser
PILGRIM BALANCED FUND Pilgrim Investments, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks a balance of long-term capital appreciation and current income.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and normally seeks
a target allocation of 50%, although this may vary with market conditions.
The remainder of the Fund's assets are normally invested in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach in equity selection, and seeks
securities whose prices in relation to projected earnings are believed to be
reasonable in comparison to the market. For this Fund, a company with a market
capitalization of over $5 billion is considered to be a large company, although
the Fund may also invest to a limited degree in companies that have a market
capitalization between $1 billion and $5 billion.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities (commonly known as "junk bonds") rated below investment grade
(i.e., lower than the four-highest rating categories) by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit quality for the high yield debt securities in which the Fund may
invest. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique or in furtherance of its investment objective. The Fund
may invest up to 35% of its net assets in zero coupon securities.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund also may invest in smaller
companies, which may be more susceptible to price swings than larger companies.
Market Trends -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
Changes in Interest Rates -- the value of debt and equity securities can change
in response to changes in interest rates. The value of the debt securities held
by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer maturities
tend to be more sensitive to changes in interest rates, usually making them more
volatile than debt securities with shorter maturities. Zero coupon securities
are particularly sensitive to changes in interest rates.
Credit Risk -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may invest
in high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
Inability to Sell Securities -- high yield securities and securities of smaller
companies may be less liquid than other investments. The Fund could lose money
if it cannot sell a security at the time and price that would be most beneficial
to the Fund.
Risks of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
Risks of Using Derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
58 Pilgrim Balanced Fund
<PAGE>
PILGRIM BALANCED FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-6.29 23.44 16.39 20.50 23.34
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, a different adviser managed the Fund.
Best and worst quarterly performance during this period:
3rd quarter 1997 up 14.44%.
2nd quarter 1994: down 5.88%
The Fund's year-to-date total return as of September 30, 1999 was 2.58%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lipper Balanced Fund Index and a composite index consisting
of 60% S&P 500 Composite Stock Price Index and 40% Lehman Brothers
Government/Corporate Bond Index.
Average annual total returns(3)
Lipper
Balanced
Class Class Class Fund Composite
A(4) B(5) C(6) Index(7) Index
---- ---- ---- -------- -----
One year, ended
December 31, 1998 % 16.26 17.80 21.52 15.09 20.93
Five years, ended
December 31, 1998 % 13.52 N/A 14.14 13.87 17.34
Since inception of
Class A and C(8) % 14.25 N/A 14.75 13.55 15.27
Since inception
of Class B(8) % N/A 26.42 N/A 16.93 20.48
- - - - - - - - - ----------
(3) Class T shares of the Fund were not offered during the period ended
December 31, 1998.
(4) Reflects deduction of sales charge of 5.75%.
(5) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(6) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(7) The Lipper Balanced Fund Index is an unmanaged index that measures the
performance of balanced funds (funds that seek current income balanced with
capital appreciation).
(8) Classes A and C commenced operations on April 19, 1993. Class B commenced
operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Balanced Fund 59
<PAGE>
- - - - - - - - - -------------
Equity &
Income Funds
- - - - - - - - - -------------
Adviser
PILGRIM INCOME & GROWTH FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks current income balanced with capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in a mix of dividend paying equity securities,
convertible securities, and debt securities of any maturity rated in one of the
top four categories by Moody's (Baa or better), S&P (Baa or better) or another
nationally recognized statistical rating agency, or, if unrated, believed to be
of comparable quality.
Under normal market conditions, the Fund invests at least 65% of its total
assets in income-producing securities, which consist of debt securities,
convertibles, and equity securities normally expected to pay dividends. It
normally invests no more than 30% of its assets in convertible securities.
In selecting equity securities, the adviser uses a qualitative analysis to
identify companies offering a history of rising dividends and increasing cash
flows and, of those companies, seeks value companies.
PENDING MERGER -- Subject to shareholder approval, the Fund's Board of Trustees
has approved the reorganization of the Fund into Pilgrim Balanced Fund. You
could therefore ultimately hold shares of that fund.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity and convertible securities face market, issuer
and other risks, and their values may go up or down, sometimes rapidly and
unpredictably. Market risk is the risk that securities may decline in value due
to factors affecting securities markets generally or particular industries.
Issuer risk is the risk that the value of a security may decline for reasons
relating to the issuer, such as changes in the financial condition of the
issuer. While equities may offer the potential for greater long-term growth than
most debt securities, they generally have higher volatility. Similarly,
covertible securities may display higher volatility then debt securities.
Market Trends -- from time to time, the stock market may not favor the
dividend-paying equity and convertible securities in which the Fund may invest.
Rather, the market could favor other types of equity securities, such as growth
stocks, or may not favor equities at all.
Changes in Interest Rates -- the value of debt, equity, and covertible
securities can change in response to changes in interest rates. The Fund's
performance may be significantly affected by changes in interest rates. The
value of the debt and convertible securities held by the Fund may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with longer durations. Debt securities
with longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter durations.
Credit risk -- the Fund could lose money if the issuer of a debt, convertible or
even equity security is unable to meet its financial obligations or goes
bankrupt. This is especially true during periods of economic uncertainty or
economic downturns. The Fund is subject to the risks that issuers stop making
interest and principal payments, and equity issuers lower or eliminate
dividends.
60 Pilgrim Income & Growth Fund
<PAGE>
PILGRIM INCOME & GROWTH FUND
- - - - - - - - - ----------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-3.56 21.33 15.23 15.56 5.76
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
Best and worst quarterly performance during this period:
4th quarter 1998: up 12.28%
3rd quarter 1998: down 9.21%
The Fund's year-to-date total return as of September 30, 1999 was 1.15%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lipper Balanced Fund Index.
Average annual total returns
Lipper
Balanced
Fund
Class A(2) Class B(3) Class C(4) Index(5)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -0.32 0.28 4.06 15.09
Five years, ended
December 31, 1998 % 9.20 N/A N/A 13.87
Since inception of
Class A(6) % 9.54 N/A N/A 13.45
Since inception of
Class B(6) % N/A 8.93 N/A 13.60
Since inception of
Class C(6) % N/A N/A 10.05 15.37
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 2%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) The Lipper Balanced Fund Index is an unmanaged index that measures the
performance of balanced funds (funds that seek current income balanced with
capital appreciation).
(6) Class A commenced operations on November 8, 1993. Class B commenced
operations on February 9, 1994. Class C commenced operations on March 31,
1994.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Income & Growth Fund 61
<PAGE>
- - - - - - - - - -------------
Equity &
Income Funds
- - - - - - - - - -------------
Adviser
PILGRIM BALANCE SHEET OPPORTUNITIES FUND Pilgrim Advisors, Inc.
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks income, with a secondary objective of capital appreciation.
INVESTMENT
STRATEGY
[GRAPHIC]
The Fund invests primarily in domestic debt and equity securities. The portfolio
manager reviews various factors relating to an issuer, especially its financial
statements, to determine which type of security -- debt or equity --offers the
best potential for high current income combined with the potential for capital
growth.
Under normal market conditions, the Fund invests at least 51% of its total
assets in securities expected to produce income, including debt securities and
equity securities normally expected to pay dividends. It may hold up to 50% of
its assets in debt securities rated as low as B by Moody's or S&P (junk bonds).
Equity securities may include common stocks, preferred stocks, convertible
securities and warrants and other stock purchase rights. Debt securities in
which the Fund invests have varying maturities and pay fixed, floating or
adjustable interest rates. The Fund may also hold pay-in-kind securities and
discount obligations, including zero coupon securities, and mortgage-related and
asset-backed securities. The Fund may invest up to 20% of its net assets in
foreign issuers, but only 10% of its net assets can be in securities that are
not listed on a U.S. securities exchange.
In selecting equity securities, the adviser emphasizes a value approach, and
seeks securities whose prices in relation to projected earnings are believed to
be reasonable in comparison to the market. The adviser selects securities of
large companies believed to be leaders in their industries. For this Fund, a
company with a market capitalization of over $5 billion is considered to be a
large company.
PENDING MERGER -- Subject to shareholder approval, the Fund's Board of Trustees
has approved the reorganization of the Fund into Pilgrim Balanced Fund. You
could therefore ultimately hold shares of that fund.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund's investments may be
affected by the following additional risks:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities (including convertibles, preferreds
and warrants) face market, issuer and other risks, and their values may go up or
down, sometimes rapidly and unpredictably. Market risk is the risk that
securities may decline in value due to factors affecting securities markets
generally or particular industries. Issuer risk is the risk that the value of a
security may decline for reasons relating to the issuer, such as changes in the
financial condition of the issuer. While equities may offer the potential for
greater long-term growth than most debt securities, they generally have higher
volatility.
Changes in Interest Rates -- the Fund's performance is significantly affected by
changes in interest rates. The value of the debt and convertible securities held
by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer durations
tend to be more sensitive to changes in interest rates, usually making them more
volatile than debt securities with shorter dura-tions. Zero coupon securities
are particularly sensitive to changes in interest rates.
Credit Risk -- the Fund could lose money if the issuer of a security is unable
to meet its financial obligations or goes bankrupt. This Fund may be subject to
more credit risk than many income funds, because the debt and convertible
securities in which it invests may be high-yield, lower-rated securities debt
securities, which are considered predominantly speculative with respect to the
issuer's continuing ability to meet interest and principal payments. This is
especially true during periods of economic uncertainty or economic downturns.
Prepayment Risk -- the Fund may invest in mortgage-related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
Inability to Sell Securities -- high-yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other securities. The Fund
could lose money if it cannot sell a security at the time and price that would
be most beneficial to the Fund.
Risk of Foreign Investing -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political, social and economic conditions, a lack of adequate and
accurate company information, a lack of liquidity in securities, differences in
the way securities markets operate, accounting, auditing, and/or financial
standards that are different than those in the U.S., less secure foreign banks,
securities depositories, or exchanges than those in the U.S., and foreign
controls on investment.
62 Pilgrim Balance Sheet Opportunities Fund
<PAGE>
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's shares from year to
year.
Year by year total returns (%)(1)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-3.56 21.33 15.23 15.56 5.76
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did. The figures shown for the years
1996 to 1998 provide performance for Class A shares of the Fund. The
figures shown for the years 1989 to 1995 provide performance for Class T
shares of the Fund, revised to reflect expenses of Class A shares.
Best and worst quarterly performance during this period:
4th quarter 1998: up 12.89%
3rd quarter 1998: down 13.30%
The Fund's year-to-date total return as of September 30, 1999 was 7.34%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the Lipper Balanced Fund Index.
Average annual total returns
Lipper
Balanced
Fund
Class A(2) Class B(3) Class C(4) Class T(5) Index(6)
---------- ---------- ---------- ---------- --------
One year, ended
December 31, 1998 % -0.84 -0.36 3.58 0.83 15.09
Five years, ended
December 31, 1998 % N/A N/A N/A 11.09 13.87
Ten years, ended
December 31, 1998 % N/A N/A N/A 11.61 13.32
Since inception of
Class A, B, and C(7) % 12.53 13.23 13.61 N/A 16.98
Since inception of
Class T(7) % N/A N/A N/A 10.34 12.75
- - - - - - - - - ----------
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects deduction of a deferred sales charge of 4% for the 1 year return.
(6) The Lipper Balanced Fund Index is an unmanaged index that measures the
performance of balanced Funds (funds that seek current income balanced with
capital appreciation).
(7) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Balance Sheet Opportunities Fund 63
<PAGE>
- - - - - - - - - -------------
Equity &
Income Funds
- - - - - - - - - -------------
Adviser
Pilgrim Investments, Inc.
Sub-Adviser
Nicholas-Applegate
PILGRIM CONVERTIBLE FUND Capital Management
- - - - - - - - - --------------------------------------------------------------------------------
OBJECTIVE
[GRAPHIC]
The Fund seeks maximum total return, consisting of capital appreciation and
current income.
INVESTMENT
STRATEGY
[GRAPHIC]
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. Convertible securities are generally preferred stock or
other securities, including debt securities, that are convertible into common
stock. The Fund emphasizes companies with market capitalizations above $500
million. Through investments in convertible securities, the Fund seeks to
capture the upside potential of the underlying equities with less downside
exposure.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in high yield
debt or convertible securities (commonly known as "junk bonds") rated below
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. There is no minimum credit rating for high yield
securities in which the Fund may invest. The Fund may also invest in securities
issued by the U.S. government and its agencies and instrumentalities.
In evaluating convertibles, the Fund's sub-adviser evaluates each security's
investment characteristics as a fixed income instrument as well as its potential
for capital appreciation.
In analyzing specific companies for possible investment, the sub-adviser
ordinarily looks for several of the following characteristics: above-average per
share earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. The
sub-adviser usually considers whether to sell a particular security when any of
those factors materially changes.
The Fund may also lend portfolio securities on a short-term or long-term basis,
up to 30% of its total assets.
- - - - - - - - - --------------------------------------------------------------------------------
RISKS
[GRAPHIC]
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
Price Volatility -- the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, issuer and other risks, and their values may go up or down, sometimes
rapidly and unpredictably. Market risk is the risk that securities may decline
in value due to factors affecting securities markets generally or particular
industries. Issuer risk is the risk that the value of a security may decline for
reasons relating to the issuer, such as changes in the financial condition of
the issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility. The Fund may
invest in small and medium-sized companies, which may be more susceptible to
greater price swings than larger companies because they may have fewer financial
resources, more limited product and market diversification and many are
dependent on a few key managers.
Changes in Interest Rates -- the value of the convertible and debt securities
held by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in securities with intermediate
and long terms to maturity. Securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
securities with shorter durations. Zero coupon securities are particularly
sensitive to changes in interest rates.
Credit Risk -- the Fund could lose money if the issuer of a security is unable
to meet its financial obligations or goes bankrupt. This is especially true
during periods of economic uncertainty or economic downturns. This Fund may be
subject to more credit risk than many bond funds, because the convertible
securities and debt securities in which it invests may be lower-rated
securities.
Inability to Sell Securities -- convertible securities and lower rated debt and
covertible securities may be less liquid than other investments. The Fund could
lose money if it cannot sell a security at the time and price that would be most
beneficial to the Fund.
Securities Lending -- There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price.
64 Pilgrim Convertible Fund
<PAGE>
PILGRIM CONVERTIBLE FUND
- - - - - - - - - --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED
[GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Year by year total returns (%)(1)(2)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-8.23 21.67 20.29 22.58 20.86
- - - - - - - - - ----------
(1) These figures are as of December 31 of each year. They do not reflect sales
charges and would be lower if they did.
(2) Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
Best and worst quarterly performance during this period:
4th quarter 1998: up 19.73%
3rd quarter 1998: down 9.08%
The Fund's year-to-date total return as of September 30, 1999 was 11.60%.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance -- the First Boston Convertible Index.
Average annual total returns
First
Boston
Convertible
Class A(3) Class B(4) Class C(5) Index(6)
---------- ---------- ---------- --------
One year, ended
December 31, 1998 % 13.93 15.31 19.12 6.55
Five years, ended
December 31, 1998 % 13.41 N/A 14.03 10.82
Since inception of Classes A
and C(7) % 15.74 N/A 16.19 11.42
Since inception of Class B(7) % N/A 20.61 N/A 13.48
- - - - - - - - - ----------
(3) Reflects deduction of sales charge of 5.75%.
(4) Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
(5) Reflects deduction of sales charge of 1% for the 1 year return.
(6) The First Boston Convertible Index is an unmanaged index that measures the
performance of a universe of convertible securities that are similar, but
not identical, to those in the Fund's portfolio.
(7) Classes A and C commenced operations on April 19, 1993. Class B commenced
operations on May 31, 1995.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Convertible Fund 65
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
There are two types of fees and expenses when you invest in mutual funds: fees,
including sales charges, you pay directly when you buy or sell shares, and
operating expenses paid each year by the Fund. The tables that follow show the
fees and expenses for each of the Pilgrim Funds.
<TABLE>
<CAPTION>
Fees you pay directly
Class A Class B Class C(1) Class M(2) Class T(2)
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Maximum sales charge on your investment
(as a % of offering price) %
Equity Funds and Equity & Income Funds 5.75(3) none none 3.50(3) none
Income Funds (except Money Market) 4.75(3) none none 3.25(3) none
Money Market Fund none none none N/A N/A
Maximum deferred sales charge (as a % of
purchase or sales price, whichever is less)
Equity Funds and Equity & Income Funds none(4) 5.00(5) 1.00(6) none 4.00(7)
Income Funds (including Money Market) none(4) 5.00(5) 1.00(6) none 4.00(7)
</TABLE>
(1) Not all Funds offer Classes B and C. See page 73.
(2) Class T shares are available only for certain exchanges or reinvestment of
dividends. See page 74.
(3) Reduced for purchases of $50,000 and over. Please see page 74.
(4) A contingent deferred sales charge of no more than 1% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. Please see page 74.
(5) Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. Please see page 74.
(6) Imposed upon redemption within 1 year from purchase.
(7) Imposed upon redemption within 4 years from purchase. The fee has scheduled
reductions after the first year. Please see page 74.
<TABLE>
<CAPTION>
Operating expenses paid each year by the Funds(1)
(as a % of average net assets)
Class A
Distribution Total
and service fund Fee waiver
Management (12b-1) Other operating by Net
Fund fee fees expenses(4) expenses adviser(2) expenses
---- --- ---- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
MagnaCap % 0.71 0.30 0.34 1.35 -- 1.35
LargeCap Leaders % 1.00 0.25 0.73 1.98 -0.23 1.75
Research Enhanced Index % 0.70 0.30 0.56 1.56 -- 1.56
Growth Opportunities % 0.75 0.30 0.32 1.37 -- 1.37
LargeCap Growth % 0.75 0.35 0.25 1.35 -- 1.35
MidCap Value % 1.00 0.25 0.54 1.79 -0.04 1.75
MidCap Opportunities % 1.00 0.30 1.12 2.42 -- 2.42
MidCap Growth % 0.75 0.35 0.25 1.35 -- 1.35
Growth + Value % 1.00 0.30 0.39 1.69 -- 1.69
SmallCap Opportunities % 0.75 0.30 0.42 1.47 -- 1.47
SmallCap Growth % 1.00 0.35 0.24 1.59 -- 1.59
Bank and Thrift % 0.72 0.25 0.42 1.39 -- 1.39
Worldwide Growth % 1.00 0.35 0.30 1.65 -- 1.65
International Value % 1.00 0.30 0.38 1.68 -- 1.68
International Core Growth % 1.00 0.35 0.38 1.73 -- 1.73
International SmallCap Growth % 1.00 0.35 0.42 1.77 -- 1.77
Emerging Markets Value % 1.00 0.30 0.91 2.21 -- 2.21
Emerging Countries % 1.25 0.35 0.93 2.53 -0.53 2.00
Asia-Pacific Equity % 1.25 0.25 1.48 2.98 -0.98 2.00
Government Securities Income % 0.50 0.25 0.65 1.40 -- 1.40
Government Securities % 0.65 0.30 0.37 1.32 -- 1.32
Strategic Income % 0.45 0.35 0.67 1.47 -0.52 0.95
High Yield % 0.60 0.25 0.27 1.12 -0.02 1.10
High Yield II % 0.60 0.35 0.32 1.27 -0.17 1.10
High Yield III % 0.60 0.30 0.36 1.26 -- 1.26
High Total Return % 0.71 0.30 0.33 1.34 -- 1.34
High Total Return II % 0.75 0.30 0.35 1.40 -- 1.40
Money Market % 0.25 0.25 0.75 1.25 -- 1.25
Balanced % 0.75 0.35 0.51 1.61 -0.26 1.35
Income & Growth % 0.75 0.30 0.35 1.40 -- 1.40
Balance Sheet Opportunities % 0.65 0.30 0.52 1.47 -- 1.47
Convertible % 0.75 0.35 0.23 1.33 -- 1.33
</TABLE>
66 What You Pay to Invest
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating expenses paid each year by the Funds(1)
(as a % of average net assets)
Class B
Distribution Total
and service fund Fee waiver
Management (12b-1) Other operating by Net
Fund fee fees expenses(4) expenses adviser(2) expenses
---- --- ---- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
MagnaCap % 0.71 1.00 0.34 2.05 -- 2.05
LargeCap Leaders % 1.00 1.00 0.73 2.73 -0.23 2.50
Research Enhanced Index % 0.70 1.00 0.59 2.29 -- 2.29
Growth Opportunities % 0.75 1.00 0.38 2.13 -- 2.13
LargeCap Growth % 0.75 1.00 0.25 2.00 -- 2.00
MidCap Value % 1.00 1.00 0.54 2.54 -0.04 2.50
MidCap Opportunities % 1.00 1.00 1.27 3.27 -- 3.27
MidCap Growth % 0.75 1.00 0.25 2.00 -- 2.00
Growth + Value % 1.00 1.00 0.39 2.39 -- 2.39
SmallCap Opportunities % 0.75 1.00 0.43 2.18 -- 2.18
SmallCap Growth % 1.00 1.00 0.24 2.24 -- 2.24
Bank and Thrift % 0.72 1.00 0.42 2.14 -- 2.14
Worldwide Growth % 1.00 1.00 0.30 2.30 -- 2.30
International Value % 1.00 1.00 0.41 2.41 -- 2.41
International Core Growth % 1.00 1.00 0.38 2.38 -- 2.38
International SmallCap Growth % 1.00 1.00 0.42 2.42 -- 2.42
Emerging Markets Value % 1.00 1.00 0.93 2.93 -- 2.93
Emerging Countries % 1.25 1.00 0.93 3.18 -0.53 2.65
Asia-Pacific Equity % 1.25 1.00 1.48 3.73 -0.98 2.75
Government Securities Income % 0.50 1.00 0.65 2.15 -- 2.15
Government Securities % 0.65 1.00 0.40 2.05 -- 2.05
Strategic Income % 0.45 0.75 0.67 1.87 -0.52 1.35
High Yield % 0.60 1.00 0.27 1.87 -0.02 1.85
High Yield II % 0.60 1.00 0.32 1.92 -0.17 1.75
High Yield III % 0.60 1.00 0.37 1.97 -- 1.97
High Total Return % 0.71 1.00 0.35 2.06 -- 2.06
High Total Return II % 0.75 1.00 0.36 2.11 -- 2.11
Money Market % 0.25 1.00 0.75 2.00 -- 2.00
Balanced % 0.75 1.00 0.51 2.26 -0.26 2.00
Income & Growth % 0.75 1.00 0.37 2.12 -- 2.12
Balance Sheet Opportunities % 0.65 1.00 0.52 2.17 -- 2.17
Convertible % 0.75 1.00 0.23 1.98 -- 1.98
</TABLE>
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
What You Pay to Invest 67
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating expenses paid each year by the Funds(1)
(as a % of average net assets)
Class C(3)
Distribution Total
and service fund Fee waiver
Management (12b-1) Other operating by Net
Fund fee fees expenses(4) expenses adviser(2) expenses
- - - - - - - - - ---- --- ---- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
MagnaCap % 0.71 1.00 0.34 2.05 -- 2.05
LargeCap Leaders % 1.00 1.00 0.73 2.73 -0.23 2.50
Research Enhanced Index % 0.70 1.00 0.57 2.27 -- 2.27
Growth Opportunities % 0.75 1.00 0.38 2.13 -- 2.13
LargeCap Growth % 0.75 1.00 0.25 2.00 -- 2.00
MidCap Value % 1.00 1.00 0.54 2.54 -0.04 2.50
MidCap Opportunities % 1.00 1.00 1.22 3.22 -- 3.22
MidCap Growth % 0.75 1.00 0.25 2.00 -- 2.00
Growth + Value % 1.00 1.00 0.40 2.40 -- 2.40
SmallCap Opportunities % 0.75 1.00 0.47 2.22 -- 2.22
SmallCap Growth % 1.00 1.00 0.24 2.24 -- 2.24
Worldwide Growth % 1.00 1.00 0.30 2.30 -- 2.30
International Value % 1.00 1.00 0.41 2.41 -- 2.41
International Core Growth % 1.00 1.00 0.38 2.38 -- 2.38
International SmallCap Growth % 1.00 1.00 0.42 2.42 -- 2.42
Emerging Markets Value % 1.00 1.00 0.91 2.91 -- 2.91
Emerging Countries % 1.25 1.00 0.93 3.18 -0.53 2.65
Government Securities Income % 0.50 1.00 0.65 2.15 -- 2.15
Government Securities % 0.65 1.00 0.40 2.05 -- 2.05
Strategic Income % 0.45 0.75 0.67 1.87 -0.52 1.35
High Yield % 0.60 1.00 0.27 1.87 -0.02 1.85
High Yield II % 0.60 1.00 0.32 1.92 -0.17 1.75
High Yield III % 0.60 1.00 0.38 1.98 -- 1.98
High Total Return % 0.71 1.00 0.36 2.07 -- 2.07
High Total Return II % 0.75 1.00 0.37 2.12 -- 2.12
Money Market % 0.25 1.00 0.75 2.00 -- 2.00
Balanced % 0.75 1.00 0.51 2.26 -0.26 2.00
Income & Growth % 0.75 1.00 0.33 2.08 -- 2.08
Balance Sheet Opportunities % 0.65 1.00 0.50 2.15 -- 2.15
Convertible % 0.75 1.00 0.23 1.98 -- 1.98
Class M
Distribution Total
and service fund Fee waiver
Management (12b-1) Other operating by Net
Fund fee fees expenses(4) expenses adviser(2) expenses
---- --- ---- ----------- -------- ---------- --------
MagnaCap % 0.71 0.75 0.34 1.80 -- 1.80
LargeCap Leaders % 1.00 0.75 0.73 2.48 -0.23 2.25
MidCap Value % 1.00 0.75 0.54 2.29 -0.04 2.25
Asia-Pacific Equity % 1.25 0.75 1.48 3.48 -0.98 2.50
Government Securities Income % 0.50 0.75 0.65 1.90 -- 1.90
High Yield % 0.60 0.75 0.27 1.62 -0.02 1.60
</TABLE>
68 What You Pay to Invest
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating expenses paid each year by the Funds(1)
(as a % of average net assets)
Class T(5)
Distribution Total
and service fund Fee waiver
Management (12b-1) Other operating by Net
Fund fee fees expenses(4) expenses adviser(2) expenses
---- --- ---- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities % 0.75 0.95 0.35 2.05 -- 2.05
SmallCap Opportunities % 0.75 0.95 0.40 2.10 -- 2.10
Government Securities Income % 0.50 0.65 0.65 1.80 -- 1.80
Government Securities % 0.65 0.65 0.40 1.70 -- 1.70
High Yield II % 0.60 0.65 0.32 1.57 -0.17 1.40
High Yield III % 0.60 0.65 0.35 1.60 -- 1.60
Balanced % 0.75 0.75 0.51 2.01 -0.26 1.75
Balance Sheet Opportunities % 0.65 0.75 0.49 1.89 -- 1.89
</TABLE>
- - - - - - - - - ----------
(1) These tables show the estimated operating expenses for each Fund by class
as a ratio of expenses to average daily net assets. These estimates are
based on each Fund's actual operating expenses for its most recent complete
fiscal year and fee waivers to which the Adviser has agreed.
(2) Pilgrim Investments has entered into expense limitation agreements with
each Fund except MagnaCap, Bank and Thrift, Government Securities Income,
Research Enhanced Index, Growth Opportunities, MidCap Opportunities, Growth
+ Value, SmallCap Opportunities, International Value, Emerging Markets
Value, Government Securities, High Yield III, High Total Return, High Total
Return II, Income and Growth and Balance Sheet Opportunities under which it
will limit expenses of the Fund, excluding interest, taxes, brokerage and
extraordinary expenses, subject to possible reimbursement to Pilgrim
Investments within three years. The expense limit for each such Fund is
shown as "Net Expenses." For each Fund except Government Securities Income
Fund, the expense limit will continue through at least October 31, 2001.
Nicholas-Applegate Capital Management bears 50% of the cost of maintaining
the expense limit for Funds which it serves as sub-adviser. Pilgrim
Investments has separately agreed to reimburse Government Securities Income
Fund to the extent that total Fund operating expenses, excluding interest,
taxes, brokerage commissions, extraordinary expenses, and distribution fees
in excess of 0.25%, exceed 1.50% of the Fund's average daily net asset on
the first $40 million in net assets and 1% of average daily net assets in
excess of $40 million. The expense limit for Government Securities Income
Fund will terminate only with termination of the advisory contract with
Pilgrim Investments. Government Securities Fund has a voluntary management
fee waiver of 0.15%. After the waiver, the management fee would be 0.50%
and the total fund operating expenses would be 1.17% for Class A, 1.90% for
Class B, 1.90% for Class C and 1.55% for Class T.
(3) Because Class C shares are new for the MagnaCap, LargeCap Leaders, MidCap
Value, Government Securities Income and High Yield Funds, their expenses
are estimated based on Class B expenses.
(4) For the LargeCap Growth, MidCap Growth, SmallCap Growth, Worldwide Growth,
International Core Growth, International SmallCap Growth, Emerging
Countries, Strategic Income, High Yield II, Balanced and Convertible Funds,
other expenses have been restated to reflect the elimination of certain
administrative fees effective May 24, 1999.
(5) Because Class T shares are new for Government Securities Income, High Yield
II, and Balanced, their expenses are estimated based on Class A expenses.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
What You Pay to Invest 69
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
Examples
The examples that follow are intended to help you compare the cost of investing
in the Pilgrim Funds with the cost of investing in other mutual funds. Each
example assumes that you invested $10,000, reinvested all your dividends, the
Fund earned an average annual return of 5%, and annual operating expenses
remained at the current level. Keep in mind that this is only an estimate --
actual expenses and performance may vary.
Class A
Fund 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
MagnaCap $ 705 978 1,272 2,105
LargeCap Leaders $ 743 1,118 1,540 2,713
Research Enhanced Index $ 725 1,039 1,376 2,325
Growth Opportunities $ 706 984 1,282 2,127
LargeCap Growth $ 705 978 1,272 2,105
MidCap Value $ 743 1,098 1,482 2,553
MidCap Opportunities $ 806 1,286 1,791 3,173
MidCap Growth $ 705 978 1,272 2,105
Growth + Value $ 737 1,077 1,440 2,458
SmallCap Opportunities $ 716 1,013 1,332 2,231
SmallCap Growth $ 727 1,048 1,391 2,356
Bank and Thrift $ 708 990 1,292 2,148
Worldwide Growth $ 733 1,065 1,420 2,417
International Value $ 736 1,074 1,435 2,448
International Core Growth $ 741 1,089 1,460 2,499
International SmallCap Growth $ 745 1,100 1,479 2,539
Emerging Markets Value $ 786 1,226 1,692 2,973
Emerging Countries $ 766 1,219 1,751 3,198
Asia-Pacific Equity $ 766 1,264 1,885 3,549
Government Securities Income $ 611 897 1,204 2,075
Government Securities $ 603 873 1,164 1,990
Strategic Income $ 567 818 1,143 2,061
High Yield $ 582 810 1,059 1,770
High Yield II $ 582 826 1,107 1,907
High Yield III $ 597 856 1,134 1,925
High Total Return $ 605 879 1,174 2,011
High Total Return II $ 611 897 1,204 2,075
Money Market $ 127 397 686 1,511
Balanced $ 705 1,005 1,353 2,334
Income & Growth $ 709 993 1,297 2,158
Balance Sheet Opportunities $ 716 1,013 1,332 2,231
Convertible $ 703 972 1,262 2,084
70 What You Pay to Invest
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
Examples
<TABLE>
<CAPTION>
Class B
If you sell your shares If you don't sell your shares
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $ 708 943 1,303 2,200 208 643 1,103 2,200
LargeCap Leaders $ 753 1,103 1,603 2,845 253 803 1,403 2,845
Research Enhanced Index $ 732 1,015 1,425 2,443 232 715 1,225 2,443
Growth Opportunities $ 716 967 1,344 2,269 216 667 1,144 2,269
LargeCap Growth $ 703 927 1,278 2,160 203 627 1,078 2,160
MidCap Value $ 753 1,083 1,543 2,686 253 783 1,343 2,686
MidCap Opportunities $ 830 1,307 1,907 3,374 330 1,007 1,707 3,374
MidCap Growth $ 703 927 1,278 2,160 203 627 1,078 2,160
Growth + Value $ 742 1,045 1,475 2,553 242 745 1,275 2,553
SmallCap Opportunities $ 721 982 1,369 2,334 221 682 1,169 2,334
SmallCap Growth $ 727 1,000 1,400 2,411 227 700 1,200 2,411
Bank and Thrift $ 717 970 1,349 2,282 217 670 1,149 2,282
Worldwide Growth $ 733 1,018 1,430 2,473 233 718 1,230 2,473
International Value $ 744 1,051 1,485 2,566 244 751 1,285 2,566
International Core Growth $ 741 1,042 1,470 2,555 241 742 1,270 2,555
International SmallCap Growth $ 745 1,055 1,491 2,596 245 755 1,291 2,596
Emerging Markets Value $ 796 1,207 1,743 3,082 296 907 1,543 3,082
Emerging Countries $ 768 1,179 1,769 3,259 268 879 1,569 3,259
Asia-Pacific Equity $ 778 1,255 1,955 3,679 278 955 1,755 3,679
Government Securities Income $ 718 973 1,354 2,292 218 673 1,154 2,292
Government Securities $ 708 943 1,303 2,192 208 643 1,103 2,192
Strategic Income $ 637 784 1,111 1,998 137 484 911 1,998
High Yield $ 688 884 1,207 1,991 188 584 1,007 1,991
High Yield II $ 678 869 1,204 2,046 178 569 1,004 2,046
High Yield III $ 700 918 1,262 2,112 200 618 1,062 2,112
High Total Return $ 709 946 1,308 2,205 209 646 1,108 2,205
High Total Return II $ 714 961 1,334 2,260 214 661 1,134 2,260
Money Market $ 703 927 1,278 2,134 203 627 1,078 2,134
Balanced $ 703 955 1,361 2,389 203 655 1,161 2,389
Income & Growth $ 715 964 1,339 2,268 215 664 1,139 2,268
Balance Sheet Opportunities $ 720 979 1,364 2,326 220 679 1,164 2,326
Convertible $ 701 921 1,268 2,139 201 621 1,068 2,139
</TABLE>
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
What You Pay to Invest 71
<PAGE>
WHAT YOU PAY TO INVEST
- - - - - - - - - --------------------------------------------------------------------------------
Examples
<TABLE>
<CAPTION>
Class C
If you sell your shares If you don't sell your shares
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $ 308 643 1,103 2,379 208 643 1,103 2,379
LargeCap Leaders $ 353 803 1,403 3,026 253 803 1,403 3,026
Research Enhanced Index $ 330 709 1,215 2,605 230 709 1,215 2,605
Growth Opportunities $ 316 667 1,144 2,462 216 667 1,144 2,462
LargeCap Growth $ 303 627 1,078 2,327 203 627 1,078 2,327
MidCap Value $ 353 783 1,343 2,869 253 783 1,343 2,869
MidCap Opportunities $ 425 992 1,683 3,522 325 992 1,683 3,522
MidCap Growth $ 303 627 1,078 2,327 203 627 1,078 2,327
Growth + Value $ 343 748 1,280 2,736 243 748 1,280 2,736
SmallCap Opportunities $ 325 694 1,190 2,554 225 694 1,190 2,554
SmallCap Growth $ 327 700 1,200 2,575 227 700 1,200 2,575
Worldwide Growth $ 333 718 1,230 2,636 233 718 1,230 2,636
International Value $ 344 751 1,285 2,746 244 751 1,285 2,746
International Core Growth $ 341 742 1,270 2,716 241 742 1,270 2,716
International SmallCap Growth $ 345 755 1,291 2,756 245 755 1,291 2,756
Emerging Markets Value $ 394 901 1,533 3,233 294 901 1,533 3,233
Emerging Countries $ 368 879 1,569 3,409 268 879 1,569 3,409
Government Securities Income $ 318 673 1,154 2,483 218 673 1,154 2,483
Government Securities $ 308 643 1,103 2,379 208 643 1,103 2,379
Strategic Income $ 237 484 911 2,103 137 484 911 2,103
High Yield $ 288 584 1,007 2,187 188 584 1,007 2,187
High Yield II $ 278 569 1,004 2,215 178 569 1,004 2,215
High Yield III $ 301 621 1,068 2,306 201 621 1,068 2,306
High Total Return $ 310 649 1,114 2,400 210 649 1,114 2,400
High Total Return II $ 315 664 1,139 2,452 215 664 1,139 2,452
Money Market $ 303 627 1,078 2,327 203 627 1,078 2,327
Balanced $ 303 655 1,161 2,554 203 655 1,161 2,554
Income & Growth $ 311 652 1,119 2,410 211 652 1,119 2,410
Balance Sheet Opportunities $ 318 673 1,154 2,483 218 673 1,154 2,483
Convertible $ 301 621 1,068 2,306 201 621 1,068 2,306
</TABLE>
Class M
Fund 1 year 3 years 5 years 10 years
- - - - - - - - - ---- ------ ------- ------- --------
MagnaCap $ 526 897 1,291 2,392
LargeCap Leaders $ 570 1,052 1,583 3,033
MidCap Value $ 570 1,033 1,525 2,878
Asia-Pacific Equity $ 594 1,200 1,927 3,845
Government Securities Income $ 512 903 1,318 2,475
High Yield $ 482 816 1,174 2,181
<TABLE>
<CAPTION>
Class T
If you sell your shares If you don't sell your shares
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities $ 608 843 1,103 2,205 208 643 1,103 2,205
SmallCap Opportunities $ 613 858 1,129 2,270 213 658 1,129 2,270
Government Securities Income $ 583 766 975 2,011 183 566 975 2,011
Government Securities $ 573 736 923 1,908 173 536 923 1,908
High Yield II $ 543 662 822 1,757 143 462 822 1,757
High Yield III $ 563 705 871 1,809 163 505 871 1,809
Balanced $ 578 779 1,034 2,192 178 579 1,034 2,192
Balance Sheet Opportunities $ 592 794 1,021 2,102 192 594 1,021 2,102
</TABLE>
72 What You Pay to Invest
<PAGE>
SHAREHOLDER
CHOOSING A SHARE CLASS GUIDE
- - - - - - - - - --------------------------------------------------------------------------------
PILGRIM PURCHASE OPTIONSTM
Depending upon the Fund, you may select from up to four separate classes of
shares: Class A, Class B, Class C and Class M.
Class A
* Front-end sales charge, as described on the next page (except for Money
Market Fund).
* Distribution and service (12b-1) fees of 0.25% to 0.35%.
Class B
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1% (0.75% for Strategic Income
Fund).
* A contingent deferred sales charge, as described on the next page.
* Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses. Class B shares acquired initially through Funds
that were part of the Nicholas-Applegate Mutual Funds at the time of
purchase will convert after seven years from the date of original purchase.
Class C
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1% (0.75% for Strategic Income
Fund).
* A 1% contingent deferred sales charge on shares sold within one year of
purchase.
* No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
* Not offered by Bank and Thrift Fund and Asia-Pacific Equity Fund.
Class M
* Lower front-end sales charge than Class A, as described on the next page.
* Distribution and service (12b-1) fees of 0.75%.
* No automatic conversion to Class A shares, so annual expenses continue at
the Class M level throughout the life of your investment.
* Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield
Fund.
Class T
* No longer available for purchase, unless you are investing income earned on
Class T shares or exchanging Class T Shares of another Fund.
* Distribution and service (12b-1) fees of 0.65 to 1% (varies by fund).
* A contingent deferred sales charge, as described in this section.
* Automatic conversion to Class A shares after 8 years, thus reducing future
annual expenses.
* Offered only by Growth Opportunities, SmallCap Opportunities, Government
Securities Income, Government Securities, High Yield II, High Yield III,
Balanced, and Balance Sheet Opportunities Fund.
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the initial sales charge or the contingent deferred sales
charge. The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Higher distribution
fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A or Class M shares. Orders for Class B shares and Class M shares in excess of
$250,000 and $1,000,000, respectively, will be accepted as orders for Class A
shares or declined. You should discuss which Class of shares is right for you
with your investment professional.
Distribution and Shareholder Service Fees
To pay for the cost of promoting the Funds and servicing your shareholder
account, each class of each Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
increase your cost of investing and may exceed the cost of paying other types of
sales charges.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 73
<PAGE>
SHAREHOLDER
GUIDE CHOOSING A SHARE CLASS
- - - - - - - - - --------------------------------------------------------------------------------
SALES CHARGE CALCULATION
Class A
Class A shares of the Funds are sold subject to the following sales charge:
Equity Funds and
Equity & Income Funds Income Funds
------------------------ -----------------------
As a % As a %
of the As a % of of the As a % of
offering net offering net
Your Investment price asset value price asset value
- - - - - - - - - --------------- ----- ----------- ----- -----------
Less than $50,000 5.75 6.10 4.75 4.99
$50,000 - $99,999 4.50 4.71 4.50 4.71
$100,000 - $249,999 3.50 3.63 3.50 3.63
$250,000 - $499,999 2.50 2.56 2.50 2.56
$500,000 - $1,000,000 2.00 2.04 2.00 2.04
$1,000,000 and over See below See below
Money Market Fund. There is no sales charge if you purchase Class A shares of
Money Market Fund. However, if the Class A shares are exchanged for shares of
another Pilgrim Fund, you will be charged the applicable sales load for that
fund upon the exchange.
Investments of $1 Million or More. There is no front-end sales charge if you
purchase Class A shares in an amount of $1 million or more. However, the shares
will be subject to a contingent deferred sales charge if they are redeemed
within one or two years of purchase, depending on the amount of the purchase, as
follows:
Period during which
Your investment CDSC CDSC applies
--------------- ---- ------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares that were purchased in an amount of $1 million or more
through Funds that were part of the Nicholas-Applegate Mutual Funds at the time
of purchase will be subject to a contingent deferred sales charge of 1% within
one year from the date of purchase.
Class A shares that were purchased in an amount of $1 million or more through
funds that were part of the Northstar family of funds at the time of purchase
are subject to a different contingent deferred sales charge period of 18 months
from the date of purchase. See the SAI for further information.
Class B, Class C and Class T
Class B and Class C shares are offered at their net asset value per share
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares that you sell within a certain period of
time after you bought them. The amount of the CDSC is based on the lesser of the
net asset value of the shares at the time of purchase or redemption. There is no
CDSC on shares acquired through the reinvestment of dividends and capital gains
distributions. The CDSCs are as follows:
Class B Deferred Sales Charge(1)
CDSC on shares
Years after purchase being sold
- - - - - - - - - -------------------- ----------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6th year none
(1) Class B shares that were purchased through funds that were part of the
Northstar family of funds at the time of purchase are subject to a different
contingent deferred sales charge. Please see the SAI for further information.
Class C Deferred Sales Charge
CDSC on shares
Years after purchase being sold
- - - - - - - - - -------------------- ----------
1st year 1%
After 1st year none
Class T Deferred Sales Charge
CDSC on shares
Years after purchase being sold
- - - - - - - - - -------------------- ----------
1st year 4%
2nd year 3%
3rd year 2%
4th year 1%
After 4th year none
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Funds will first redeem shares in your account that are not subject
to a CDSC, and then will sell shares that have the lowest CDSC.
Class M
Class M shares of the Funds are sold subject to the following sales charge.
MagnaCap,
LargeCap Leaders, Government
MidCap Value, Securities
and Income and
Asia-Pacific High Yield
Equity Funds Funds
------------------- -------------------
As a % As a % As a % As a %
of the of net of the of net
offering asset offering asset
Your investment price value price value
- - - - - - - - - --------------- ----- ----- ----- -----
Less than $50,000 3.50% 3.63% 3.25% 3.36%
$50,000 - $99,999 2.50% 2.56% 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52% 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01% 1.00% 1.01%
$500,000 and over none none none none
74 Shareholder Guide
<PAGE>
SHAREHOLDER
CHOOSING A SHARE CLASS GUIDE
- - - - - - - - - --------------------------------------------------------------------------------
Sales Charge Reductions and Waivers
Reduced Sales Charges. You may reduce the initial sales charge on a purchase of
Class A or Class M shares of the funds by combining multiple purchases to take
advantage of the breakpoints in the sales charge schedules. You may do this by:
Letter of Intent -- lets you purchase shares over a 13 month period and pay the
same sales charge as if the shares had all been purchased at once.
Rights of Accumulation -- lets you add the value of shares of any open-end
Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of
your next purchase for purposes of calculating the sales charge.
Combination Privilege -- shares held by investors in the Pilgrim Funds which
impose a CDSC may be combined with Class A or Class M shares for a reduced sales
charge.
See the Account Application or the Statement of Additional Information for
details, or contact your financial representative or the Shareholder Servicing
Agent for more information.
CDSC Waivers. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
* redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of
death or initial determination of permanent disability.
* for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan,
up to a maximum of 12% per year of a shareholder's account value based on
the value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
* mandatory distributions from a tax-deferred retirement plan or an IRA.
However, if you purchased shares that were part of the Nicholas-Applegate
Mutual Funds, you may be eligible for a CDSC waiver prior to the mandatory
distribution age.
* If you think you may be eligible for a CDSC waiver, contact your financial
representative or the Shareholder Servicing Agent.
Reinstatement Privilege. If you sell Class B, Class C or Class T shares of a
Pilgrim Fund, you may reinvest some or all of the proceeds in the same share
class within 90 days without a sales charge. Reinstated Class B, Class C and
Class T shares will retain their original cost and purchase date for purposes of
the CDSC. This privilege can be used only once per calendar year. If you want to
use the Reinstatement Privilege, contact your financial representative or the
Shareholder Servicing Agent. Consult the SAI for more information.
Sales Charge Waivers. Class A or Class M shares may be purchased without a sales
charge by certain individuals and institutions. For additional information,
contact the Shareholder Servicing Agent, or see the Statement of Additional
Information.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 75
<PAGE>
SHAREHOLDER
GUIDE HOW TO PURCHASE SHARES
- - - - - - - - - --------------------------------------------------------------------------------
The minimum initial investment amounts for the Pilgrim Funds are as follows:
* Non-retirement accounts: $1,000
* Retirement accounts: $250
* Pre-Authorized Investment Plan: $100 to open; you must invest at least $100
a month.
The minimum additional investment is $100.
Make your investment using the table on the right.
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. The Pilgrim Funds reserve the right to waive minimum
investment amounts. The Funds reserve the right to liquidate sufficient shares
to recover annual transfer agent fees or to close your account and redeem your
shares should you fail to maintain your account value at a minimum of $1,000.00
($250.00 for IRA's).
Retirement Plans
The Funds have available prototype qualified retirement plans for both
corporations and for self-employed individuals. They also have available
prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (IFTC) acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment
Your professional with an
Investment authorized firm
Professional can help you establish
and maintain your
account.
By Mail Visit or consult an Visit or consult an
investment investment
professional. Make professional. Fill out
your check payable to the Account Additions
the Pilgrim Funds and form included on the
mail it, along with a bottom of your account
completed Application. statement along with
Please indicate your your check payable to
investment professional the Fund and mail
on the New Account them to the address on
Application the account statement.
Remember to write your account
number on the check.
By Wire Call the Pilgrim Wire the funds in the
Operations Department same manner described
at (800) 336-3436 to under "Initial
obtain an account Investment."
number and indicate
your investment
professional on the
account.
Instruct your bank to
wire funds to the Fund
in the care of:
Investors Fiduciary
Trust Co.
ABA #101003621
Kansas City, MO
credit to: ___________
(the Fund)
A/C #751-8315; for
further credit
to: _________________
Shareholder
A/C #_________________
(A/C # you received
over the telephone)
Shareholder Name:
_______________________
(Your Name Here)
After wiring funds you
must complete the
Account Application
and send it to:
Pilgrim Funds
P.O. Box 219368
Kansas City, MO
64121-6368
76 Shareholder Guide
<PAGE>
SHAREHOLDER
HOW TO REDEEM SHARES GUIDE
- - - - - - - - - --------------------------------------------------------------------------------
You may redeem shares using the table on the right.
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
Systematic Withdrawal Plan
You may elect to make periodic withdrawals from your account on a regular basis.
* Your account must have a current value of at least $10,000.
* Minimum withdrawal amount is $100.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
Payments
Normally, payment for shares redeemed will be made within three days after
receipt by the Transfer Agent of a written request in good order. When you place
a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
Each Fund normally intends to pay in cash for all shares redeemed, but under
abnormal conditions that make payment in cash unwise, a Fund may make payment
wholly or partly in securities at their then current market value equal to the
redemption price. In such case, a Fund could elect to make payment in securities
for redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
Method Procedures
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge for
their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in which
the account is registered, and the dollar value or
number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 219368
Kansas City, MO 64121-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification
is provided on the Account Application. A signature
guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check the
box on the Account Application which signifies that
you do not wish to use telephone redemptions. To
redeem by telephone, call the Shareholder Servicing
Agent at (800) 992-0180.
Receiving Proceeds By Check:
You may have redemption proceeds (up to a maximum of
$100,000) mailed to an address which has been on
record with Pilgrim Funds for at least 30 days.
Receiving Proceeds By Wire:
You may have redemption proceeds (subject to a minimum
of $5,000) wired to your pre-designated bank account.
You will not be able to receive redemption proceeds
by wire unless you check the box on the Account
Application which signifies that you wish to receive
redemption proceeds by wire and attach a voided
check. Under normal circumstances, proceeds will be
transmitted to your bank on the business day
following receipt of your instructions, provided
redemptions may be made. In the event that share
certificates have been issued, you may not request a
wire redemption by telephone.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 77
<PAGE>
SHAREHOLDER
GUIDE TRANSACTION POLICIES
- - - - - - - - - --------------------------------------------------------------------------------
Net Asset Value
The net asset value (NAV) per share for each Fund and class is determined each
business day as of the close of regular trading on the New York Stock Exchange
(usually at 4:00 p.m. Eastern Time). The NAV per share of each class of each
Fund is calculated by taking the value of the Fund's assets attributable to that
class, subtracting the Fund's liabilities attributable to that class, and
dividing by the number of shares of that class that are outstanding. Because
foreign securities may trade on days when the Funds do not price shares, the net
asset value of a Fund that invests in foreign securities may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith under the supervision of the Board of Directors or Trustees. Valuing
securities at fair value involves greater reliance on judgment than securities
that have readily available market quotations.
Money Market Fund. The Money Market Fund tries to maintain a stable NAV of $1.00
per share. Because the Primary Institutional Fund uses the amortized cost method
of valuing the securities held by it and rounds its per share net asset value to
the nearest whole cent, it is anticipated that the net asset value of the
Primary Institutional Fund will remain constant at $1.00 per share. However, the
Money Market Fund makes no assurance that either it or the Primary Institutional
Fund can maintain a $1.00 net asset value per share.
Price of Shares
When you buy shares, you pay the NAV plus any applicable sales charge. When you
sell shares, you receive the NAV minus any applicable deferred sales charge.
Exchange orders are effected at NAV.
Execution of Requests
Purchase and sale requests are executed at the next NAV determined after the
order is received in proper form by the Transfer Agent or Distributor. A
purchase order will be deemed to be in proper form when all of the required
steps set forth above under "How to Purchase Shares" have been completed. If you
purchase by wire, however, the order will be deemed to be in proper form after
the telephone notification and the federal funds wire have been received. If you
purchase by wire, you must submit an application form in a timely fashion. If an
order or payment by wire is received after the close of regular trading on the
New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not
be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
Telephone Orders
The Funds and their transfer agent will not be responsible for the authenticity
of phone instructions or losses, if any, resulting from unauthorized shareholder
transactions if they reasonably believe that such instructions were genuine. The
Funds and their transfer agent have established reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include recording telephone instructions for exchanges and expedited
redemptions, requiring the caller to give certain specific identifying
information, and providing written confirmation to shareholders of record not
later than five days following any such telephone transactions. If the Funds and
their transfer agent do not employ these procedures, they may be liable for any
losses due to unauthorized or fraudulent telephone instructions.
Exchanges
You may exchange shares of a Fund for shares of the same class of any other
Pilgrim Fund, without paying any additional sales charge, except that Class A
shares of the Money Market Fund for which no sales charge was paid must pay the
applicable sales load on an exchange into Class A shares of another Fund. In
addition, Class T shares of any Fund may be exchanged for Class B shares of the
Money Market Fund. Shares subject to a CDSC will continue to age from the date
that the original shares were purchased. If you exchange shares of a Fund that
at the time you acquired the shares was a Nicholas-Applegate Mutual Fund, the
shares you receive on the exchange will be subject to the current CDSC structure
and conversion rights of the Fund being acquired, although the shares will
continue to age for CDSC and conversion purposes from the date the original
shares were acquired.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Funds are intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice,
78 Shareholder Guide
<PAGE>
SHAREHOLDER
TRANSACTION POLICIES GUIDE
- - - - - - - - - --------------------------------------------------------------------------------
restrict the frequency of, otherwise modify, or impose charges of up to $5.00
upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege. A
Fund may change or cancel its exchange policies at any time, upon 60 days'
written notice to shareholders.
Systematic Exchange Privilege
With an initial account balance of at least $5,000 and subject to the
information and limitations outlined above, you may elect to have a specified
dollar amount of shares systematically exchanged, monthly, quarterly,
semi-annually or annually (on or about the 10th of the applicable month), from
your account to an identically registered account in the same class of any other
open-end Pilgrim Fund. This exchange privilege may be modified at any time or
terminated upon 60 days' written notice to shareholders.
Small Accounts
Due to the relatively high cost of handling small investments, the Funds reserve
the right upon 30 days' written notice to redeem, at NAV, the shares of any
shareholder whose account (except for IRAs) has a value of less than $1,000,
other than as a result of a decline in the NAV per share.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 79
<PAGE>
MANAGEMENT
OF THE FUNDS ADVISERS
- - - - - - - - - --------------------------------------------------------------------------------
Pilgrim Advisors, Inc., formerly Northstar Investment Management Corporation
("Pilgrim Advisors") or Pilgrim Investments, Inc. ("Pilgrim Investments") serves
as the investment adviser to each of the Funds. Both are indirect wholly-owned
subsidiaries of ReliaStar Financial Corp. ("ReliaStar") (NYSE: RLR). Through its
subsidiaries, ReliaStar offers individuals and institutions life insurance and
annuities, employee benefits products and services, life and health reinsurance,
retirement plans, mutual funds, bank products, and personal finance education.
Pilgrim Advisors or Pilgrim Investments, as the case may be, has overall
responsibility for the management of the Funds for which it serves as adviser.
The adviser provides or oversees all investment advisory and portfolio
management services for each Fund, and assists in managing and supervising all
aspects of the general day-to-day business activities and operations of the
Funds, including custodial, transfer agency, dividend disbursing, accounting,
auditing, compliance and related services. Pilgrim Advisors is a registered
investment adviser that currently manages over $4 billion in mutual funds and
institutional accounts.
Pilgrim Advisors' and Pilgrim Investments' principal address is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser. As of September 30, 1999, Pilgrim Investments managed over $7.7 billion
in assets. Pilgrim Investments acquired certain assets of previous advisers to
certain of the Funds in separate transactions that closed on April 7, 1995 and
May 21, 1999. On October 29, 1999, ReliaStar acquired Pilgrim Investments.
Pilgrim Advisors and Pilgrim Investments share certain resources and investment
personnel.
Pilgrim Advisors or Pilgrim Investments, as the case may be, receives a monthly
fee for its services based on the average daily net assets of each of the funds
it manages.
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year as a percentage of that Fund's average daily net
assets:
Fund Advisory Fee
- - - - - - - - - ---- ------------
MagnaCap 0.71%
LargeCap Leaders 1.00
Research Enhanced Index 0.70
Growth Opportunities 0.75
LargeCap Growth 0.75
MidCap Value 1.00
MidCap Opportunities 1.00
MidCap Growth 0.75
Growth + Value 1.00
SmallCap Opportunities 0.75
SmallCap Growth 1.00
Bank and Thrift 0.72
Worldwide Growth 1.00
Fund Advisory Fee
- - - - - - - - - ---- ------------
International Value 1.00%
International Core Growth 1.00
International SmallCap Growth 1.00
Emerging Markets Value 1.00
Emerging Countries 1.25
Asia-Pacific Equity 1.25
Government Securities Income 0.50
Government Securities 0.65
Strategic Income 0.45
High Yield 0.60
High Yield II 0.60
High Yield III 0.60
High Total Return 0.71
High Total Return II 0.75
Money Market 0.25
Balanced 0.75
Income & Growth 0.75
Balance Sheet Opportunities 0.65
Convertible 0.75
Pilgrim Advisors Directly Manages the Portfolios of the Following Funds:
Growth Opportunities Fund and MidCap
Opportunities Fund.
The following individuals share responsibility for the day-to-day management of
the Growth Opportunities Fund and MidCap Opportunities Fund:
Mary Lisanti has managed the Pilgrim SmallCap Opportunities Fund since July
1998, has co-managed the Pilgrim MidCap Opportunities Fund since the fund was
formed in August 1998 and has managed or co-managed the Pilgrim Growth
Opportunities Fund since August 1998. She joined Pilgrim Advisors in May 1998.
Ms. Lisanti has over 20 years of experience in small and mid-cap investments.
Before joining Pilgrim Advisors, Ms. Lisanti was a Portfolio Manager at Strong
Capital Management where she managed the Strong Small Cap Fund and co-managed
the Strong Mid Cap Fund. From 1993 to 1996, Ms. Lisanti was a Managing Director
and Head of Small and Mid-Capitalization Equity Strategies at Bankers Trust
Corp. where she managed the BT Small Cap Fund and the BT Capital Appreciation
Fund. Prior to Bankers Trust, Ms. Lisanti was a Portfolio Manager with the
Evergreen Funds. She began her career as an Analyst specializing in emerging
growth stocks with Donaldson, Lufkin & Jenrette and Shearson Lehman Hutton, and
was ranked the number one Institutional Investor Emerging Growth Stock Analyst
in 1989. She is a Chartered Financial Analyst, and a Member of the New York
Society of Security Analysts and the Financial Analyst Federation.
80 Management of the Funds
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MANAGEMENT
ADVISERS OF THE FUNDS
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Jeffrey Bernstein has co-managed the Pilgrim MidCap Opportunities Fund since the
Fund was formed in August 1998 and has co-managed the Pilgrim Growth
Opportunities Fund since January 2000. He joined Pilgrim Advisors in May 1998.
Mr. Bernstein has over 10 years of experience in small and mid-cap investments.
Before joining Pilgrim Advisors, Mr. Bernstein was a Portfolio Manager at Strong
Capital Management where he co-managed the Strong MidCap Fund. From November
1995 to February 1997, Mr. Bernstein was a Portfolio Manager with
Berkeley Capital. From September 1993 to November 1995, Mr. Bernstein was an
Assistant Portfolio Manager at Bankers Trust Corp. Prior to Bankers Trust, Mr.
Bernstein was an Analyst for Cowen & Co.
SmallCap Opportunities Fund
Mary Lisanti, whose background is described above, has served as a manager of
the SmallCap Opportunities Fund since July 1998.
Income & Growth Fund
This Fund is managed by a team led by Mary Lisanti, whose background is
described above. Ms. Lisanti has served as a Portfolio Manager of the Fund since
November 1998.
Government Securities Fund
Robert Kinsey has managed or co-managed the Pilgrim Government Securities Fund
since November 1999.
Mr. Kinsey has over 14 years of experience in the management of fixed-income
investments. At Pilgrim Investments, Inc. (Pilgrim Investments), an affiliate of
Pilgrim Advisors, he serves as Vice President and a Senior Portfolio Manager.
Prior to joining Pilgrim Investments, Mr. Kinsey was a Vice President and fixed
income Portfolio Manager of Federated Investors from January 1995 to March 1999.
From July 1992 to January 1995, Mr. Kinsey was a Principal and Portfolio Manager
for Harris Investment Management.
High Yield Fund III, High Total Return Fund and High Total Return Fund II
Kevin Mathews has served as Senior Portfolio Manager of High Yield III, High
Total Return II and High Total Return since November 1999.
Mr. Mathews has over 16 years of experience in the management of high-yield
fixed income investments. At Pilgrim Investments, an affiliate of Pilgrim
Advisors, he serves as a Senior Vice President and Senior Portfolio Manager.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager of Van Kampen American Capital.
Charles Ullerich has served as co-manager of High Yield III, High Total Return
II and High Total Return since December 1999.
Mr. Ullerich has approximately nine years of experience in the management of
fixed-income investments. At Pilgrim Investments, an affiliate of Pilgrim
Advisors, he serves as a Vice President and Portfolio Manager. Prior to joining
Pilgrim Investments, Mr. Ullerich was Vice President of Treasury Services for
First Liberty Bank of Macon, Georgia since 1991, where he was Portfolio Manager
for a mortgage and treasury securities portfolio.
Balance Sheet Opportunities Fund
The following individuals share responsibility for the day-to-day management of
the Balance Sheet Opportunities Fund:
Robert Kinsey, whose background is described above, has co-managed the Balance
Sheet Opportunities Fund since November 1999.
Kevin Mathews, whose background is described above, has co-managed the Balance
Sheet Opportunities Fund since November 1999.
G. David Underwood has co-managed the Balance Sheet Opportunities Fund since
November 1999.
Mr. Underwood has over 21 years of investment management experience. At Pilgrim
Investments, an affiliate of Pilgrim, he serves as a Vice President and Senior
Portfolio Manager. Prior to joining Pilgrim Investments in December 1996, Mr.
Underwood was a Director of Funds Management for First Interstate Capital
Management.
Charles Ullerich, whose background is described above, has co-managed the
Balance Sheet Opportunities Fund since December 1999.
Pilgrim Investments Directly Manages the Portfolios of the Following Funds:
MagnaCap Fund
This Fund is managed by a team led by Howard N. Kornblue, Senior Vice President
and Senior Portfolio Manager for Pilgrim Investments. Mr. Kornblue has served as
a Portfolio Manager of MagnaCap Fund since 1989. The other individuals on the
team are G. David Underwood and Robert M. Kloss.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Management of the Funds 81
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MANAGEMENT
OF THE FUNDS ADVISERS
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LargeCap Leaders and MidCap Value Fund
The LargeCap Leaders and MidCap Value Funds are managed by a team led by G.
David Underwood, Vice President and Senior Portfolio Manager for Pilgrim
Investments. Mr. Underwood is the Lead Portfolio Manager of LargeCap Leaders
Fund. Prior to joining Pilgrim Investments in December, 1996, Mr. Underwood
served as Director of Funds Management for First Interstate Capital Management.
Mr. Underwood's prior experience includes a 10 year association with Integra
Trust Company of Pittsburgh where he served as Director of Research and Senior
Portfolio Manager. The other individual on the team is Robert M. Kloss.
Bank and Thrift Fund
Carl Dorf, Senior Vice President and Senior Portfolio Manager of Bank and Thrift
Fund has been managing the Fund's portfolio since January 1991, when he joined
Pilgrim Investments' predecessor. Mr. Dorf is also a Senior Vice President of
Pilgrim Investments.
Strategic Income Fund
The following individuals share responsibility for the day-to-day management of
the Strategic Income Fund:
Robert K. Kinsey, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey
manages Strategic Income Fund's assets that are invested in assets other than
high yield debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was
a Vice President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Senior Portfolio Manager of Strategic Income Fund
since May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
Charles Ullerich, Vice President and Portfolio Manager of Pilgrim Investments,
has served as a Co-Portfolio Manager of Strategic Income Fund since December
1999. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President of
Treasury Services for First Liberty Bank of Macon, GA since 1991, where he was
Portfolio Manager for a mortgage and treasury securities portfolio.
Government Securities Income Fund
Robert K. Kinsey, whose background is described above, has primary
responsibility for the day-to-day management of Government Securities Income
Fund, and has served as Senior Portfolio Manager of Government Securities Income
Fund since May 24, 1999.
High Yield Fund and High Yield Fund II
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of High Yield Fund and High Yield Fund II since June 1995 and
May 1999, respectively.
Charles Ullerich, whose background is described above, has served as a
co-manager of High Yield Fund and High Yield Fund II since December 1999.
Balanced Fund
The following individuals share responsibility for the day-to-day management of
the Balanced Fund:
G. David Underwood, whose background is described above, has served as Senior
Portfolio Manager of the equity portion of the Balanced Fund's assets since May
24, 1999.
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
Robert K. Kinsey, whose background is described above, has served as a Portfolio
Manager of the fixed income portion of Balanced Fund's assets since May 24,
1999.
Charles Ullerich, whose background is described above, has served as a
co-manager of the fixed income portion of Balanced Fund's assets since December
1999.
82 Management of the Funds
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MANAGEMENT
SUB-ADVISERS OF THE FUNDS
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For the following Funds, Pilgrim Advisors or Pilgrim Investments has engaged a
Sub-Adviser to provide the day-to-day management of the Fund's portfolio. The
Sub-Advisers are among the most respected institutional investment advisers in
the world, and have been selected primarily on the basis of their successful
application of a consistent, well-defined, long-term investment approach over a
period of several market cycles.
Research Enhanced Index Fund
J.P. Morgan Investment Management Inc.
A registered investment adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan) serves as Sub-Adviser to the Pilgrim Research Enhanced Index Fund. The
firm was formed in 1984. The firm evolved from the Trust and Investment Division
of Morgan Guaranty Trust Company which acquired its first tax-exempt client in
1913 and its first pension account in 1940. J.P. Morgan currently manages
approximately $326 billion for institutions and pension funds. The company is a
wholly owned subsidiary of J.P. Morgan & Co. J.P. Morgan's principal address is
522 Fifth Avenue, New York, New York 10036.
James Wiess has co-managed the Pilgrim Research Enhanced Index Fund since the
fund was formed in December 1998. At J.P. Morgan Investment Management Inc., he
serves as a Portfolio Manager and Member of the Structured Equity Group with the
responsibility of portfolio rebalancing and research and development of
structured equities strategies.
Mr. Wiess has over 16 years of investment management experience. Before joining
J.P. Morgan Investment Management Inc. in 1992, Mr. Wiess was a Stock Index
Arbitrager for seven years at Oppenheimer & Co. and a Consultant for Data
Resources. He is a Chartered Financial Analyst.
Timothy Devlin has co-managed the Pilgrim Research Enhanced Index Fund since the
fund was formed in December 1998. At J.P. Morgan Investment Management Inc., he
serves as a Portfolio Manager and Member of the Structured Equity Group.
Mr. Devlin has over 12 years of investment management experience. Before joining
J.P. Morgan Investment Management Inc. in 1996, Mr. Devlin was a Portfolio
Manager for nine years at Mitchell Hutchins Asset Management, Inc. where he
managed quantitatively-driven portfolios for institutional and retail investors.
Growth + Value Fund
Navellier Fund Management, Inc.
A registered investment adviser, Navellier Fund Management Inc. (Navellier)
serves as Sub-Adviser to the Pilgrim Growth + Value Fund. Navellier and its
affiliate, Navellier & Associates, Inc., manage over $2 billion for
institutions, pension funds and high net worth individuals.
Navellier is wholly owned by Louis Navellier. Navellier's principal address is 1
East Liberty, Third Floor, Reno, Nevada 89501. Louis Navellier has managed the
Pilgrim Growth + Value Fund since the fund was formed in November 1996. Mr.
Navellier has over 19 years of investment management experience and is the sole
owner of Navellier & Associates, Inc., a registered investment adviser that
manages investments for institutions, pension funds and high net worth
individuals. Mr. Navellier's investment newsletter, MPT Review, has been
published for over 19 years and is widely renowned throughout the investment
community.
International Value Fund and Emerging Markets Value Fund
Brandes Investment Partners, L.P.
A registered investment adviser, Brandes Investment Partners, L.P. (Brandes)
serves as Sub-Adviser to the Pilgrim International Value Fund and the Pilgrim
Emerging Markets Value Fund. The company was formed in May 1996 as the successor
to its general partner, Brandes Investment Partners, Inc. which has been
providing investment advisory services (through various predecessor entities)
since 1974. Brandes currently manages over $33 billion in international
portfolios. Brandes' principal address is 12750 High Bluff Drive, San Diego,
California 92130.
Charles Brandes has co-managed the Pilgrim International Value Fund and the
Pilgrim Emerging Markets Value Fund since the funds were formed in March 1995
and January 1998, respectively. Mr. Brandes has over 31 years of investment
management experience. He founded the general partner of Brandes Investment
Partners, L.P. in 1974 and owns a controlling interest in it. At Brandes
Investment Partners, L.P., he serves as a Managing Partner. He is a Chartered
Financial Analyst and a Member of the Association for Investment Management and
Research.
Ian Sunder has co-managed the Pilgrim Emerging Markets Value Fund since the fund
was formed in January 1998. Mr. Sunder has over nine years of investment
management experience. At Brandes Investment Partners, L.P., he serves as a
Portfolio Manager. He is a Chartered Financial Analyst, and a Member of the
Association for Investment Management and Research and the Financial Analysts
Socity.
Jeff Busby has co-managed the Pilgrim International Value Fund since the fund
was formed in March 1995. Mr. Busby has over 13 years of investment management
experience. At Brandes Investment Partners, L.P., he serves as a Managing
Partner. He is also responsible for overseeing all trading activities for the
firm. He is a Chartered Financial Analyst, and a Member of the Association for
Investment Management and Research and the Financial Analysts Society.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Management of the Funds 83
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MANAGEMENT
OF THE FUNDS SUB-ADVISERS
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Asia-Pacific Equity Fund
HSBC Asset Management (Americas) Inc. and HSBC Asset Management (Hong Kong)
Limited (collectively, HSBC) serve jointly as Sub-Adviser to Asia-Pacific Equity
Fund.
The firms are part of HSBC Asset Management, the global investment advisory and
fund management business unit of HSBC Holdings plc (founded as the Hong Kong and
Shanghai Banking Corporation in 1865) which, with headquarters in London, is one
of the world's largest banking and financial organizations. HSBC Asset
Management manages over approximately $66 billion of assets worldwide for a wide
variety of institutional, retail and private clients. HSBC Asset Management has
advisory operations in Hong Kong and Singapore, among other locations. Its
Parent company has over a century of operations in local economies throughout
the Asia-Pacific region. HSBC Asset Management's principal business address is
140 Broadway, 6th Floor, New York, New York 10005.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
and Man Wing Chung, Chief Investment Officer Asia (ex Japan), HSBC Hong Kong,
are primarily responsible for portfolio management of Asia-Pacific Equity Fund.
Mr. Lutcher joined HSBC in 1997, and has over 20 years of investment experience.
Prior to joining HSBC, Mr. Lutcher was with Merrill Lynch Asset Management. Mr.
Chung has been with HSBC for 6 years, and has 11 years investment experience.
LargeCap Growth Fund, MidCap Growth Fund, SmallCap Growth Fund, International
Core Growth Fund, Worldwide Growth Fund, International SmallCap Growth Fund,
Emerging Countries Fund and Convertible Fund
Nicholas-Applegate Capital Management (NACM).
NACM serves as Sub-Adviser to the Funds listed above. Founded in 1984, NACM
manages over $35 billion of discretionary assets for numerous clients, including
employee benefit plans of corporations, public retirement systems and unions,
university endowments, foundations, and other institutional investors and
individuals. Each of the Funds listed above is managed by a team of portfolio
managers and analysts employed by NACM. NACM's principal business address is 600
West Broadway, San Diego, California 92101.
84 Management of the Funds
<PAGE>
DIVIDENDS,
DISTRIBUTIONS
DIVIDENDS/TAXES AND TAXES
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Dividends
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
Annually(1) Semi-Annually{1} Quarterly(2) Monthly(3)
- - - - - - - - - ----------- ---------------- ------------ ----------
LargeCap Leaders MagnaCap Balanced Strategic
Research Enhanced Income & Income
Index Growth Government
Growth Balance Sheet Securities
Opportunities Opportunities Income
LargeCap Growth Convertible Government
MidCap Value Securities
MidCap High Yield
Opportunities High Yield II
MidCap Growth High Yield III
Growth + Value High Total
SmallCap Return
Opportunities High Total
SmallCap Growth Return II
Bank and Thrift Money Market
Worldwide
Growth
International
Value
International
Core Growth
International
SmallCap
Growth
Emerging
Markets Value
Emerging
Countries
Asia-Pacific Equity
(1) Distributions normally expected to consist primarily of capital gains.
(2) Distributions normally expected to consist on an annual basis of a variable
combination of capital gains and ordinary income.
(3) Distributions normally expected to consist primarily of ordinary income.
Each Fund distributes capital gains, if any, annually.
Dividend Reinvestment
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C, M or T shares of a Fund invested in another Pilgrim Fund
which offers the same class shares. If you are a shareholder of Pilgrim Prime
Rate Trust, whose shares are not held in a broker or nominee account, you may,
upon written request, elect to have all dividends invested into a pre-existing
Class A account of any open-end Pilgrim Fund.
Taxes
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you sell or redeem Fund shares. You will
generally have a capital gain or loss, which will be long-term or short-term,
generally depending on how long you hold those shares. If you exchange shares,
you may be treated as if you sold them. You are responsible for any tax
liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Dividends, Distributions and Taxes 85
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MORE INFORMATION
ABOUT RISKS
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All mutual funds involve risk -- some more than others -- and there is always
the chance that you could lose money or not earn as much as you hope. A Fund's
risk profile is largely a factor of the principal securities in which it invests
and investment techniques that it uses. The following pages discuss the risks
associated with certain of the types of securities in which the Funds may invest
and certain of the investment practices that the Funds may use. For more
information about these and other types of securities and investment techniques
that may be used by the Funds, see the SAI.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
PRINCIPAL RISKS
Investments in Foreign Securities. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter into foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts to have the necessary currencies to
settle transactions, or to help protect Fund assets against adverse changes in
foreign currency exchange rates, or to provide exposure to a foreign currency
commensurate with the exposure to securities from that country. Such efforts
could limit potential gains that might result from a relative increase in the
value of such currencies, and might, in certain cases, result in losses to the
Fund.
Emerging Markets Investments. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete or unseasonal financial systems; environmental problems; less well
developed legal systems; and less reliable custodial services and settlement
practices.
Inability to Sell Securities -- some securities usually trade in lower volume
and may be less liquid than securities of large established companies. These
less liquid securities could include securities of small and mid-size U.S.
companies, high-yield securities, convertible securities, unrated debt and
convertible securities, securities that originate from small offerings, and
foreign securities, particularly those from companies in emerging markets. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
High Yield Securities. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as zero
coupon or pay-in-kind securities tend to be more volatile. The secondary market
in which high yield securities are traded is generally less liquid than the
market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
Corporate Debt Securities. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
One measure of risk for fixed income securities is duration. Duration is one of
the tools used by a portfolio manager in selection of fixed income securities.
Historically, the maturity of a
86 More Information About Risks
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bond was used as a proxy for the sensitivity of a bond's price to changes in
interest rates, otherwise known as a bond's "interest rate risk" or
"volatility." According to this measure, the longer the maturity of a bond, the
more its price will change for a given change in market interest rates. However,
this method ignores the amount and timing of all cash flows from the bond prior
to final maturity. Duration is a measure of average life of a bond on a present
value basis, which was developed to incorporate a bond's yield, coupons, final
maturity and call features into one measure. For point of reference, the
duration of a noncallable 7% coupon bond with a remaining maturity of 5 years is
approximately 4.5 years, and the duration of a noncallable 7% coupon bond with a
remaining maturity of 10 years is approximately 8 years. Material changes in
interest rates may impact the duration calculation.
U.S. Government Securities. Some U.S. Government agency securities may be
subject to varying degrees of credit risk particularly those not backed by the
full faith and credit of the United States Government. All U.S. Government
securities may be subject to price declines in the securities due to changing
interest rates.
Convertible Securities. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
Other Investment Companies. Each Fund (except the MagnaCap, High Yield and
Government Securities Income Funds) may invest up to 10% of its assets in other
investment companies. When a Fund invests in other investment companies, you
indirectly pay a proportionate share of the expenses of that other investment
company (including management fees, administration fees, and custodial fees) in
addition to the expenses of the Fund.
Restricted and Illiquid Securities. Each Fund may invest in restricted and
illiquid securities (except MagnaCap Fund may not invest in restricted
securities). If a security is illiquid, the Fund might be unable to sell the
security at a time when the adviser might wish to sell, and the security could
have the effect of decreasing the overall level of the Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less liquid
than registered securities traded on established secondary markets.
Mortgage-Related Securities. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
Interests in Loans. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the credit
risk of nonpayment of principal or interest. Substantial increases in interest
rates may cause an increase in loan defaults. Although the loans will generally
be fully collateralized at the time of acquisition, the collateral may decline
in value, be relatively illiquid, or lose all or substantially all of its value
subsequent to the Fund's investment. Many loans are relatively illiquid, and may
be difficult to value.
Derivatives. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, and some do, so please check the description of the Fund's
policies. Derivatives are also subject to credit risks related to the
counterparty's ability to perform, and any deterioration in the counterparty's
creditworthiness could adversely affect the instrument. A risk of using
derivatives is that the adviser might imperfectly judge the market's direction.
For instance, if a derivative is used as a hedge to offset investment risk in
another security, the hedge might not correlate to the market's movements and
may have unexpected or undesired results, such as a loss or a reduction in
gains.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
More Information About Risks 87
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MORE INFORMATION
ABOUT RISKS
- - - - - - - - - --------------------------------------------------------------------------------
Temporary Defensive Strategies. When the adviser or sub-adviser to a Fund
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure. To the extent
that a Fund invests defensively, it likely will not achieve capital
appreciation.
Portfolio Turnover. Each Fund (except the MagnaCap, LargeCap Leaders, MidCap
Value, Bank and Thrift and Asia-Pacific Equity Funds) is generally expected to
engage in frequent and active trading of portfolio securities to achieve its
investment objective. A high portfolio turnover rate involves greater expenses
to a Fund, including brokerage commissions and other transaction costs, and is
likely to generate more taxable short-term gains for shareholders, which may
have an adverse effect on the performance of the Fund.
OTHER RISKS
Repurchase Agreements. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
Lending Portfolio Securities. In order to generate additional income, each Fund
(except Bank and Thrift Fund) may lend portfolio securities in an amount up to
331|M/3% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower default or fail financially.
Borrowing. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
Reverse Repurchase Agreements and Dollar Rolls. A reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for a Fund depends upon the costs of
the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase a Fund's yield; however,
such transactions also increase a Fund's risk to capital and may result in a
shareholder's loss of principal.
Short Sales. Each Fund (except the MagnaCap, LargeCap Leaders, Bank and Thrift,
Asia-Pacific Equity, Government Securities Income and High Yield Funds) may make
short sales. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the expectation that the market price will drop.
If the price of the security rises, the Fund may have to cover its short
position at a higher price than the short sale price, resulting in a loss.
Pairing Off Transactions. A pairing-off transaction occurs when a Fund commits
to purchase a security at a future date, and then the Fund "pairs-off" the
purchase with a sale of the same security prior to or on the original settlement
date. Whether a pairing-off transaction on a debt security produces a gain
depends on the movement of interest rates. If interest rates increase, then the
money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.
Percentage and Rating Limitations Unless otherwise stated, the percentage
limitations in this prospectus apply at the time of investment.
Year 2000 Compliance
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Adviser and the Funds' other service providers do
not properly process and calculate date-related information after January 1,
2000. This is commonly known as the "Year 2000 Problem." The Year 2000 Problem
could have a negative impact on handling securities trades, payment of interest
and dividends, pricing, and account services. Pilgrim Investments and Pilgrim
Advisors have taken steps that they believe are reasonably designed to address
the Year 2000 Problem with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps have been taken by the Funds'
other major service providers. It is not anticipated that the Funds will
directly bear any material costs associated with Pilgrim Investments', Pilgrim
Advisors', and the Funds' other service providers efforts to become Year 2000
compliant. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact to the Funds nor can there be any
assurance that the Year 2000 Problem will not have an adverse effect on the
companies whose securities are held by the Funds or on global markets or
economies, generally. Foreign issuers may be more susceptible to risks
associated with the Year 2000 Problem than domestic issuers.
88 More Information About Risks
<PAGE>
Financial
Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
89
<PAGE>
Financial
PILGRIM MAGNACAP FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A Class B
July 17,
1995(2) to
Year ended June 30, Year ended June 30, June 30,
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996
---- ---- ---- ---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 17.07 15.92 16.69 14.03 12.36 16.86 15.81 16.59 14.22
Income from investment operations:
Net investment income (loss) $ 0.07 0.04 0.10 0.09 0.12 (0.04) (0.04) -- 0.06
Net realized and unrealized gains on
investments $ 2.37 3.02 4.16 2.87 2.29 2.32 2.97 4.13 2.61
Total from investment operations $ 2.44 3.06 4.26 2.96 2.41 2.28 2.93 4.13 2.67
Less distributions from:
Net investment income $ 0.04 0.06 0.12 0.06 0.14 -- 0.03 -- 0.06
Net realized gains on investments $ 1.78 1.85 4.91 0.24 0.60 1.78 1.85 4.91 0.24
Net asset value, end of period $ 17.69 17.07 15.92 16.69 14.03 17.36 16.86 15.81 16.59
Total Return(3): % 15.93 20.53 30.82 21.31 20.61 15.12 19.76 29.92 18.98
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 368,508 348,759 290,355 235,393 211,330 116,227 77,787 37,427 10,509
Ratios to average net assets:
Expenses(4) % 1.35 1.37 1.46 1.68 1.59 2.05 2.07 2.16 2.38
Net investment income (loss)(4) % 0.41 0.29 0.64 0.54 0.98 (0.29) (0.41) (0.04) 0.07
Portfolio turnover rate % 48 53 77 15 6 48 53 77 15
Class C Class M
June 1, July 17,
1999(2) to 1995(2) to
June 30, Year ended June 30, June 30,
1999 1999 1998 1997 1996
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 16.69 16.95 15.87 16.63 14.22
Income from investment operations:
Net investment income (loss) $ -- (0.01) -- 0.02 0.08
Net realized and unrealized gains on
investments $ 0.68 2.35 2.98 4.16 2.63
Total from investment operations $ 0.68 2.34 2.98 4.18 2.71
Less distributions from: Net investment income $ -- -- 0.05 0.03 0.06
Net realized gains on investments $ -- 1.78 1.85 4.91 0.24
Net asset value, end of period $ 17.37 17.51 16.95 15.87 16.63
Total Return(3): % 4.07 15.41 20.00 30.26 19.26
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 601 16,351 14,675 6,748 1,961
Ratios to average net assets:
Expenses(4) % 1.12 1.80 1.82 1.91 2.13
Net investment income (loss)(4) % 0.42 (0.04) (0.16) 0.22 0.32
Portfolio turnover rate % 48 48 53 77 15
</TABLE>
- - - - - - - - - ----------
(1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
90 Pilgrim MagnaCap Fund
<PAGE>
Financial
Highlights PILGRIM LARGECAP LEADERS FUND
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A Class B
Ten months Ten months
ended ended
Year ended June 30, June 30, Year ended June 30, June 30,
1999 1998(2) 1997 1996(1) 1999 1998(2) 1997 1996(1)
---- ------- ---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 14.70 14.17 11.77 10.00 14.44 14.04 11.71 10.00
Income from investment operations:
Net investment income (loss) $ -- 0.01 0.06 0.07 (0.09) (0.10) (0.02) 0.06
Net realized and unrealized gains on
investments $ 3.00 2.30 2.63 1.87 2.90 2.28 2.59 1.81
Total from investment operations $ 3.00 2.31 2.69 1.94 2.81 2.18 2.57 1.87
Less distributions from: Net investment income $ -- -- 0.05 0.08 -- -- -- 0.07
Net realized gains on investments $ 0.35 1.78 0.24 0.09 0.35 1.78 0.24 0.09
Net asset value, end of period $ 17.35 14.70 14.17 11.77 16.90 14.44 14.04 11.71
Total Return(4): % 20.66 17.71 23.24 19.56 19.71 16.91 22.23 18.85
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 8,506 7,606 8,961 2,530 24,213 15,605 13,611 1,424
Ratios to average net assets:
Net expenses after expense reimbursement(5) % 1.75 1.75 1.75 1.75 2.50 2.50 2.50 2.50
Gross expenses prior to expense
reimbursement(5) % 1.98 2.28 2.33 5.44 2.73 3.03 3.08 5.79
Net investment income (loss) after expense
reimbursement(5) % (0.04) 0.03 0.41 0.65 (0.79) (0.72) (0.35) (0.25)
Portfolio turnover rate % 87 78 86 59 87 78 86 59
Class C Class M
June 17, Ten months
1999(3) to ended
June 30, Year ended June 30, June 30,
1999 1999 1998(2) 1997 1996(1)
---- ---- ------- ---- -------
Per Share Operating Performance:
Net asset value, beginning of period $ 16.54 14.55 14.10 11.73 10.00
Income from investment operations:
Net investment income (loss) $ -- (0.09) (0.07) -- 0.06
Net realized and unrealized gains on
investments $ 0.38 2.97 2.30 2.62 1.83
Total from investment operations $ 0.38 2.88 2.23 2.62 1.89
Less distributions from: Net investment income $ -- -- -- 0.01 0.07
Net realized gains on investments $ -- 0.35 1.78 0.24 0.09
Net asset value, end of period $ 16.92 17.08 14.55 14.10 11.73
Total Return(4): % 2.30 20.04 17.20 22.58 19.06
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- 5,661 5,533 4,719 1,240
Ratios to average net assets:
Net expenses after expense reimbursement(5) % -- 2.25 2.25 2.25 2.25
Gross expenses prior to expense
reimbursement(5) % -- 2.48 2.78 2.83 5.90
Net investment income (loss) after expense
reimbursement(5) % -- (0.54) (0.47) (0.10) 0.06
Portfolio turnover rate % 87 87 78 86 59
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on September 1, 1995.
(2) Effective November 1, 1997, Pilgrim Investments, Inc. assumed the portfolio
investment responsibilities of the Fund from ARK Asset Management Company,
Inc.
(3) Commencement of offering shares.
(4) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(5) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim LargeCap Leaders Fund 91
<PAGE>
Financial
PILGRIM RESEARCH ENHANCED INDEX FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended October 31,
1999 1999 1999
---- ---- ----
<S> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning of the period $ 10.00 10.00 10.00
Net investment gain $ 0.01 (0.02) (0.02)
Net realized and unrealized loss on investments $ 1.13 1.11 1.11
Total from investment operations $ 1.14 1.09 1.09
Net asset value at the end of the period $ 11.14 11.09 11.09
Total investment return(2) % 11.40 10.90 10.90
Ratios and supplemental data:
Net assets at the end of the period ($000s) $ 27,091 99,249 75,941
Ratio of expenses to average net assets(3) % 1.29 1.99 1.99
Ratio of expense reimbursement to average net assets(3) % 0.27 0.30 0.28
Ratio of net investment loss to average net assets(3) % 0.23 (0.49) (0.49)
Portfolio turnover rate % 26 26 26
</TABLE>
- - - - - - - - - ----------
(1) Class A, B and C commenced operations on December 30, 1998.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
92 Pilgrim Research Enhanced Index Fund
<PAGE>
Financial
Highlights PILGRIM GROWTH OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
<TABLE>
<CAPTION>
Class A Class B
Six Six
months months
ended ended
June 30, June 30,
1999 Year ended December 31, 1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1) (unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- ------- ----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning
of the period $ 26.06 21.26 17.92 15.53 17.59 25.46 20.93 17.76 15.50 17.59
Net investment income (loss) $ (0.15) (0.08) 0.03 0.02 0.08 (0.23) (0.23) (0.15) (0.06) 0.06
Net realized and unrealized gain
on investments $ 7.83 5.09 4.16 3.18 1.95 7.63 4.97 4.17 3.13 1.92
Total from investment operations $ 7.68 5.01 4.19 3.20 2.03 7.40 4.74 4.02 3.07 1.98
Dividends from net investment income $ -- -- -- -- (0.10) -- -- -- -- (0.08)
Dividends from net realized gain on
investments sold $ -- (0.21) (0.85) (0.81) (3.99) -- (0.21) (0.85) (0.81) (3.99)
Total distributions $ 0.00 (0.21) (0.85) (0.81) (4.09) 0.00 (0.21) (0.85) (0.81) (4.07)
Net asset value at the end of the
period $ 33.74 26.06 21.26 17.92 15.53 32.86 25.46 20.93 17.76 15.50
Total investment return(2) % 29.39 23.61 23.59 20.54 11.55 28.99 22.69 22.84 19.74 11.27
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 38,769 29,358 9,334 4,750 1,355 25,261 15,480 8,815 4,444 1,987
Ratio of expenses to average net
assets % 1.39 1.37 1.37 150 1.42(3) 2.11 2.13 2.14 2.20 2.07(3)
Ratio of expense reimbursement to
average net assets % -- -- 0.03 0.06 -- -- -- -- 0.04 --
Ratio of net investment income
(loss) to average net assets % (1.03) (0.47) 0.04 0.11 0.63(3) (1.74) (1.26) (0.95) (0.55) 0.06(3)
Portfolio turnover rate % 170 98 32 62 134 170 98 32 62 134
Class C
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance:
Net asset value at the beginning
of the period $ 25.48 20.91 17.76 15.50 17.59
Net investment income (loss) $ (0.23) (0.27) (0.13) (0.05) 0.04
Net realized and unrealized gain
on investments $ 7.63 5.05 4.13 3.12 1.92
Total from investment operations $ 7.40 4.78 4.00 3.07 1.96
Dividends from net investment income $ -- -- -- -- (0.06)
Dividends from net realized gain on
investments sold $ -- (0.21) (0.85) (0.81) (3.99)
Distributions from capital -- -- -- -- --
Total distributions $ 0.00 (0.21) (0.85) (0.81) (4.05)
Net asset value at the end of the
period $ 32.88 25.48 20.91 17.76 15.50
Total investment return(2) % 28.96 22.90 22.73 19.74 11.17
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 2,575 1,625 1,152 365 69
Ratio of expenses to average net
assets % 2.12 2.13 2.17 2.20 2.11(3)
Ratio of expense reimbursement to
average net assets % -- -- -- 0.15 --
Ratio of net investment income
(loss) to average net assets % (1.76) (1.24) (1.00) (0.57) 0.02(3)
Portfolio turnover rate % 170 98 32 62 134
Class T
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
Operating performance:
Net asset value at the beginning
of the period $ 25.59 21.02 17.82 15.53 15.75 17.33
Net investment income (loss) $ (0.25) (0.36) (0.17) (0.06) 0.07 0.08
Net realized and unrealized gain
on investments $ 7.68 5.14 4.22 3.16 3.77 (1.41)
Total from investment operations $ 7.43 4.78 4.05 3.10 3.84 (1.33)
Dividends from net investment income $ -- -- -- -- (0.07) (0.08)
Dividends from net realized gain on
investments sold $ -- (0.21) (0.85) (0.81) (3.99) (0.15)
Distributions from capital -- -- -- -- -- (0.02)
Total distributions $ 0.00 (0.21) (0.85) (0.81) (4.06) (0.25)
Net asset value at the end of the
period $ 33.02 25.59 21.02 17.82 15.53 15.75
Total investment return(2) % 28.96 22.79 22.94 19.90 24.40 (7.66)
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 61,638 52,023 73,674 70,406 76,343 76,391
Ratio of expenses to average net
assets % 2.04 2.05 2.03 2.00 2.00 2.00
Ratio of expense reimbursement to
average net assets % -- -- -- 0.04 -- --
Ratio of net investment income
(loss) to average net assets % (1.68) (1.19) (0.81) (3.05) 0.37 0.49
Portfolio turnover rate % 170 98 32 62 134 54
</TABLE>
- - - - - - - - - ----------
(1) Class A, B and C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Growth Opportunities Fund 93
<PAGE>
Financial
PILGRIM LARGECAP GROWTH FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A Class B
Three Three
months Year July 21, months Year July 21,
ended ended 1997(1) to ended ended 1997(1) to
June 30, March 31, March 31, June 30, March 31, March 31,
1999(2) 1999 1998 1999(2) 1999 1998
-------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 24.94 15.73 12.50 25.04 15.64 12.50
Income from investment operations:
Net investment income (loss) $ (0.02) (0.08) (0.03) (0.05) (0.08) (0.07)
Net realized and unrealized gains on investments $ 3.17 9.77 3.29 3.16 9.71 3.24
Total from investment operations $ 3.15 9.69 3.26 3.11 9.63 3.17
Less distributions from:
Net investment income $ -- -- -- -- -- --
Net realized gains on investments $ -- 0.48 0.03 -- 0.23 0.03
Net asset value, end of period $ 28.09 24.94 15.73 28.15 25.04 15.64
Total Return(3): % 12.63 63.06 62.35 12.42 62.28 61.08
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 30,108 12,445 4,742 49,057 20,039 3,187
Ratios to average net assets:
Net expenses after expense reimbursement(4) % 1.43 1.59 1.60 2.08 2.24 2.25
Gross expenses prior to expense reimbursement(4) % 1.45 2.24 4.70 2.10 2.89 4.78
Net investment income (loss) after expense
reimbursement(4) % (0.56) (0.65) (0.87) (1.21) (1.28) (1.36)
Portfolio turnover % 27 253 306 27 253 306
Class C
Three
months Year July 21,
ended ended 1997(1) to
June 30, March 31, March 31,
1999(2) 1999 1998
------- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 24.97 15.63 12.50
Income from investment operations:
Net investment income (loss) $ (0.06) (0.07) (0.05)
Net realized and unrealized gains on investments $ 3.16 9.65 3.24
Total from investment operations $ 3.10 9.58 3.19
Less distributions from:
Net investment income $ -- -- --
Net realized gains on investments $ -- 0.24 0.06
Net asset value, end of period $ 28.07 24.97 15.63
Total Return(3): % 12.41 61.97 61.38
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 17,755 8,004 960
Ratios to average net assets:
Net expenses after expense reimbursement(4) % 2.08 2.25 2.25
Gross expenses prior to expense reimbursement(4) % 2.10 2.90 7.79
Net investment income (loss) after expense
reimbursement(4) % (1.21) (1.26) (1.49)
Portfolio turnover % 27 253 306
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on July 21, 1997.
(2) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
94 Pilgrim LargeCap Growth Fund
<PAGE>
Financial
Highlights PILGRIM MIDCAP VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KMPG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A Class B
Three months Ten months
ended ended
Year ended June 30, June 30, June 30,
1999 1998 1997 1996(1) 1999 1998 1997 1996(1)
---- ---- ---- ------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 16.79 14.64 11.99 10.00 16.47 14.49 11.94 10.00
Income from investment operations:
Net investment income (loss) $ (0.09) (0.07) (0.02) 0.13 (0.21) (0.18) (0.05) 0.07
Net realized and unrealized gains on
investments $ 0.12 2.71 2.85 1.91 0.12 2.65 2.76 1.90
Total from investment operations $ 0.03 2.64 2.83 2.04 (0.09) 2.47 2.71 1.97
Less distributions from:
Net investment income $ -- -- 0.07 0.05 -- -- 0.05 0.03
Net realized gains on investments $ 1.17 0.49 0.11 -- 1.17 0.49 0.11 --
Net asset value, end of period $ 15.65 16.79 14.64 11.99 15.21 16.47 14.49 11.94
Total Return(3): % 0.95 18.40 23.89 20.48 0.21 17.40 22.95 19.80
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 18,621 27,485 16,985 2,389 31,223 40,575 23,258 2,123
Ratios to average net assets:
Net expenses after expense reimbursement(4) % 1.75 1.75 1.75 1.75 2.50 2.50 2.50 2.50
Gross expenses prior to expense
reimbursement(4) % 1.79 1.78 1.94 4.91 2.54 2.53 2.69 5.32
Net investment income (loss) after expense
reimbursement(4) % (0.48) (0.53) (0.13) 2.00 (1.23) (1.28) (0.90) 1.27
Portfolio turnover rate % 109 85 86 60 109 85 86 60
Class C Class M
June 2, Ten months
1999 to ended
June 30, June 30,
1999(2) 1999 1998 1997 1996(1)
------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 14.84 16.52 14.49 11.93 10.00
Income from investment operations:
Net investment income (loss) $ (0.02) (0.17) (0.15) (0.03) 0.06
Net realized and unrealized gains on
investments $ 0.38 0.12 2.67 2.76 1.91
Total from investment operations $ 0.36 (0.05) 2.52 2.73 1.97
Less distributions from:
Net investment income $ -- -- -- 0.06 0.04
Net realized gains on investments $ -- 1.17 0.49 0.11 --
Net asset value, end of period $ 15.20 15.30 16.52 14.49 11.93
Total Return(3): % 2.43 0.46 17.76 23.21 19.82
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 47 10,504 13,232 8,378 1,731
Ratios to average net assets:
Net expenses after expense reimbursement(4): % 2.50 2.25 2.25 2.25 2.25
Gross expenses prior to expense
reimbursement(4): % 2.54 2.29 2.28 2.44 4.72
Net investment income (loss) after expense
reimbursement(4): % (1.23) (0.98) (1.03) (0.63) 1.16
Portfolio turnover rate % 109 109 85 86 60
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on September 1, 1995.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Value Fund 95
<PAGE>
Financial
PILGRIM MIDCAP OPPORTUNITIES FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Six months Six months Six months
ended Year ended ended Year ended ended Year ended
June 30, 1999 December 31, June 30, 1999 December 31, June 30, 1999 December 31,
(unaudited) 1998 (unaudited) 1998 (unaudited) 1998
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 12.96 10.00 12.97 10.00 12.96 10.00
Net investment loss $ (0.09) (0.03) (0.05) (0.03) (0.08) (0.04)
Net realized and unrealized gain on
investments $ 4.34 2.99 4.28 3.00 4.27 3.00
Total from investment operations $ 4.25 2.96 4.23 2.97 4.19 2.96
Net asset value at the end of the
period $ 17.21 12.96 17.20 12.97 17.15 12.96
Total investment return(2): % 32.79 29.60 32.61 29.70 32.33 29.60
Ratios and supplemental data
Net assets at the end of the period
($000s) $ 1,519 610 750 140 385 87
Ratio of expenses to average net
assets(3) % 1.80 1.80 250 2.50 2.50 2.50
Ratio of expense reimbursement to
average net assets(3): % 0.22 0.62 0.25 0.77 0.33 0.72
Ratio of net investment loss to
average net assets(3): % (1.45) (1.10) (2.12) (2.05) (2.14) (2.04)
Portfolio turnover rate % 124 61 124 61 124 61
</TABLE>
- - - - - - - - - ----------
(1) Class A, B and C commenced operations on August 20, 1998.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
96 Pilgrim MidCap Opportunities Fund
<PAGE>
Financial
Highlights PILGRIM MIDCAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors.
For all periods ending prior to June 30, 1999, the financial information was
audited by other independent auditors.
<TABLE>
<CAPTION>
Class A
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 19.93 18.63 16.80 18.37 13.61 13.25
Income from investment operations:
Net investment income (loss) $ (0.06) (0.50) (0.14) (0.17) (0.18) (0.10)
Net realized and unrealized gains on
investments $ 1.47 3.17 6.50 0.57 4.94 0.46
Total from investment operations $ 1.41 2.67 6.36 0.40 4.76 0.36
Less distributions from:
Net investment income $ -- -- -- -- -- --
Net realized gains on investments $ -- 1.37 4.53 1.97 -- --
Net asset value, end of period $ 21.34 19.93 18.63 16.80 18.37 13.61
Total Return(3): % 7.07 15.36 41.81 1.09 35.07 2.72
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 66,586 67,550 90,619 76,108 77,275 65,292
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 1.49 1.56 1.57 1.60 1.58 1.59
Gross expenses prior to expense
reimbursement(4) % 1.50 1.64 1.66 1.56 1.56 1.63
Net investment income (loss) after
expense reimbursement(4) % (1.20) (1.04) (1.33) (1.05) (0.91) (0.66)
Portfolio turnover % 55 154 200 153 114 98
Class B
Three
months May 31,
ended 1995(2) to
June 30, Year ended March 31, March 31,
1999(1) 1999 1998 1997 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period 23.54 21.55 16.33 16.25 12.50
Income from investment operations:
Net investment income (loss) (0.11) (0.42) (0.25) (0.17) (0.09)
Net realized and unrealized gains on
investments 1.75 3.42 6.74 0.25 3.84
Total from investment operations 1.64 3.00 6.49 0.08 3.75
Less distributions from:
Net investment income -- -- -- -- --
Net realized gains on investments -- 1.01 1.27 -- --
Net asset value, end of period 25.18 23.54 21.55 16.33 16.25
Total Return(3): 6.97 14.59 40.84 (0.49) 30.00
Ratios/Supplemental Data:
Net assets, end of period (000's) 49,335 45,876 46,806 29,002 11,186
Ratios to average net assets:
Net expenses after expense
reimbursement(4) 2.14 2.22 2.22 2.25 2.22
Gross expenses prior to expense
reimbursement(4) 2.14 2.29 2.21 2.66 3.39
Net investment income (loss) after
expense reimbursement(4) (1.85) (1.69) (1.99) (1.69) (1.61)
Portfolio turnover 55 154 200 153 114
Class C
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 18.49 17.15 16.48 18.06 13.45 13.18
Income from investment operations:
Net investment income (loss) $ (0.09) (0.61) (0.28) (0.32) (0.27) (0.17)
Net realized and unrealized gains on
investments $ 1.38 2.97 6.26 0.62 4.88 0.44
Total from investment operations $ 1.29 2.36 5.98 0.30 4.61 0.27
Less distributions from: Net investment
income $ -- -- -- -- -- --
Net realized gains on investments $ -- 1.02 5.31 1.88 -- --
Net asset value, end of period $ 19.78 18.49 17.15 16.48 18.06 13.45
Total Return(3): % 6.98 14.60 40.95 0.56 34.28 2.05
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 144,832 141,685 166,849 157,501 177,461 143,390
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 2.14 2.23 2.27 2.14 2.14 2.24
Gross expenses prior to expense
reimbursement(4) % 2.14 2.30 2.33 2.17 2.14 2.24
Net investment income (loss) after
expense reimbursement(4) % (1.85) (1.70) (2.01) (1.59) (1.47) (1.30)
Portfolio turnover % 55 154 200 153 114 98
</TABLE>
- - - - - - - - - ----------
(1) Effective May 24, 1999, Pilgrim Investment Inc. became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of dividends and capital
gain distributions at net asset value and excluding the deduction of sales
charges. Total return for less than one year is not annualized.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Growth Fund 97
<PAGE>
Financial
PILGRIM GROWTH + VALUE FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended October 31, Year ended October 31, Year ended October 31,
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning of the period $ 10.44 12.15 10.00 10.29 12.08 10.00 10.29 12.08 10.00
Net investment loss $ (0.17) (0.11) (0.05) (0.27) (0.16) (0.08) (0.26) (0.16) (0.08)
Net realized and unrealized gain on investments $ 9.49 (1.42) 2.20 9.32 (1.45) 2.16 9.30 (1.45) 2.16
Total from investment operations $ 9.32 (1.53) 2.15 9.05 (1.61) 2.08 9.04 (1.61) 2.08
Dividends from net realized gain (loss) on
investments sold $ -- (0.18) -- -- (0.18) -- -- (0.18) --
Total distributions $
Net asset value at the end of the period $ 19.76 10.44 12.15 19.34 10.29 12.08 19.33 10.29 12.08
Total investment return(2) % 89.27 (12.63) 21.50 87.95 (13.38) 20.80 87.85 (13.38) 20.80
Ratios and supplemental data:
Net assets at the end of the period ($000s) $ 81,225 33,425 34,346 227,227 105,991 76,608 84,391 37,456 26,962
Ratio of expenses to average net assets(3) % 1.69 1.72 1.84 2.39 2.45 2.55 2.40 2.46 2.56
Ratio of expense reimbursement to average net
assets(3) % -- -- 0.02 -- -- 0.02 -- -- 0.02
Ratio of net investment loss to average net
assets(3) % (1.30) (0.92) (0.94) (2.00) (1.67) (1.68) (2.01) (1.69) (1.70)
Portfolio turnover rate % 197 162 144 197 162 144 197 162 144
</TABLE>
- - - - - - - - - ----------
(1) Class A, B and C commenced operations on November 18, 1996.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
98 Pilgrim Growth + Value Fund
<PAGE>
Financial
Highlights PILGRIM SMALLCAP OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
<TABLE>
<CAPTION>
Class A
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning of
the period $ 29.00 27.77 24.72 20.92 19.56
Net investment loss $ (0.21) (0.27) (0.02) (0.04) (0.09)
Net realized and unrealized gain on
investments $ 7.50 2.23 3.68 3.84 2.48
Total from investment operations $ 7.29 1.96 3.66 3.80 2.39
Dividends from net realized gain on
investments sold $ -- (0.73) (0.61) -- (1.03)
Total distributions $ -- (0.73) (0.61) -- (1.03)
Net asset value at the end of the
period $ 36.29 29.00 27.77 24.72 20.92
Total investment return(2) % 25.14 7.59 14.92 18.16 12.20
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 48,185 45,461 78,160 65,660 2,335
Ratio of expenses to average net
assets % 1.49 1.47 1.43 1.46 1.50(3)
Ratio of expense reimbursement to
average net assets % -- -- -- 0.01 --
Ratio of net investment loss to
average net assets % (1.32) (0.70) (0.07) (0.30) (0.91)(3)
Portfolio turnover rate % 136 257 175 140 71
Class B
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning of
the period 28.26 27.27 24.46 20.84 19.56
Net investment loss (0.33) (0.48) (0.19) (0.12) (0.12)
Net realized and unrealized gain on
investments 7.31 2.20 3.61 3.74 2.43
Total from investment operations 6.98 1.72 3.42 3.62 2.31
Dividends from net realized gain on
investments sold -- (0.73) (0.61) -- (1.03)
Total distributions -- (0.73) (0.61) -- (1.03)
Net asset value at the end of the
period 35.24 28.26 27.27 24.46 20.84
Total investment return(2) 24.70 6.84 14.10 17.37 11.79
Ratios and supplemental data:
Net assets at the end of the period
($000s) 130,115 124,065 169,516 126,859 1,491
Ratio of expenses to average net
assets 2.18 2.18 2.15 2.17 2.20(3)
Ratio of expense reimbursement to
average net assets -- -- -- 0.01 0.01
Ratio of net investment loss to
average net assets (2.01) (1.43) (0.78) (1.01) (1.64)(3)
Portfolio turnover rate 136 257 175 140 71
Class C
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance:
Net asset value at the beginning of
the period $ 28.24 27.26 24.46 20.84 19.56
Net investment loss $ (0.33) (0.55) (0.20) (0.13) (0.15)
Net realized and unrealized gain
(loss) on investments $ 7.30 2.26 3.61 3.75 2.46
Total from investment operations $ 6.97 1.71 3.41 3.62 2.31
Dividends from net realized gain on
investments sold $ -- (0.73) (0.61) -- (1.03)
Total distributions $ -- (0.73) (0.61) -- (1.03)
Net asset value at the end of the
period $ 35.21 28.24 27.26 24.46 20.84
Total investment return(2) % 24.68 6.81 14.06 17.37 11.79
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 30,446 29,746 51,460 37,342 62
Ratio of expenses to average net
assets % 2.23 2.22 2.18 2.20 2.20(3)
Ratio of expense reimbursement to
average net assets % -- -- -- 0.01 0.03
Ratio of net investment loss to
average net assets % (2.07) (1.45) (0.82) (1.03) (1.60)(3)
Portfolio turnover rate % 136 257 175 140 71
Class T
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning
of the period 28.36 27.34 24.48 20.84 19.64 20.79
Net investment loss (0.32) (0.51) (0.18) (0.21) (0.34) (0.25)
Net realized and unrealized gain
(loss) on investments 7.34 2.26 3.65 3.85 2.57 (0.76)
Total from investment operations 7.02 1.75 3.47 3.64 2.23 (1.01)
Dividends from net realized gain
on investments sold -- (0.73) (0.61) -- (1.03) (0.14)
Total distributions -- (0.73) (0.61) -- (1.03) (0.14)
Net asset value at the end of the
period 35.38 28.36 27.34 24.48 20.84 19.64
Total investment return(2) 24.75 6.94 14.29 17.47 11.34 (4.86)
Ratios and supplemental data:
Net assets at the end of the period
($000s) 18,998 18,203 32,800 35,670 33,557 38,848
Ratio of expenses to average net
assets 2.10 2.10 1.99 2.07 2.16 2.16
Ratio of expense reimbursement to
average net assets -- -- -- 0.04 -- --
Ratio of net investment loss to
average net assets (1.93) (1.33) (0.62) (0.89) (1.50) (1.25)
Portfolio turnover rate 136 257 175 140 71 39
</TABLE>
- - - - - - - - - ----------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim SmallCap Opportunities Fund 99
<PAGE>
Financial
PILGRIM SMALLCAP GROWTH FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors.
For all periods ending prior to June 30, 1999, the financial information was
audited by other independent auditors.
<TABLE>
<CAPTION>
Class A
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 16.72 19.75 15.15 17.93 13.06 12.10
Income from investment operations:
Net investment income (loss) $ (0.06) (0.85) (0.08) (0.22) (0.20) (0.16)
Net realized and unrealized gains
(loss) on investments $ 2.42 0.69 6.91 (0.66) 5.09 1.12
Total from investment operations $ 2.36 (0.16) 6.83 (0.88) 4.89 0.96
Less distributions from: Net
investment income $ -- -- -- -- -- --
Net realized gains on investments $ -- 2.87 2.23 1.90 0.02 --
Net asset value, end of period $ 19.08 16.72 19.75 15.15 17.93 13.06
Total Return(3): % 14.11 0.37 46.32 (6.26) 37.48 7.93
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 102,641 94,428 201,943 121,742 138,155 106,725
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 1.70 1.85 1.89 1.72 1.74 1.86
Gross expenses prior to expense
reimbursement(4) % 1.74 1.95 1.90 1.72 1.74 1.84
Net investment income (loss) after
expense reimbursement(4) % (1.46) (1.32) (1.85) (1.26) (1.20) (1.27)
Portfolio turnover % 32 90 92 113 130 100
Class B
Three
months May 31,
ended 1995(2) to
June 30, Year ended March 31, March 31,
1999(1) 1999 1998 1997 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period 21.12 22.53 15.51 16.69 12.50
Income from investment operations:
Net investment income (loss) (0.12) (0.53) (0.27) (0.21) (0.14)
Net realized and unrealized gains
(loss) on investments 3.05 0.33 7.29 (0.97) 4.33
Total from investment operations 2.93 (0.20) 7.02 (1.18) 4.19
Less distributions from:
Net investment income -- -- -- -- --
Net realized gains on investments -- 1.21 -- -- --
Net asset value, end of period 24.05 21.12 22.53 15.51 16.69
Total Return(3): 13.87 (0.29) 45.26 (7.07) 33.52
Ratios/Supplemental Data:
Net assets, end of period (000's) 49,448 45,140 55,215 28,030 13,626
Ratios to average net assets:
Net expenses after expense
reimbursement(4) 2.35 2.57 2.62 2.61 2.58
Gross expenses prior to expense
reimbursement(4) 2.39 2.66 2.63 2.73 3.26
Net investment income (loss) after
expense reimbursement(4) (2.11) (2.03) (2.59) (2.13) (2.09)
Portfolio turnover 32 90 92 113 130
Class C
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 16.51 18.62 14.69 17.62 12.96 12.07
Income from investment operations:
Net investment income (loss) $ (0.09) (0.84) (0.38) (0.31) (0.29) (0.22)
Net realized and unrealized gains
on investments $ 2.39 0.61 6.84 (0.63) 5.03 1.11
Total from investment operations $ 2.30 (0.23) 6.46 (0.94) 4.74 0.89
Less distributions from: Net
investment income $ -- -- -- -- -- --
Net realized gains on investments $ -- 1.88 2.53 1.99 0.08 --
Net asset value, end of period $ 18.81 16.51 18.62 14.69 17.62 12.96
Total Return(3): % 13.93 (0.24) 45.40 (6.81) 37.18 7.37
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 153,471 144,597 225,025 182,907 207,332 157,292
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 2.35 2.51 2.57 2.35 2.35 2.44
Gross expenses prior to expense
reimbursement(4) % 2.39 2.60 2.59 2.35 2.35 2.44
Net investment income (loss) after
expense reimbursement(4) % (2.11) (1.97) (2.53) (1.89) (1.81) (1.85)
Portfolio turnover % 32 90 92 113 130 100
</TABLE>
- - - - - - - - - ----------
(1) Effective May 24, 1999, Pilgrim Investments Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of dividends and capital
gain distributions at net asset value and excluding the deduction of sales
charges. Total return for less than one year is not annualized.
(4) Annualized.
100 Pilgrim SmallCap Growth Fund
<PAGE>
Financial
Highlights PILGRIM BANK AND THRIFT FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the year ended June 30, 1999, the six-month period ended June 30, 1998 and
the years ended December 31, 1997, 1996, and 1995, the information in the table
below, with the exception of the information in the row labeled "Total
Investment Return at Net Asset Value" for periods prior to January 1, 1997, have
been audited by KPMG LLP, independent auditors. For all periods ending prior to
December 31, 1995, the financial information, with the exception of the
information in the row labeled "Total Investment Return at Net Asset Value", was
audited by another independent auditor. The information in the row labeled
"Total Investment Return at Net Asset Value" has not been audited for periods
prior to January 1, 1997. Prior to October 17, 1997, the Class A shares were
designated as Common Stock and the Fund operated as a closed-end investment
company.
<TABLE>
<CAPTION>
Class A Class B
Six Six
Year months Year months October 20,
ended ended ended ended 1997(2) to
June 30, June 30, Year ended December 31, June 30, June 30, December 31,
1999 1998(3) 1997 1996 1995(1) 1994 1999 1998(3) 1997
---- ------- ---- ---- ------- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 27.52 25.87 17.84 14.83 10.73 11.87 27.40 25.85 25.25
Income (loss) from investment operations:
Net investment income $ 0.29 0.11 0.34 0.32 0.31 0.26 0.08 0.01 0.04
Net realized and unrealized gains (loss)
on investments $ (2.70) 1.54 10.83 5.18 4.78 (0.53) (2.66) 1.54 2.92
Total from investment operations $ (2.41) 1.65 11.17 5.50 5.09 (0.27) (2.58) 1.55 2.96
Less distributions from:
Net investment income $ 0.18 -- 0.31 0.35 0.34 0.22 0.06 -- 0.04
Net realized gains on investments $ 0.55 -- 2.65 2.14 0.65 0.65 0.55 -- 2.04
Tax return of capital $ -- -- 0.18 -- -- -- -- -- 0.28
Net asset value, end of year $ 24.38 27.52 25.87 17.84 14.83 10.73 24.21 27.40 25.85
Closing market price, end of year -- -- -- 15.75 12.88 9.13 -- -- --
Total Investment Return At Market
Value(4) % -- -- -- 43.48 52.81 (8.85) -- -- --
Total Investment Return At Net Asset
Value(5) % (8.61) 6.38 64.86 41.10 49.69 (1.89) (9.31) 6.00 11.88
Ratios/Supplemental Data:
Net assets, end of year ($millions) $ 403 549 383 252 210 152 343 360 76
Ratio to average net assets:
Expenses(6) % 1.39 1.20 1.10 1.01 1.05 1.28 2.14 1.95 1.89
Net investment income(6) % 1.09 0.94 1.39 1.94 2.37 2.13 0.34 0.19 0.99
Portfolio turnover rate % 29 2 22 21 13 14 29 2 22
</TABLE>
- - - - - - - - - ----------
(1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(2) Commencement of offering shares.
(3) Effective June 30, 1998, Bank and Thrift Fund changed its year end to June
30.
(4) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
(5) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(6) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Bank and Thrift Fund 101
<PAGE>
Financial
PILGRIM WORLDWIDE GROWTH FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 21.39 19.33 16.88 16.57 14.29 14.94
Income from investment operations:
Net investment income (loss) $ -- (0.02) 0.04 (0.16) (0.07) (0.05)
Net realized and unrealized gains
(loss) on investments $ 2.19 5.78 5.33 2.20 2.86 (0.09)
Total from investment operations $ 2.19 5.76 5.37 2.04 2.79 (0.14)
Less distributions from:
Net investment income $ -- 0.06 -- -- 0.12 0.02
Net realized gains on investments $ -- 3.64 2.92 1.73 0.39 0.49
Net asset value, end of period $ 23.58 21.39 19.33 16.88 16.57 14.29
Total Return(3): % 10.24 33.56 34.55 12.51 19.79 (0.90)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 66,245 49,134 38,647 24,022 23,481 22,208
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 1.75 1.86 1.86 1.85 1.85 1.85
Gross expenses prior to expense
reimbursement(4) % 1.75 2.02 2.21 2.17 2.17 2.18
Net investment income (loss) after
expense reimbursement(4) % (0.03) (0.62) (0.69) (0.93) (0.35) (0.42)
Portfolio turnover % 57 247 202 182 132 99
Class B
Three
months May 31,
ended 1995(2) to
June 30, Year ended March 31, March 31,
1999(1) 1999 1998 1997 1996
------- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 24.21 20.10 16.02 14.34 12.50
Income from investment operations:
Net investment income (loss) (0.03) (0.08) (0.17) (0.14) (0.05)
Net realized and unrealized gains
(loss) on investments 2.46 6.25 5.44 1.82 1.89
Total from investment operations 2.43 6.17 5.27 1.68 1.84
Less distributions from:
Net investment income -- 0.01 -- -- --
Net realized gains on investments -- 2.05 1.19 -- --
Net asset value, end of period 26.64 24.21 20.10 16.02 14.34
Total Return(3): 10.04 32.74 34.03 11.72 14.72
Ratios/Supplemental Data:
Net assets, end of period (000's) 27,938 18,556 10,083 5,942 1,972
Ratios to average net assets:
Net expenses after expense
reimbursement(4) 2.40 2.51 2.51 2.50 2.50
Gross expenses prior to expense
reimbursement(4) 2.40 2.67 2.70 4.81 9.50
Net investment income (loss) after
expense reimbursement(4) (0.68) (1.31) (1.37) (1.62) (1.28)
Portfolio turnover 57 247 202 182 132
Class C
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 21.52 19.05 16.92 16.76 14.44 14.86
Income from investment operations:
Net investment income (loss) $ (0.04) (0.20) (0.19) (0.28) (0.21) (0.15)
Net realized and unrealized gains
(loss) on investments $ 2.21 5.83 5.41 2.23 2.92 (0.08)
Total from investment operations $ 2.17 5.63 5.22 1.95 2.71 (0.23)
Less distributions from:
Net investment income $ -- 0.01 -- -- 0.01 --
Net realized gains on investments $ -- 3.15 3.09 1.79 0.38 0.19
Net asset value, end of period $ 23.69 21.52 19.05 16.92 16.76 14.44
Total Return(3): % 10.08 32.73 33.72 11.81 18.95 (1.49)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 111,250 98,470 84,292 70,345 71,155 71,201
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 2.40 2.51 2.51 2.50 2.50 2.50
Gross expenses prior to expense
reimbursement(4) % 2.40 2.67 2.77 2.61 2.57 2.57
Net investment income (loss) after
expense reimbursement(4) % (0.68) (1.28) (1.34) (1.57) (0.99) (1.06)
Portfolio turnover % 57 247 202 182 132 99
</TABLE>
- - - - - - - - - ----------
(1) Effective May 24, 1999, Pilgrim Investments Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
102 Pilgrim Worldwide Growth Fund
<PAGE>
Financial
Highlights PILGRIM INTERNATIONAL VALUE FUND
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class.(1)
The 1998 and 1997 figures have been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, are included in the annual
report, which is available upon request. The figures prior to 1997 were audited
by other independent accountants.
<TABLE>
<CAPTION>
Class A
Year ended October 31,
1999 1998 1997 1996 1995(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 11.88 10.90 9.05 8.10 7.64
Net investment income (loss) $ .08 0.11 (0.09) 0.14 0.09
Net realized and unrealized gain
on investments $ 3.58 0.96 2.30 0.85 0.37
Total from investment operations $ 3.66 1.07 2.21 0.99 0.46
Dividends from net investment
income $ (.12) -- (0.14) (0.04) --
Dividends from net realized gain
on investments sold $ (.67) (0.09) (0.22) -- --
Total distributions $ (.79) (0.09) (0.36) (0.04) --
Net asset value at the end
of the period $ 14.75 11.88 10.90 9.05 8.10
Total investment return(3) % 32.55 9.86 27.59 12.15 9.39(4)
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 451,815 211,018 60,539 16,777 5,188
Ratio of expenses to average
net assets % 1.68 1.74 1.80 1.85 1.85(4)
Ratio of expense reimbursement
to average net assets % -- -- 0.27 0.97 6.08(4)
Ratio of net investment income
to average net assets % .92 1.62 0.46 1.52 1.67(4)
Portfolio turnover rate % 29 32 26 74 --
Class B Class C
Year ended October 31, Year ended October 31,
1999 1998 1997 1999 1998 1997 1996 1995(1)
---- ---- ---- ---- ---- ---- ---- -------
Operating performance
Net asset value at the beginning
of the period 11.76 10.87 10.00 11.75 10.86 8.93 8.05 7.61
Net investment income (loss) .01 0.07 (0.02) 0.00 0.06 (0.06) 0.05 0.06
Net realized and unrealized gain
on investments 3.51 0.91 0.89 3.51 0.92 2.20 0.86 0.38
Total from investment operations 3.52 0.98 0.87 3.51 0.98 2.14 0.91 0.44
Dividends from net investment
income (.04) -- -- (.04) -- (0.04) (0.03) --
Dividends from net realized gain
on investments sold (.67) (0.09) -- (.67) (0.09) (0.17) -- --
Total distributions (.71) (0.09) -- (.71) (0.09) (0.21) (0.03) --
Net asset value at the end
of the period 14.57 11.76 10.87 14.55 11.75 10.86 8.93 8.05
Total investment return(3) 31.55 9.16 8.70 31.50 9.07 25.92 11.39 8.89(4)
Ratios and supplemental data
Net assets at the end of the
period ($000s) 278,871 145,976 59,185 310,227 137,651 62,103 14,530 5,749
Ratio of expenses to average
net assets 2.41 2.47 2.50 (4) 2.41 2.47 2.50 2.50 2.50(4)
Ratio of expense reimbursement
to average net assets -- -- 0.08 (4) -- -- 0.24 1.21 6.08(4)
Ratio of net investment income
to average net assets .18 0.69 (0.71)(4) .19 0.68 (0.23) 0.62 1.13(4)
Portfolio turnover rate 29 32 26 29 32 26 74 --
</TABLE>
- - - - - - - - - ----------
(1) The mutual fund commenced operations on March 6, 1995 as the Brandes
International Fund, a series of the Brandes Investment Trust. At the close
of business on April 18, 1997 (the "Closing"), the Pilgrim International
Value Fund (formerly the "Northstar International Value Fund") acquired the
net assets of the Brandes International Fund, pursuant to an Agreement of
Reorganization dated February 4, 1997. On April 21, 1997, the Brandes
International Fund was reorganized as the Northstar International Value
Fund.
(2) Class B commenced operations on April 18, 1997.
(3) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim International Value Fund 103
<PAGE>
Financial
PILGRIM INTERNATIONAL CORE GROWTH FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A Class B
Three Three
months February 28, months February 28,
ended 1997(1) to ended 1997(1) to
June 30, Year ended March 31, March 31, June 30, Year ended March 31, March 31,
1999(2) 1999 1998 1997 1999(2) 1999 1998 1997
------- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 17.71 17.01 12.73 12.50 17.89 17.10 12.68 12.50
Income from investment operations:
Net investment income (loss) $ 0.04 (0.01) (0.02) -- -- (0.16) (0.11) --
Net realized and unrealized gains
on investments $ 1.17 1.02 4.56 0.23 1.19 1.05 4.66 0.18
Total from investment operations $ 1.21 1.01 4.54 0.23 1.19 0.89 4.55 0.18
Less distributions from:
Net investment income $ -- 0.18 -- -- -- 0.03 -- --
Net realized gains on investments $ -- 0.13 0.26 -- -- 0.07 0.13 --
Net asset value, end of period $ 18.92 17.71 17.01 12.73 19.08 17.89 17.10 12.68
Total Return(3): % 6.83 5.90 36.10 1.76 6.65 5.24 35.31 1.44
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 12,409 21,627 12,664 2 12,034 11,033 7,942 1
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 1.77 1.89 1.96 1.95 2.36 2.53 2.61 2.59
Gross expenses prior to expense
reimbursement(4) % 1.86 2.13 3.02 4,579.78 2.45 2.77 3.04 16,000.25
Net investment income (loss) after
expense reimbursement(4) % 0.50 (0.51) (0.45) 0.00 (0.09) (1.13) (1.32) 0.00
Portfolio turnover % 67 214 274 76 67 214 274 76
Class C
Three
months February 28,
ended 1997(1) to
June 30, Year ended March 31, March 31,
1999(2) 1999 1998 1997
------- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 17.94 17.16 12.68 12.50
Income from investment operations:
Net investment income (loss) $ -- (0.05) (0.07) --
Net realized and unrealized gains
on investments $ 1.20 0.94 4.55 0.18
Total from investment operations $ 1.20 0.89 4.48 0.18
Less distributions from: Net investment income $ -- 0.11 -- --
Net realized gains on investments $ -- -- -- --
Net asset value, end of period $ 19.14 17.94 17.16 12.68
Total Return(3): % 6.69 5.22 35.25 1.44
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 11,936 10,400 3,517 43
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 2.36 2.55 2.61 2.41
Gross expenses prior to expense reimbursement(4) % 2.45 2.79 5.10 25.55
Net investment income (loss) after
expense reimbursement(4) % (0.09) (1.19) (1.27) (0.07)
Portfolio turnover % 67 214 274 76
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on February 28, 1997.
(2) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
104 Pilgrim International Core Growth Fund
<PAGE>
Financial
Highlights PILGRIM INTERNATIONAL SMALLCAP GROWTH FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
Three
months August 31,
ended 1994(1) to
June 30, Year ended March 31, March 31,
1999(3) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 21.03 19.29 14.92 13.15 11.51 12.50
Income from investment operations:
Net investment income (loss) $ (0.03) 0.02 (0.15) 0.04 (0.02) --
Net realized and unrealized gains on
investments $ 2.80 3.21 5.36 1.88 1.79 (0.98)
Total from investment operations $ 2.77 3.23 5.21 1.92 1.77 (0.98)
Less distributions from:
Net investment income $ -- -- -- 0.01 0.13 0.01
Net realized gains on investments $ -- 1.49 0.84 0.14 -- --
Net asset value, end of period $ 23.80 21.03 19.29 14.92 13.15 11.51
Total Return(4): % 13.17 17.26 36.31 14.67 15.46 (7.85)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 37,490 25,336 11,183 5,569 1,056 610
Ratios to average net assets:
Net expenses after expense
reimbursement(5) % 1.84 1.94 1.96 1.95 1.95 1.95
Gross expenses prior to expense
reimbursement(5) % 1.86 2.08 2.75 3.76 10.06 9.77
Net investment income (loss) after
expense reimbursement(5) % (0.69) (0.82) (1.56) (1.05) (0.27) (0.07)
Portfolio turnover % 44 146 198 206 141 75
Class B
Three
months May 31,
ended 1995(2) to
June 30, Year ended March 31, March 31,
1999(3) 1999 1998 1997 1996
------- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 22.43 20.16 15.89 13.96 12.50
Income from investment operations:
Net investment income (loss) (0.07) (0.20) (0.15) (0.15) (0.02)
Net realized and unrealized gains on
investments 2.97 3.46 5.56 2.09 1.48
Total from investment operations 2.90 3.26 5.41 1.94 1.46
Less distributions from:
Net investment income -- -- -- 0.01 --
Net realized gains on investments -- 0.99 1.14 -- --
Net asset value, end of period 25.33 22.43 20.16 15.89 13.96
Total Return(4): 12.93 16.55 35.73 13.96 11.68
Ratios/Supplemental Data:
Net assets, end of period (000's) 19,331 16,158 12,033 5,080 1,487
Ratios to average net assets:
Net expenses after expense
reimbursement(5) 2.49 2.59 2.61 2.60 2.60
Gross expenses prior to expense
reimbursement(5) 2.51 2.73 2.98 4.89 16.15
Net investment income (loss) after
expense reimbursement(5) (1.34) (1.45) (2.20) (1.66) (0.64)
Portfolio turnover 44 146 198 206 141
Class C
Three
months August 31,
ended 1994(1) to
June 30, Year ended March 31, March 31,
1999(3) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 20.60 18.53 14.87 13.05 11.32 12.50
Income from investment operations:
Net investment income (loss) $ (0.06) (0.10) (0.11) (0.16) 0.01 (0.04)
Net realized and unrealized gains on
investments $ 2.80 3.09 5.09 1.98 1.72 (1.12)
Total from investment operations $ 2.74 2.99 4.98 1.82 1.73 (1.16)
Less distributions from:
Net investment income $ -- -- -- -- -- 0.02
Net realized gains on investments $ -- 0.92 1.32 -- -- --
Net asset value, end of period $ 23.34 20.60 18.53 14.87 13.05 11.32
Total Return(4): % 13.31 16.55 35.63 13.98 15.30 (9.25)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 18,354 13,226 8,014 3,592 933 24
Ratios to average net assets:
Net expenses after expense
reimbursement(5) % 2.49 2.59 2.61 2.60 2.60 2.61
Gross expenses prior to expense
reimbursement(5) % 2.51 2.73 3.38 3.95 16.15 75.37
Net investment income (loss) after
expense reimbursement(5) % (1.34) (1.45) (2.18) (1.67) (1.02) (0.76)
Portfolio turnover % 44 146 198 206 141 75
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on August 31, 1994.
(2) Commencement of share offerings.
(3) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(4) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(5) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim International Smallcap Growth Fund 105
<PAGE>
Financial
PILGRIM EMERGING MARKETS VALUE FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended October 31, Year ended October 31, Year ended October 31,
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning of the period $ 7.69 10.00 7.65 10.00 7.63 10.00
Net investment income $ .12 0.12 .08 0.09 .04 0.09
Net realized and unrealized loss on investments $ 3.01 (2.43) 2.97 (2.44) 3.00 (2.46)
Total from investment operations $ 3.13 (2.31) 3.05 (2.35) 3.04 (2.37)
Dividends from net investment income $ (.14) (.10) (.11)
Net asset value at the end of the period $ 10.68 7.69 10.60 7.65 10.56 7.63
Total investment return(2) % 41.48 (23.10) 40.41 (23.50) 40.49 (23.70)
Ratios and supplemental data
Net assets at the end of the period ($000s) $ 9,281 3,815 3,823 3,583 6,674 2,304
Ratio of expenses to average net assets(3) % 2.06 1.80 2.70 2.50 2.75 2.50
Ratio of expense reimbursement to average net
assets(3) % .15 2.08 .23 2.24 .16 2.37
Ratio of net investment income to average net
assets(3) % 1.36 3.38 .67 2.55 .61 2.60
Portfolio turnover rate % 38 7 38 7 38 7
</TABLE>
- - - - - - - - - ----------
(1) Class A, B and C commenced operations on January 1, 1998.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
106 Pilgrim Emerging Markets Value Fund
<PAGE>
Financial
Highlights PILGRIM EMERGING COUNTRIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
Three
months November 28
ended 1994(1) to
June 30, Year Ended March 31, March 31,
1999(3) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 13.43 17.39 17.20 14.03 11.00 12.50
Income from investment operations:
Net investment income (loss) $ (0.05) (0.06) 0.03 (0.06) (0.04) 0.04
Net realized and unrealized gains
(loss) on investments $ 3.36 (3.81) 1.22 3.51 3.15 (1.54)
Total from investment operations $ 3.31 (3.87) 1.25 3.45 3.11 (1.50)
Less distributions from:
Net investment income $ -- 0.02 -- -- 0.02 --
Net realized gains on investments $ -- 0.07 1.06 0.28 0.06 --
Net asset value, end of period $ 16.74 13.43 17.39 17.20 14.03 11.00
Total Return(4): % 24.65 (22.23) 8.06 24.79 28.43 (11.98)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 53,483 47,180 71,014 38,688 4,718 1,197
Ratio to average net assets:
Net expenses after expense
reimbursement(5) % 2.13 2.27 2.26 2.25 2.25 2.25
Gross expenses prior to expense
reimbursement(5) % 2.66 2.56 2.48 3.08 6.72 6.15
Net investment income (loss) after
expense reimbursement(5) % (1.30) (0.25) 0.55 (1.14) (0.35) 1.09
Portfolio turnover % 67 213 243 176 118 61
Class B
Three
months May 31,
ended 1995(2) to
June 30, Year Ended March 31, March 31,
1999(3) 1999 1998 1997 1996
------- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 13.64 17.64 17.29 14.02 12.50
Income from investment operations:
Net investment income (loss) (0.07) (0.22) (0.07) (0.11) (0.04)
Net realized and unrealized gains
(loss) on investments (3.41) (3.70) 1.26 3.47 1.56
Total from investment operations 3.34 (3.92) 1.19 3.36 1.52
Less distributions from:
Net investment income -- -- -- -- --
Net realized gains on investments -- 0.08 0.84 0.09 --
Net asset value, end of period 16.98 13.64 17.64 17.29 14.02
Total Return(4): 24.49 (22.23) 7.47 24.00 12.16
Ratios/Supplemental Data:
Net assets, end of period (000's) 26,342 22,338 38,796 24,558 3,557
Ratio to average net assets:
Net expenses after expense
reimbursement(5) 2.75 2.91 2.91 2.90 2.90
Gross expenses prior to expense
reimbursement(5) 3.28 3.20 3.06 3.66 7.58
Net investment income (loss) after
expense reimbursement(5) (1.92) (0.80) (0.20) (1.77) (1.05)
Portfolio turnover 67 213 243 176 118
Class C
Three
months November 28,
ended 1994(1) to
June 30, Year Ended March 31, March 31,
1999(3) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 13.14 16.98 16.81 13.71 10.79 12.50
Income from investment operations:
Net investment income (loss) $ (0.07) (0.27) (0.12) (0.10) (0.05) --
Net realized and unrealized gains
(loss) on investments $ 3.28 (3.49) 1.26 3.37 2.97 (1.70)
Total from investment operations $ 3.21 (3.76) 1.14 3.27 2.92 (1.70)
Less distributions from:
Net investment income $ -- -- -- -- -- 0.01
Net realized gains on investments $ -- 0.08 0.97 0.17 -- --
Net asset value, end of period $ 16.35 13.14 16.98 16.81 13.71 10.79
Total Return(4): % 24.43 (22.21) 7.47 23.94 27.30 (13.64)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 24,230 19,246 36,986 29,376 4,345 59
Ratio to average net assets:
Net expenses after expense
reimbursement(5) % 2.75 2.90 2.91 2.90 2.90 2.90
Gross expenses prior to expense
reimbursement(5) % 3.28 3.19 3.09 3.12 6.23 242.59
Net investment income (loss) after
expense reimbursement(5) % (1.92) (0.77) (0.26) (1.75) (1.06) (0.04)
Portfolio turnover % 67 213 243 176 118 61
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on November 28, 1994.
(2) Commencement of offering shares.
(3) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(4) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(5) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Emerging Countries Fund 107
<PAGE>
Financial
PILGRIM ASIA-PACIFIC EQUITY FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A Class B
Ten months Ten months
ended ended
Year ended June 30, June 30, Year ended June 30, June 30,
1999 1998 1997 1996(1) 1999 1998 1997 1996(1)
---- ---- ---- ------- ---- ---- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 4.46 10.93 10.35 10.00 4.37 10.83 10.31 10.00
Income from investment operations:
Net investment income (loss) $ -- 0.03 0.02 0.03 (0.04) (0.03) (0.07) (0.01)
Net realized and unrealized gain (loss) on
investments $ 2.76 (6.50) 0.58 0.34 2.69 (6.43) 0.59 0.32
Total from investment operations $ 2.76 (6.47) 0.60 0.37 2.65 (6.46) 0.52 0.31
Less distributions from:
Net investment income $ -- -- -- -- -- -- -- --
In excess of net investment income $ -- -- -- 0.02 -- -- -- --
Tax return of capital $ -- -- 0.02 -- -- -- -- --
Net asset value, end of period $ 7.22 4.46 10.93 10.35 7.02 4.37 10.83 10.31
Total Return(2): % 61.88 (59.29) 5.78 3.76 60.64 (59.65) 5.04 3.19
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 14,417 11,796 32,485 18,371 12,959 9,084 30,169 17,789
Ratios to average net assets:
Net expenses after expense reimbursement(3) % 2.00 2.00 2.00 2.00 2.75 2.75 2.75 2.75
Gross expenses prior to expense
reimbursement(3) % 2.98 2.80 2.54 3.47 3.73 3.55 3.29 4.10
Net investment income (loss) after expense
reimbursement(3) % 0.01 0.38 0.00 0.33 (0.74) (0.39) (0.79) (0.38)
Portfolio turnover rate % 111 81 38 15 111 81 38 15
Class M
Ten months
ended
Year ended June 30, June 30,
1999 1998 1997 1996(1)
---- ---- ---- -------
Per Share Operating Performance:
Net asset value, beginning of period $ 4.40 10.86 10.32 10.00
Income from investment operations:
Net investment income (loss) $ (0.02) -- (0.05) --
Net realized and unrealized gain (loss) on
investments $ 2.69 (6.46) 0.59 0.33
Total from investment operations $ 2.67 (6.46) 0.54 0.33
Less distributions from:
Net investment income $ -- -- -- --
In excess of net investment income $ -- -- -- 0.01
Tax return of capital $ -- -- -- --
Net asset value, end of period $ 7.07 4.40 10.86 10.32
Total Return(2): % 60.68 (59.48) 5.26 3.32
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 5,184 4,265 11,155 6,476
Ratios to average net assets:
Net expenses after expense reimbursement(3) % 2.50 2.50 2.50 2.50
Gross expenses prior to expense
reimbursement(3) % 3.48 3.30 3.04 3.88
Net investment income (loss) after expense
reimbursement(3) % (0.49) (0.07) (0.55) (0.16)
Portfolio turnover rate % 111 81 38 15
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on September 1, 1995.
(2) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(3) Annualized.
108 Pilgrim Asia-Pacific Equity Fund
<PAGE>
Financial
Highlights PILGRIM GOVERNMENT SECURITIES INCOME FUND
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
Year ended June 30,
1999 1998 1997 1996 1995(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 12.88 12.71 12.59 12.97 12.73
Income (loss) from investment operations:
Net investment income $ 0.76 0.64 0.69 0.75 0.84
Net realized and unrealized gain (loss) on investments $ (0.52) 0.30 0.20 (0.32) 0.24
Total from investment operations $ 0.24 0.94 0.89 0.43 1.08
Less distributions from:
Net investment income $ 0.77 0.77 0.73 0.75 0.84
Tax return of capital $ -- -- 0.04 0.06 --
Total distributions $ 0.77 0.77 0.77 0.81 0.84
Net asset value, end of period $ 12.35 12.88 12.71 12.59 12.97
Total Return(3): % 1.89 7.63 7.33 3.34 8.96
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 21,060 23,682 29,900 38,753 43,631
Ratios to average net assets:
Net expenses after expense reimbursement(4) % 1.40 1.50 1.42 1.51 1.40
Gross expenses prior to expense reimbursement(4) % 1.40 1.58 1.42 1.57 1.54
Net investment income after expense reimbursement(4) % 6.05 5.13 5.78 5.64 6.37
Portfolio turnover rate % 58 134 172 170 299
Class B
July 17,
1995(2) to
Year ended June 30, June 30,
1999 1998 1997 1996
---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 12.84 12.68 12.59 12.95
Income (loss) from investment operations:
Net investment income 0.69 0.60 0.67 0.66
Net realized and unrealized gain (loss) on investments (0.54) 0.24 0.11 (0.37)
Total from investment operations 0.15 0.84 0.78 0.29
Less distributions from:
Net investment income 0.69 0.68 0.69 0.65
Tax return of capital -- -- -- --
Total distributions
Net asset value, end of period 12.30 12.84 12.68 12.59
Total Return(3): 1.09 6.78 6.38 2.25
Ratios/Supplemental Data:
Net assets, end of period (000's) 12,426 3,220 1,534 73
Ratios to average net assets:
Net expenses after expense reimbursement(4) 2.15 2.25 2.17 2.26
Gross expenses prior to expense reimbursement(4) 2.15 2.29 2.17 2.41
Net investment income after expense reimbursement(4) 5.30 4.24 4.92 4.98
Portfolio turnover rate 58 134 172 170
Class C Class M
June 11, July 17,
1999(2) to 1995(2) to
June 30, Year Ended June 30, June 30,
1999 1999 1998 1997 1996
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 12.24 12.88 12.72 12.59 12.95
Income (loss) from investment operations:
Net investment income $ 2.05 0.69 0.64 0.70 0.68
Net realized and unrealized gain (loss) on investments $ (1.86) (0.52) 0.23 0.14 (0.36)
Total from investment operations $ 0.19 0.17 0.87 0.84 0.32
Less distributions from:
Net investment income $ -- 0.71 0.71 0.70 0.68
Tax return of capital $ -- -- -- 0.01 --
Total distributions
Net asset value, end of period $ 12.43 12.34 12.88 12.72 12.59
Total Return(3) % 1.55 1.31 7.02 6.88 2.52
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 7 751 224 61 24
Ratios to average net assets:
Net expenses after expense reimbursement(4) % 2.15 1.90 2.00 1.92 2.01
Gross expenses prior to expense reimbursement(4) % 2.15 1.90 2.05 1.92 2.16
Net investment income after expense reimbursement(4) % 5.30 5.57 4.29 5.25 5.73
Portfolio turnover rate % 58 58 134 172 170
</TABLE>
- - - - - - - - - ----------
(1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Government Securities Income Fund 109
<PAGE>
Financial
PILGRIM GOVERNMENT SECURITIES FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request. The figures prior to 1995
were audited by other independent accountants.
<TABLE>
<CAPTION>
Class A
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value at the beginning of the
period $ 9.38 9.53 9.48 10.07 9.51
Net investment income $ 0.27 0.49 0.68 0.63 0.34
Net realized and unrealized gain (loss)
on investments $ (0.50) -- -- (0.60) 0.59
Total from investment operations $ (0.23) 0.49 0.68 0.03 0.93
Dividends from net investment income $ (0.32) (0.64) (0.63) (0.62) (0.37)
Total distributions $ (0.32) (0.64) (0.63) (0.62) (0.37)
Net asset value at the end of the period $ 8.83 9.38 9.53 9.48 10.07
Total investment return(2) % (2.54) 5.27 7.46 0.57 10.04
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 28,131 31,181 1,744 14,185 3,235
Ratio of expenses to average net assets % 1.20 1.17 1.15 1.09 1.20(3)
Ratio of expense reimbursement to
average net assets % -- 0.15 0.17 0.20 0.20(3)
Ratio of net investment income to
average net assets % 5.94 6.18 6.44 6.85 6.01(3)
Portfolio turnover rate % 40 304 129 101 295
Class B
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance:
Net asset value at the beginning of
the period 9.40 9.55 9.48 10.07 9.51
Net investment income 0.23 0.51 0.52 0.57 0.30
Net realized and unrealized gain (loss)
on investments (0.49) (0.09) 0.11 (0.60) 0.59
Total from investment operations (0.26) 0.42 0.63 (0.03) 0.89
Dividends from net investment income (0.28) (0.57) (0.56) (0.56) (0.33)
Total distributions (0.28) (0.57) (0.56) (0.56) (0.33)
Net asset value at the end of the period 8.86 9.40 9.55 9.48 10.07
Total investment return(2) (2.76) 4.49 6.93 (0.15) 9.61
Ratios and supplemental data:
Net assets at the end of the period
($000s) 27,274 27,250 13,503 9,135 2,790
Ratio of expenses to average net assets 1.91 1.90 1.89 1.80 1.70(3)
Ratio of expense reimbursement to
average net assets -- 0.15 0.17 0.20 0.20(3)
Ratio of net investment income to
average net assets 5.23 5.55 5.50 6.05 5.20(3)
Portfolio turnover rate 40 304 129 101 295
Class C
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance:
Net asset value at the beginning
of the period $ 9.38 9.54 9.47 10.07 9.51
Net investment income $ 0.24 0.45 0.59 0.58 0.30
Net realized and unrealized gain (loss)
on investments $ (0.50) (0.05) 0.04 (0.62) 0.59
Total from investment operations $ (0.26) 0.40 0.63 (0.04) 0.89
Dividends from net investment income $ (0.28) (0.56) (0.56) (0.56) (0.33)
Distributions from capital $ -- -- -- -- --
Total distributions (0.28) (0.56) (0.56) (0.56) (0.33)
Net asset value at the end of the period $ 8.84 9.38 9.54 9.47 10.07
Total investment return(2) $ (2.81) 4.35 6.93 (0.21) 9.61
Ratios and supplemental data:
Net assets at the end of the period
($000s) $ 2,465 2,652 542 1,147 8
Ratio of expenses to average net assets $ 1.97 1.90 1.85 1.80 1.68(3)
Ratio of expense reimbursement and
waiver to average net assets % -- 0.15 0.17 0.21 0.20(3)
Ratio of net investment income to
average net assets % 5.15 5.44 5.67 6.22 5.28(3)
Portfolio turnover rate % 40 304 129 101 295
Class T
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
Operating performance:
Net asset value at the beginning of the
period 9.39 9.55 9.48 10.07 8.74 10.32
Net investment income 0.25 0.58 0.57 0.60 0.58 0.56
Net realized and unrealized gain (loss)
on investments (0.49) (0.14) 0.10 (0.59) 1.35 (1.56)
Total from investment operations (0.24) 0.44 0.67 0.01 1.93 (1.00)
Dividends from net investment income (0.30) (0.60) (0.60) (0.60) (0.60) (0.57)
Distributions from capital -- -- -- -- -- (0.01)
Total distributions (0.30) (0.60) (0.60) (0.60) (0.60) (0.58)
Net asset value at the end of the period 8.85 9.39 9.55 9.48 10.07 8.74
Total investment return(2) (2.69) 4.84 7.38 0.32 22.90 (9.82)
Ratios and supplemental data:
Net assets at the end of the period
($000s) 41,018 49,713 89,939 112,126 150,951 152,608
Ratio of expenses to average net assets 1.54 1.55 1.45 1.30 1.30 1.29
Ratio of expense reimbursement and
waiver to average net assets -- 0.15 0.20 0.21 0.20 0.20
Ratio of net investment income to
average net assets 5.60 5.97 5.99 6.37 6.23 6.00
Portfolio turnover rate 40 304 129 101 295 315
</TABLE>
- - - - - - - - - ----------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
110 Pilgrim Government Securities Fund
<PAGE>
Financial
Highlights PILGRIM STRATEGIC INCOME FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A Class B Class C
Three Three Three
months July 27, months July 27, months July 27,
ended 1998(1) to ended 1998(1) to ended 1998(1) to
June 30, March 31, June 30, March 31, June 30, March 31,
1999(2) 1999 1999(2) 1999 1999(2) 1999
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of
period $ 12.89 13.08 12.61 12.78 13.10 13.27
Income from investment
operations:
Net investment income $ 0.26 0.53 0.18 0.45 0.19 0.48
Net realized and unrealized
gains (loss) on investments $ (0.42) (0.08) (0.33) (0.05) (0.35) (0.06)
Total from investment operations $ (0.16) 0.45 (0.15) 0.40 (0.16) 0.42
Less distributions from:
Net investment income $ 0.14 0.53 0.13 0.46 0.13 0.48
Net realized gains on
investments $ -- 0.11 -- 0.11 -- 0.11
Net asset value, end of period $ 12.59 12.89 12.33 12.61 12.81 13.10
Total Return(3): % (1.23) 5.60 (1.20) 5.17 (1.21) 5.19
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 2,736 5,751 5,658 6,637 7,965 8,128
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 0.90 0.96 1.29 1.37 1.29 1.36
Gross expenses prior to expense
reimbursement(4) % 1.56 1.98 1.95 2.42 1.95 2.41
Net investment income (loss)
after expense reimbursement(4) % 5.88 5.81 5.49 5.35 5.49 5.36
Portfolio turnover % 69 274 69 274 69 274
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on July 27, 1998.
(2) Effective May 24, 1999, Pilgrim Investment, Inc., became the Investment
Manager of the Fund.
(3) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Strategic Income Fund 111
<PAGE>
Financial
PILGRIM HIGH YIELD FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
Eight
months
ended
Year ended June 30, June 30,
1999 1998 1997 1996 1995(1)(3)
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 6.94 6.80 6.36 6.15 5.95
Income (loss) from investment
operations:
Net investment income $ 0.58 0.61 0.61 0.59 0.35
Net realized and unrealized gain (loss)
on investments $ (0.96) 0.16 0.43 0.16 0.21
Total from investment operations $ (0.38) 0.77 1.04 0.75 0.56
Less distributions from: Net investment
income $ 0.62 0.63 0.60 0.54 0.36
In excess of net investment income $ 0.01 -- -- -- --
Total distributions $ 0.63 0.63 0.60 0.54 0.36
Net asset value, end of period $ 5.93 6.94 6.80 6.36 6.15
Total Return(4): % (5.57) 11.71 17.14 12.72 9.77
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 131,535 102,424 35,940 18,691 15,950
Ratios to average net assets:
Net expenses after expense
reimbursement(5) % 1.00 1.00 1.00 1.00 2.25
Gross expenses prior to expense
reimbursement(5) % 1.12 1.17 1.42 2.19 2.35
Net investment income after expense
reimbursement(5) % 9.32 9.05 9.54 9.46 8.84
Portfolio turnover rate % 184 209 394 399 166
Class B
Year July 17,
ended 1995(2) to
October 31, Year ended June 30, June 30,
1994 1999 1998 1997 1996
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 6.47 6.92 6.78 6.36 6.20
Income (loss) from investment
operations:
Net investment income 0.54 0.53 0.58 0.57 0.48
Net realized and unrealized gain (loss)
on investments (0.51) (0.96) 0.14 0.41 0.14
Total from investment operations 0.03 (0.43) 0.72 0.98 0.62
Less distributions from: Net investment
income 0.55 0.56 0.58 0.56 0.46
In excess of net investment income -- 0.01 -- -- --
Total distributions 0.55
Net asset value, end of period 5.95 5.92 6.92 6.78 6.36
Total Return(4): 0.47 (6.23) 10.90 16.04 10.37
Ratios/Supplemental Data:
Net assets, end of period (000's) 16,046 261,589 154,303 40,225 2,374
Ratios to average net assets:
Net expenses after expense
reimbursement(5) 2.00 1.75 1.75 1.75 1.75
Gross expenses prior to expense
reimbursement(5) 2.07 1.87 1.92 2.17 2.94
Net investment income after expense
reimbursement(5) 8.73 8.57 8.30 8.64 9.02
Portfolio turnover rate 192 184 209 394 339
Class C Class M
May 27, July 17,
1999(2) to 1995(2) to
June 30, Year ended June 30, June 30,
1999 1999 1998 1997 1996
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 5.91 6.92 6.78 6.36 6.20
Income (loss) from investment
operations:
Net investment income $ 0.05 0.55 0.59 0.58 0.50
Net realized and unrealized gain (loss)
on investments $ 0.01 (0.95) 0.14 0.41 0.14
Total from investment operations $ 0.06 (0.40) 0.73 0.99 0.64
Less distributions from: Net investment
income $ 0.05 0.58 0.59 0.57 0.48
In excess of net investment income $ -- 0.01 -- -- --
Total distributions
Net asset value, end of period $ 5.92 5.93 6.92 6.78 6.36
Total Return(4): % 0.34 (5.85) 11.16 16.29 10.69
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 551 24,129 19,785 8,848 1,243
Ratios to average net assets:
Net expenses after expense
reimbursement(5) % 1.75 1.50 1.50 1.50 1.50
Gross expenses prior to expense
reimbursement(5) % 1.87 1.62 1.67 1.92 2.69
Net investment income after expense
reimbursement(5) % 8.57 8.82 8.55 8.93 9.41
Portfolio turnover rate % 184 184 209 394 339
</TABLE>
- - - - - - - - - ----------
(1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(2) Commencement of offering shares.
(3) Effective November 1, 1994, High Yield Fund changed its year end to June
30.
(4) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(5) Annualized.
112 Pilgrim High Yield Fund
<PAGE>
Financial
Highlights PILGRIM HIGH YIELD FUND II
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A Class B
Three Three
months Year March 27, months Year March 27,
ended ended 1998 to ended ended 1998 to
June 30, March 31, March 31, June 30, March 31, March 31,
1999(2) 1999 1998(1) 1999(2) 1999 1998(1)
------- ---- ------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 11.66 12.72 12.70 11.66 12.71 12.69
Income from investment operations:
Net investment income (loss) $ 0.28 1.12 0.01 0.27 1.04 0.01
Net realized and unrealized gains (loss)
on investments $ (0.09) (1.00) 0.01 (0.09) (0.99) 0.01
Total from investment operations $ 0.19 0.12 0.02 0.18 0.05 0.02
Less distributions from:
Net investment income $ 0.28 1.18 -- 0.26 1.10 --
Net asset value, end of period $ 11.57 11.66 12.72 11.58 11.66 12.71
Total Return(3): % 1.60 1.13 0.16 1.53 0.55 0.16
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 16,795 17,327 4,690 41,882 42,960 8,892
Ratios to average net assets:
Net expenses after expense
reimbursement(4) % 1.10 1.12 1.06 1.75 1.77 1.69
Gross expenses prior to expense
reimbursement(4) % 1.37 1.53 1.06 2.02 2.18 1.69
Net investment income (loss) after
expense reimbursement(4) % 9.68 9.44 7.22 9.03 8.84 6.61
Portfolio turnover % 44 242 484 44 242 484
Class C
Three
months Year March 27,
ended ended 1998 to
June 30, March 31, March 31,
1999(2) 1999 1998(1)
------- ---- -------
Per Share Operating Performance:
Net asset value, beginning of period 11.66 12.71 12.69
Income from investment operations:
Net investment income (loss) 0.27 1.04 0.01
Net realized and unrealized gains (loss)
on investments (0.09) (0.99) 0.01
Total from investment operations 0.18 0.05 0.02
Less distributions from:
Net investment income 0.26 1.10 --
Net asset value, end of period 11.58 11.66 12.71
Total Return(3): 1.53 0.55 0.16
Ratios/Supplemental Data:
Net assets, end of period (000's) 18,618 21,290 4,815
Ratios to average net assets:
Net expenses after expense
reimbursement(4) 1.75 1.77 1.66
Gross expenses prior to expense
reimbursement(4) 2.02 2.18 1.66
Net investment income (loss) after
expense reimbursement(4) 9.03 8.79 6.91
Portfolio turnover 44 242 484
</TABLE>
- - - - - - - - - ----------
(1) The Fund commenced operations on March 27, 1998.
(2) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Yield Fund II 113
<PAGE>
Financial
PILGRIM HIGH YIELD FUND III Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request. The figures prior to 1995
were audited by other independent accountants.
<TABLE>
<CAPTION>
Class A
Six
months
Ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 8.53 9.14 8.94 8.56 8.68
Net investment income $ 0.34 0.75 0.73 0.76 0.48
Net realized and unrealized gain
(loss) on investments $ (0.32) (0.55) 0.23 0.44 (0.10)
Total from investment operations $ 0.02 0.20 0.96 1.20 0.38
Dividends from net investment
income $ (0.38) (0.75) (0.76) (0.75) (0.50)
Dividends from net realized gain $ -- (0.06) -- -- --
Dividends from capital $ -- -- -- (0.07) --
Total distributions $ (0.38) (0.81) (0.76) (0.82) (0.50)
Net asset value at the end of the
period $ 8.17 8.53 9.14 8.94 8.56
Total investment return(2) % 0.19 2.25 11.18 14.74 4.48
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 26,748 31,134 16,213 13,146 7,466
Ratio of expenses to average net
assets % 1.29 1.26 1.20 1.11 1.02(3)
Ratio of net investment income
to average net assets % 8.05 8.27 8.06 8.60 9.83(3)
Portfolio turnover rate % 38 135 134 128 103
Class B
Six
months
Ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance
Net asset value at the beginning
of the period 8.52 9.15 8.95 8.57 8.68
Net investment income 0.31 0.68 0.67 0.71 0.44
Net realized and unrealized gain
(loss) on investments (0.31) (0.56) 0.23 0.43 (0.09)
Total from investment operations -- 0.12 0.90 1.14 0.35
Dividends from net investment
income (0.35) (0.69) (0.70) (0.69) (0.46)
Dividends from net realized gain -- (0.06) -- -- --
Dividends from capital -- -- -- (0.07) --
Total distributions (0.35) (0.75) (0.70) (0.76) (0.46)
Net asset value at the end of the
period 8.17 8.52 9.15 8.95 8.57
Total investment return(2) (0.05) 1.28 10.38 13.94 4.17
Ratios and supplemental data
Net assets at the end of the
period ($000s) 125,781 139,711 108,469 79,199 29,063
Ratio of expenses to average net
assets 2.00 1.97 1.91 1.81 1.71(3)
Ratio of net investment income
to average net assets 7.33 7.50 7.35 7.88 9.18(3)
Portfolio turnover rate 38 135 134 128 103
Class C
Six
months
ended
June 30,
1999 Year ended December 31,
(unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance
Net asset value at the beginning
of the period $ 8.53 9.15 8.95 8.57 8.68
Net investment income $ 0.32 0.67 0.67 0.72 0.44
Net realized and unrealized gain
(loss) on investments $ (0.32) (0.54) 0.23 0.42 (0.09)
Total from investment operations $ (0.01) 0.13 0.90 1.14 0.35
Dividends from net investment
income $ (0.35) (0.69) (0.70) (0.69) (0.46)
Dividends from net realized gain $ -- (0.06) -- -- --
Dividends from capital $ -- -- -- (0.07) --
Total distributions $ (0.35) (0.75) (0.70) (0.76) (0.46)
Net asset value at the end of the
period $ 8.17 8.53 9.15 8.95 8.57
Total investment return(2) % (0.17) 1.39 10.37 13.93 4.17
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 21,332 23,559 21,393 14,275 3,410
Ratio of expenses to average net
assets % 2.00 1.98 1.92 1.82 1.72(3)
Ratio of net investment income
to average net assets % 7.35 7.48 7.35 7.85 9.29(3)
Portfolio turnover rate % 38 135 134 128 103
Class T
Six
months
ended
June 30,
1999 Year ended December 31,
(Unaudited) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning
of the period 8.52 9.14 8.94 8.56 8.29 9.31
Net investment income 0.32 0.71 0.71 0.73 0.84 0.81
Net realized and unrealized gain
(loss) on investments (0.31) (0.54) 0.23 0.45 0.26 (0.99)
Total from investment operations 0.01 0.17 0.94 1.18 1.10 (0.18)
Dividends from net investment
income (0.36) (0.73) (0.74) (0.73) (0.83) (0.83)
Dividends from net realized gain -- -- -- -- -- (0.01)
Dividends from capital -- (0.06) -- (0.07) -- --
Total distributions (0.36) (0.79) (0.74) (0.80) (0.83) (0.84)
Net asset value at the end of the
period 8.17 8.52 9.14 8.94 8.56 8.29
Total investment return(2) 0.14 1.79 10.86 14.49 13.71 (2.18)
Ratios and supplemental data
Net assets at the end of the
period ($000s) 69,681 89,116 109,320 124,431 139,711 136,426
Ratio of expenses to average net
assets 1.62 1.60 1.47 1.31 1.33 1.34
Ratio of net investment income
to average net assets 7.71 7.83 7.77 8.43 9.69 9.08
Portfolio turnover rate 38 135 134 128 103 86
</TABLE>
- - - - - - - - - ----------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
114 Pilgrim High Yield Fund III
<PAGE>
Financial
Highlights PILGRIM HIGH TOTAL RETURN FUND
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 3.77 5.00 4.78 4.48 4.41
Net investment income $ 0.37 0.46 0.48 0.46 0.48
Net realized and unrealized gain
(loss) on investments $ (0.41) (1.07) 0.20 0.32 0.07
Total from investment operations $ (0.04) (0.61) 0.68 0.78 0.55
Dividends from net investment
income $ (0.39) (0.47) (0.46) (0.48) (0.48)
Dividends from net investment
gain on investments sold $ -- (0.15) -- -- --
Distributions declared from
capital $ (0.05) -- -- -- --
Total distributions $ (0.44) (0.62) (0.46) (0.48) (0.48)
Net asset value at the end of the
period $ 3.29 3.77 5.00 4.78 4.48
Total investment return(1) % (1.86) (13.65) 15.03 18.14 13.02
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 91,991 148,650 215,361 167,698 88,552
Ratio of expenses to average net
assets % 1.34 1.30 1.42 1.52 1.55
Ratio of expense reimbursement
to average net assets % -- -- -- -- --
Ratio of net investment income
to average net assets(3) % 10.16 9.93 9.88 9.86 10.90
Portfolio turnover rate % 59 123 183 158 145
Class B
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning
of the period 3.77 5.00 4.77 4.47 4.41
Net investment income 0.34 0.43 0.44 0.43 0.45
Net realized and unrealized gain
(loss) on investments (0.41) (1.07) 0.22 0.32 0.06
Total from investment operations (0.07) (0.64) 0.66 0.75 0.51
Dividends from net investment
income (0.37) (0.44) (0.43) (0.45) (0.45)
Dividends from net investment
gain on investments sold -- (0.15) -- -- --
Distributions declared from
capital (0.04) -- -- -- --
Total distributions (0.41) (0.59) (0.43) (0.45) (0.45)
Net asset value at the end of the
period 3.29 3.77 5.00 4.77 4.47
Total investment return(1) (2.56) (14.28) 14.46 17.08 11.97
Ratios and supplemental data
Net assets at the end of the
period ($000s) 280,413 428,903 577,351 346,919 96,362
Ratio of expenses to average net
assets 2.06 2.02 2.12 2.23 2.25
Ratio of expense reimbursement
to average net assets -- -- -- -- --
Ratio of net investment income
to average net assets(3) 9.42 9.20 9.18 9.14 10.20
Portfolio turnover rate 59 123 183 158 145
Class C
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating performance:
Net asset value at the beginning
of the period $ 3.78 5.02 4.79 4.49 4.41
Net investment income $ 0.34 0.43 0.44 0.43 0.44
Net realized and unrealized gain
(loss) on investments $ (0.40) (1.08) 0.22 0.32 0.09
Total from investment operations $ (0.06) (0.65) 0.66 0.75 0.53
Dividends from net investment
income $ (0.37) (0.44) (0.43) (0.45) (0.45)
Dividends from net investment
gain on investments sold $ -- (0.15) -- -- --
Distributions declared from
capital $ (0.04) -- -- -- --
Total distributions $ (0.41) (0.59) (0.43) (0.45) (0.45)
Net asset value at the end of the
period $ 3.31 3.78 5.02 4.79 4.49
Total investment return(1) % 2.24 (14.41) 14.42 17.28 12.44
Ratios and supplemental data:
Net assets at the end of the
period ($000s) $ 40,503 64,141 97,457 54,382 11,011
Ratio of expenses to average net
assets % 2.07 2.03 2.13 2.23 2.27
Ratio of expense reimbursement
to average net assets % -- -- -- -- --
Ratio of net investment income
to average net assets(3) % 9.42 9.19 9.18 9.14 10.18
Portfolio turnover rate % 59 123 183 158 145
</TABLE>
- - - - - - - - - ----------
(1) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim High Total Return Fund 115
<PAGE>
Financial
PILGRIM HIGH TOTAL RETURN FUND II Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A(1)
Year ended October 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning of the period $ 4.78 5.49 5.00
Net investment income $ 0.43 0.50 0.28
Net realized and unrealized (loss) on investments $ (0.55) (0.70) 0.53
Total from investment operations $ (0.12) (0.20) 0.81
Dividends from net investment income $ (0.43) (0.48) (0.28)
Distributions declared from capital $ (0.05) (0.03) (0.04)
Total distributions $ (0.48) (0.51) (0.32)
Net asset value at the end of the period $ 4.18 4.78 5.49
Total investment return(2) % (3.10) (4.23) 16.53
Ratios and supplemental data
Net assets at the end of the period ($000s) $ 20,003 40,924 8,548
Ratio of expenses to average net assets(3) % 1.40 1.44 1.26
Ratio of expense reimbursement to average net assets(3) % -- 0.01 3.36
Ratio of net investment income to average net assets(3) % 9.46 8.90 5.89
Portfolio turnover rate % 110 150 164
Class B(1) Class C(1)
Year ended October 31, Year ended October 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning of the period 4.79 5.49 5.00 4.79 5.50 5.00
Net investment income 0.41 0.47 0.25 0.40 0.47 0.25
Net realized and unrealized (loss) on investments (0.57) (0.70) 0.53 (0.55) (0.71) 0.54
Total from investment operations (0.16) (0.23) 0.78 (0.15) (0.24) 0.79
Dividends from net investment income (0.42) (0.44) (0.25) (0.41) (0.44) (0.25)
Distributions declared from capital (0.03) (0.03) (0.04) (0.04) (0.03) (0.04)
Total distributions (0.45) (0.47) (0.29) (0.45) (0.47) (0.29)
Net asset value at the end of the period 4.18 4.79 5.49 4.19 4.79 5.50
Total investment return(2) (4.00) (4.90) 15.91 (3.77) (4.90) 16.12
Ratios and supplemental data
Net assets at the end of the period ($000s) 125,796 168,859 38,076 31,014 53,703 12,334
Ratio of expenses to average net assets(3) 2.11 2.17 1.95 2.12 2.17 1.95
Ratio of expense reimbursement to average net assets(3) -- 0.02 0.75 -- 0.01 0.78
Ratio of net investment income to average net assets(3) 8.66 8.17 5.20 8.70 8.16 5.17
Portfolio turnover rate 110 150 164 110 150 164
</TABLE>
- - - - - - - - - ----------
(1) Classes A, B & C commenced operations on January 31, 1997.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
116 Pilgrim High Total Return Fund II
<PAGE>
Financial
Highlights PILGRIM BALANCED FUND
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
Three
months
ended
June 30, Year ended March 31,
1999(2) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 19.03 19.53 15.54 16.16 13.74 13.52
Income from investment operations:
Net investment income $ 0.10 0.36 0.26 0.32 0.34 0.21
Net realized and unrealized gains on
investments $ 0.17 2.58 5.70 0.84 2.42 0.22
Total from investment operations $ 0.27 2.94 5.96 1.16 2.76 0.43
Less distributions from:
Net investment income $ 0.07 0.43 0.27 0.32 0.34 0.21
Net realized gains on investments $ -- 3.01 1.70 1.46 -- --
Net asset value, end of period $ 19.23 19.03 19.53 15.54 16.16 13.74
Total Return(3): % 1.42 17.10 39.34 6.74 20.16 3.22
Ratio/Supplemental Data:
Net assets, end of period (in thousands) $ 9,619 9,519 6,675 4,898 5,902 4,980
Ratio to average net assets:
Net expenses after expense
reimbursement(4) % 1.49 1.59 1.61 1.60 1.60 1.60
Gross expenses prior to expense
reimbursement(4) % 1.75 1.97 2.56 3.00 3.30 2.78
Net investment income (loss) after expense
reimbursement(4) % 2.06 2.08 3.58 1.87 2.16 1.44
Portfolio turnover % 63 165 260 213 197 110
Class B
Three
months May 31,
ended 1995(1) to
June 30, Year ended March 31, March 31,
1999(2) 1999 1998 1997 1996
------- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 20.38 20.07 14.88 14.18 12.50
Income from investment operations:
Net investment income 0.07 0.28 0.15 0.17 0.12
Net realized and unrealized gains on
investments 0.18 2.74 5.58 0.70 1.68
Total from investment operations 0.25 3.02 5.73 0.87 1.80
Less distributions from:
Net investment income 0.04 0.31 0.15 0.17 0.12
Net realized gains on investments -- 2.40 0.39 -- --
Net asset value, end of period 20.59 20.38 20.07 14.88 14.18
Total Return(3): 1.24 16.49 38.79 6.10 14.45
Ratio/Supplemental Data:
Net assets, end of period (in thousands) 7,157 6,048 4,254 2,133 673
Ratio to average net assets:
Net expenses after expense
reimbursement(4) 2.14 2.24 2.26 2.25 2.25
Gross expenses prior to expense
reimbursement(4) 2.40 2.62 2.71 6.44 13.05
Net investment income (loss) after expense
reimbursement(4) 1.41 1.43 2.99 1.25 1.38
Portfolio turnover 63 165 260 213 197
Class C
Three
months
ended
June 30, Year ended March 31,
1999(2) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 18.35 19.90 15.59 16.20 13.76 13.54
Income from investment operations:
Net investment income $ 0.06 0.26 0.15 0.21 0.24 0.11
Net realized and unrealized gains on
investments $ 0.16 2.52 5.71 0.85 2.44 0.22
Total from investment operations $ 0.22 2.78 5.86 1.06 2.68 0.33
Less distributions from:
Net investment income $ 0.04 0.28 0.15 0.21 0.24 0.11
Net realized gains on investments $ -- 4.05 1.40 1.46 -- --
Net asset value, end of period $ 18.53 18.35 19.90 15.59 16.20 13.76
Total Return(3): % 1.21 16.34 38.35 6.05 19.58 2.47
Ratio/Supplemental Data:
Net assets, end of period (in thousands) $ 21,331 21,655 20,784 16,990 16,586 16,470
Ratio to average net assets:
Net expenses after expense
reimbursement(4) % 2.14 2.23 2.26 2.25 2.25 2.25
Gross expenses prior to expense
reimbursement(4) % 2.40 2.61 2.68 2.83 3.01 2.60
Net investment income (loss) after expense
reimbursement(4) % 1.41 1.43 2.93 1.23 1.53 0.83
Portfolio turnover % 63 165 260 213 197 110
</TABLE>
- - - - - - - - - ----------
(1) Commencement of offering of shares.
(2) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Balanced Fund 117
<PAGE>
Financial
PILGRIM INCOME & GROWTH FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Class A
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 11.70 12.47 12.16 10.86 10.00
Net investment income $ .17 0.37 0.38 0.32 0.35
Net realized and unrealized gain
(loss) on investments $ 1.11 (0.22) 1.53 1.29 0.84
Total from investment operations $ 1.28 0.15 1.91 1.61 1.19
Dividends from net investment
income $ (.18) (0.39) (0.34) (0.31) (0.33)
Dividends from net realized gain
on investments sold $ (3.14) (0.53) (1.26) -- --
Total distributions $ (3.32) (0.92) (1.60) (0.31) (0.33)
Net asset value at the end of the
period $ 9.66 11.70 12.47 12.16 10.86
Total investment return(1) % 11.99 1.12 17.02 14.48 13.19
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 39,313 47,378 53,805 85,250 76,031
Ratio of expenses to average net
assets % 1.40 1.40 1.47 1.52 1.51
Ratio of expense reimbursement
to average net assets % -- -- -- -- --
Ratio of net investment income
to average net assets % 1.40 2.99 2.90 2.78 3.39
Portfolio turnover rate % 102 102 56 147 91
Class B
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning
of the period 11.68 12.44 12.13 10.84 9.99
Net investment income .09 0.29 0.27 0.24 0.27
Net realized and unrealized gain
(loss) on investments 1.11 (0.22) 1.55 1.28 0.85
Total from investment operations 1.20 0.07 1.82 1.52 1.12
Dividends from net investment
income (.09) (0.30) (0.25) (0.23) (0.27)
Dividends from net realized gain
on investments sold (3.14) (0.53) (1.26) -- --
Total distributions (3.23) (0.83) (1.51) (0.23) (0.27)
Net asset value at the end of the
period 9.65 11.68 12.44 12.13 10.84
Total investment return(1) 11.24 0.44 15.06 13.60 12.31
Ratios and supplemental data
Net assets at the end of the
period ($000s) 39,763 55,873 73,829 71,123 60,347
Ratio of expenses to average net
assets 2.12 2.12 2.18 2.26 2.23
Ratio of expense reimbursement
to average net assets -- -- -- -- --
Ratio of net investment income
to average net assets .68 2.28 2.18 2.09 2.66
Portfolio turnover rate 102 102 56 147 91
Class C
Year ended October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning
of the period $ 11.66 12.42 12.12 10.83 9.99
Net investment income $ .13 0.31 0.28 0.24 0.27
Net realized and unrealized gain
(loss) on investments $ 1.06 (0.24) 1.54 1.28 0.85
Total from investment operations $ 1.19 0.07 1.82 1.52 1.12
Dividends from net investment
income $ (.07) (0.30) (0.26) (0.23) (0.28)
Dividends from net realized gain
on investments sold $ (3.14) (0.53) (1.26) -- --
Total distributions $ (3.21) (0.83) (1.52) (0.23) (0.28)
Net asset value at the end of the
period $ 9.64 11.66 12.42 12.12 10.83
Total investment return(1) % 11.12 0.51 15.04 13.68 12.33
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 13,339 41,186 69,494 60,458 53,661
Ratio of expenses to average net
assets % 2.08 2.09 2.15 2.20 2.22
Ratio of expense reimbursement
to average net assets % -- -- -- -- --
Ratio of net investment income
to average net assets % .74 2.32 2.21 2.10 2.67
Portfolio turnover rate % 102 102 56 147 91
</TABLE>
- - - - - - - - - ----------
(1) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
118 Pilgrim Income & Growth Fund
<PAGE>
Financial
Highlights PILGRIM BALANCE SHEET OPPORTUNITIES FUND
- - - - - - - - - --------------------------------------------------------------------------------
The following chart shows the Fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request. The figures prior to 1995
were audited by other independent accountants.
<TABLE>
<CAPTION>
Class A
Six Months
Ended
June 30, 1999 Year ended December 31,
(Unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Operating performance
Net asset value at the beginning
of the period $ 12.34 13.00 11.78 12.53 12.77
Net investment income $ 0.21 0.50 0.52 0.56 0.43
Net realized and unrealized gain
on investments $ 1.00 0.14 2.27 0.74 1.06
Total from investment operations $ 1.21 0.64 2.79 1.30 1.49
Dividends from net investment
income $ (0.21) (0.56) (0.54) (0.57) (0.48)
Dividends from net realized gain
on investments sold $ -- (0.74) (1.03) (1.48) (1.25)
Total distributions $ (0.21) (1.30) (1.57) (2.05) (1.73)
Net asset value at the end of the
period $ 13.34 12.34 13.00 11.78 12.53
Total investment return(2) % 9.89 5.19 24.31 10.54 11.95
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 17,686 18,537 1,281 1,100 797
Ratio of expenses to average net
assets % 1.52 1.47 1.50 1.40 1.27(3)
Ratio of expense reimbursement
to average net assets % -- -- 0.02 0.09 --
Ratio of net investment income
to average net assets % 3.22 4.02 4.01 4.30 4.99(3)
Portfolio turnover rate % 4 38 130 107 131
Class B
Six Months
Ended
June 30, 1999 Year ended December 31,
(Unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance
Net asset value at the beginning
of the period 12.28 12.94 11.74 12.51 12.77
Net investment income 0.16 0.44 0.44 0.50 0.35
Net realized and unrealized gain
on investments 1.00 0.10 2.25 0.71 1.09
Total from investment operations 1.16 0.54 2.69 1.21 1.44
Dividends from net investment
income (0.16) (0.46) (0.46) (0.50) (0.45)
Dividends from net realized gain
on investments sold -- (0.74) (1.03) (1.48) (1.25)
Total distributions (0.16) (1.20) (1.49) (1.98) (1.70)
Net asset value at the end of the
period 13.28 12.28 12.94 11.74 12.51
Total investment return(2) 9.64 4.38 23.48 9.76 11.56
Ratios and supplemental data
Net assets at the end of the
period ($000s) 5,179 5,107 4,969 3,765 1,759
Ratio of expenses to average net
assets 2.24 2.17 2.15 2.10 1.95(3)
Ratio of expense reimbursement
to average net assets -- -- 0.02 0.07 --
Ratio of net investment income
to average net assets 2.50 3.33 3.37 3.64 4.38(3)
Portfolio turnover rate 4 38 130 107 131
Class C
Six Months
Ended
June 30, 1999 Year ended December 31,
(Unaudited) 1998 1997 1996 1995(1)
----------- ---- ---- ---- -------
Operating performance
Net asset value at the beginning
of the period $ 12.31 12.95 11.75 12.52 12.77
Net investment income $ 0.16 0.45 0.43 0.49 0.38
Net realized and unrealized gain
on investments $ 1.02 0.11 2.25 0.70 1.07
Total from investment operations $ 1.18 0.56 2.68 1.19 1.45
Dividends from net investment
income $ (0.17) (0.46) (0.45) (0.48) (0.45)
Dividends from net realized gain
on investments sold $ -- (0.74) (1.03) (1.48) (1.25)
Distributions from capital $
Total distributions $ (0.17) (1.20) (1.48) (1.96) 1.70
Net asset value at the end of the
period $ 13.32 12.31 12.95 11.75 12.52
Total investment return(2) % 9.64 4.53 23.41 9.72 11.49
Ratios and supplemental data
Net assets at the end of the
period ($000s) $ 653 753 756 372 231
Ratio of expenses to average net
assets % 2.22 2.15 2.25 2.10 1.91(3)
Ratio of expense reimbursement
to average net assets % -- -- -- 0.10
Ratio of net investment income
to average net assets % 2.50 3.34 3.30 3.61 4.49(3)
Portfolio turnover rate % 4 38 130 107 131
Class T
Six Months
Ended
June 30, 1999 Year ended December 31,
(Unaudited) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
Operating performance
Net asset value at the beginning
of the period 12.38 13.01 11.79 12.54 11.54 12.94
Net investment income 0.19 0.59 0.50 0.53 0.57 0.57
Net realized and unrealized gain
on investments 1.01 (0.01) 2.24 0.73 2.27 (1.25)
Total from investment operations 1.20 0.58 2.74 1.26 2.84 (0.68)
Dividends from net investment
income (0.18) (0.47) (0.49) (0.53) (0.59) (0.54)
Dividends from net realized gain
on investments sold -- (0.74) (1.03) (1.48) (1.25) (0.16)
Distributions from capital -- -- -- -- -- (0.02)
Total distributions (0.18) (1.21) (1.52) (2.01) (1.84) (0.72)
Net asset value at the end of the
period 13.40 12.38 13.01 11.79 12.54 11.54
Total investment return(2) 9.77 4.64 23.91 10.18 25.11 (5.33)
Ratios and supplemental data
Net assets at the end of the
period ($000s) 20,116 24,065 53,201 59,490 72,472 73,764
Ratio of expenses to average net
assets 1.94 1.89 1.83 1.69 1.68 1.69
Ratio of expense reimbursement
to average net assets -- -- 0.04 0.06 -- --
Ratio of net investment income
to average net assets 2.82 3.59 3.70 3.99 4.44 4.36
Portfolio turnover rate 4 38 130 107 131 59
</TABLE>
- - - - - - - - - ----------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Pilgrim Balance Sheet Opportunities Fund 119
<PAGE>
Financial
PILGRIM CONVERTIBLE FUND Highlights
- - - - - - - - - --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value, beginning of period $ 21.92 19.12 16.59 15.68 12.86 14.16
Income from investment operations:
Net investment income (loss) $ 0.10 0.40 0.44 0.47 0.48 0.49
Net realized and unrealized gains
(loss) on investments $ 1.35 3.17 4.49 1.64 2.82 (0.89)
Total from investment operations $ 1.45 3.57 4.93 2.11 3.30 (0.40)
Less distributions from:
Net investment income $ 0.10 0.41 0.44 0.48 0.48 0.49
Net realized gains on
investments $ -- 0.36 1.96 0.72 -- 0.41
Net asset value, end of period $ 23.27 21.92 19.12 16.59 15.68 12.86
Total Return(3): % 6.62 19.17 31.04 13.73 26.00 (2.64)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $ 73,133 65,742 47,290 32,082 31,712 31,150
Ratio to average net assets:
Net expenses after expense
reimbursement(4) % 1.45 1.53 1.57 1.60 1.60 1.60
Gross expenses prior to expense
reimbursement(4) % 2.10 1.65 1.74 1.75 1.76 1.76
Net investment income (loss) after
expense reimbursement(4) % 1.82 2.08 5.64 2.83 3.29 3.71
Portfolio turnover % 28 138 160 167 145 126
Class B
Three
months May 31,
ended Year Ended 1995(2) to
June 30, March 31, March 31,
1999(1) 1999 1998 1997 1996
------- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period 23.86 20.56 16.60 14.96 12.50
Income from investment operations:
Net investment income (loss) 0.07 0.29 0.32 0.31 0.24
Net realized and unrealized gains
(loss) on investments 1.47 3.47 4.65 1.64 2.46
Total from investment operations 1.54 3.76 4.97 1.95 2.70
Less distributions from:
Net investment income 0.06 0.27 0.32 0.31 0.24
Net realized gains on
investments -- 0.19 0.69 -- --
Net asset value, end of period 25.34 23.86 20.56 16.60 14.96
Total Return(3): 6.47 18.52 30.51 13.01 21.72
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) 68,091 58,736 36,725 12,740 2,125
Ratio to average net assets:
Net expenses after expense
reimbursement(4) 2.10 2.18 2.22 2.25 2.25
Gross expenses prior to expense
reimbursement(4) 2.10 2.30 2.33 3.19 7.08
Net investment income (loss) after
expense reimbursement(4) 1.17 1.44 5.04 2.29 2.59
Portfolio turnover 28 138 160 167 145
Class C
Three
months
ended
June 30, Year ended March 31,
1999(1) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 22.40 19.55 17.05 15.89 13.03 14.28
Income from investment operations:
Net investment income (loss) $ 0.07 0.28 0.34 0.37 0.40 0.41
Net realized and unrealized gains
(loss) on investments $ 1.37 3.25 4.60 1.66 2.86 (0.89)
Total from investment operations $ 1.44 3.53 4.94 2.03 3.26 (0.48)
Less distributions from:
Net investment income $ 0.06 0.25 0.34 0.37 0.40 0.41
Net realized gains on investments $ -- 0.43 2.10 0.50 -- 0.36
Net asset value, end of period $ 23.78 22.40 19.55 17.05 15.89 13.03
Total Return(3): % 6.45 18.45 30.22 12.91 25.24 (3.26)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $ 100,276 95,998 81,561 62,143 58,997 61,792
Ratio to average net assets:
Net expenses after expense
reimbursement(4) % 2.10 2.18 2.22 2.25 2.25 2.25
Gross expenses prior to expense
reimbursement(4) % 2.10 2.30 2.31 2.29 2.28 2.29
Net investment income (loss) after
expense reimbursement(4) % 1.17 1.44 4.99 2.18 2.64 3.05
Portfolio turnover % 28 138 160 167 145 126
</TABLE>
- - - - - - - - - ----------
(1) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(2) Commencement of offering shares.
(3) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(4) Annualized.
120 Pilgrim Convertible Fund
<PAGE>
WHERE TO GO FOR MORE INFORMATION
You'll find more information about the Pilgrim Funds in our:
ANNUAL/SEMIANNUAL REPORTS
Include a discussion of recent market conditions and investment strategies that
significantly affected performance, the financial statements and the auditor's
reports (in annual report only).
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more detailed information about the Pilgrim Funds. The SAI is
legally part of this prospectus (it is incorporated by reference). A copy has
been filed with the Securities and Exchange Commission (SEC).
Please write or call for a free copy of the current Annual/semiannual reports,
the SAI or other Fund information, or to make shareholder inquiries:
The Pilgrim Funds
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
1-800-992-0180
Or visit our website at www.pilgrimfunds.com.
This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may
obtain the information for a fee by contacting the SEC at:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-0102
or at the e-mail address: [email protected]
Or obtain the information at no cost by visiting the SEC's Internet website at
http://www.sec.gov.
When contacting the SEC, you will want to refer to the Fund's SEC file number.
The file numbers are as follows:
Pilgrim Growth Opportunities Fund 811-4431
Pilgrim Equity Trust 811-8817
Pilgrim Mayflower Trust 811-7978
Pilgrim SmallCap Opportunities Fund 811-4434
Pilgrim Advisory Funds, Inc. 811-9040
Pilgrim Government Securities Income Fund, Inc. 811-4031
Pilgrim Investment Funds, Inc. 811-1939
Pilgrim Mutual Funds 811-7428
Pilgrim Bank and Thrift Fund, Inc. 811-4504
Pilgrim High Yield III Fund 811-5496
Pilgrim Balance Sheet Opportunities Fund 811-2239
Pilgrim Government Securities Fund 811-4423
<PAGE>
GRAPHICS DESCRIPTION APPENDIX
There are four icon sized graphics used throughout the prospectuses as follows:
1. In the sections describing the Objective of the Funds, the graphic icon is
that of a dart in the bullseye of a target.
2. In the sections describing the Investment Strategy of the Funds, the
graphic icon is that of a compass pointing due north.
3. In the sections describing the Risks of the Funds, the graphic icon is that
of an old fashioned scale tilting heavy on the left side.
4. In the sections describing the Performance history of the Funds, the
graphic icon is that of a stack of US currency bills.
5. On the bottom footer of every odd numbered page (right hand page), the
graphic icon is that of a telephone by the 800 number of the fund to call
for information.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
January 4, 2000
PILGRIM ADVISORY FUNDS, INC.
Pilgrim Asia-Pacific Equity Fund
Pilgrim MidCap Value Fund
Pilgrim LargeCap Leaders Fund
PILGRIM INVESTMENT FUNDS, INC.
Pilgrim MagnaCap Fund
Pilgrim High Yield Fund
PILGRIM BANK AND THRIFT FUND, INC.
Pilgrim Bank and Thrift Fund
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Pilgrim Government Securities Income Fund
PILGRIM MUTUAL FUNDS
Pilgrim International Core Growth Fund
Pilgrim Worldwide Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim High Yield Fund II
Pilgrim Strategic Income Fund
Pilgrim Money Market Fund
PILGRIM SMALLCAP OPPORTUNITIES FUND
Pilgrim SmallCap Opportunities Fund
PILGRIM GROWTH OPPORTUNITIES FUND
Pilgrim Growth Opportunities Fund
PILGRIM EQUITY TRUST
Pilgrim MidCap Opportunities Fund
PILGRIM MAYFLOWER TRUST
Pilgrim Emerging Markets Value Fund
Pilgrim Growth + Value Fund
Pilgrim High Total Return Fund
Pilgrim High Total Return Fund II
Pilgrim Income & Growth Fund
Pilgrim International Value Fund
Pilgrim Research Enhanced Index Fund
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
Pilgrim Balance Sheet Opportunities Fund
PILGRIM GOVERNMENT SECURITIES FUND
Pilgrim Government Securities Fund
PILGRIM HIGH YIELD FUND III
Pilgrim High Yield Fund III
<PAGE>
This Statement of Additional Information ("SAI") relates to each series
(each a "Fund" and collectively the "Funds") of each Registrant (each a
"Company") listed above. A Prospectus for the Funds, dated January 4, 2000,
which provides the basic information you should know before investing in the
Funds, may be obtained without charge from the Funds or the Funds' Principal
Underwriter, Pilgrim Securities, Inc. ("Pilgrim Securities" or the
"Distributor"), at the address listed above. This Statement of Additional
Information is not a prospectus and it should be read in conjunction with the
Prospectus, dated January 4, 2000, which has been filed with the Securities and
Exchange Commission ("SEC"). In addition, the financial statements from the
Funds' Annual Report dated December 31, 1998 and the Semi-Annual Report dated
June 30, 1999 (Equity Trust, SmallCap Opportunities Fund, Growth Opportunities
Fund, Balance Sheet Opportunities Fund, Government Securities Fund, and High
Yield Fund III), the Annual Report dated October 31, 1999 (Mayflower Trust) and
the Annual Report dated June 30, 1999 (Bank and Thrift Fund, Advisory Funds,
Investment Funds, Pilgrim Mutual Funds, and Government Securities Income Fund)
are incorporated herein by reference (excluding the Money Market Fund which is
newly organized). Copies of the Funds' Prospectus and Annual or Semi-Annual
Report may be obtained without charge by contacting Pilgrim Funds at the address
and phone number written above.
<PAGE>
TABLE OF CONTENTS
ORGANIZATION OF THE REGISTRANTS................................................2
MANAGEMENT OF THE FUNDS........................................................6
FUND..........................................................................15
INVESTMENT MANAGER FEES.......................................................21
EXPENSE LIMITATION AGREEMENTS.................................................29
RULE 12B-1 PLANS..............................................................32
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS.......................................40
INVESTMENT RESTRICTIONS -- THE ADVISORY FUNDS.................................87
PORTFOLIO TRANSACTIONS.......................................................108
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................112
DETERMINATION OF SHARE PRICE.................................................119
SHAREHOLDER INFORMATION......................................................120
SHAREHOLDER SERVICES AND PRIVILEGES..........................................120
DISTRIBUTIONS................................................................123
TAX CONSIDERATIONS...........................................................123
CALCULATION OF PERFORMANCE DATA..............................................130
GENERAL INFORMATION..........................................................137
FINANCIAL STATEMENTS.........................................................139
<PAGE>
ORGANIZATION OF THE REGISTRANTS
PILGRIM ADVISORY FUNDS
Pilgrim Advisory Funds, Inc. ("Advisory Funds") is a Maryland corporation
registered as an open-end, diversified management investment company. The
Advisory Funds was organized in April 1985. The Company currently consists of
three separate diversified investment funds, Pilgrim Asia-Pacific Equity Fund
("Asia-Pacific Equity Fund"), Pilgrim MidCap Value Fund ("MidCap Value Fund")
and Pilgrim LargeCap Leaders Fund ("LargeCap Leaders Fund"), each with its own
investment objective and policies.
On November 16, 1998, the name of Pilgrim Advisory Funds, Inc. was changed
from "Pilgrim America Masters Series, Inc.," and the names of the Funds were
changed from "Pilgrim America Masters Asia-Pacific Equity Fund," "Pilgrim
America Masters MidCap Value Fund," and "Pilgrim America Masters LargeCap Value
Fund."
PILGRIM INVESTMENT FUNDS
Pilgrim Investment Funds, Inc. ("Pilgrim Investment Funds") is a Maryland
corporation registered as an open-end, diversified management investment
company. Pilgrim Investment Funds was organized in July 1969. The Company
currently consists of two separate diversified investment funds: Pilgrim
MagnaCap Fund ("MagnaCap Fund") and Pilgrim High Yield Fund ("High Yield Fund").
On August 18, 1989, shareholders of the High Yield Fund approved a proposal
to reorganize the High Yield Fund from a New York common law trust to a series
of Pilgrim High Yield Trust, a Massachusetts business trust. Effective January
18, 1990, Pilgrim High Yield Trust changed its name to Pilgrim Strategic
Investment Series ("PSIS") and the High Yield Fund became a series of PSIS.
Subsequently, on April 4, 1995, shareholders approved a proposal to reorganize
High Yield Fund from a series of PSIS to a series of the Company, a Maryland
corporation, in connection with the sale by the former Pilgrim Management
Corporation of its name and its books and records related to the Fund to a
subsidiary of Pilgrim America Capital Corporation (formerly Express America
Holdings Corporation). This reorganization, while having no ramifications with
respect to the investment objectives, policies, or restrictions of the High
Yield Fund, did result in a change of manager and distributor.
On July 14, 1995, Pilgrim Investments Funds' name was changed from "Pilgrim
Investment Funds, Inc." to "Pilgrim America Investment Funds, Inc.," MagnaCap
Fund's name was changed from "Pilgrim MagnaCap Fund" to "Pilgrim America
MagnaCap Fund," and High Yield Fund's name was changed from "Pilgrim High Yield
Fund" to "Pilgrim America High Yield Fund." On November 16, 1998, the name of
the Pilgrim Investments Funds became "Pilgrim Investment Funds, Inc.," the name
of MagnaCap Fund became "Pilgrim MagnaCap Fund," and the name of High Yield Fund
became "Pilgrim High Yield Fund."
PILGRIM MUTUAL FUNDS
Pilgrim Mutual Funds is a Delaware business trust registered as an
open-end, diversified management investment company. Pilgrim Mutual Funds was
organized in 1992. Prior to a reorganization of the Trust, which became
effective on July 24, 1998 (the "Reorganization"), the Trust offered shares in a
number of separate diversified portfolios, each of which invested all of its
assets in a corresponding master fund of Nicholas-Applegate Investment Trust
(the "Master Trust"). The Reorganization eliminated this two-tiered
"master-feeder" structure.
On March 15, 1999, the name of the Trust was changed from
"Nicholas-Applegate Mutual Funds," and the name of each Fund (except the Money
Market Fund, which is a new fund) was changed as follows:
2
<PAGE>
<TABLE>
<CAPTION>
Old Name New Name
- - - - - - - - - -------- --------
<S> <C>
Nicholas-Applegate International Core Growth Fund Pilgrim International Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund Pilgrim Worldwide Growth Fund
Nicholas-Applegate International Small Cap Growth Fund Pilgrim International Small Cap GrowthFund
Nicholas-Applegate Emerging Countries Fund Pilgrim Emerging Countries Fund
Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund
Nicholas-Applegate Mid Cap Growth Fund Pilgrim Mid Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund Pilgrim Small Cap Growth Fund
Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund
Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund
Nicholas-Applegate High Yield Bond Fund Pilgrim High Yield Fund II
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
On May 24, 1999, the names of the following Funds were changed as follows:
<TABLE>
<CAPTION>
Old Name New Name
- - - - - - - - - -------- --------
<S> <C>
Pilgrim International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund
Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund
Pilgrim High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund III that, if approved by shareholders of Pilgrim High Yield Fund III,
will result in the reorganization of Pilgrim High Yield Fund III into the
Pilgrim High Yield Fund II series of Pilgrim Mutual Funds. If the Agreement and
Plan of Reorganization is approved by shareholders, the Reorganization is
expected to occur in the spring of 2000.
The Trustees have approved an Agreement and Plan of Reorganization for
Balance Sheet Opportunities Fund and Income & Growth Fund that, if approved by
shareholders of Balance Sheet Opportunities Fund and Income & Growth Fund, will
result in the reorganization Balance Sheet Opportunities Fund and Income &
Growth Fund into the Pilgrim Balanced Fund, a series of Pilgrim Mutual Funds. If
the Agreement and Plan of Reorganization is approved by shareholders, the
Reorganization is expected to occur in the spring of 2000.
PILGRIM BANK AND THRIFT FUND
Pilgrim Bank and Thrift Fund, Inc. ("Bank and Thrift Fund") is a Maryland
corporation registered as an open-end, diversified management investment
company. The Bank and Thrift Fund was organized in November 1985 and changed its
name from "Pilgrim Regional BankShares, Inc." to "Pilgrim America Bank and
Thrift Fund, Inc." in April, 1996. The Fund operated as a closed-end fund prior
to October 17, 1997. On October 16, 1997, shareholders approved open-ending the
Fund, and since October 17, 1997, the Fund has operated as an open-end fund. On
November 16, 1998, the name of the Fund became "Pilgrim Bank and Thrift Fund."
PILGRIM GOVERNMENT SECURITIES INCOME FUND
Pilgrim Government Securities Income Fund, Inc. ("Government Securities
Income Fund") is a California corporation registered as an open-end, diversified
management investment company. The Government Securities Income Fund was
organized in May 1984.
3
<PAGE>
The Trustees have approved an Agreement and Plan of Reorganization for the
Government Securities Income Fund that, if approved by shareholders of the
Government Securities Income Fund in the spring of 2000, will result in the
reorganization of the Pilgrim Government Securities Fund into the Government
Securities Income Fund.
PILGRIM SMALLCAP OPPORTUNITIES FUND
Pilgrim SmallCap Opportunities Fund ("SmallCap Opportunities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. SmallCap Opportunities Fund was organized in 1986. On
November 1, 1999, the name of SmallCap Opportunities Fund was changed from
"Northstar Special Fund" (formerly Advantage Special Fund).
PILGRIM GROWTH OPPORTUNITIES FUND
Pilgrim Growth Opportunities Fund ("Growth Opportunities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. Growth Opportunities Fund was organized in 1986. On November
1, 1999, the name of Growth Opportunities Fund was changed from "Northstar
Growth Fund" (formerly Advantage Growth Fund).
PILGRIM EQUITY TRUST
Pilgrim Equity Trust ("Equity Trust") is a Massachusetts business trust
registered as an open-end, diversified management investment company. Equity
Trust was organized in June of 1998. The Company currently consists of one
separate diversified investment fund, Pilgrim MidCap Opportunities Fund ("MidCap
Opportunities Fund"). On November 1, 1999, the name of Equity Trust was changed
from the "Northstar Equity Trust", and MidCap Opportunities Fund was changed
from "Northstar Mid-Cap Growth Fund."
PILGRIM MAYFLOWER TRUST
Pilgrim Mayflower Trust ("Mayflower Trust") is a Massachusetts business
trust registered as an open-end, management investment company. The Mayflower
Trust and two of its series Pilgrim Income & Growth Fund ("Income & Growth
Fund") and Pilgrim High Total Return Fund ("High Total Return Fund") were
organized in 1993. Pilgrim Growth + Value Fund ("Growth + Value Fund) and
Pilgrim High Total Return Fund II ("High Total Return Fund II") were organized
in 1996. Pilgrim International Value Fund ("International Value Fund") commenced
operations on March 6, 1995 as the Brandes International Fund, a series of
Brandes Investment Trust. It was reorganized on April 21, 1997 as the
International Value Fund, a series of the Pilgrim Mayflower Trust. Pilgrim
Emerging Markets Value Fund ("Emerging Markets Value Fund") and Pilgrim Research
Enhanced Index Fund ("Research Enhanced Index Fund"), each a series of Pilgrim
Mayflower Trust, were organized 1998.
4
<PAGE>
On November 1, 1999, the name of Mayflower Trust was changed from
"Northstar Trust" (formerly Northstar Advantage Trust). On the same date, the
following funds changed their names as follows:
<TABLE>
<CAPTION>
Old Name New Name
- - - - - - - - - -------- --------
<S> <C>
Northstar Emerging Markets Value Fund Pilgrim Emerging Markets Value Fund
Northstar Growth + Value Fund Pilgrim Growth + Value Fund
Northstar High Total Return Fund (formerly Pilgrim High Total Return Fund
Northstar Advantage High Total Return Fund)
Northstar High Total Return Fund II Pilgrim High Total Return Fund II
Northstar Income & Growth Fund (formerly Pilgrim Income & Growth Fund
Northstar Advantage Income and Growth Fund)
Northstar International Value Fund Pilgrim International Value Fund
Northstar Research Enhanced Index Fund Pilgrim Research Enhanced Index Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for
Income & Growth Fund that, if approved by shareholders of Income & Growth Fund
in the spring of 2000, will result in the reorganization of Income & Growth Fund
into the Pilgrim Balanced Fund series of Pilgrim Mutual Funds.
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
Pilgrim Balance Sheet Opportunities Fund ("Balance Sheet Opportunities
Fund") is a Massachusetts business trust registered as an open-end, diversified
management investment company. Balance Sheet Opportunities Fund was organized in
1986. On November 1, 1999, Pilgrim Balance Sheet Opportunities Fund's name was
changed from "Northstar Balance Sheet Opportunities Fund" (formerly Advantage
Income Fund).
The Trustees have approved an Agreement and Plan of Reorganization for
Balance Sheet Opportunities Fund that, if approved by shareholders of Balance
Sheet Opportunities Fund in the spring of 2000, will result in the
reorganization of Balance Sheet Opportunities Fund into the Pilgrim Balanced
Fund series of Pilgrim Mutual Funds.
PILGRIM GOVERNMENT SECURITIES FUND
Pilgrim Government Securities Fund ("Government Securities Fund") is a
Massachusetts business trust registered as an open-end, diversified management
investment company. Government Securities Fund was organized in 1986. On
November 1, 1999, Government Securities Fund's name was changed from "Northstar
Government Securities Fund" (formerly Advantage Government Securities Fund).
The Trustees have approved an Agreement and Plan of Reorganization for
Government Securities Fund that, if approved by shareholders of Government
Securities Fund in the spring of 2000, will result in the reorganization of
Government Securities Fund into Government Securities Income Fund.
PILGRIM HIGH YIELD FUND III
Pilgrim High Yield Fund III ("High Yield Fund III") is a Massachusetts
business trust registered as an open-end, diversified management investment
company. High Yield Fund III was organized in 1989. On November 1, 1999, High
Yield Fund III's name was changed from "Northstar High Yield Fund" (formerly
Advantage High Yield Fund).
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund III that, if approved by shareholders of High Yield Fund III in the
spring of 2000, will result in the reorganization of the High Yield Fund III
into the High Yield Fund II series of Pilgrim Mutual Funds.
5
<PAGE>
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS/TRUSTEES.
Each Company is managed by its Directors/Trustees ("Board of Directors" and
"Board of Trustees" are used interchangeably in this SAI). The Directors and
Officers of the Companies are listed below. An asterisk (*) has been placed next
to the name of each Director who is an "interested person," as that term is
defined in the 1940 Act, by virtue of that person's affiliation with the
Companies, or the Companies' Investment Managers ("Pilgrim Investments" and
"Pilgrim Advisors" or the "Investment Manager(s)"). Unless otherwise noted, the
mailing address of the Directors/Trustees and officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. The Board of Directors/Trustees
governs each Fund and is responsible for protecting the interests of
shareholders. The Directors/Trustees are experienced executives who oversee the
Funds' activities, review contractual arrangements with companies that provide
services to each Fund, and review each Fund's performance.
Set forth below is information regarding the Directors/Trustees of the
Funds. (Ms. Baldwin, Mr. Burton, Mr. Patton, and Mr. Stallings are not Trustees
of the Mayflower Trust, but rather they serve as a member of its Advisory Board.
Ms. Baldwin is not a Trustee of the SmallCap Opportunities, Growth
Opportunities, Balance Sheet Opportunities, Government Securities, and the High
Yield Fund III Funds, but rather she serves as a member of their Advisory
Boards.)
MARY A. BALDWIN, PH.D. (Age 60) Director. Realtor, Coldwell Banker Success
Realty (formerly, The Prudential Arizona Realty) for more than the last
five years. Ms. Baldwin is also Vice President, United States Olympic
Committee (November 1996 - Present), and formerly Treasurer, United States
Olympic Committee (November 1992 - November 1996). Ms. Baldwin is also a
Director, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Managers.
AL BURTON. (Age 71) Director. President of Al Burton Productions for more
than the last five years; formerly Vice President, First Run Syndication,
Castle Rock Entertainment (July 1992 - November 1994). Mr. Burton is also a
Director, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Managers.
PAUL S. DOHERTY. (Age 65) Director. President, of Doherty, Wallace,
Pillsbury and Murphy, P.C., Attorneys. Mr. Doherty is a Director of
Tambrands, Inc. Mr. Doherty is also a Director and/or Trustee of each of
the Funds managed by the Investment Managers.
ROBERT B. GOODE. (Age 69) Director. Currently retired. Mr. Goode was
formerly Chairman of The First Reinsurance Company of Hartford (1990-1991)
and President and Director of American Skandis Life Assurance Company
(1987-1989). Mr. Goode is also a Director and/or Trustee of each of the
Funds managed by the Investment Managers.
ALAN L. GOSULE. (Age 58) Director. Partner, Rogers & Wells (since 1991).
Mr. Gosule is a Director of F.L. Putnam Investment Management Co., Inc. Mr.
Gosule is also a Director and/or Trustee of each of the Funds managed by
the Investment Managers.
*MARK LIPSON. (Age 50) Director. Chairman and Director of Pilgrim Advisors,
Inc., and Director of Pilgrim Funding, Inc. Mr. Lipson was formerly
Chairman of Pilgrim Holdings Corporation and Northstar Distributors, Inc.;
Director of Northstar Administrators Corporation; President of Pilgrim
Funding, Inc.; Director, President and Chief Executive Officer of National
6
<PAGE>
Securities & Research Corporation; and Director/Trustee and President of
the National Affiliated Investment Companies and certain of National's
subsidiaries (prior to August 1993). Mr. Lipson is also a Director and/or
Trustee of each of the Funds managed by the Investment Managers.
WALTER H. MAY. (Age 63) Director. Retired. Mr. May was formerly a Senior
Executive for Piper Jaffray, Inc. Mr. May is also a Director and/or Trustee
of each of the Funds managed by the Investment Managers.
JOCK PATTON. (Age 54) Director. Private Investor. Director of Hypercom
Corporation (since January 1999), Stuart Entertainment, Inc. (since January
1999), and JDA Software Group, Inc. (since January 1999). Mr. Patton was
formerly Director of Artisoft, Inc. (August 1994 - July 1998); President
and Co-owner of StockVal, Inc. (April 1993 - June 1997) and a Partner and
Director of the law firm of Streich, Lang, P.A. (1972 - 1993). Mr. Patton
is also a Director, Trustee, or a member of the Advisory Board of each of
the Funds managed by the Investment Managers.
DAVID W.C. PUTNAM. (Age 60) Director. President, Clerk and Director of F.L.
Putnam Securities Company, Inc., F.L. Putnam Investment Management Company,
Inc., Trust Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is Director of
Anchor Investment Management Corporation and President and Director/Trustee
of Anchor Capital Accumulation Trust, Anchor International Bond Trust,
Anchor Gold and Currency Trust, Anchor Resources and Commodities Trust and
Anchor Strategic Assets Trust. Mr. Putnam is also a Director and/or Trustee
of each of the Funds managed by the Investment Managers.
JOHN R. SMITH. (Age 76) Director. President of New England Fiduciary
Company (since 1991). Mr. Smith is Chairman of Massachusetts Educational
Financing Authority (since 1987), Vice Chairman of Massachusetts Health and
Education Authority and formerly Financial Vice President of Boston College
(1970-1991). Mr. Smith is also a Director and/or Trustee of each of the
Funds managed by the Investment Managers.
*ROBERT W. STALLINGS. (Age 50) Director. Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim
Group, Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim
Investments, Inc. (since December 1994); Chairman, Pilgrim Securities, Inc.
("Pilgrim Securities") (since December 1994); President and Chief Executive
Officer of Pilgrim Funding, Inc. (since November 1999); and Chairman,
President and Chief Executive Officer of Pilgrim Holdings Corporation
(Pilgrim Capital Corporation merged into this subsidiary October 29, 1999)
(since August 1991). Mr. Stallings is also a Director, Trustee, or a member
of the Advisory Board of each of the Funds managed by the Investment
Managers.
*JOHN G. TURNER. (Age 60) Chairman. Chairman and Chief Executive Officer of
Relia Star Financial Corp. and Relia Star Life Insurance Co. (since 1993);
Chairman of ReliaStar United Services Life Insurance Company and ReliaStar
Life Insurance Company of New York (since 1995); Chairman of Northern Life
Insurance Company (since 1992); Director of Northstar Investment Management
Corporation and affiliates (since October 1993); Chairman and
Director/Trustee of the Northstar affiliated investment companies (since
October 1993). Mr. Turner was formerly President of ReliaStar Financial
Corp. and ReliaStar Life Insurance Co. (1989-1991) and President and Chief
7
<PAGE>
Operating Officer of ReliaStar Life Insurance Company (1986-1991). Mr.
Turner is also Chairman of each of the Funds managed by the Investment
Managers.
DAVID W. WALLACE. (Age 75) Director. Chairman of Putnam Trust Company and
FECO Engineered Systems, Inc. Mr. Wallace is President and Director/Trustee
of the Robert R. Young Foundation, Governor of the New York Hospital and
Director of UMC Electronics and Zurn Industries, Inc. Mr. Wallace was
formerly Chairman of Lone Star Industries, Chairman and Chief Executive
Officer of Todd Shipyards, Bangor Punta Corporation, and National
Securities & Research Corporation. Mr. Wallace is also a Director and/or
Trustee of each of the Funds managed by the Investment Managers.
Each Fund pays each Director who is not an interested person a pro rata
share, as described below, of (i) an annual retainer of $20,000; (ii) $5,000 per
quarterly Board meeting; (iii) $500 per committee meeting; (iv) $500 per special
or telephonic meeting; and (v) out-of-pocket expenses. The pro rata share paid
by each Fund is based on the Funds' average net assets as a percentage of the
average net assets of all the funds managed by the Investment Manager for which
the Directors serve in common as Directors (and, in the case of Mary A. Baldwin,
Al Burton, Jock Patton, and Robert W. Stallings, Funds for which they serve as a
member of the Advisory Board).
COMPENSATION OF DIRECTORS.
The following tables set forth information regarding compensation of
Directors by each Company and other funds managed by the Investment Manager for
the fiscal year ended June 30, 1999, October 31, 1999, or December 31, 1998, as
applicable. Officers of the Companies and Directors who are interested persons
of the Companies do not receive any compensation from the Fund or any other
funds managed by the Investment Manager. In the column headed "Total
Compensation From Registrant and Fund Complex Paid to Directors," the number in
parentheses indicates the total number of boards in the fund complex on which
the Director served during that fiscal year.
8
<PAGE>
COMPENSATION TABLE*
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION AGGREGATE
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE FROM COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE COMPENSATION BALANCE FROM
FROM PILGRIM FROM SMALLCAP FROM GROWTH FROM HIGH COMPENSATION FROM SHEET GOVERNMENT
NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES YIELD FUND FROM EQUITY MAYFLOWER OPPORTUNITIES SECURITIES
PERSON, POSITION FUNDS(1)(5) FUND(2)(6) FUND(2)(6) III(2)(6) TRUST(2)(6) TRUST(4)(3)(6) FUND(2)(6) FUND(3)(6)
---------------- ----------- ---------- ---------- --------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dann V. Angeloff(7) $25,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Fred C. Applegate(7) $22,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Walter E. Auch(8) 20,476 N/A N/A N/A N/A N/A N/A N/A
Former Director/
Advisory Officer
Mary A. Baldwin(9)(10) 1,476
Director
John P. Burke 1,476 N/A N/A N/A N/A N/A N/A N/A
Director (9)(11)
Al Burton(9)(10) 1,476 N/A N/A N/A N/A N/A N/A N/A
Director
Theodore J. Coburn(7) $24,000 N/A N/A N/A N/A N/A N/A N/A
Director
Darlene Deremer(7) $21,000 N/A N/A N/A N/A N/A N/A N/A
Director
Paul S. Doherty(12) N/A $2,369 $1,369 $1,369 $308 $8,086 $1,369 $1,369
Director
Bruce S. Foerster N/A N/A N/A N/A N/A N/A N/A N/A
Former Director (13)
Robert B. Goode, Jr N/A $2,338 $1,338 $1,338 $308 $7,817 $1,338 $1,338
Director (12)
Alan S. Gosule (12) N/A $2,369 $1,369 $1,369 $308 $6,731 $1,369 $1,369
Director
George F. Keane(7) $23,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
Arthur B. Laffer(7) $18,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
<CAPTION>
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM
AGGREGATE AGGREGATE AGGREGATE FROM BENEFITS ESTIMATED REGISTRANT
COMPENSATION COMPENSATION COMPENSATION GOVERNMENT ACCRUED ANNUAL AND FUND
FROM FROM FROM BANK SECURITIES AS PART OF BENEFITS COMPLEX PAID
NAME OF ADVISORY INVESTMENT AND THRIFT INCOME FUND UPON TO
PERSON, POSITION FUNDS(1) FUNDS(1) FUND(1) FUND(1) EXPENSES RETIREMENT DIRECTORS(1)
---------------- -------- -------- ------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dann V. Angeloff(7) N/A N/A N/A N/A None N/A $25,000
Former Director (1 board)
Fred C. Applegate(7) N/A N/A N/A N/A None N/A $22,000
Former Director (1 board)
Walter E. Auch(8) $89 $643 $553 $26 N/A N/A $13,250
Former Director/ (3 boards)
Advisory Officer
Mary A. Baldwin(9)(10) $1,248 $8,028 $8,422 $388 N/A N/A $30,000
Director (6 boards)
John P. Burke $1,248 $8,028 $8,422 $388 N/A N/A $30,000
Director (9)(11) (6 boards)
Al Burton(9)(10) $1,248 $8,028 $8,422 $388 N/A N/A $29,500
Director (6 boards)
Theodore J. Coburn(7) N/A N/A N/A N/A None N/A $24,000
Director (1 board)
Darlene Deremer(7) N/A N/A N/A N/A None N/A $21,000
Director (1 board)
Paul S. Doherty(12) N/A N/A N/A N/A N/A N/A $16,000
Director (7 boards)
Bruce S. Foerster $600 $3,434 $4,222 $134 N/A N/A $15,000
Former Director (13) (5 boards)
Robert B. Goode, Jr N/A N/A N/A N/A N/A N/A $15,500
Director (12) (7 boards)
Alan S. Gosule (12) N/A N/A N/A N/A N/A N/A $14,000
Director (7 boards)
George F. Keane(7) N/A N/A N/A N/A None N/A $23,000
Former Director (1 board)
Arthur B. Laffer(7) N/A N/A N/A N/A None N/A $18,000
Former Director (1 board)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION AGGREGATE
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE FROM COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE COMPENSATION BALANCE FROM
FROM PILGRIM FROM SMALLCAP FROM GROWTH FROM HIGH COMPENSATION FROM SHEET GOVERNMENT
NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES YIELD FUND FROM EQUITY MAYFLOWER OPPORTUNITIES SECURITIES
PERSON, POSITION FUNDS(1)(5) FUND(2)(6) FUND(2)(6) III(2)(6) TRUST(2)(6) TRUST(4)(3)(6) FUND(2)(6) FUND(3)(6)
---------------- ----------- ---------- ---------- --------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark L. Lipson N/A $0 $0 $0 $0 $0 $0 $0
Director (12)(14)
Walter H. May (12) N/A $2,369 $1,369 $1,369 $308 $8,087 $1,369 $1,369
Jock Patton (9)(10) 1,476 N/A N/A N/A N/A N/A N/A N/A
Director
David W.C. Putnam (12) N/A $2,338 $1,338 $1,338 $308 $7,466 $1,338 $1,338
(7 boards)
John R. Smith (12) $2,369 $1,369 $1,369 $308 $8,086 $1,369 $1,369
Director
Robert W. $0 N/A N/A N/A N/A N/A N/A N/A
Stallings(9)(10)(14)
Director
John G. Turner (12)(14) N/A $0 $0 $0 $0 $0 $0 $0
Director
David W. Wallace(12) N/A $2,369 $1,369 $1,369 $308 $7,735 $1,369 $1,369
Charles E. Young(7) $23,000 N/A N/A N/A N/A N/A N/A N/A
Former Director
<CAPTION>
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM
AGGREGATE AGGREGATE AGGREGATE FROM BENEFITS ESTIMATED REGISTRANT
COMPENSATION COMPENSATION COMPENSATION GOVERNMENT ACCRUED ANNUAL AND FUND
FROM FROM FROM BANK SECURITIES AS PART OF BENEFITS COMPLEX PAID
NAME OF ADVISORY INVESTMENT AND THRIFT INCOME FUND UPON TO
PERSON, POSITION FUNDS(1) FUNDS(1) FUND(1) FUND(1) EXPENSES RETIREMENT DIRECTORS(1)
---------------- -------- -------- ------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark L. Lipson N/A N/A N/A N/A N/A N/A $0
Director (12)(14) (7 boards)
Walter H. May (12) N/A N/A N/A N/A N/A N/A $16,000
Jock Patton (9)(10) $1,229 $7,883 $8,291 $381 N/A N/A $29,500
Director (6 boards)
David W.C. Putnam (12) N/A N/A N/A N/A N/A N/A $13,250
(7 boards)
John R. Smith (12) N/A N/A $16,000
Director (7 boards)
Robert W. $0 $0 $0 $0 N/A N/A $0
Stallings(9)(10)(14) (6 boards)
Director
John G. Turner (12)(14) N/A N/A N/A N/A N/A N/A $0
Director (7 boards)
David W. Wallace(12) N/A N/A N/A N/A N/A N/A $13,750
(7 boards)
Charles E. Young(7) N/A N/A N/A N/A None N/A $23,000
Former Director (1 board)
</TABLE>
- - - - - - - - - ----------
* Officers and Trustees who are interested persons do not receive any
compensation from the Funds.
(1) Information provided for the fiscal year ended June 30, 1999.
(2) Information provided for the fiscal year ended December 31, 1998.
(3) Information provided for the fiscal year ended October 31, 1999.
(4) This total does not include the Research Enhanced Index Fund which
commenced operations on December 20, 1998.
(5) Prior to May 24, 1999, the Trust was part of a different Fund complex.
Effective May 24, 1999, when Pilgrim Investments, Inc. became the
investment adviser to the Funds, the Trust joined the Pilgrim family of
funds.
(6) Prior to November 1, 1999, the Fund was part of a different Fund complex.
Effective November 1, 1999, the Trust joined the Pilgrim family of funds.
(7) Resigned as Trustee effective May 21, 1999.
10
<PAGE>
(8) Mr. Auch was elected as a Director of Pilgrim Bank and Thrift Fund, Inc.
and Pilgrim Prime Rate Trust on May 24, 1999. While he was a trustee of
Pilgrim Mutual Funds (formerly Nicholas-Applegate Mutual Funds) prior to
that date, Pilgrim Mutual Funds was not part of the Pilgrim Fund complex
until May 24, 1999. Mr. Auch also served as a non-voting advisory director
for Pilgrim Advisory Funds, Inc., Pilgrim Investment Funds, Inc. and
Pilgrim Government Securities Income Fund, Inc., effective May 24, 1999.
Resigned as Trustee effective October 29, 1999.
(9) Also serves as a member of the Board of Trustees of the Pilgrim Prime Rate
Trust.
(10) Elected a Trustee or non-voting advisory board member of SmallCap
Opportunities Fund, Growth Opportunities Fund, High Yield Fund III, Equity
Trust, Mayflower Trust, Balance Sheet Opportunities Fund, and Government
Securities Fund on November 16, 1999.
(11) Resigned effected October 29, 1999.
(12) Elected a Director/Trustee of Mutual Funds, Advisory Funds, Investment
Funds, Bank and Thrift Fund, and Government Securities Income Fund on
October 26, 1999.
(13) Resigned as a Director effected September 30, 1998.
(14) "Interested person," as defined in the Investment Company Act of 1940, of
the Company because of the affiliation with the Investment Manager.
+ Pilgrim Mutual Funds has recently changed its fiscal year end to June 30.
11
<PAGE>
OFFICERS
Unless otherwise noted, the mailing address of the officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. The following individuals serve as
officers for each Fund:
James R. Reis, EXECUTIVE VICE PRESIDENT AND ASSISTANT SECRETARY. (Age 41)
Director, Vice Chairman (since December 1994), Executive Vice President
(since April 1995), and Director of Structured Finance (since April 1998),
Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994)
and Vice Chairman (since November 1995) of Pilgrim Securities; Executive
Vice President, Assistant Secretary and Chief Credit Officer of Pilgrim
Prime Rate Trust; Executive Vice President and Assistant Secretary of each
of the other Pilgrim Funds. Chief Financial Officer (since December 1993),
Vice Chairman and Assistant Secretary (since April 1993) and former
President (May 1991 - December 1993), Pilgrim Capital (formerly Express
America Holdings Corporation). Presently serves or has served as an officer
or director of other affiliates of Pilgrim Capital.
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT. (Age 49) President and Chief
Executive Officer (since August 1996), Pilgrim Investments; Executive Vice
President of most of the other Pilgrim Funds (since July 1996). Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY. (Age 50)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of each of the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER.
(Age 41) Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice
President and Principal Financial Officer of each of the other Pilgrim
Funds. He served in same capacity from January, 1995 - April, 1997.
Formerly, Chief Financial Officer of Endeaver Group (April, 1997 to June,
1998).
Robert S. Naka, SENIOR VICE PRESIDENT AND ASSISTANT SECRETARY. (Age 36)
Senior Vice President, Pilgrim Investments (since November 1999) and
Pilgrim Group, Inc. (since August 1999). Senior Vice President and
Assistant Secretary of each of the other Pilgrim Funds. Formerly Vice
President, Pilgrim Investments (April 1997 - October 1999), Pilgrim Group,
Inc. (February 1997 - August 1999). Formerly Assistant Vice President,
Pilgrim Group, Inc. (August 1995 - February 1997). Formerly Operations
Manager, Pilgrim Group, Inc. (April 1992 - April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER. (Age 31) Vice President,
Pilgrim Investments (since August 1997), Accounting Manager (since November
1995). Vice President and Treasurer of most of the other Pilgrim Funds.
Formerly Assistant Vice President and Accounting Supervisor for PaineWebber
(June 1993 - April 1995).
12
<PAGE>
In addition to the above listed officers, the following individuals also serve
as officers for the indicated Fund:
PILGRIM ADVISORY FUNDS.
G. David Underwood, VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER. (Age 50)
Vice President, Pilgrim Investments (since December 1996). Formerly
Director of Funds Management, First Interstate Capital Management (January
1995 - November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
PILGRIM INVESTMENT FUNDS.
Howard N. Kornblue, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER (Age
57) Senior Vice President, Pilgrim Investments (since August 1995).
Formerly Senior Vice President, Pilgrim Group, Inc. (November 1986 - April
1995).
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO (Age 40)
Senior Vice President, Pilgrim Investments (since July 1998). Formerly Vice
President, Pilgrim Investments (August 1995 - July 1998); Vice President,
Van Kampen America Capital (May 1987 - April 1995).
PILGRIM MUTUAL FUNDS.
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER (Age
40) Senior Vice President, Pilgrim Investments (since July 1998). Formerly
Vice President, Pilgrim Investments (August 1995 - July 1998); Vice
President, Van Kampen America Capital (May 1987 - April 1995).
G. David Underwood, VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER. (Age 48)
Vice President, Pilgrim Investments (since December 1996). Formerly
Director of Funds Management, First Interstate Capital Management (January
1995 - November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
Robert K. Kinsey, VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 41) Vice
President, Pilgrim Investments (since March 1999). Formerly Vice President
and Fixed Income Portfolio Manager, Federated Investors (January 1995 -
March 1999); Principal and Portfolio Manager, Harris Investment Management
(July 1992 - January 1995).
BANK AND THRIFT FUND.
Carl Dorf, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER. (Age 58)
Senior Vice President (since February 1997), Pilgrim Investments, Inc.
Formerly Vice President, Pilgrim Investments, Inc. (August 1995 - February
1997). Formerly Vice President, Pilgrim Bank and Thrift Fund, Inc. (January
1996 - May 1997). Formerly Vice President, Pilgrim Management Corporation
(January 1991 - April 1995).
GOVERNMENT SECURITIES INCOME FUND.
Robert K. Kinsey, VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER. (Age 41)
Vice President, Pilgrim Investments (since March 1999). Formerly Vice
President and Fixed Income Portfolio Manager, Federated Investors (January
1995 - March 1999); Principal and Portfolio Manager, Harris Investment
Management (July 1992 - January 1995).
Charles G. Ullerich, VICE PRESIDENT AND PORTFOLIO MANAGER (Age 34) Vice
President, Pilgrim Investments (since February 1998). Formerly Assistant
Portfolio Manager of Pilgrim Government Securities Income Fund, Inc.
(August 1995 - September 1996) and Vice President, First Liberty Bank
(April 1991 - August 1995).
13
<PAGE>
MAYFLOWER TRUST.
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO (Age 40)
Senior Vice President, Pilgrim Investments (since July 1998). Formerly Vice
President, Pilgrim Investments (August 1995 - July 1998); Vice President,
Van Kampen America Capital (May 1987 - April 1995).
Mary Lisanti, EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 43)
Executive Vice President and Chief Investment Adviser-Equities, Pilgrim
Investments (since November 1999). Formerly Portfolio Manager, Strong
Capital Management (September 1996 - May 1998); Managing Director and
Portfolio Manager, Banker Trust Corporation (March 1993 - August 1996).
EQUITY TRUST.
Mary Lisanti, EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 43)
Executive Vice President and Chief Investment Adviser-Equities, Pilgrim
Investments (since November 1999). Formerly Portfolio Manager, Strong
Capital Management (September 1996 - May 1998); Managing Director and
Portfolio Manager, Banker Trust Corporation (March 1993 - August 1996).
SMALLCAP OPPORTUNITIES FUND.
Mary Lisanti, EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 43)
Executive Vice President and Chief Investment Adviser-Equities, Pilgrim
Investments (since November 1999). Formerly Portfolio Manager, Strong
Capital Management (September 1996 - May 1998); Managing Director and
Portfolio Manager, Banker Trust Corporation (March 1993 - August 1996).
GROWTH OPPORTUNITIES FUND.
Mary Lisanti, EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 43)
Executive Vice President and Chief Investment Adviser-Equities, Pilgrim
Investments (since November 1999). Formerly Portfolio Manager, Strong
Capital Management (September 1996 - May 1998); Managing Director and
Portfolio Manager, Banker Trust Corporation (March 1993 - August 1996).
BALANCE SHEET OPPORTUNITIES FUND.
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER (Age
40) Senior Vice President, Pilgrim Investments (since July 1998). Formerly
Vice President, Pilgrim Investments (August 1995 - July 1998); Vice
President, Van Kampen America Capital (May 1987 - April 1995).
G. David Underwood, VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER. (Age 48)
Vice President, Pilgrim Investments (since December 1996). Formerly
Director of Funds Management, First Interstate Capital Management (January
1995 - November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
Robert K. Kinsey, VICE PRESIDENT AND PORTFOLIO MANAGER. (Age 41) Vice
President, Pilgrim Investments (since March 1999). Formerly Vice President
and Fixed Income Portfolio Manager, Federated Investors (January 1995 -
March 1999); Principal and Portfolio Manager, Harris Investment Management
(July 1992 - January 1995).
14
<PAGE>
GOVERNMENT SECURITIES FUND.
Robert K. Kinsey, VICE PRESIDENT AND Senior PORTFOLIO MANAGER. (Age 41)
Vice President, Pilgrim Investments (since March 1999). Formerly Vice
President and Fixed Income Portfolio Manager, Federated Investors (January
1995 - March 1999); Principal and Portfolio Manager, Harris Investment
Management (July 1992 - January 1995).
Charles G. Ullerich, VICE PRESIDENT AND PORTFOLIO MANAGER (Age 34) Vice
President, Pilgrim Investments (since February 1998). Formerly Assistant
Portfolio Manager of Pilgrim Government Securities Income Fund, Inc.
(August 1995 - September 1996) and Vice President, First Liberty Bank
(April 1991 - August 1995
HIGH YIELD FUND III.
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER (Age
40) Senior Vice President, Pilgrim Investments (since July 1998). Formerly
Vice President, Pilgrim Investments (August 1995 - July 1998); Vice
President, Van Kampen America Capital (May 1987 - April 1995).
PRINCIPAL SHAREHOLDERS
As of December 15, 1999 the Directors and Officers as a group owned less
than 1% of any class of each Fund's outstanding shares. As of that date, to the
knowledge of management, no person owned beneficially or of record more than 5%
of the outstanding shares of any class of the Funds, except as follows:
<TABLE>
<CAPTION>
CLASS AND TYPE OF PERCENTAGE
Fund ADDRESS OWNERSHIP PERCENTAGE OF CLASS OF FUND
---- ------- --------- ------------------- -------
<S> <C> <C> <C> <C>
Pilgrim Inv Fiduciary Trust Co Cust Class C 7.65% 0.04008%
Magnacap IRA R/O Robert P MacNeil Record Holder
Fund 69736 Henry Ross Dr
Romeo, MI 48065-4040
Pilgrim Advest Inc Class C 27.83% 0.22743%
LargeCap FBO 655-70562-12 Record Holder
Leaders Fund 90 State House Square
Hartford, CT 06103-3708
Pilgrim PaineWebber Cust FBO Class C 5.27% 0.04301%
LargeCap Lynda A Shephard Record Holder
Leaders Fund PO Box 3321
Weehawken, NJ 07087-8154
Pilgrim Joseph E Chodl & Class C 8.39% 0.06851%
LargeCap Stepanie E Chodl JTWROS Record Holder
Leaders Fund 201 Lake Hinsdale Dr Apt. 308
Clarendon Hills, IL 60514-2236
Pilgrim Growth Northern Trust Co TTEE FBO Class A 7.69% 1.77236%
Opportunities Reliastar Success Shar Plan & ESOP Record Holder
Fund 22-47317
PO Box 92956
Chicago, IL 60675-2956
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Growth Norwest Bank Minnesota NA Class I 18.18% 5.83646%
Opportunities FBO Reliastar Pension Plan Record Holder
Fund A/C #13132700
PO Box 1533
Minneapolis, MN 55480
Pilgrim MidCap Prudential Securities Inc. FBO Class C 5.64% 0.02267%
Value Fund Jerome M Garden Tr PSP &Trust PS Plan Record Holder
150 E Huron St. Ste 910
Chicago, IL 60611-2946
Pilgrim MidCap Prudential Securities Inc. FBO Class C 5.59% 0.02247%
Value Fund Mr Michael D Fox IRA 05/13/99 Record Holder
2893 Idlewood Ln
Pilgrim MidCap Raymond James & Assoc Inc Cust Class C 16.29% 0.06553%
Value Fund Carl D Mastis IRA Record Holder
4684 Colima Ct
Saint Louis, MO 63128-2309
Pilgrim MidCap H Andrew Gross Class A 14.41% 0.90068%
Opportunities 17 Purchase Hills Dr Record Holder
Fund Purchase, NY 10577
Pilgrim MidCap Mary Lisanti & Class A 10.06% 0.62844%
Opportunities Anthony O'Connor Record Holder
Fund 215 Old Beach Glen Road
Boonton, NJ 07005
Pilgrim MidCap Olde Discount FBO 18109486 Class A 5.34% 0.33369%
Opportunities 751 Griswold St Record Holder
Fund Detroit, MI 48266-3224
Pilgrim MidCap Donald Pels Class Q 39.13% 0.95190%
Growth Fund 375 Park Ave Ste 3305 Record Holder
New York, NY 10152-3399
Pilgrim SmallCap Suntrust Bank Central FL NA TTEE Class Q 20.00% 0.45475%
Growth Fund FBO Akerman Senterfitt & Edison PA Record Holder
Cash or Deferred PSP & Trust C/O
Fascorp Record Keeper 8515 E
Orchard Rd Ste 212
Englewood, CO 80111-5037
Pilgrim SmallCap Suntrust Bank Central FL NA TTEE Class Q 15.83% 0.36003%
Growth Fund FBO Hubbard Construction Co Emp Record Holder
PSP and 401K Plan C/O Fascorp
Record Keeper 8515 E Orchard Rd
Ste 212
Englewood, CO 80111-5037
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim SmallCap Susan S Rand Class Q 11.79% 0.26813%
Growth Fund PO Box 452 Record Holder
Salisbury, CT 06068-0452
Pilgrim Int'l Trust Company of America Class A 5.29% 1.45761%
Core Growth 7103 S Revere Pkwy Record Holder
Fund Englewood, CO 80112-3936
Pilgrim Int'l PaineWebber FBO Class A 7.94% 2.19047%
Core Growth Thomas R Sloan Record Holder
Fund 705 Sunset Drive
Greensboro, NC 27408-6414
Pilgrim Int'l PaineWebber FBO Class C 7.74% 2.12374%
Core Growth Arnold I Richman, Int'l Acct Record Holder
Fund 218 North Charles Street, Ste 500
Baltimore, MD 21201-4019
Pilgrim Emerging CIBC World Markets Corp. Class A 5.75% 2.72268%
Markets PO Box 3484 Record Holder
Value Fund Church Street Station
New York, NY 10008-3484
Pilgrim Asia Conti Investments LLC Class A 6.94% 2.55410%
Pacific Equity C/O Continental Grain Co Record Holder
Fund Attn: Mary Greenebaum
277 Park Ave
New York, NY 10172-003
Pilgrim Gov't Red Lake County Court House Class A 6.97% 4.14455%
Securities Attn: Jay Gilemette Record Holder
Income Fund Red Lake Falls, MN 56750
Pilgrim Gov't Jeffery J Malek Class C 7.95% 0.05997%
Securities 1799 Herman Dr Record Holder
Income Fund York, PA 17404-1030
Pilgrim Gov't WFS Cust FBO Class C 33.86% 0.25542%
Securities Gail C Mazur IRA Record Holder
Income Fund A/C 5788-9419
11 Nettlecreek Rd
Fairport, NY 14450-3021
Pilgrim Gov't George E & Florence E Leslie Tr Class M 5.65% 0.13884%
Securities FBO Leslie Family Trust Record Holder
Income Fund PO Box 70400
Pasadena, CA 91117-7400
Pilgrim Gov't Carol A McArthur Separate Property Class M 8.71% 0.21403%
Securities 395 Sawdust Rd Ste 2153 Record Holder
Income Fund The Woodlands, TX 77380-2242
Pilgrim Gov't Prudential Securities Inc. FBO Class M 19.17% 0.47137%
Securities Dr. Antonio Aguirre Record Holder
Income Fund Zeisselstr 8
60138 Frankfort AM, Germany
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Gov't First Clearing Corporation Cust Class C 7.04% 0.15648%
Securities Fund FBO 1536-2048 W Dean Bidgood Jr. Record Holder
C/O Bidgood & Associates
2605 Meridian Pkwy Ste 200
Pilgrim Strategic Eastern Bank & Trust Class A 14.54% 2.95125%
Income Fund FBO Munksjo Paper 401K Record Holder
217 Essex St
Salem, MA 01970-3792
Pilgrim Strategic CNA Trust FBO Class B 7.03% 2.97319%
Income Fund Con Agg Recycling Corp Record Holder
PO Box 5024
Costa Mesa, CA 92628-5024
Pilgrim Strategic Wachovia Securities Inc Class C 5.50% 1.96650%
Income Fund FBO 5750066416 Record Holder
301 N Main St, MC-32002
Winston-Salem, NC 27150-0002
Pilgrim High New Life Corp of America FBO Class A 5.14% 1.48783%
Yield Fund Norvell L Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Olde Discount FBO 09005070 Class C 6.51% 0.08954%
Yield Fund 751 Griswold St Record Holder
Detroit, MI 48226-3224
Pilgrim High Wachovia Securities Inc. Class A 7.98% 1.1254%
Yield Fund II FBO 324-75213-17 Record Holder
PO Box 1220
Charlotte, NC 28201-1220
Pilgrim High New Life Corp of America FBO Class C 12.98% 2.94440%
Yield Fund II Norvell L Olive President Record Holder
PO Box 906
Hendersonville, TN 37077-0906
Pilgrim High Prudential Securities Inc FBO Class A 5.23% 0.65355%
Total Return Mr Richard Simon TTEE Record Holder
Fund II Richard Simon Rev Trust
Aventura, FL 33180-2566
Pilgrim Money Advest Inc FBO Class A 7.60% 0.82757%
Market Fund 440-70255-11 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Advest Inc FBO Class A 22.60% 2.46035%
Market Fund 426-70457-16 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Advest Inc FBO Class A 9.35% 1.01818%
Market Fund 440-70340-18 Record Holder
90 State House Square
Hartford, CT 06103-3708
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Money Advest Inc FBO Class A 6.16% 0.67102%
Market Fund 440-72623-12 Record Holder
90 State House Square
Hartford, CT 06103-3708
Pilgrim Money Marvin Anthony McCall & Class A 7.50% 0.81601%
Market Fund Lisa Diane McCall JTWROS Record Holder
2711 Morning Leaf Ct
Spring, TX 77388-5441
Pilgrim Money Raymond James Assoc Inc Cust IRA Class C 8.38% 1.08620%
Market Fund FBO Thomas P Johnson Record Holder
7449 S Ogden Way
Littleton, CO 80122-1472
Pilgrim Money Resources Trust Co Tr FBO Class C 6.64% 0.86114%
Market Fund Barbara G Metzler I###-##-#### Record Holder
PO Box 5900
Denver, CO 80217-5900
Pilgrim Money Salomon Smith Barney Inc Class C 12.92% 1.67494%
Market Fund FBO 00124605083 Record Holder
333 West 34th St - 3rd Floor
New York, NY 10001
Pilgrim Money PaineWebber FBO Class C 5.36% 0.69506%
Market Fund Carolyn L Mehew Record Holder
PO Box 3321
Weehawken, NJ 07087-8154
Pilgrim Money PaineWebber FBO Class C 6.78% 0.87921%
Market Fund Harvey and Constance Fox Co-Ttees Record Holder
Fox Family Trust
20455 Chalet Lane
Saratoga, CA 95070-4928
Pilgrim Balance Wexford Clearing Services Corp Class C 10.67% 0.14206%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Nicholas De Morato IRA
Fund 527 Hillside St
Forest City, PA 18421-9615
Pilgrim Balance Wexford Clearing Services Corp Class C 7.12% 0.09485%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Frances A Tartaglione IRA R/O
Fund 114 Holden Blvd
Staten Island, NY 10314-5368
Pilgrim Balance Wexford Clearing Services Corp Class C 15.98% 0.21273%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Anthony F Costa IRA
Fund 52 Hayrick Ln
Commack, NY 11725-1420
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Pilgrim Balance Wexford Clearing Services Corp Class C 6.31% 0.08393%
Sheet FBO Prudential Secs C/F Record Holder
Opportunities Teresa R Costa IRA
Fund 52 Hayrick Ln
Commack, NY 11725-1420
Pilgrim Balance Wexford Clearing Services Corp Class C 27.13% 0.36119%
Sheet Colt Collectors Assn Inc Record Holder
Opportunities C/O Richard Burdick - Treasurer
Fund PO Box 4667
Ventura, CA 93007
Pilgrim Trust Company of America Class Q 5.25% 0.45542%
Convertible FBO TCA Record Holder
Fund 7103 Revere Pkwy
Englewood, CO 80112-3936
Pilgrim Dalton L Knauss Ttee Class Q 11.23% 0.97421%
Convertible ElaineV Knauss Revocable Trust Record Holder
Fund PO Box 1108
Carefree, AZ 85377-1108
Pilgrim Dalton L Knauss Ttee Class Q 11.26% 0.97678%
Convertible Dalton L Knauss Revocable Trust Record Holder
Fund PO Box 2173
Carefree, AZ 85377-2173
</TABLE>
INVESTMENT MANAGERS
The Investment Manager for the Equity Trust, SmallCap Opportunities Fund,
Growth Opportunities Fund, Mayflower Trust, Balance Sheet Opportunities Fund,
the Government Securities Fund and the High Yield Fund III is Pilgrim Advisors,
Inc. The Investment Manager for the Bank and Thrift Fund, Advisory Funds,
Investment Funds, Pilgrim Mutual Funds and Government Securities Income Fund is
Pilgrim Investments, Inc. (Pilgrim Advisors, Inc. and Pilgrim Investments, Inc.
are collectively referred to as the "Investment Manager"). Pilgrim Advisors,
Inc. was formerly known as Northstar Investment Management Corporation until its
name change following the acquisition on October 29, 1999.
In this capacity, The Investment Manager, subject to the authority of the
Trustees of the Funds, and subject to delegation of certain responsibilities to
Navellier Fund Management, Inc. as the Sub-Adviser for the Growth + Value Fund,
Brandes Investment Partners, L.P. as the Sub-Adviser for the International Value
Fund and the Emerging Markets Value Fund and J.P. Morgan Investment Management
Inc. as the Sub-Adviser for the Research Enhanced Index Fund, serves as
investment manager to the Funds and has overall responsibility for the
management of each Funds' portfolio. The Investment Manager oversees the
investment management of the Sub-Advisers for the Funds which are managed by a
Sub-Adviser. The Investment Manager serves pursuant to separate Investment
Management Agreements between the Investment Manager and each Company on behalf
of the Funds. The Investment Management Agreements require the Investment
Manager to oversee the provision of all investment advisory and portfolio
management services for the Funds.
Pilgrim Advisors, Inc. and Pilgrim Investments, Inc. are both registered as
investment advisers with the SEC and serve as investment adviser to registered
investment companies (or series thereof), as well as privately managed accounts.
As of December 15, 1999, Investment Manager had assets under management of
approximately $13.6 billion. Pilgrim Advisors, Inc. and Pilgrim Investments,
Inc. are wholly-owned subsidiaries of ReliaStar Financial Corp. (NYSE:RLR).
20
<PAGE>
Through its subsidiaries, ReliaStar Financial Corp. offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education. Pilgrim Advisors, Inc. was formerly
known as Northstar Investment Management Corporation until its name change
following the acquisition on October 29, 1999.
Each Investment Management Agreement requires the Investment Manager to
provide, subject to the supervision of the Board of Directors/Trustees,
investment advice and investment services to the Fund and to furnish advise and
recommendations with respect to investment of the Fund's assets and the purchase
or sale of its portfolio securities. The Investment Manager also provides
investment research and analysis. Each Investment Management Agreement provides
that the Investment Manager is not subject to liability to the Fund for any act
or omission in the course of, or connected with, rendering services under the
Agreement, except by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations and duties under the Agreement.
After an initial two year term, each Investment Management Agreement
continues in effect from year to year so long as such continuance is
specifically approved at least annually by (a) the Board of Directors/Trustees
or (b) the vote of a "majority" (as defined in the 1940 Act) of the Fund's
outstanding shares voting as a single class; provided, that in either event the
continuance is also approved by at least a majority of the Board of
Directors/Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Investment Manager by vote cast in person at a meeting called for the
purpose of voting on such approval.
Each Investment Management Agreement is terminable without penalty with not
less than 60 days' notice by the Board of Directors/Trustees or by a vote of the
holders of a majority of the Fund's outstanding shares voting as a single class,
or upon not less than 60 days' notice by the Investment Manager. The Investment
Management Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
INVESTMENT MANAGER FEES
The Investment Manager bears the expense of providing its services, and
pays the fees of the Sub-Adviser (if any). For its services, each Fund pays the
Investment Manager a monthly fee in arrears equal to the following as a
percentage of the Fund's average daily net assets during the month:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- - - - - - - - - ------ --------------------------------
SmallCap Growth Fund 1.00% of the Fund's average net assets
MidCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Balanced Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
21
<PAGE>
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- - - - - - - - - ------ --------------------------------
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250 million
of average net assets, and 0.35% of the average
net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the Fund's
average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
International SmallCap 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average
net assets in excess of $1 billion
Money Market 0.50% of average net assets if the has not
Fund invested substantially all of its assets in
another investment company, Fund* 0.25% if
substantially all of its assets are invested in
another investment company
MidCap Value Fund 1/12 of 1.00% of the Fund's average daily net
assets during the month (approximately 1.00% on an
annual basis)
LargeCap Leaders Fund 1/12 of 1.00% of the Fund's average daily net
assets during the month (approximately 1.00% on an
annual basis)
Asia-Pacific Equity Fund 1/12 of 1.25% of the Fund's average daily net
assets during the month (approximately 1.25% on an
annual basis)
MagnaCap Fund 1.00% of the Fund's average daily net assets on
the first $30 million of net assets. The annual
rate is reduced to 0.75% on net assets from $30
million to $250 million; to 0.625% on net assets
from $250 million to $500 million; and to 0.50% on
net assets over $500 million
High Yield Fund 0.60% of the Fund's average daily net asset value.
Prior to April 17, 1998, the Investment Management
fee was an annual fee at a rate of 0.75% on the
first $25 million in net assets, 0.625% on net
assets over $25 million up to $100 million, 0.50%
on net assets over $100 million up to $500
million, and 0.40% for net assets over $500
million
Bank and Thrift Fund 1.00% of the first $30 million of average daily
net assets, 0.75% of the next $95 million of
average daily net assets and 0.70% of average
daily net assets in excess of $125 million. The
fees are computed and accrued daily and paid
monthly
Government Securities 0.50% of the Fund's average daily net assets on
Income Fund the first $500 million of net assets. The annual
rate is reduced to 0.45% on net assets from $500
million to $1 billion, and to 0.40% on net assets
in excess of $1 billion
- - - - - - - - - ----------
* The Money Market Fund will also pay advisory fees to Reserve Management
Company, Inc., the investment adviser of Primary Institutional Fund, a
series of Reserve Institutional Trust, the investment company in which the
Money Market Fund invests substantially all of its assets.
22
<PAGE>
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- - - - - - - - - ------ --------------------------------
SmallCap Opportunities 0.75% of the Fund's average daily net assets
Fund
Mid-Cap Opportunities 1.00% of the Fund's average daily net assets
Fund
Growth Opportunities 0.75% of the Fund's average daily net assets
Fund
Growth + Value Fund 1.00% of the Fund's average daily net assets
International Value Fund 1.00% of the Fund's average daily net assets
Emerging Markets Value 1.00% of the Fund's average daily net assets
Fund
Research Enhanced Index 0.70% of the Fund's average daily net assets
Fund
Income & Growth Fund 0.75% on the first $250 million of aggregate
average daily net assets Fund, 0.70% on the next
$250 million of such assets, 0.65% on the next
$250 million of such assets; 0.60% on the next
$250 million of such assets, and 0.55% on the
remaining aggregate daily net assets in excess of
$1 billion
Government Securities Fund 0.65% of the Fund's average daily net assets
High Yield Fund III 0.60% of the Fund's average daily net assets
High Total Return Fund II 0.75% of the Fund's average daily net assets
High Total Return Fund 0.75% on the first $250 million of aggregate
average daily net assets of each Fund, 0.70% on
the next $250 million of such assets, 0.65% on the
next $250 million of such assets; 0.60% on the
next $250 million of such assets, and 0.55% on the
remaining aggregate daily net assets of each Fund
in excess of $1 billion.
Balance Sheet 0.65% of the Fund's average daily net assets. This
Opportunities Fund fee is accrued daily and payable monthly
SUB-ADVISORY AGREEMENTS
The Investment Management Agreement for certain Funds provides that the
Investment Manager, with the approval of the Company's Board of Directors, may
select and employ investment advisers to serve as portfolio manager for any Fund
("Sub-Adviser"), and shall monitor the Sub-Advisers' investment programs and
results, and coordinate the investment activities of the Sub-Advisers to ensure
compliance with regulatory restrictions. The Investment Manager pays all of its
expenses arising from the performance of its obligations under the Investment
Management Agreement, including all fees payable to the Sub-Advisers, executive
salaries and expenses of the Directors/Trustees and Officers of the Company who
are employees of the Investment Manager or its affiliates and office rent of the
Company. The Sub-Advisers pay all of their expenses arising from the performance
of their obligations under the sub-advisory agreements (the "Sub-Advisory
Agreements").
23
<PAGE>
Subject to the expense reimbursement provisions described in this Statement
of Additional Information, other expenses incurred in the operation of the
Company are borne by the Funds, including, without limitation, investment
advisory fees; brokerage commissions; interest; legal fees and expenses of
attorneys; fees of independent auditors, transfer agents and dividend disbursing
agents, accounting agents, and custodians; the expense of obtaining quotations
for calculating each Fund's net asset value; taxes, if any, and the preparation
of each Fund's tax returns; cost of stock certificates and any other expenses
(including clerical expenses) of issue, sale, repurchase or redemption of
shares; fees and expenses of registering and maintaining the registration of
shares of the Funds under federal and state laws and regulations; expenses of
printing and distributing reports, notices and proxy materials to existing
shareholders; expenses of printing and filing reports and other documents filed
with governmental agencies; expenses of annual and special shareholder meetings;
expenses of printing and distributing prospectuses and statements of additional
information to existing shareholders; fees and expenses of Directors of the
Company who are not employees of the Investment Manager or any Sub-Adviser, or
their affiliates; membership dues in trade associations; insurance premiums; and
extraordinary expenses such as litigation expenses.
The Sub-Advisory Agreements may be terminated without payment of any
penalties by the Investment Manager, the Trustees of the Directors, on behalf of
a Company, or the shareholders of such Fund upon 60 days' prior written notice.
Otherwise, the Sub-Advisory Agreements will remain in effect for two years and
will, thereafter, continue in effect from year to year, subject to the annual
approval of the appropriate Board of Directors/Trustees, on behalf of a Fund, or
the vote of a majority of the outstanding voting securities, and the vote, cast
in person at a meeting duly called and held, of a majority of the
Directors/Trustees, on behalf of a Fund who are not parties to the Sub-Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of any such
Party.
Pursuant to a Sub-Advisory Agreement between Pilgrim Advisors and Navellier
Fund Management, Inc. ("Navellier"), Navellier acts as sub-adviser to the Growth
+ Value Fund. In this capacity, Navellier, subject to the supervision and
control of Pilgrim Advisors and the Trustees of such Fund, will manage the
Fund's portfolio investments, consistently with its investment objective, and
executes any of the Fund's investment policies that it deems appropriate to
utilize from time to time. Fees payable under the Sub-Advisory Agreement accrue
daily and are paid monthly by Pilgrim Advisors. Navellier is wholly owned and
controlled by its sole stockholder, Louis G. Navellier. Navellier's address is:
1 East Liberty, Third Floor, Reno, Nevada, 89501.
Pursuant to Sub-Advisory Agreements between Pilgrim Advisors and Brandes
Investment Partners, L.P. ("Brandes"), Brandes acts as Sub-Adviser to the
International Value Fund and the Emerging Markets Value Fund, respectively. In
this capacity, Brandes, subject to the supervision and control of Pilgrim
Advisors and the Trustees of the Funds, manages each Fund's portfolio
investments, consistently with each Fund's investment objective, and executes
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. Fees payable under the Sub-Advisory Agreements accrue daily and
are paid monthly by Pilgrim Advisors. Brandes' address is 12750 High Bluff
Drive, San Diego, California 92130. Charles Brandes, who controls the general
partner of Brandes, serves as one of the Managing Directors of Brandes.
Pursuant to a Sub-Advisory Agreement between Pilgrim Advisors and J.P.
Morgan Investment Management Inc., ("J.P. Morgan"), J.P. Morgan acts as
sub-adviser to the Research Enhanced Index Fund. In this capacity, J.P. Morgan,
subject to the supervision and control of Pilgrim Advisors and the Trustees of
the Fund, on behalf of the Fund, manages the Fund's portfolio investments,
consistently with the Fund's investment objective, and executes any of the
Fund's investment policies that it deems appropriate to utilize from time to
time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid
monthly by Pilgrim Advisors. J.P. Morgan's address is 522 Fifth Avenue, New
York, New York 10036.
24
<PAGE>
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and
Nicholas-Applegate Capital Management ("NACM"), dated October 29, 1999, NACM
acts as sub-adviser to the International Core Growth Fund, Worldwide Growth
Fund, International SmallCap Growth Fund, Emerging Countries Fund, LargeCap
Growth Fund, MidCap Growth Fund, SmallCap Growth Fund, and Convertible Fund. In
this capacity, NACM, subject to the supervision and control of Pilgrim
Investments and the Trustees of the Funds, manages each Fund's portfolio
investments, consistently with each Fund's investment objective, and executes
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. NACM's address is 600 West Broadway, 30th Floor, San Diego,
California 92101. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership, the general partner of which
is Nicholas-Applegate Capital Management Holdings, Inc., a California
corporation owned by Arthur Nicholas.
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and HSBC
Asset Management (Americas) Inc. and HSBC Asset Management (Hong Kong) Limited
(collectively HSBC), HSBC acts as sub-adviser to the Asia-Pacific Equity Fund.
HSBC is part of HSBC Asset Management, the global investment advisory and fund
management business of the HSBC Group. In this capacity, HSBC, subject to the
supervision and control of Pilgrim Investments and the Trustees of the Funds,
manages each Fund's portfolio investments, consistently with each Fund's
investment objective, and executes any of the Fund's investment policies that it
deems appropriate to utilize from time to time. HSBC's address is 140 Broadway,
6th Floor, New York, New York 10005.
As compensation to each Sub-Adviser for its services, the Investment
Manager pays the Sub-Adviser a monthly fee in arrears equal to the following as
a percentage of a Fund's average daily net assets managed during the month:
SERIES ANNUAL SUB-ADVISORY FEE
- - - - - - - - - ------ -----------------------
SmallCap Growth Fund 0.50% of the Fund's average net assets
MidCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Emerging Countries Fund 0.625% of the Fund's average net assets
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
International SmallCap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
International Core 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average
net assets in excess of $1 billion
Growth + Value Fund 0.50% of the Fund's average daily net assets
International Value Fund 0.50% of the Fund's average daily net assets
25
<PAGE>
SERIES ANNUAL SUB-ADVISORY FEE
- - - - - - - - - ------ -----------------------
Emerging Markets Fund 0.50% of the Fund's average daily net assets
Research Enhanced Index Fund 0.20% of the Fund's average daily net assets
Asia-Pacific Equity Fund 1/12 of .50% of the Fund's average daily net
assets
FORMER SUB-ADVISER FOR LARGECAP LEADERS FUND
Ark Asset Management Co., Inc. (Ark) served as Sub-Adviser to the LargeCap
Leaders Fund from September 1, 1995 through October 31, 1997. For the fiscal
year ended June 30, 1997, the Investment Manager paid portfolio management fees
to Ark of $60,843. For the period from July 1, 1997 through October 31, 1997,
the Portfolio Manager paid portfolio management fees to Ark of $48,365.
FORMER SUB-ADVISER FOR MIDCAP VALUE FUND
Cramer Rosenthal McGlynn, LLC (CRM) or its predecessor served as
Sub-Adviser to the MidCap Value Fund through September 30, 1999. For the fiscal
years ended June 30, 1999, 1998 and 1997, the Investment Manager paid portfolio
management fees to CRM of $343,208, $339,347, and $193,080, respectively.
INVESTMENT ADVISER OF THE PRIMARY FUND
The Money Market Fund invests substantially all of its assets in the
Primary Fund. The Primary Fund is managed by Reserve Management Company, Inc.
Reserve Management Company, Inc. currently manages assets in excess of $5
billion and has over 27 years of investment experience. The Investment
Management Agreement for the Primary Fund provides that Reserve Investment
Management Company, Inc. shall not be liable for any error of judgment or
mistake of law or for any loss suffered by a fund in connection with the matters
to which the Agreement relates, except a loss resulting from the willful
misfeasance, bad faith or gross negligence on the part of Reserve Management
Company, Inc. or from reckless disregard by it of its duties and obligations
thereunder. Reserve Management Company, Inc. may make such advertising and
promotional expenditures, using its own resources, as it from time to time deems
appropriate.
ADMINISTRATION
Pilgrim Group, Inc. serves as Administrator for the Funds, pursuant to an
Administrative Services Agreement with Equity Trust, Mayflower Trust, Mutual
Funds, Balance Sheet Opportunities Fund, SmallCap Opportunities Fund, Growth
Opportunity Fund, Government Securities Fund and High Yield Fund III. Subject to
the supervision of the Board of Trustees, the Administrator provides the overall
business management and administrative services necessary to the proper conduct
of the Funds' business, except for those services performed by the Investment
Manager under the Investment Advisory Agreements, the custodian for the Funds
under the Custodian Agreements, the transfer agent for the Funds under the
Transfer Agency Agreements, and such other service providers as may be retained
by the Funds from time to time. The Administrator acts as liaison among these
service providers to the Funds. The Administrator is also responsible for
ensuring that the Funds operate in compliance with applicable legal requirements
and for monitoring the Investment Manager for compliance with requirements under
applicable law and with the investment policies and restrictions of the Funds.
The Administrator is an affiliate of the Investment Manager.
Prior to May 24, 1999, Pilgrim Mutual Funds had an Administration Agreement
with Investment Company Administration ("ICA"), 4455 East Camelback Road, Suite
261-E, Phoenix, Arizona 85018. Pursuant to an Administration Agreement with
26
<PAGE>
Pilgrim Mutual Funds, ICA was responsible for performing all administrative
services required for the daily business operations of Pilgrim Mutual Funds,
subject to the supervision of the Board of Trustees of Pilgrim Mutual Funds. For
the fiscal years ended March 31, 1999 and 1998, ICA received aggregate
compensation of $1,059,155 and $848,799, respectively, for all of the series of
the Pilgrim Mutual Funds.
Also, prior to May 24, 1999, Pilgrim Mutual Funds had an Administrative
Services Agreement with NACM under which NACM was responsible for providing all
administrative services which are not provided by ICA or by Pilgrim Mutual
Funds' Distributor, transfer agents, accounting agents, independent accountants
and legal counsel. For the fiscal years ended March 31, 1999 and 1998, NACM
received aggregate compensation of $1,603,130 and $1,972,037, respectively, for
all of the series of the Pilgrim Mutual Funds pursuant to the Administrative
Services Agreement.
The amounts of the advisory and administrative fees paid by each Fund for
the fiscal years ended June 30, 1999, 1998, and 1997 were:
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE THE
BANK AND THRIFT FUND, ADVISORY FUNDS, INVESTMENT FUNDS, PILGRIM MUTUAL
FUNDS,(1) AND THE GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
June 30, March 31,
----------------------------------------- ---------------------------------------
1999 1999 1999 1999 1998 1998
Advisory Fees Admin. Fees Advisory Fees Admin. Fees Advisory Fees Admin. Fees
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
International Core Growth Fund(4)... $ 253,063.00 $1,061,288 $ 308,562
Worldwide Growth Fund(4)............ 589,768 1,472,492 1,251,181
International SmallCap Growth Fund(4) 327,972 1,149,529 658,893
Emerging Countries Fund(4).......... 716,000 3,476,180 2,790,216
LargeCap Growth Fund(4)............. 115,161 178,627 32,530
MidCap Growth Fund(4)............... 549,879 3,049,230 3,422,148
Small Cap Growth Fund(4)............ 811,208 5,334,833 6,613,874
Convertible Fund(4)................. 438,229 1,997,038 1,427,198
Balanced Fund(4).................... 66,601 261,803 220,025
Strategic Income Fund(2)............ 23,699 124,514 94,359
High Yield Fund II(4)............... 132,246 466,926 36,505
Money Market Fund................... N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1999 1998 1997
Advisory Fees Advisory Fees Advisory Fees
------------- ------------- -------------
<S> <C> <C> <C>
LargeCap Leaders Fund............... $ 300,494 $ 286,830 $ 174,325
MidCap Value Fund................... 670,780 678,816 250,512
Asia Pacific Equity Fund............ 303,920 553,589 773,252
High Yield Fund..................... 2,176,246 977,868 332,032
Bank and Thrift Fund(3)............. 5,893,806 2,446,063 2,361,103
MagnaCap Fund....................... 3,200,909 2,846,061 2,157,744
Government Securities Income Fund... 189,816 144,487 170,619
</TABLE>
- - - - - - - - - ----------
(1) Prior to the Reorganization, the Pilgrim Mutual Funds had not engaged the
services of an investment adviser for the Trust's A, B, C and Institutional
Portfolios because these portfolios invested all their assets in master
funds of the Master Trust. Consequently, the amounts of the advisory fees
reported below for the Pilgrim Mutual Funds were for services provided to
the master funds of the Master Trust.
(2) Includes the advisory fees, fee reductions and expense reimbursements of
the Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the Strategic Income Fund.
27
<PAGE>
(3) Prior to October 17, 1997, the investor manager was paid management fees
based on average weekly net assets. 1998 includes management fees for a
six-month period ended June 30, 1998.
(4) Reflects three month period from April 1, 1999 to June 30, 1999.
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE
MAYFLOWER TRUST DURING THE FISCAL YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees(1) Fees(1)
--------- ------- ----------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Growth + Value Fund 2,711,399 358,875 $ 1,696,786 169,679 538,291 74,529
International Value Fund (3) 7,164,823 931,067 $ 3,501,309 486,422 789,163 116,315
Emerging Markets Value Fund 145,031 20,184 $ 45,079 4,508 N/A N/A
Research Enhanced Index Fund(4) 690,257 122,493 N/A N/A N/A N/A
Income & Growth Fund 902,463 138,464 $ 1,399,807 186,641 1,513,778 233,759
High Total Return Fund II 1,877,964 308,071 $ 1,470,229 196,031 68,888 14,025
High Total Return Fund 4,228,374 726,605 $ 5,691,286 995,897 5,442,788 989,855
</TABLE>
- - - - - - - - - ----------
(1) Does not reflect expense reimbursement of $99,612 for Emerging Markets
Value Fund and $27,865 for High Total Return Fund II.
(2) Does not reflect expense reimbursement of $11,165 for Growth + Value Fund,
$173,911 for International Value Fund or $105,669 for High Total Return
Fund II.
(3) Prior to April 21, 1997, the International Value Fund was managed by
Brandes Investment Partners L.P. The administrator for the Fund was the
Investment Company Administration Corporation.
(4) The Research Enhanced Index Fund commenced operations on December 30, 1998.
TOTAL ADVISORY AND ADMINISTRATIVE FEES PAID TO THE FUNDS WHICH COMPRISE THE
EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND, GROWTH OPPORTUNITIES FUND,
BALANCE SHEET OPPORTUNITIES FUND, GOVERNMENT SECURITIES FUND, AND
HIGH YIELD FUND III DURING FISCAL YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees Fees
---------- ------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
SmallCap Opportunities Fund(1)........ $2,033,840 392,303 2,341,067 266,145 1,146,789 N/A
Mid-Cap Opportunities Fund(1),(3)..... $ 73,797 7,380 N/A N/A N/A N/A
Growth Opportunities Fund(1).......... $1,541,921 239,970 1,412,949 136,648 575,383 N/A
Government Securities Fund(1)(2)...... $ 697,032 133,321 762,504 78,343 923,929 N/A
High Yield Fund III................... $1,537,716 322,406 1,289,419 180,250 942,594 N/A
Balance Sheet Opportunities Fund(4)... $ 365,125 75,818 398,127 46,191 532,941 N/A
</TABLE>
- - - - - - - - - ----------
(1) Does not reflect expense reimbursement of $37,687 for the Mid-Cap
Opportunities Fund and a fee waiver of $160,854 for the Government
Securities Fund for the year ended December 31, 1998; expense reimbursement
of $10,635 for the Growth Opportunities Fund and $227,803 for the
Government Securities Fund for the year ended December 31, 1997; and
expense reimbursement of $20,615 for the SmallCap Opportunities Fund and
$34,126 for the Growth Opportunities Fund for the year ended December 31,
1996.
(2) Net of waiver of investment advisory fees of $160,854, $201,863 and
$284,286 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(3) The Mid-Cap Opportunities Fund commenced operations on August 20, 1998.
(4) Does not reflect expense reimbursement of $20,690 for the year end December
31, 1997 or expense reimbursement of $41,925 for the year ended December
31, 1996.
28
<PAGE>
During the fiscal years ended October 31, 1999, 1998, and 1997, the Funds
listed below paid the following subadvisory fees:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR OCTOBER 31, 1999
1999 1998 1997
--------- --------- --------
Growth + Value Fund....................... 1,355,700 $ 998,812 $275,490
International Value Fund.................. 3,582,411 1,750,654 288,604
Emerging Markets Value Fund (1)........... 56,232 26,985 N/A
Research-Enhanced Index Fund.............. 199,666 N/A N/A
Income & Growth Fund...................... N/A 178,919 245,657
- - - - - - - - - ----------
(1) For the period December 1, 1998 through February 28, 1999, Brandes
Investment Partners, L.P. agreed to waive the subadvisory fee for Emerging
Markets Value Fund.
During the fiscal years ended December 31, 1998, 1997 and 1996, the
SmallCap Opportunities Fund paid the following subadvisory fees:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR ENDED DECEMBER 31, 1998
1998 1997 1996
--------- --------- --------
SmallCap Opportunities Fund $ 789,408 1,498,283 763,585
During the fiscal years ended June 30, 1999, 1998, and 1997, the Investment
Manager paid sub-advisory fees to the following:
TOTAL SUBADVISORY FEES PAID DURING FISCAL YEAR ENDED JUNE 30, 1999
1999 1998 1997
-------- ------- -------
Asia-Pacific Equity Fund $121,638 307,103 221,487
International Core Growth Fund (1)(2) 19,830 N/A N/A
Worldwide Growth Fund (1)(2) 110,816 N/A N/A
International SmallCap Growth Fund (1)(2) 58,033 N/A N/A
Emerging Countries Fund (1)(2) 104,238 N/A N/A
LargeCap Growth Fund (1)(2) 33,219 N/A N/A
MidCap Growth Fund (1)(2) 105,229 N/A N/A
SmallCap Growth Fund (1)(2) 157,474 N/A N/A
Convertible Fund (1)(2) 101,904 N/A N/A
- - - - - - - - - ----------
(1) Prior to May 24, 1999, the funds were managed by Nicholas-Applegate and had
no subadvisor fees.
(2) Reflects three month period from April 1, 1999 to June 30, 1999.
EXPENSE LIMITATION AGREEMENTS
The Investment Manager entered into expense limitation agreements with the
following Funds, pursuant to which the Investment Manager has agreed to waive or
limit its fees. In connection with these agreements and certain U.S. tax
requirements, the Investment Managers will assume other expenses so that the
total annual ordinary operating expenses of the Funds (which excludes interest,
taxes, brokerage commissions, extraordinary expenses such as litigation, other
expenses not incurred in the ordinary course of each Fund's business, and
expenses of any counsel or other persons or services retained by the Company's
directors who are not "interested persons" (as defined in the 1940 Act) of the
Investment Manager) do not exceed:
Fund Class A Class B Class C Class M Class Q
- - - - - - - - - ----- ------- ------- ------- ------- -------
Asia-Pacific Equity Fund 2.00% 2.75% N/A 2.50% N/A
SmallCap Growth Fund 1.59% 2.24% 2.24% N/A 1.49%
MidCap Growth Fund 1.35% 2.00% 2.00% N/A 1.25%
MidCap Value Fund 1.75% 2.50% 2.50% 2.25% 1.75%
29
<PAGE>
Fund Class A Class B Class C Class M Class Q
- - - - - - - - - ----- ------- ------- ------- ------- -------
LargeCap Growth Fund 1.35% 2.00% 2.00% N/A 1.25%
LargeCap Leaders Fund 1.75% 2.50% 2.50% 2.25% 1.75%
Convertible Fund 1.33% 1.98% 1.98% N/A 1.23%
Balanced Fund 1.35% 2.00% 2.00% N/A 1.25%
Strategic Income Fund 0.95% 1.35% 1.35% N/A 0.85%
High Yield Fund II 1.10% 1.75% 1.75% N/A 1.00%
Emerging Countries Fund 2.00% 2.65% 2.65% N/A 1.90%
Worldwide Growth Fund 1.65% 2.30% 2.30% N/A 1.55%
International SmallCap Growth Fund 1.77% 2.42% 2.42% N/A 1.67%
International Core Growth Fund 1.73% 2.38% 2.38% N/A 1.63%
Money Market Fund 1.25% 2.00% 2.00% N/A N/A
High Yield Fund 1.10% 1.85% 1.85% 1.60% 1.10%
Each Fund will at a later date reimburse the Investment Manager for
management fees waived and other expenses assumed by the Investment Manager
during the previous 36 months, but only if, after such reimbursement, the Fund's
expense ratio does not exceed the percentage described above. The Investment
Manager will only be reimbursed for fees waived or expenses assumed after the
effective date of the expense limitation agreements. Nicholas-Applegate Capital
Management will bear 50% of any fees waived and other expenses assumed pursuant
to the expense limitation agreement with respect to any Fund for which it serves
as sub-adviser, and will receive 50% of any recoupment amount with respect to
such Funds.
Each expense limitation agreement provides that these expense limitations
shall continue until October 31, 2001. Thereafter, the agreement will
automatically renew for one-year terms unless the Investment Manager provides
written notice of the termination of the agreement to the Trust at least 30 days
prior to the end of the then-current term. In addition, the agreement will
terminate upon termination of the Investment Management Agreement, or it may be
terminated by the Trust, without payment of any penalty, upon ninety (90) days'
prior written notice to the Investment Manager at its principal place of
business.
For the advisory and the Investment Funds, prior to the expense limitation
agreement described above, the Funds had an expense limitation agreement with
the predecessor adviser which provided for expense limits at the same levels as
the current agreement.
For the Pilgrim Mutual Fund (other than the Money Market Fund which is a
new fund), prior to the expense limitation agreement described above, the
Investment Manager voluntarily agreed to waive all or a portion of its fee and
to reimburse operating expenses of the Advisory Funds, excluding distribution
fees, interest, taxes, brokerage and extraordinary expenses, to 0.75%.
30
<PAGE>
The voluntary fee reductions are as follows:
June 30, March 31
------- --------------------------------
FUND 1999(1) 1999(1) 1998 1997
- - - - - - - - - ---- ------- -------- -------- --------
SmallCap Growth Fund 29,487 $518,164 $675,970 $487,625
MidCap Growth Fund 1,010 301,613 591,684 652,932
LargeCap Growth Fund 4,314 154,098 132,912 5,199
Convertible Fund 0 318,025 339,803 757,713
Balanced Fund 12,611 132,033 182,871 1,122,862
Strategic Income Fund 31,139 232,922 419,604 1,148,587
High Yield Fund II 54,363 318,323 111,479 15,931
Emerging Countries Fund 69,001 816,718 628,044 811,357
Worldwide Growth Fund 0 242,660 381,568 980,833
International SmallCap Growth Fund 3,405 168,199 389,240 851,489
International Core Growth Fund 11,093 253,811 204,723 37,345
June 30
--------------------------------
1999 1998 1997
-------- -------- --------
LargeCap Leaders Fund $ 76,094 $ 151,645 $100,148
MidCap Value Fund 21,944 21,934 49,495
Asia-Pacific Equity Fund 249,734 355,259 334,704
High Yield Fund 441,770 269,351 219,739
- - - - - - - - - ----------
(1) Reflects three month period from April 1, 1998 through June 30, 1999.
The Investment Manager has entered into an expense limitation agreement
with the High Yield Fund, pursuant to which the Investment Manager has agreed to
waive or limit its fees and to assume other expenses so that the total annual
ordinary operating expenses of the Fund (which excludes interest, taxes,
brokerage commissions, extraordinary expenses such as litigation, other expenses
not incurred in the ordinary course of such Fund's business, and expenses of any
counsel or other persons or services retained by the Company's directors who are
not "interested persons" (as defined in the 1940 Act) of the Investment Manager)
do not exceed the following ratios for the periods indicated:
Period Limit Applies Class A Class B Class C Class M Class Q
- - - - - - - - - -------------------- ------- ------- ------- ------- -------
Through 12/31/1999 1.00% 1.75% 1.75% 1.50% 1.00%
From 1/1/2000 through
termination of Agreement 1.10% 1.85% 1.85% 1.60% 1.10%
The High Yield Fund will at a later date reimburse the Investment Manager
for management fees waived and other expenses assumed by the Investment Manager
during the previous 36 months, but only if, after such reimbursement, the Fund's
expense ratio does not exceed the percentage described above. The Investment
Manager will only be reimbursed for fees waived or expenses assumed after the
effective date of the expense limitation agreement.
Prior to the expense limitation agreement described above, the Investment
Manager voluntarily agreed to waive all or a portion of its fee and to reimburse
operating expenses of the High Yield Fund, excluding distribution fees,
interest, taxes, brokerage and extraordinary expenses, to 0.75%.
GOVERNMENT SECURITIES INCOME FUND.
Pursuant to the terms of the Investment Management Agreement of the
Government Securities Income Fund, the Investment Manager will reimburse the
Fund to the extent that the gross operating costs and expenses, excluding any
interest, taxes, brokerage commissions, amortization of organizational expenses,
31
<PAGE>
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 its average daily net asset value for the first
$40 million of net assets and 1.00% of average daily net assets in excess of $40
million for any one fiscal year. This reimbursement policy cannot be changed
unless the agreement is amended, which would require shareholder approval.
DISTRIBUTOR
Shares of each Fund are distributed by Pilgrim Securities, Inc. ("Pilgrim
Securities" or the "Distributor") pursuant to a Distribution Agreement between
each Company and the Distributor. Each Distribution Agreement requires the
Distributor to use its best efforts on a continuing basis to solicit purchases
of shares of the Funds. Each Company and the Distributor have agreed to
indemnify each other against certain liabilities. At the discretion of the
Distributor, all sales charges may at times be reallowed to an authorized dealer
("Authorized Dealer"). If 90% or more of the sales commission is reallowed, such
Authorized Dealer may be deemed to be an "underwriter" as that term is defined
under the Securities Act of 1933, as amended. Each Distribution Agreement will
remain in effect for two years and from year to year thereafter only if its
continuance is approved annually by a majority of the Board of Directors who are
not parties to such agreement or "interested persons" of any such party and must
be approved either by votes of a majority of the Directors or a majority of the
outstanding voting securities of the Company. See the Prospectus for information
on how to purchase and sell shares of the Funds, and the charges and expenses
associated with an investment. The sales charge retained by the Distributor and
the commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc., which
is a wholly-owned subsidiary of Pilgrim Holdings Corporation.
For the fiscal year ended June 30, 1999, the Distributor received the
following amounts in sales charges, after reallowance to Dealers in connection
with rates of shares of Bank and Thrift Fund, Advisory Funds, Investment Funds,
Mutual Funds, and Government Securities Income Fund: $871,391 with respect to
Class A shares; $146,773 with respect to Class B shares; $14,263 with respect to
Class C shares; and $42,420 with respect to Class M shares.
For the fiscal year ended October 31, 1999, the Distributor received the
following amounts in sales charges, after reallowance to Dealers, in connection
with sales of shares of Mayflower Trust: $477,146 with respect to Class A
shares; $6,055,717 with respect to Class B shares; and $247,753 with respect to
Class C shares.
For the fiscal year ended December 31, 1998, the Distributor (or Advest)
received the following amounts in sales charges, after reallowance to Dealers in
connection with sales of shares of SmallCap Opportunities Fund, Equity Trust,
Growth Opportunities Fund, Government Securities Fund, High Yield Fund III, and
Balance Sheet Opportunities Fund: $65,519 with respect to Class A shares;
$1,641,240 with respect to Class B shares; $45,300 with respect to Class C
shares; and $52,319 with respect to Class T shares.
RULE 12b-1 PLANS
Each Company has a distribution plan pursuant to Rule 12b-1 under the 1940
Act applicable to each class of shares offered by each Fund ("Rule 12b-1
Plans"). The Funds intend to operate the Rule 12b-1 Plans in accordance with
their terms and the National Association of Securities Dealers, Inc. rules
concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be
entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C, Class M, Class Q shares and
Class T in amounts as set forth in the following table:
32
<PAGE>
<TABLE>
<CAPTION>
Fees Based On Average Daily Net Assets
---------------------------------------------------------
Name of Fund Class A Class B Class C Class M Class Q Class T
------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Asia-Pacific Equity Fund 0.25% 1.00% N/A .75% N/A N/A
MidCap Value Fund 0.25% 1.00% 1.00% .75% .25% N/A
LargeCap Leaders Fund 0.25% 1.00% 1.00% .75% .25% N/A
MagnaCap Fund 0.30% 1.00% 1.00% .75% .25% N/A
High Yield Fund 0.25% 1.00% 1.00% .75% .25% N/A
Bank and Thrift Fund 0.25% 1.00% 1.00% N/A N/A N/A
Government Securities Income Fund 0.25% 1.00% 1.00% .75% .25% N/A
International Core Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
Worldwide Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
International SmallCap Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
Emerging Countries Fund 0.35% 1.00% 1.00% N/A .25% N/A
LargeCap Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
MidCap Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
SmallCap Growth Fund 0.35% 1.00% 1.00% N/A .25% N/A
Convertible Fund 0.35% 1.00% 1.00% N/A .25% N/A
Balanced Fund 0.35% 1.00% 1.00% N/A .25% N/A
High Yield Fund II 0.35% 1.00% 1.00% N/A .25% N/A
Strategic Income Fund 0.35% 0.75% 0.75% N/A .25% N/A
Money Market Fund 0.25% 1.00% 1.00% N/A .25% N/A
SmallCap Opportunities Fund 0.30% 1.00% 1.00% N/A N/A .95%
Growth Opportunities Fund 0.30% 1.00% 1.00% N/A N/A .95%
MidCap Opportunities Fund 0.30% 1.00% 1.00% N/A N/A N/A
Emerging Markets Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
Growth + Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
High Total Return Fund 0.30% 1.00% 1.00% N/A N/A N/A
High Total Return Fund II 0.30% 1.00% 1.00% N/A N/A N/A
Income & Growth Fund 0.30% 1.00% 1.00% N/A N/A N/A
International Value Fund 0.30% 1.00% 1.00% N/A N/A N/A
Research Enhanced Index Fund 0.30% 1.00% 1.00% N/A N/A N/A
Balance Sheet Opportunities Fund 0.30% 1.00% 1.00% N/A N/A .75%
Government Securities Fund 0.30% 1.00% 1.00% N/A N/A .65%
High Yield Fund III 0.30% 1.00% 1.00% N/A N/A .65%
</TABLE>
The Rule 12b-1 Plan for the Money Market Fund provides that the
distribution fee is reduced by that amount, if any, paid to the Distributor or
any affiliate of Distributor from the investment adviser or distributor of any
investment company in which the Money Market Fund invests.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C, Class M, Class Q,
and Class T shares of the Funds, including payments to dealers for selling
shares of the Funds and for servicing shareholders of these classes of the
Funds. Activities for which these fees may be used include: promotional
activities; preparation and distribution of advertising materials and sales
literature; expenses of organizing and conducting sales seminars; personnel
costs and overhead of the Distributor; printing of prospectuses and statements
of additional information (and supplements thereto) and reports for other than
existing shareholders; payments to dealers and others that provide shareholder
services; interest on accrued distribution expenses; and costs of administering
the Rule 12b-1 Plans. No more than 0.75% per annum of a Fund's average net
assets may be used to finance distribution expenses, exclusive of shareholder
servicing payments, and no Authorized Dealer may receive shareholder servicing
payments in excess of 0.25% per annum of a Fund's average net assets held by the
Authorized Dealer's clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly
basis to Authorized Dealers for both distribution and shareholder servicing at
rates that are based on the average daily net assets of shares that are
registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. The rates, on an annual basis, are as follows: 0.25% for Class A, 0.25%
for Class B, 1.00% (.75% for Strategic Income Fund) for Class C, 0.65% (0.40%
for Government Securities Income Fund and High Yield Fund) for Class M, 0.25%
33
<PAGE>
for Class Q, and ___% for Class T. Rights to these ongoing payments begin to
accrue in the 13th month following a purchase of Class A, B or C shares and in
the 1st month following a purchase of Class M and Class Q shares.
The Distributor will be reimbursed for its actual expenses incurred under a
Rule 12b-1 Plan with respect to Class A shares of MagnaCap Fund, High Yield Fund
and Government Securities Income Fund. The Distributor has incurred costs and
expenses with respect to Class A shares that may be reimbursable in future
months or years in the amounts of $1,023,574 for MagnaCap Fund 0.30% of its net
assets), $299,650 for High Yield Fund (0.25% of its net assets), and $64,135 for
Government Securities Income Fund (0.25% of its net assets) as of June 30, 1999.
With respect to Class A shares of each other Fund and Class B, Class C, Class M,
Class Q, and Class T shares of each Fund that offers the class, the Distributor
will receive payment without regard to actual distribution expenses it incurs.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of a Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1
Plans also recognize that the Investment Manager and/or the Distributor may use
their resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers. Such compensation and
incentives may include, but are not limited to, cash, merchandise, trips and
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited sales personnel, payment for
travel expenses (including meals and lodging) incurred by sales personnel and
members of their families, or other invited guests, to various locations for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more of the Funds or other funds managed by the
Investment Manager and/or other events sponsored by dealers. In addition, the
Distributor may, at its own expense, pay concessions in addition to those
described above to dealers that satisfy certain criteria established from time
to time by the Distributor. These conditions relate to increasing sales of
shares of the Funds over specified periods and to certain other factors. These
payments may, depending on the dealer's satisfaction of the required conditions,
be periodic and may be up to (1) 0.30% of the value of the Funds' shares sold by
the dealer during a particular period, and (2) 0.10% of the value of the Funds'
shares held by the dealer's customers for more than one year, calculated on an
annual basis.
The Rule 12b-1 Plans have been approved by the Board of Directors of each
Fund, including all of the Directors who are not interested persons of the
Company as defined in the 1940 Act. Each Rule 12b-1 Plan must be renewed
annually by the Board of Directors, including a majority of the Directors who
are not interested persons of the Company and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such Directors be committed to the Directors who are not
interested persons. Each Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Directors or by a vote of a majority of the Fund's outstanding shares on 60
days written notice. The Distributor or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Directors has determined
that differing distribution arrangements in connection with the sale of new
shares of a Fund is necessary and appropriate in order to meet the needs of
different potential investors. Therefore, the Board of Directors, including
those Directors who are not interested persons of the Company, concluded that,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Rule 12b-1 Plans as
tailored to each class of each Fund, will benefit such Funds and their
respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
34
<PAGE>
material amendments to a Plan or any distribution or service agreement shall be
approved by the Directors who are not interested persons of the Company, cast in
person at a meeting called for the purpose of voting on any such amendment.
The Distributor is required to report in writing to the Board of Directors
at least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably be
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
During their fiscal year ended December 31, 1998, expenses incurred by the
Distributor for distribution-related activities with respect to each class of
shares of each Fund listed below were as follows:
Distribution Expenses Class A Class B Class C
- - - - - - - - - --------------------- ------- ------- -------
SMALLCAP OPPORTUNITIES FUND
Salaries/Overides............................ $204,015 $102,411 $22,425
Commissions Paid............................. -- 106,926 56,642
Marketing, RMM, & Convention Expense......... 280,528 110,510 19,687
Total........................................ 484,543 319,847 98,754
MIDCAP OPPORTUNITIES FUND
Salaries/Overides............................ $1,504 $47 $3
Commissions Paid............................. -- -- --
Marketing, RMM, & Convention Expense......... 25,684 9,038 1,808
Total........................................ 27,188 9,085 1,811
GROWTH OPPORTUNITIES FUND
Salaries/Overides............................ $71,838 $11,550 $1,286
Commissions Paid............................. -- 3,933 3,802
Marketing, RMM, & Convention Expense......... 62,864 8,228 921
Total........................................ 134,702 23,711 6,009
GOVERNMENT SECURITIES FUND
Salaries/Overides............................ $77,481 $23,296 $2,286
Commissions Paid............................. -- 7,887 8,515
Marketing, RMM, & Convention Expense......... 52,524 10,739 817
Total........................................ 130,005 41,922 11,618
HIGH YIELD FUND III
Salaries/Overides............................ $75,788 $110,938 $16,931
Commissions Paid............................. -- 66,716 53,100
Marketing, RMM, & Convention Expense......... 110,537 79,289 10,566
Total........................................ 186,325 256,943 80,597
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, C and Q shares for the
fiscal period ended June 30, 1999 were as follows:
Distribution Expenses Class A Class B Class C Class Q
- - - - - - - - - --------------------- -------- -------- -------- --------
INTERNATIONAL CORE GROWTH FUND $ -- $ -- $ -- $ --
Advertising 31 23 21 19
Printing 595 437 391 364
Salaries & Commissions 8,279 6,084 5,450 5,065
Broker Servicing 1,640 1205 1080 1003
Miscellaneous 852 626 561 521
Total 11,397 8,375 7,503 6,972
35
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- - - - - - - - - --------------------- -------- -------- -------- --------
WORLDWIDE GROWTH FUND -- -- -- --
Advertising 77 31 282 16
Printing 1,477 588 5,354 281
Salaries & Commissions 28,724 11,441 104,098 5,473
Broker Servicing 4,075 1,623 14,767 776
Miscellaneous 2,117 843 7,671 403
Total 36,470 14,526 132,172 6,949
INT'L SMALLCAP GROWTH FUND -- -- -- --
Advertising 69 40 47 87
Printing 1,319 755 886 1,666
Salaries & Commissions 14,673 8,409 9,859 18,531
Broker Servicing 3,639 2,086 2,445 4,596
Miscellaneous 1,891 1,084 1,270 2,388
Total 21,591 12,374 14,507 27,268
EMERGING COUNTRIES FUND -- -- -- --
Advertising 98 47 72 129
Printing 1,852 892 1,372 2,459
Salaries & Commissions 24,679 11,882 18,276 32,756
Broker Servicing 5,110 2,460 3,784 6,782
Miscellaneous 2,655 1,278 1,966 3,524
Total 34,394 16,559 25,470 45,650
LARGECAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising 112 175 75 29
Printing 2,130 3,317 1,404 547
Salaries & Commissions 14,165 22,059 4,340 3,637
Broker Servicing 5,874 9,148 3,873 1,508
Miscellaneous 3,052 4,752 2,012 784
Total 25,333 39,451 16,704 6,505
MIDCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising 31 22 176 8
Printing 610 421 3,343 146
Salaries & Commissions 28,002 19,331 153,574 6,719
Broker Servicing 1,682 1,161 9,223 403
Miscellaneous 874 603 4,792 210
Total 31,199 21,538 171,108 7,486
SMALLCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising 55 27 205 5
Printing 1,045 503 3,891 100
Salaries & Commissions 42,184 20,319 157,025 4,024
Broker Servicing 2,883 1,389 10,731 275
Miscellaneous 1,498 721 5,575 143
Total 47,665 22,959 177,427 4,547
CONVERTIBLE FUND $ -- $ -- $ -- $ --
Advertising 61 54 186 11
Printing 1,145 1,042 3,536 209
Salaries & Commissions 29,922 27,223 92,398 5,465
Broker Servicing 3,158 2,874 9,753 577
Miscellaneous 1,641 1,493 5,067 300
Total 35,927 32,686 110,940 6,562
BALANCED FUND $ -- $ -- $ -- $ --
Advertising 17 11 65 --
Printing 314 214 1,253 6
Salaries & Commissions 5,824 3,973 23,259 114
Broker Servicing 865 590 3,456 17
Miscellaneous 449 307 1,795 9
Total 7,469 5,095 29,828 146
36
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- - - - - - - - - --------------------- -------- -------- -------- --------
HIGH YIELD FUND II $ -- $ -- $ -- $ --
Advertising 21 53 13 6
Printing 409 1005 252 122
Salaries & Commissions 7,040 17,312 4,336 2,100
Broker Servicing 1,127 2,771 694 336
Miscellaneous 585 1,440 361 175
Total 9,182 22,581 5,656 2,739
STRATEGIC INCOME FUND $ -- $ -- $ -- $ --
Advertising 16 30 47 1
Printing 296 578 894 20
Salaries & Commissions 2,673 5,205 8,044 177
Broker Servicing 818 1,593 2,462 54
Miscellaneous 425 828 1,279 28
Total 4,228 8,234 12,726 280
MONEY MARKET FUND
Advertising N/A N/A N/A N/A
Printing N/A N/A N/A N/A
Salaries & Commissions N/A N/A N/A N/A
Broker Servicing N/A N/A N/A N/A
Miscellaneous N/A N/A N/A N/A
Total N/A N/A N/A N/A
During their fiscal year ended October 31, 1999,(1) expenses incurred by
the Distributor for distribution-related activities with respect to each class
of shares of each Fund listed below were as follows:
Distribution Expenses Class A Class B Class C
- - - - - - - - - --------------------- ------------ ---------- ------------
GROWTH & VALUE FUND
Salaries/Overides..................... 203,959.00 167,908.00 124,870.00
Commissions Paid...................... 15,711.00 10,417.00 250,545.00
Marketing, RMM, & Convention Expense.. 84,432.00 85,651.00 74,640.00
Total................................. 304,102.00 263,976.00 450,055.00
INTERNATIONAL VALUE FUND
Salaries/Overides..................... 1,522,722.00 299,846.00 545,963.00
Commissions Paid...................... 164,784.00 9,180.00 1,383,699.00
Marketing, RMM, & Convention Expense.. 428,046.00 123,709.00 252,555.00
Total................................. 2,115,552.00 432,735.00 2,182,217.00
EMERGING MARKETS VALUE FUND
Salaries/Overides..................... 31,614.00 3,335.00 10,776.00
Commissions Paid...................... 97.00 0.00 25,987.00
Marketing, RMM, & Convention Expense.. 11,726.00 4,064.00 7,233.00
Total................................. 43,437.00 7,399.00 43,996.00
RESEARCH ENHANCED INDEX FUND
Salaries/Overides..................... 113,194.00 174,798.00 174,812.00
Commissions Paid...................... 69,413.00 0.00 702,009.00
Marketing, RMM, & Convention Expense.. 72,991.00 63,238.00 77,189.00
Total................................. 255,598.00 238,036.00 954,010.00
37
<PAGE>
Distribution Expenses Class A Class B Class C
- - - - - - - - - --------------------- ------------ ---------- ------------
INCOME & GROWTH FUND
Salaries/Overides..................... 100,665.00 32,411.00 34,862.00
Commissions Paid...................... 0.00 8,884.00 4,215.00
Marketing, RMM, & Convention Expense.. 60,290.00 23,158.00 27,188.00
Total................................. 160,955.00 64,453.00 66,265.00
HIGH TOTAL RETURN FUND II
Salaries/Overides..................... 93,765.00 160,313.00 85,465.00
Commissions Paid...................... 0.00 8,678.00 122,294.00
Marketing, RMM, & Convention Expense.. 62,566.00 83,993.00 55,091.00
Total................................. 156,331.00 252,984.00 262,850.00
HIGH TOTAL RETURN FUND
Salaries/Overides..................... 303,005.00 309,315.00 106,423.00
Commissions Paid...................... 20,160.00 74,013.00 136,149.00
Marketing, RMM, & Convention Expense.. 192,437.00 187,354.00 67,061.00
Total................................. 515,602.00 570,682.00 309,633.00
- - - - - - - - - ----------
(1) Information is only available as of September 30, 1999.
During the fiscal year ended December 31, 1998, expenses incurred by the
Distributor (for Advest with respect to Class T Shares prior to June 2, 1995)
for certain distribution related activities with respect to each class of shares
of the Fund were as follows:
Distribution Expenses Class A Class B Class C Class T
- - - - - - - - - --------------------- ------- ------- ------- -------
BALANCE SHEET OPPORTUNITIES FUND
Salaries/Overides..................... $35,330 $ 4,803 $ 311 $ --
Commissions Paid...................... -- 2,667 249 --
Marketing, RMM, & Convention Expense.. 34,475 3,933 495 --
Total................................. 69,805 11,403 1,055 --
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, C, M, and Q shares for the
fiscal year ended June 30, 1999 were as follows (the Funds did not offer Class C
or Class Q shares until May 24, 1999):
Distribution Expenses Class A Class B Class C Class M Class Q
- - - - - - - - - --------------------- ------- ------- ------- ------- -------
ASIA-PACIFIC EQUITY FUND
Advertising $ 517 $ 410 N/A $ 222 N/A
Printing 9,692 7,790 N/A 4,235 N/A
Salaries & Commissions 63,457 51,008 N/A 27,727 N/A
Broker Servicing 21,931 17,628 N/A 9,582 N/A
Miscellaneous 10,467 8,415 N/A 4,574 N/A
Total 106,058 85,251 N/A 46,340 N/A
MIDCAP VALUE FUND
Advertising $ 517 $ 1,111 $ 2 $ 490 N/A
Printing 9,692 21,108 30 9320 N/A
Salaries & Commissions 63,457 226,491 320 100,011 N/A
Broker Servicing 21,931 46,552 66 20,556 N/A
Miscellaneous 10,467 20,008 27 8,835 N/A
Total 106,058 315,270 445 139,212 N/A
LARGECAP LEADERS FUND
Advertising $ 199 $ 543 N/A $ 236 N/A
Printing 3,783 10,312 N/A 4,490 N/A
Salaries & Commissions 38,736 105,585 N/A 45,970 N/A
Broker Servicing 8,483 23,124 N/A 10,068 N/A
Miscellaneous 3,935 10,726 N/A 4,670 N/A
Total 55,136 150,290 N/A 65,434 N/A
38
<PAGE>
Distribution Expenses Class A Class B Class C Class M Class Q
- - - - - - - - - --------------------- ------- ------- ------- ------- -------
MAGNACAP FUND
Advertising $ 7,519 $ 2,431 $ 12 $ 659 N/A
Printing 142,855 46,191 219 12,514 N/A
Salaries & Commissions 1,206,704 390,175 1,849 105,707 N/A
Broker Servicing 319,208 103,212 489 27,962 N/A
Miscellaneous 144,731 46,797 222 12,678 N/A
Total 1,821,017 588,806 2,791 159,520 N/A
HIGH YIELD FUND
Advertising $ 3,296 $ 7,012 $ 18 $ 947 N/A
Printing 62,618 133,234 344 17,996 N/A
Salaries & Commissions 481,059 1,023,562 2,644 138,255 N/A
Broker Servicing 115,540 245,838 635 33,206 N/A
Miscellaneous 73,102 155,542 402 21,009 N/A
Total 735,615 1,565,188 4,043 211,413 N/A
BANK AND THRIFT FUND
Advertising $ 8,400 $ 9,498 N/A N/A N/A
Printing 159,602 180,455 N/A N/A N/A
Salaries & Commissions 1,080,995 1,222,226 N/A N/A N/A
Broker Servicing 359,413 406,370 N/A N/A N/A
Miscellaneous 171,147 193,507 N/A N/A N/A
Total 1,779,557 2,012,056 N/A N/A N/A
GOV'T SECURITIES INCOME FUND
Advertising $ 693 $ 259 $ 1 $ 29 N/A
Printing 13,169 4,922 22 543 N/A
Salaries & Commissions 102,076 38,150 174 4,212 N/A
Broker Servicing 29,556 11,046 51 1,220 N/A
Miscellaneous 13,718 5,127 24 566 N/A
Total 159,212 59,504 272 6,570 N/A
Prior to May 24, 1999, the Trust had a Distribution Plan with respect to
each Class of each Pilgrim Mutual Funds (other than the Money Market Fund) and a
separate Shareholder Service Plan with respect to each Class of each Fund (other
than the Money Market Fund). Under the Distribution Plan, NAS (the Distributor's
predecessor) was entitled to payment each month in the following amounts: with
respect to Class A shares at an annual rate of up to 0.10% of the average daily
net assets of the Class A shares of a Fund; with respect to Class B shares at an
annual rate of up to 0.75% of the average daily net assets of the Class B shares
of a Fund; and with respect to Class C shares at an annual rate of up to 0.75%
of the average daily net assets of the Class C shares of a Fund. The
Distribution Plan did not apply to Class Q shares. Under the Distribution Plan,
NAS was paid without regard to actual distribution expenses it incurred. The
aggregate amounts earned by NAS pursuant to that Distribution Plan for the
fiscal year ended June 30, 1999, were as follows:
Fund Name 12b-1 Payments
- - - - - - - - - --------- --------------
International Core Growth Fund $ 174,064
Worldwide Growth Fund 822,399
International SmallCap Growth Fund 208,084
Emerging Countries Fund 549,129
LargeCap Growth Fund 102,429
MidCap Growth Fund 1,526,263
SmallCap Growth Fund 1,874,462
Convertible Fund 1,108,863
Balanced Fund 210,891
Strategic Income Fund 52,773
High Yield Fund II 411,227
39
<PAGE>
Under the Shareholder Service Plan for the Pilgrim Mutual Funds, NAS was
entitled to payment each month in the following amounts: with respect to Class A
shares at an annual rate of up to 0.25% of the average daily net assets of the
Class A shares of a Fund; with respect to Class B shares at an annual rate of up
to 0.25% of the average daily net assets of the Class B shares of a Fund; with
respect to Class C shares at an annual rate of up to 0.25% of the average daily
net assets of the Class C shares of a Fund; and with respect to Class Q shares
at an annual rate of up to 0.25% of the average daily net assets of the Class Q
shares of a Fund. Under the Shareholder Service Plan, NAS was paid only with
respect to expenses actually incurred. If expenses incurred by NAS exceeded the
amount of the shareholder service fee in a particular month, the excess amount
would be carried forward and recovered in a future period if NAS's actual
expenses were less than the shareholder service fee. However, effective May 24,
1999, the Funds were no longer responsible for those excess amounts.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no longer be able to avail themselves of any automatic
investment or other service then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
SHAREHOLDER SERVICING AGENT.
Pilgrim Group, Inc. serves as Shareholder Servicing Agent for the Funds.
The Shareholder Servicing Agent is responsible for responding to written and
telephonic inquiries from shareholders. Each Fund pays the Shareholder Servicing
Agent a monthly fee on a per-contact basis, based upon incoming and outgoing
telephonic and written correspondence.
OTHER EXPENSES.
In addition to the management fee and other fees described previously, each
Fund pays other expenses, such as legal, audit, transfer agency and custodian
out-of-pocket fees, proxy solicitation costs, and the compensation of Directors
who are not affiliated with the Investment Manager. Most Fund expenses are
allocated proportionately among all of the outstanding shares of that Fund.
However, the Rule 12b-1 Plan fees for each class of shares are charged
proportionately only to the outstanding shares of that class.
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS
Some of the different types of securities in which the Funds may invest,
subject to their respective investment objectives, policies and restrictions,
are described in the Prospectus under "The Funds," "Investment Objectives and
Policies," and "Investment Practices and Risk Considerations." Additional
information concerning the characteristics and risks of certain of the Funds'
investments are set forth below. There can be no assurance that any of the Funds
will achieve their investment objectives. References to the Money Market Fund
include investments by the Primary Fund in which it invests.
TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS.
Each Fund's assets (other than the Money Market Fund whose investments are
typically short-term) may be invested in certain short-term, high-quality debt
instruments (and, in the case of Bank and Thrift Fund, investment grade debt
instruments) and in U.S. Government securities for the following purposes: (i)
to meet anticipated day-to-day operating expenses; (ii) pending the Investment
Manager's or Portfolio Manager's ability to invest cash inflows; (iii) to permit
40
<PAGE>
the Fund to meet redemption requests; and (iv) for temporary defensive purposes.
A Fund for which the investment objective is capital appreciation may also
invest in such securities if the Fund's assets are insufficient for effective
investment in equities.
Although it is expected that each Fund will normally be invested consistent
with its investment objectives and policies, the short-term instruments in which
a Fund (except Government Securities Income Fund) may invest include: (i)
short-term obligations of the U.S. Government and its agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities; (iii) commercial paper, including master notes; (iv) bank
obligations, including certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. LargeCap Leaders Fund, MidCap Value
Fund and Asia-Pacific Equity Fund may also invest in long-term U.S. Government
securities and money market funds, while Asia-Pacific Equity Fund may invest in
short-term obligations of foreign governments and their agencies,
instrumentalities, authorities, or political subdivisions. The short-term
instruments in which Government Securities Income Fund may invest include
short-term U.S. Government securities and repurchase agreements on U.S.
Government securities. The Funds will normally invest in short-term instruments
that do not have a maturity of greater than one year.
COMMON STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES.
Each Fund (other than Government Securities Income Fund and the Money
Market Fund) may invest in common stocks, which represent an equity (ownership)
interest in a company. This ownership interest generally gives a Fund the right
to vote on issues affecting the company's organization and operations. Such
investments will be diversified over a cross-section of industries and
individual companies. For Funds other than the LargeCap Growth Fund, some of
these companies will be organizations with market capitalizations of $500
million or less or companies that have limited product lines, markets and
financial resources and are dependent upon a limited management group. Examples
of possible investments include emerging growth companies employing new
technology, cyclical companies, initial public offerings of companies offering
high growth potential, or other corporations offering good potential for high
growth in market value. The securities of such companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
Each Fund (other than the Money Market Fund) may also buy other types of
equity securities such as convertible securities, preferred stock, and warrants
or other securities that are exchangeable for shares of common stock. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, a Fund seeks the
opportunity, through the conversion feature, to participate in the capital
appreciation of the common stock into which the securities are convertible,
while investing at a better price than may be available on the common stock or
obtaining a higher fixed rate of return than is available on common stocks. The
value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
The market value of convertible debt securities tends to vary inversely
with the level of interest rates. The value of the security declines as interest
rates increase and increases as interest rates decline. Although under normal
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market conditions longer term debt securities have greater yields than do
shorter term debt securities of similar quality, they are subject to greater
price fluctuations. A convertible security may be subject to redemption at the
option of the issuer at a price established in the instrument governing the
convertible security. If a convertible security held by a Fund is called for
redemption, the Fund must permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Funds
because the Funds purchase such securities for their equity characteristics.
As a matter of operating policy, each fund which comprises the Pilgrim
Mutual Funds will invest more than 5% of its net assets in warrants. A warrant
gives the holder a right to purchase at any time during a specified period a
predetermined number of shares of common stock at a fixed price. Unlike
convertible debt securities or preferred stock, warrants do not pay a fixed
dividend. Investments in warrants involve certain risks, including the possible
lack of a liquid market for resale of the warrants, potential price fluctuations
as a result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercised, resulting in a loss of the Fund's entire
investment therein).
Each fund which comprises the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, a fund may purchase a non-convertible debt security and
a warrant or option, which enables the fund to have a convertible-like position
with respect to a company, group of companies or stock index. Synthetic
convertible securities are typically offered by financial institutions and
investment banks in private placement transactions. Upon conversion, the fund
generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike a
true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market value
of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. A Fund only invests in synthetic convertibles with respect
to companies whose corporate debt securities are rated "A" or higher by Moody's
or "A" or higher by S&P and will not invest more than 15% of its net assets in
such synthetic securities and other illiquid securities.
The MidCap Value Fund will invest substantially all of its assets, and
LargeCap Leaders Fund, Asia-Pacific Equity Fund, and Bank and Thrift Fund may
invest, in the equity securities of certain midcap companies. Midcap companies
will tend to be smaller, more emerging companies and investment in these
companies may involve greater risk than is customarily associated with
securities of larger, more established companies. Midcap companies may
experience relatively higher growth rates and higher failure rates than do
larger companies. The trading volume of securities of midcap companies is
normally less than that of larger companies and, therefore, may
disproportionately affect their market price, tending to make them rise more in
response to buying demand and fall more in response to selling pressure than is
the case with larger companies.
PREFERRED STOCK
Each Fund (other than the Money Market Fund) may invest in preferred stock.
Preferred stock, unlike common stock, offers a stated dividend rate payable from
a corporation's earnings. Such preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be
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"cumulative," requiring all or a portion of prior unpaid dividends to be paid
before dividends are paid on the issuer's common stock. Preferred stock also
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation, and may be
"participating," which means that it may be entitled to a dividend exceeding the
stated dividend in certain cases. The rights of preferred stocks on the
distribution of a corporation's assets in the event of a liquidation are
generally subordinate to the rights associated with a corporation's debt
securities.
EURODOLLAR CONVERTIBLE SECURITIES
Each fund which comprises the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the same
or a different issuer. Interest and dividends on Eurodollar securities are
payable in U.S. dollars outside of the United States. The Funds may invest
without limitation in Eurodollar convertible securities that are convertible
into foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange or the American Stock Exchange or convertible into publicly
traded common stock of U.S. companies. The Funds may also invest up to 15% of
its total assets invested in convertible securities, taken at market value, in
Eurodollar convertible securities that are convertible into foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each fund which comprises the Pilgrim Mutual Funds may invest in Eurodollar
and Yankee Dollar instruments. Eurodollar instruments are bonds that pay
interest and principal in U.S. dollars held in banks outside the United States,
primarily in Europe. Eurodollar instruments are usually issued on behalf of
multinational companies and foreign governments by large underwriting groups
composed of banks and issuing houses from many countries. Yankee Dollar
instruments are U.S. dollar denominated bonds issued in the U.S. by foreign
banks and corporations. These investments involve risks that are different from
investments in securities issued by U.S. issuers. See "Foreign Investment
Considerations."
SECURITIES OF BANKS AND THRIFTS
The Bank and Thrift Fund invests primarily in equity securities of banks
and thrifts. A `money center bank' is a bank or bank holding company that is
typically located in an international financial center and has a strong
international business with a significant percentage of its assets outside the
United States. `Regional banks' are banks and bank holding companies which
provide full service banking, often operating in two or more states in the same
geographic area, and whose assets are primarily related to domestic business.
Regional banks are smaller than money center banks and also may include banks
conducting business in a single state or city and banks operating in a limited
number of states in one or more geographic regions. The third category which
constitutes the majority in number of banking organizations are typically
smaller institutions that are more geographically restricted and less well-known
than money center banks or regional banks and are commonly described as
`community banks.'
The Bank and Thrift Fund may invest in the securities of banks or thrifts
that are relatively smaller, engaged in business mostly within their geographic
region, and are less well-known to the general investment community than money
center and larger regional banks. The shares of depository institutions in which
the Fund may invest may not be listed or traded on a national securities
exchange or on the National Association of Securities Dealers Automated
Quotation System (`NASDAQ'); as a result there may be limitations on the Fund's
ability to dispose of them at times and at prices that are most advantageous to
the Fund.
The profitability of banks and thrifts is largely dependent upon interest
rates and the resulting availability and cost of capital funds over which these
concerns have limited control, and, in the past, such profitability has shown
significant fluctuation as a result of volatile interest rate levels. In
addition, general economic conditions are important to the operations of these
concerns, with exposure to credit losses resulting from financial difficulties
of borrowers.
Changes in state and Federal law are producing significant changes in the
banking and financial services industries. Deregulation has resulted in the
diversification of certain financial products and services offered by banks and
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financial services companies, creating increased competition between them. In
addition, state and federal legislation authorizing interstate acquisitions as
well as interstate branching has facilitated the increasing consolidation of the
banking and thrift industries. Although regional banks involved in intrastate
and interstate mergers and acquisitions may benefit from such regulatory
changes, those which do not participate in such consolidation may find that it
is increasingly difficult to compete effectively against larger banking
combinations. Proposals to change the laws and regulations governing banks and
companies that control banks are frequently introduced at the federal and state
levels and before various bank regulatory agencies. The likelihood of any
changes and the impact such changes might have are impossible to determine.
The last few years have seen a significant amount of regulatory and
legislative activity focused on the expansion of bank powers and diversification
of services that banks may offer. These expanded powers have exposed banks to
well-established competitors and have eroded the distinctions between regional
banks, community banks, thrifts and other financial institutions.
The thrifts in which the Bank and Thrift Fund invests generally are subject
to the same risks as banks discussed above. Such risks include interest rate
changes, credit risks, and regulatory risks. Because thrifts differ in certain
respects from banks, however, thrifts may be affected by such risks in a
different manner than banks. Traditionally, thrifts have different and less
diversified products than banks, have a greater concentration of real estate in
their lending portfolio, and are more concentrated geographically than banks.
Thrifts and their holding companies are subject to extensive government
regulation and supervision including regular examinations of thrift holding
companies by the Office of Thrift Supervision (the `OTS'). Such regulations have
undergone substantial change since the 1980's and will probably change in the
next few years.
SHORT-TERM INVESTMENTS
The Funds may invest in the following securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Funds may acquire certificates of deposit, bankers' acceptances and
time deposits. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. The Primary Institutional Fund in which the Money Market Fund
invests substantially all of its assets, requires that the foreign banks whose
obligations it acquires have capital, surplus and undivided profits of $25
billion.
A Fund holding instruments of foreign banks or financial institutions may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. See "Foreign Investments" below. Domestic banks and foreign
banks are subject to different governmental regulations with respect to the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry depends largely
upon the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry. Federal and state laws and regulations require domestic banks
to maintain specified levels of reserves, limited in the amount which they can
loan to a single borrower, and subject to other regulations designed to promote
financial soundness. However, such laws and regulations do not necessarily apply
to foreign bank obligations that a Fund may acquire.
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In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under their respective investment objectives and
policies stated above and in their Prospectuses, the Funds may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a banking
institution for a specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS.
The Funds that comprise the Pilgrim Mutual Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The Funds
may invest a portion of their assets in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper and short-term notes will normally have maturities of
less than nine months and fixed rates of return, although such instruments may
have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher (A-1 for the Primary Institutional Fund in
which the Money Market Fund invests substantially all of its assets) by S&P,
"Prime-l" or "Prime-2" by Moody's (Prime-1 for the Primary Institutional Fund in
which the Money Market Fund invests substantially all of its assets), or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Investment Manager or Portfolio
Manager to be of comparable quality. These rating symbols are described in
Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds (other
than Money Market Fund) may purchase corporate obligations which have remaining
maturities of one year or less from the date of purchase and which are rated
"AA" or higher by S&P or "Aa" or higher by Moody's.
U.S. GOVERNMENT SECURITIES.
The Funds may invest in U.S. Government securities which include
instruments issued by the U.S. Treasury, such as bills, notes and bonds. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the full faith and credit of the United States. They differ primarily
in their interest rates, the lengths of their maturities and the dates of their
issuances. In addition, U.S. Government securities include securities issued by
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association, which are also backed by the full faith and credit of the
United States. Also included in the category of U.S. Government securities are
instruments issued by instrumentalities established or sponsored by the U.S.
Government, such as the Student Loan Marketing Association, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation. While these
securities are issued, in general, under the authority of an Act of Congress,
the U.S. Government is not obligated to provide financial support to the issuing
instrumentalities, although under certain conditions certain of these
authorities may borrow from the U.S. Treasury. In the case of securities not
backed by the full faith and credit of the U.S., the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the U.S. itself in the event the agency or instrumentality does not meet its
commitment. Each Fund will invest in securities of such agencies or
instrumentalities only when the Portfolio Manager is satisfied that the credit
risk with respect to any instrumentality is comparable to the credit risk of
U.S. government securities backed by the full faith and credit of the United
States.
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MUNICIPAL SECURITIES
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in debt obligations issued by state and local
governments, territories and possessions of the U.S., regional government
authorities, and their agencies and instrumentalities ("municipal securities").
Municipal securities include both notes (which have maturities of less than one
year) and bonds (which have maturities of one year or more) that bear fixed or
variable rates of interest.
In general, "municipal securities" debt obligations are issued to obtain
funds for a variety of public purposes, such as the construction, repair, or
improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assistance (although without obligation) to make up deficiencies in the
debt service reserve fund.
The Funds may purchase insured municipal debt in which scheduled payments
of interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
MORAL OBLIGATION SECURITIES
Municipal securities may include "moral obligation" securities which are
usually issued by special purpose public authorities. If the issuer of moral
obligation bonds cannot fulfill its financial responsibilities from current
revenues, it may draw upon a reserve fund, the restoration of which is moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
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INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in tax-exempt industrial development bonds and pollution
control bonds which, in most cases, are revenue bonds and generally are not
payable from the unrestricted revenues of an issuer. They are issued by or on
behalf of public authorities to raise money to finance privately operated
facilities for business, manufacturing, housing, sport complexes, and pollution
control. Consequently, the credit quality of these securities is dependent upon
the ability of the user of the facilities financed by the bonds and any
guarantor to meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in lease obligations or installment purchase contract
obligations of municipal authorities or entities ("municipal lease
obligations"). Although lease obligations do not constitute general obligations
of the municipality for which its taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payment due under the lease obligation. A Fund may also purchase
"certificates of participation," which are securities issued by a particular
municipality or municipal authority to evidence a proportionate interest in base
rental or lease payments relating to a specific project to be made by the
municipality, agency or authority. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in any year unless
money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
The Funds will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at least
one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Manager or Portfolio Manager to be critical to
the lessee's ability to deliver essential services; and (4) contain legal
features which the Investment Manager or Portfolio Manager deems appropriate,
such as covenants to make lease payments without the right of offset or
counterclaim, requirements for insurance policies, and adequate debt service
reserve funds.
SHORT-TERM MUNICIPAL OBLIGATIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in short-term municipal obligations. These securities
include the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They also are usually general obligations of the issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the money
for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal National Mortgage Association or the
Government National Mortgage Association.
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SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term (365 days
or less) promissory notes issued by municipalities to supplement their cash
flow.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may acquire variable and floating rate instruments. Credit rating
agencies frequently do not rate such instruments; however, the Investment
Manager or Portfolio Manager will determine what unrated and variable and
floating rate instruments are of comparable quality at the time of the purchase
to rated instruments eligible for purchase by the Fund. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for the Fund to dispose of the variable or floating rate
instrument involved in the event of the issuer of the instrument defaulting on
its payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may invest in "index-linked" or "commodity-linked" notes, which are
debt securities of companies that call for interest payments and/or payment at
maturity in different terms than the typical note where the borrower agrees to
make fixed interest payments and to pay a fixed sum at maturity. Principal
and/or interest payments on an index-linked note depend on the performance of
one or more market indices, such as the S&P 500 Index or a weighted index of
commodity futures such as crude oil, gasoline and natural gas. The Funds may
also invest in "equity linked" and "currency-linked" debt securities. At
maturity, the principal amount of an equity-linked debt security is exchanged
for common stock of the issuer or is payable in an amount based on the issuer's
common stock price at the time of maturity. Currency-linked debt securities are
short-term or intermediate term instruments having a value at maturity, and/or
an interest rate, determined by reference to one or more foreign currencies.
Payment of principal or periodic interest may be calculated as a multiple of the
movement of one currency against another currency, or against an index.
Index and currency-linked securities are derivative instruments which may
entail substantial risks. Such instruments may be subject to significant price
volatility. The company issuing the instrument may fail to pay the amount due on
maturity. The underlying investment or security may not perform as expected by
the Investment Manager or Portfolio Manager. Markets, underlying securities and
indexes may move in a direction that was not anticipated by the Investment
Manager or Portfolio Manager. Performance of the derivatives may be influenced
by interest rate and other market changes in the U.S. and abroad. Certain
derivative instruments may be illiquid. See "Illiquid Securities" below.
CORPORATE DEBT SECURITIES
Each Fund may invest in corporate debt securities. Corporate debt
securities include corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities. The investment
return on a corporate debt security reflects interest earnings and changes in
the market value of the security. The market value of a corporate debt security
will generally increase when interest rates decline, and decrease when interest
rates rise. There is also the risk that the issuer of a debt security will be
unable to pay interest or principal at the time called for by the instrument.
Investments in corporate debt securities that are rated below investment grade
are described in "High Yield Securities" below.
Debt obligations that are deemed investment grade carry a rating of at
least Baa from Moody's or BBB from Standard and Poor's, or a comparable rating
from another rating agency or, if not rated by an agency, are determined by the
Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have
speculative characteristics and changes in economic circumstances are more
likely to lead to a weakened capacity to make interest and principal payments
than higher rated bonds. The Primary Fund in which the Money Market Fund invests
will invest only in corporate debt securities rated A-1 or above.
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RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred to
as "junk bonds." These bonds are subject to greater market fluctuations and risk
of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES.
The economy and interest rates affect high yield securities differently
from other securities. For example, the prices of high yield bonds have been
found to be less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic changes or individual
corporate developments. Also, during an economic downturn or substantial period
of rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal and
interest obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaults, a Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
high yield bonds and the Funds' asset values.
PAYMENT EXPECTATIONS.
High yield bonds present certain risks based on payment expectations. For
example, high yield bonds may contain redemption and call provisions. If an
issuer exercises these provisions in a declining interest rate market, a Fund
would have to replace the security with a lower yielding security, resulting in
a decreased return for investors. Conversely, a high yield bond's value will
decrease in a rising interest rate market, as will the value of the Fund's
assets. If a Fund experiences unexpected net redemptions, it may be forced to
sell its high yield bonds without regard to their investment merits, thereby
decreasing the asset base upon which the Fund's expenses can be spread and
possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION.
To the extent that there is no established retail secondary market, there
may be thin trading of high yield bonds, and this may impact the Investment
Manager's or Portfolio Manager's ability to accurately value high yield bonds
and the Funds' assets and hinder the Funds' ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
CREDIT RATINGS.
Credit ratings evaluate the safety of principal and interest payments, not
the market value risk of high yield bonds. The rating of an issuer is also
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. Also, since credit rating agencies may fail
to timely change the credit ratings to reflect subsequent events, the Investment
Manager or Portfolio Manager must monitor the issuers of high yield bonds in the
Funds' portfolios to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Funds can meet redemption requests.
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BANKING INDUSTRY OBLIGATIONS
Each Fund may invest in banking industry obligations, including
certificates of deposit, bankers' acceptances, and fixed time deposits. The
Funds will not invest in obligations issued by a bank unless (i) the bank is a
U.S. bank and a member of the FDIC and (ii) the bank has total assets of at
least $1 billion (U.S.) or, if not, the Fund's investment is limited to the
FDIC-insured amount of $100,000.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure prices or yields deemed advantageous at the time, the
Funds may purchase or sell securities on a when-issued or a delayed-delivery
basis generally 15 to 45 days after the commitment is made. The Funds will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the purpose of leverage. In such transactions, delivery of the
securities occurs beyond the normal settlement periods, but no payment or
delivery is made by, and no interest accrues to, the Fund prior to the actual
delivery or payment by the other party to the transaction. Due to fluctuations
in the value of securities purchased on a when-issued or a delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers. Similarly, the sale of securities for delayed-delivery
can involve the risk that the prices available in the market when delivery is
made may actually be higher than those obtained in the transaction itself. Each
Fund will establish a segregated account with the Custodian consisting of cash
and/or liquid assets in an amount equal to the amount of its when-issued and
delayed-delivery commitments which will be "marked to market" daily. Each Fund
will only make commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities before
the settlement date if it is deemed advisable as a matter of investment
strategy. A Fund may not purchase when issued securities or enter into firm
commitments, if as a result, more than 15% of the Fund's net assets would be
segregated to cover such securities.
When the time comes to pay for the securities acquired on a delayed
delivery basis, a Fund will meet its obligations from the available cash flow,
sale of the securities held in the segregated account, sale of other securities
or, although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation). Depending on market conditions, the Funds could
experience fluctuations in share price as a result of delayed delivery or
when-issued purchases.
HIGH YIELD SECURITIES
The High Yield Fund, High Yield Fund III, High Total Return Fund II, the
Balance Sheet Opportunities Fund, and High Total Return Fund each may invest in
high yield securities, which are debt securities that are rated lower than Baa
by Moody's Investors Service or BBB by Standard & Poor's Corporation, or of
comparable quality if unrated.
High yield securities often are referred to as `junk bonds' and include
certain corporate debt obligations, higher yielding preferred stock and
mortgage-related securities, and securities convertible into the foregoing.
Investments in high yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in higher
quality debt securities, but they also typically entail greater potential price
volatility and principal and income risk.
High yield securities are not considered to be investment grade. They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. Also, their yields
and market values tend to fluctuate more than higher-rated securities.
Fluctuations in value do not affect the cash income from the securities, but are
reflected in a Fund's net asset value. The greater risks and fluctuations in
yield and value occur, in part, because investors generally perceive issuers of
lower-rated and unrated securities to be less creditworthy.
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The yields earned on high yield securities generally are related to the
quality ratings assigned by recognized rating agencies. The following are
excerpts from Moody's description of its bond ratings: Ba -- judged to have
speculative elements; their future cannot be considered as well assured. B --
generally lack characteristics of a desirable investment. Caa -- are of poor
standing; such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca -- speculative in a high
degree; often in default. C -- lowest rate class of bonds; regarded as having
extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3
to rating categories. The modifier 1 indicates that the security is in the
higher end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking towards the lower end of the category. The following are
excerpts from S&P's description of its bond ratings: BB, B, CCC, CC, C --
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of the obligation; BB indicates the lowest
degree of speculation and C the highest. D -- in payment default. S&P applies
indicators `+,' no character, and `+' to its rating categories. The indicators
show relative standing within the major rating categories.
Certain securities held by a Fund may permit the issuer at its option to
call, or redeem, its securities. If an issuer were to redeem securities held by
a Fund during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
The medium- to lower-rated and unrated securities in which the Fund invests
tend to offer higher yields than those of other securities with the same
maturities because of the additional risks associated with them. These risks
include:
HIGH YIELD BOND MARKET.
A severe economic downturn or increase in interest rates might increase
defaults in high yield securities issued by highly leveraged companies. An
increase in the number of defaults could adversely affect the value of all
outstanding high yield securities, thus disrupting the market for such
securities.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES.
High yield securities are more sensitive to adverse economic changes or
individual corporate developments but less sensitive to interest rate changes
than are Treasury or investment grade bonds. As a result, when interest rates
rise, causing bond prices to fall, the value of high yield debt bonds tend not
to fall as much as Treasury or investment grade corporate bonds. Conversely when
interest rates fall, high yield bonds tend to underperform Treasury and
investment grade corporate bonds because high yield bond prices tend not to rise
as much as the prices of these bonds.
The financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of high yield securities to service their principal and interest
payments, to meet projected business goals and to obtain additional financing
than on more creditworthy issuers. Holders of high yield securities could also
be at greater risk because high yield securities are generally unsecured and
subordinate to senior debt holders and secured creditors. If the issuer of a
High Yield Security owned by the Funds defaults, the Funds may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
high yield securities and the Funds' net asset value. Furthermore, in the case
of high yield securities structured as zero coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes
and thereby tend to be more speculative and volatile than securities which pay
in cash.
PAYMENT EXPECTATIONS.
High yield securities present risks based on payment expectations. For
example, high yield securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the Funds
may have to replace the security with a lower yielding security, resulting in a
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decreased return for investors. Also, the value of high yield securities may
decrease in a rising interest rate market. In addition, there is a higher risk
of non-payment of interest and/or principal by issuers of high yield securities
than in the case of investment grade bonds.
LIQUIDITY AND VALUATION RISKS.
Lower-rated bonds are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of high yield
securities tend to be institutions, rather than individuals, a factor that
further limits the secondary market. To the extent that no established retail
secondary market exists, many high yield securities may not be as liquid as
Treasury and investment grade bonds. The ability of a Fund's Board of Directors
to value or sell high yield securities will be adversely affected to the extent
that such securities are thinly traded or illiquid. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities more than other securities,
especially in a thinly-traded market. To the extent the Funds owns illiquid or
restricted high yield securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. At times of less liquidity, it may be more difficult to
value high yield securities because this valuation may require more research,
and elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available.
TAXATION.
Special tax considerations are associated with investing in high yield
securities structured as zero coupon or pay-in-kind securities. The Funds report
the interest on these securities as income even though it receives no cash
interest until the security's maturity or payment date.
LIMITATIONS OF CREDIT RATINGS.
The credit ratings assigned to high yield securities may not accurately
reflect the true risks of an investment. Credit ratings typically evaluate the
safety of principal and interest payments, rather than the market value risk of
high yield securities. In addition, credit agencies may fail to adjust credit
ratings to reflect rapid changes in economic or company conditions that affect a
security's market value. Although the ratings of recognized rating services such
as Moody's and S&P are considered, the Investment Manager primarily relies on
its own credit analysis, which includes a study of existing debt, capital
structure, ability to service debts and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. Thus, the achievement of the Funds' investment objective may be
more dependent on the Investment Manager's own credit analysis than might be the
case for a fund which invests in higher quality bonds. The Investment Manager
continually monitors the investments in the Funds' portfolio and carefully
evaluates whether to dispose of or retain high yield securities whose credit
ratings have changed. The Funds may retain a security whose rating has been
changed.
CONGRESSIONAL PROPOSALS.
New laws and proposed new laws may have a negative impact on the market for
high yield securities. As examples, recent legislation requires
federally-insured savings and loan associations to divest themselves of their
investments in high yield securities and pending proposals are designed to limit
the use of, or tax and eliminate other advantages of, high yield securities. Any
such proposals, if enacted, could have a negative effect on the Funds' net asset
values.
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DERIVATIVES
The Funds may invest in derivative instruments. Generally, derivatives can
be characterized as financial instruments whose performance is derived, at least
in part, from the performance of an underlying asset or assets. Types of
derivatives include options, futures contracts, options on futures and forward
contracts. Derivative Instruments may be used for a variety of reasons,
including to enhance return, hedge certain market risks, or provide a substitute
for purchasing or selling particular securities. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit a Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (I.E., margin requirements) operated by
the clearing agency in order to reduce overall credit risk. As a result, unless
the clearing agency defaults, there is relatively little counterparty credit
risk associated with Derivatives purchased on an exchange. By contrast, no
clearing agency guarantees over-the-counter Derivatives. Therefore, each party
to an over-the-counter Derivative bears the risk that the counterparty will
default. Accordingly, the Funds will consider the creditworthiness of
counterparties to over-the-counter Derivatives in the same manner as they would
review the credit quality of a security to be purchased by a Fund.
Over-the-counter Derivatives are less liquid than exchange-traded Derivatives
since the other party to the transaction may be the only investor with
sufficient understanding of the Derivative to be interested in bidding for it.
In the case of the MidCap Value Fund, LargeCap Leaders Fund and Asia-Pacific
Equity Fund, it is expected that derivatives will not ordinarily be used for any
of the Funds, but a Fund may make occasional use of certain derivatives for
hedging. For example, MidCap Value Fund, LargeCap Leaders Fund and Asia-Pacific
Equity Fund may purchase put options to attempt to preserve the value of
securities that it holds, which it could do by exercising the option if the
price of the security falls below the `strike price' for the option. The
Advisory Funds will not engage in any other type of options transactions.
MORTGAGE-RELATED SECURITIES
The Government Securities Income Fund may invest up to 100% of its assets
and High Yield Fund may invest up to 35% of its assets in certain types of
mortgage-related securities. The Pilgrim Mutual Funds and the funds which
comprise the Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and the High Yield Fund III may also invest in Mortgage-Related
Securities. One type of mortgage-related security includes certificates that
represent pools of mortgage loans assembled for sale to investors by various
governmental and private organizations. These securities provide a monthly
payment, which consists of both an interest and a principal payment that is in
effect a "pass-through" of the monthly payment made by each individual borrower
on his or her residential mortgage loan, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying residential property,
refinancing, or foreclosure, net of fees or costs that may be incurred. Some
certificates (such as those issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, regardless of whether the mortgagor actually makes
the payment.
The Funds indicated above may invest in U.S. Government agency
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities, including GNMA, FNMA, and FHLMC. These
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instruments might be considered derivatives. The primary risks associated with
these instruments is the risk that their value will change with changes in
interest rates and prepayment risk.
A major governmental guarantor of pass-through certificates is the
Government National Mortgage Association ("GNMA"). GNMA guarantees, with the
full faith and credit of the United States government, the timely payments of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
are backed by pools of FHA-insured or VA-guaranteed mortgages. Other
governmental guarantors (but not backed by the full faith and credit of the
United States Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA
purchases residential mortgages from a list of approved seller/services that
include state and federally chartered savings and loan associations, mutual
saving banks, commercial banks, credit unions and mortgage bankers.
The Government Securities Income Fund will purchase only U.S. Government
Agency Mortgage-Backed Securities. These securities are obligations issued or
guaranteed by the U.S. Government or by one of its agencies or
instrumentalities, including but not limited to GNMA, FNMA or FHLMC. Although
their close relationship with the U.S. Government is believed to make them
high-quality securities with minimal credit risks, the U.S. Government is not
obligated by law to support either FNMA or FHLMC. However, historically there
have not been any defaults of FNMA or FHLMC issues. Mortgage-backed securities
consist of interests in underlying mortgages with maturities of up to thirty
years. However, due to early unscheduled payments of principal on the underlying
mortgages, the securities have a shorter average life and, therefore, less
volatility than a comparable thirty-year bond.
The prices of high coupon U.S. Government Agency Mortgage-Backed Securities
do not tend to rise as rapidly as those of traditional fixed-rate securities at
times when interest rates are decreasing, and tend to decline more slowly at
times when interest rates are increasing. The Government Securities Income Fund
may purchase such securities at a premium, which means that a faster principal
prepayment rate than expected will reduce the market value of and income from
such securities, while a slower prepayment rate will tend to increase the market
value of and income from such securities.
The Funds indicated above, except the Government Securities Income Fund,
may also purchase mortgage-backed securities issued by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers that also create pass-through pools of
conventional residential mortgage loans. Such issuers may in addition be the
originators of the underlying mortgage loans as well as the guarantors of the
pass-through certificates. Pools created by such non-governmental issuers
generally offer a higher rate of return than governmental pools because there
are no direct or indirect governmental guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers and the mortgage poolers.
It is expected that governmental or private entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. As new types of pass-through securities are developed and offered to
investors, the Investment Manager may, consistent with the Funds' investment
objectives, policies and restrictions, consider making investments in such new
types of securities.
Other types of mortgage-related securities in which the Funds may invest
include debt securities that are secured, directly or indirectly, by mortgages
on commercial real estate or residential rental properties, or by first liens on
residential manufactured homes (as defined in section 603(6) of the National
Manufactured Housing Construction and Safety Standards Act of 1974), whether
such manufactured homes are considered real or personal property under the laws
of the states in which they are located.
Securities in this investment category include, among others, standard
mortgage-backed bonds and newer collateralized mortgage obligations ("CMOs").
Mortgage-backed bonds are secured by pools of mortgages, but unlike pass-through
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securities, payments to bondholders are not determined by payments on the
mortgages. The bonds consist of a single class, with interest payable
periodically and principal payable on the stated date of maturity. CMOs have
characteristics of both pass-through securities and mortgage-backed bonds. CMOs
are secured by pools of mortgages, typically in the form of "guaranteed"
pass-through certificates such as GNMA, FNMA, or FHLMC securities. The payments
on the collateral securities determine the payments to bondholders, but there is
not a direct "pass-through" of payments. CMOs are structured into multiple
classes, each bearing a different date of maturity. Monthly payments of
principal received from the pool of underlying mortgages, including prepayments,
is first returned to investors holding the shortest maturity class. Investors
holding the longest maturity class receive principal only after the shorter
maturity classes have been retired.
CMOs are issued by entities that operate under order from the SEC exempting
such issuers from the provisions of the 1940 Act. Until recently, the staff of
the SEC had taken the position that such issuers were investment companies and
that, accordingly, an investment by an investment company (such as the Funds) in
the securities of such issuers was subject to the limitations imposed by Section
12 of the 1940 Act. However, in reliance on SEC staff interpretations, the Funds
may invest in securities issued by certain "exempted issuers" without regard to
the limitations of Section 12 of the 1940 Act. In its interpretation, the SEC
staff defined "exempted issuers" as unmanaged, fixed asset issuers that: (a)
invest primarily in mortgage-backed securities; (b) do not issue redeemable
securities as defined in Section 2(a)(32) of the 1940 Act; (c) operate under the
general exemptive orders exempting them from all provisions of the 1940 Act; and
(d) are not registered or regulated under the 1940 Act as investment companies.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the interest and a larger portion of the principal from
the Mortgage Assets, while the other classes will receive primarily interest and
only a small portion of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets, and
a rapid rate of principal payments may have a material adverse effect on such
security's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a Fund may fail to recoup
fully its initial investment in these securities. The determination of whether a
particular government-issued IO or PO backed by fixed-rate mortgages is liquid
is made by Pilgrim or a Sub-Adviser under guidelines and standards established
by the Board of Trustees. Such a security may be deemed liquid if it can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
Investments in mortgage-related securities involve certain risks. In
periods of declining interest rates, prices of fixed income securities tend to
rise. However, during such periods, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
such prepayments must be reinvested by the issuer at lower rates. The rate of
prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security, and may have the effect of shortening or extending
the effective maturity of the security beyond what was anticipated at the time
of the purchase. Unanticipated rates of prepayment on underlying mortgages can
be expected to increase the volatility of such securities. In addition, the
value of these securities may fluctuate in response to the market's perception
of the creditworthiness of the issuers of mortgage-related securities owned by a
Fund. Because investments in mortgage-related securities are interest sensitive,
the ability of the issuer to reinvest favorably in underlying mortgages may be
limited by government regulation or tax policy. For example, action by the Board
of Governors of the Federal Reserve System to limit the growth of the nation's
money supply may cause interest rates to rise and thereby reduce the volume of
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new residential mortgages. Additionally, although mortgages and mortgage-related
securities are generally supported by some form of government or private
guarantees and/or insurance, there is no assurance that private guarantors or
insurers will be able to meet their obligations. Further, stripped
mortgage-backed securities are likely to experience greater price volatility
than other types of mortgage securities. The yield to maturity on the interest
only class is extremely sensitive, both to changes in prevailing interest rates
and to the rate of principal payments (including prepayments) on the underlying
mortgage assets. Similarly, the yield to maturity on CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets. In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are made. A Fund could fail to fully recover its initial investment
in a CMO residual or a stripped mortgage-backed security.
Each of the Mid-Cap Opportunities Fund, Growth + Value Fund, International
Value Fund, Emerging Markets Value Fund, Research Enhanced Index Fund, Income &
Growth Fund, High Total Return Fund II and High Total Return Fund III may invest
up to 5% of its net assets in Privately Issued Collateralized Mortgage-Backed
Obligations ("CMOs"), Interest Obligations ("IOs") and Principal Obligations
("POs") when Pilgrim believes that such investments are consistent with the
Fund's investment objective.
The Pilgrim Mutual Funds, Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, Growth Opportunities Fund, Balance Sheet Opportunities
Trust, Government Securities Fund, and the High Yield Fund III may invest in
foreign mortgage-related securities. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (E.G., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans. The
Primary Fund in which the Money Market Fund invests substantially all of its
assets will not invest in foreign mortgage-related securities.
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds
invest include, but are not limited to, interests in pools of receivables, such
as credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number
of respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities. The Primary Fund in which the Money Market Fund invests
substantially all of its assets will not invest in asset-backed securities.
GNMA CERTIFICATES. Certificates of the GNMA ("GNMA Certificates") evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds, in that principal is paid back monthly as payments of principal,
including prepayments, on the mortgages in the underlying pool are passed
through to holders of GNMA Certificates representing interests in the pool,
rather than returned in a lump sum at maturity. The GNMA Certificates that the
Funds may purchase are the "modified pass-through" type.
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GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA") or guaranteed by the Veterans Administration ("VA").
GNMA is also empowered to borrow without limitation from the U.S. Treasury, if
necessary, to make payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely to
be substantially less than the stated maturity of the mortgages underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal investment
long before the maturity of the mortgages in the pool. Foreclosures impose no
risk of loss of the principal balance of a Certificate, because of the GNMA
guarantee, but foreclosure may impact the yield to shareholders because of the
need to reinvest proceeds of foreclosure. As prepayment rates of individual
mortgage pools vary widely, it is not possible to predict accurately the average
life of a particular issue of GNMA Certificates. However, statistics published
by the FHA indicate that the average life of single family dwelling mortgages
with 25 to 30-year maturities, the type of mortgages backing the vast majority
of GNMA Certificates, is approximately 12 years. Prepayments are likely to
increase in periods of falling interest rates. It is customary to treat GNMA
Certificates as 30-year mortgage-backed securities that prepay fully in the
twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the certificates, by the amount of the fees
paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield that will be earned on GNMA Certificates. First, GNMA
Certificates may be issued at a premium or discount rather than at par, and,
after issuance, GNMA Certificates may trade in the secondary market at a premium
or discount. Second, interest is earned monthly, rather than semi-annually as
with traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying it. For example, if interest rates
decline, prepayments may occur faster than had been originally projected and the
yield to maturity and the investment income of the Fund would be reduced.
SUBORDINATED MORTGAGE SECURITIES
Subordinated mortgage securities have certain characteristics and certain
associated risks. In general, the subordinated mortgage securities in which the
Funds may invest consist of a series of certificates issued in multiple classes
with a stated maturity or final distribution date. One or more classes of each
series may be entitled to receive distributions allocable only to principal,
principal prepayments, interest or any combination thereof prior to one or more
other classes, or only after the occurrence of certain events, and may be
subordinated in the right to receive such distributions on such certificates to
one or more senior classes of certificates. The rights associated with each
class of certificates are set forth in the applicable pooling and servicing
agreement, form of certificate and offering documents for the certificates.
The subordination terms are usually designed to decrease the likelihood
that the holders of senior certificates will experience losses or delays in the
receipt of their distributions and to increase the likelihood that the senior
certificate holders will receive aggregate distributions of principal and
interest in the amounts anticipated. Generally, pursuant to such subordination
terms, distributions arising out of scheduled principal, principal prepayments,
interest or any combination thereof that otherwise would be payable to one or
more other classes of certificates of such series (i.e., the subordinated
certificates) are paid instead to holders of the senior certificates. Delays in
receipt of scheduled payments on mortgage loans and losses on defaulted mortgage
loans are typically borne first by the various classes of subordinated
certificates and then by the holders of senior certificates.
In some cases, the aggregate losses in respect of defaulted mortgage loans
that must be borne by the subordinated certificates and the amount of the
distributions otherwise distributable on the subordinated certificates that
would, under certain circumstances, be distributable to senior certificate
holders may be limited to a specified amount. All or any portion of
distributions otherwise payable to holders of subordinated certificates may, in
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certain circumstances, be deposited into one or more reserve accounts for the
benefit of the senior certificate holders. Since a greater risk of loss is borne
by the subordinated certificate holders, such certificates generally have a
higher stated yield than the senior certificates.
Interest on the certificates generally accrues on the aggregate principal
balance of each class of certificates entitled to interest at an applicable
rate. The certificate interest rate may be a fixed rate, a variable rate based
on current values of an objective interest index or a variable rate based on a
weighted average of the interest rate on the mortgage loans underlying or
constituting the mortgage assets. In addition, the underlying mortgage loans may
have variable interest rates.
Generally, to the extent funds are available, interest accrued during each
interest accrual period on each class of certificates entitled to interest is
distributable on certain distribution dates until the aggregate principal
balance of the certificates of such class has been distributed in full.
The amount of interest that accrues during any interest accrual period and
over the life of the certificates depends primarily on the aggregate principal
balance of the class of certificates, which, unless otherwise specified, depends
primarily on the principal balance of the mortgage assets for each such period
and the rate of payment (including prepayments) of principal of the underlying
mortgage loans over the life of the trust.
A series of certificates may consist of one or more classes as to which
distributions allocable to principal will be allocated. The method by which the
amount of principal to be distributed on the certificates on each distribution
date is calculated and the manner in which such amount could be allocated among
classes varies and could be effected pursuant to a fixed schedule, in relation
to the occurrence of certain events or otherwise. Special distributions are also
possible if distributions are received with respect to the mortgage assets, such
as is the case when underlying mortgage loans are prepaid.
A mortgage-related security that is senior to a subordinated residential
mortgage security will not bear a loss resulting from the occurrence of a
default on an underlying mortgage until all credit enhancement protecting such
senior holder is exhausted. For example, the senior holder will only suffer a
credit loss after all subordinated interests have been exhausted pursuant to the
terms of the subordinated residential mortgage security. The primary credit risk
to the Funds by investing in subordinated residential mortgage securities is
potential losses resulting from defaults by the borrowers under the underlying
mortgages. The Funds would generally realize such a loss in connection with a
subordinated residential mortgage security only if the subsequent foreclosure
sale of the property securing a mortgage loan does not produce an amount at
least equal to the sum of the unpaid principal balance of the loan as of the
date the borrower went into default, the interest that was not paid during the
foreclosure period and all foreclosure expenses.
The Investment Manager will seek to limit the risks presented by
subordinated residential mortgage securities by reviewing and analyzing the
characteristics of the mortgage loans that underlie the pool of mortgages
securing both the senior and subordinated residential mortgage securities. The
Investment Manager has developed a set of guidelines to assist in the analysis
of the mortgage loans underlying subordinated residential mortgage securities.
Each pool purchase is reviewed against the guidelines. The Funds seek
opportunities to acquire subordinated residential mortgage securities where, in
the view of the Investment Manager, the potential for a higher yield on such
instruments outweighs any additional risk presented by the instruments. The
Investment Manager will seek to increase yield to shareholders by taking
advantage of perceived inefficiencies in the market for subordinated residential
mortgage securities.
CREDIT ENHANCEMENT. Credit enhancement for the senior certificates comprising a
series is provided by the holders of the subordinated certificates to the extent
of the specific terms of the subordination and, in some cases, by the
establishment of reserve funds. Depending on the terms of a particular pooling
and servicing agreement, additional or alternative credit enhancement may be
provided by a pool insurance policy and/or other insurance policies, third party
limited guaranties, letters of credit, or similar arrangements. Letters of
credit may be available to be drawn upon with respect to losses due to mortgagor
bankruptcy and with respect to losses due to the failure of a master service to
comply with its obligations, under a pooling and servicing agreement, if any, to
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repurchase a mortgage loan as to which there was fraud or negligence on the part
of the mortgagor or originator and subsequent denial of coverage under a pool
insurance policy, if any. A master service may also be required to obtain a pool
insurance policy to cover losses in an amount up to a certain percentage of the
aggregate principal balance of the mortgage loans in the pool to the extent not
covered by a primary mortgage insurance policy by reason of default in payments
on mortgage loans.
OPTIONAL TERMINATION OF A TRUST. A pooling and servicing agreement may provide
that the depositor and master service could effect early termination of a trust,
after a certain specified date or the date on which the aggregate outstanding
principal balance of the underlying mortgage loans is less than a specific
percentage of the original aggregate principal balance of the underlying
mortgage loans by purchasing all of such mortgage loans at a price, unless
otherwise specified, equal to the greater of a specified percentage of the
unpaid principal balance of such mortgage loans, plus accrued interest thereon
at the applicable certificate interest rate, or the fair market value of such
mortgage assets. Generally, the proceeds of such repurchase would be applied to
the distribution of the specified percentage of the principal balance of each
outstanding certificate of such series, plus accrued interest, thereby retiring
such certificates. Notice of such optional termination would be given by the
trustee prior to such distribution date.
UNDERLYING MORTGAGE LOANS. The underlying trust assets are a mortgage pool
generally consisting of mortgage loans on single, multi-family and mobile home
park residential properties. The mortgage loans are originated by savings and
loan associations, savings banks, commercial banks or similar institutions and
mortgage banking companies.
Various services provide certain customary servicing functions with respect
to the mortgage loans pursuant to servicing agreements entered into between each
service and the master service. A service duties generally include collection
and remittance of principal and interest payments, administration of mortgage
escrow accounts, collection of insurance claims, foreclosure procedures and, if
necessary, the advance of funds to the extent certain payments are not made by
the mortgagors and are recoverable under applicable insurance policies or from
proceeds of liquidation of the mortgage loans.
The mortgage pool is administered by a master service who (a) establishes
requirements for each service, (b) administers, supervises and enforces the
performance by the services of their duties and responsibilities under the
servicing agreements, and (c) maintains any primary insurance, standard hazard
insurance, special hazard insurance and any pool insurance required by the terms
of the certificates. The master service may be an affiliate of the depositor and
also may be the service with respect to all or a portion of the mortgage loans
contained in a trust fund for a series of certificates.
ZERO COUPON AND PAY-IN-KIND SECURITIES
The Funds may invest in zero coupon securities. The Convertible, Balanced,
and High Yield II Funds will limit their investments in such securities to 35%
of their respective net assets. Zero coupon, or deferred interest securities are
debt obligations that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and therefore are issued and traded
at a discount from their face amounts or par value. The discount varies,
depending on the time remaining until maturity or cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon and delayed interest securities
generally are more volatile than the market prices of securities that pay
interest periodically and are likely to respond to changes in interest rates to
a greater degree than do non-zero coupon securities having similar maturities
and credit quality. Current federal income tax law requires holders of zero
coupon securities to report as interest income each year the portion of the
original issue discount on such securities (other than tax-exempt original issue
discount from a zero coupon security) that accrues that year, even though the
holders receive no cash payments of interest during the year.
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The Funds may also invest in pay-in-kind securities. Pay-in-kind securities
are securities that pay interest or dividends through the issuance of additional
securities. A Fund will be required to report as income annual inclusions of
original issue discount over the life of such securities as if it were paid on a
current basis, although no cash interest or dividend payments are received by
the Funds until the cash payment date or the securities mature. Under certain
circumstances, the Funds could also be required to include accrued market
discount or capital gain with respect to its pay-in-kind securities.
The risks associated with lower rated debt securities apply to these
securities. Zero coupon and pay-in-kind securities are also subject to the risk
that in the event of a default, the Fund may realize no return on its
investment, because these securities do not pay cash interest.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
The Advisory Funds, High Yield Fund, MagnaCap Fund, and the Pilgrim Mutual
Funds (other than the Money Market Funds) may invest in securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other similar securities representing securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. EDRs are receipts issued by a European financial
institution evidencing a similar arrangement. Generally, ADRs, in registered
form, are designed for use in the United States securities markets, and EDRs, in
bearer form, are designed for use in European securities markets.
FOREIGN AND EMERGING MARKET SECURITIES
Each Fund, except Government Securities Fund, may invest in securities of
foreign issuers. Each of these Funds other than International Value, Emerging
Markets Value, High Yield, High Total Return II and High Total Return Funds may
invest up to 20% of its net assets in foreign securities, of which 10% of its
net assets may be invested in foreign securities that are not listed on a U.S.
securities exchange. High Yield Fund may invest up to 35% of its total assets
and High Total Return Fund II and High Total Return Fund may each invest up to
50% of its assets in foreign securities. International Value Fund and Emerging
Markets Value Fund may each invest up to 100% of its assets in securities of
foreign issuers. The Balance Sheet Opportunities Fund may invest up to 20% of
its net assets in foreign securities, of which 10% of its net assets may be
invested in foreign securities that are not listed on a U.S. securities
exchange.
The Asia-Pacific Equity Fund invests primarily, and the MagnaCap Fund may
invest up to 5% of its total assets, in certain foreign securities (including
ADRs). The International Value Fund may invest up to 25% of its assets and the
Emerging Markets Value Fund may invest greater than 65% of its assets in
securities of companies located in countries with emerging securities markets.
The High Yield Fund may invest up to 10% of its total assets in debt obligations
(including preferred stocks) issued or guaranteed by foreign corporations,
certain supranational entities (such as the World Bank) and foreign governments
(including political subdivisions having taxing authority) or their agencies or
instrumentalities, including ADRs. These securities may be denominated in either
U.S. dollars or in non-U.S. currencies. The Asia-Pacific Equity Fund will invest
substantially all of its assets in the equity securities of companies based in
the Asia-Pacific region. The Asia-Pacific countries include, but are not limited
to, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan
and Thailand, although the Fund will not invest in Japan and Australia.
Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delivery of securities may not occur at the same time as payment in some foreign
markets. Delays in settlement could result in temporary periods when a portion
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of the assets of a Fund is uninvested and no return is earned thereon. The
inability of the Funds to make intended security purchases due to settlement
problems could cause the Funds to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Funds due to subsequent declines in value of the
portfolio security or, if the Funds have entered into a contract to sell the
security, could result in possible liability to the purchaser.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies. There
is generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the United
States. A foreign government may impose exchange control regulations that may
have an impact on currency exchange rates, and there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments that could affect U.S. investments in those countries.
Although the Funds will use reasonable efforts to obtain the best available
price and the most favorable execution with respect to all transactions and the
Investment Manager or Portfolio Manager will consider the full range and quality
of services offered by the executing broker or dealer when making these
determinations, fixed commissions on many foreign stock exchanges are generally
higher than negotiated commissions on U.S. exchanges. Certain foreign
governments levy withholding taxes against dividend and interest income, or may
impose other taxes. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received by the Funds on these investments. However, these foreign
withholding taxes are not expected to have a significant impact on the Fund,
since the Fund's investment objective is to seek long-term capital appreciation
and any income earned by the Fund should be considered incidental.
The risks of investing in foreign securities may be intensified in the case
of investments in issuers domiciled or doing substantial business in emerging
markets or countries with limited or developing capital markets. Security prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of sudden adverse government action and even nationalization of businesses,
restrictions on foreign ownership, or prohibitions of repatriation of assets,
and may have less protection of property rights than more developed countries.
The economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. Transaction settlement and dividend collection procedures
may be less reliable in emerging markets than in developed markets. Securities
of issuers located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic price movements.
INTERNATIONAL DEBT SECURITIES. The Funds indicated above may invest in debt
obligations (which may be denominated in U.S. dollar or in non-U.S. currencies)
of any rating issued or guaranteed by foreign corporations, certain
supranational entities (such as the World Bank) and foreign governments
(including political subdivisions having taxing authority) or their agencies or
instrumentalities, including American Depository Receipts. No more than 10% of
the High Yield Fund's total assets, at the time of purchase, will be invested in
securities of foreign issuers. These investments may include debt obligations
such as bonds (including sinking fund and callable bonds), debentures and notes,
together with preferred stocks, pay-in-kind securities, and zero coupon
securities.
In determining whether to invest in debt obligations of foreign issuers,
the Fund will consider the relative yields of foreign and domestic high yield
securities, the economies of foreign countries, the condition of such countries'
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financial markets, the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. Dollar. These factors are
judged on the basis of fundamental economic criteria (e.g., relative inflation
levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. Subsequent foreign
currency losses may result in the Fund having previously distributed more income
in a particular period than was available from investment income, which could
result in a return of capital to shareholders. The Fund's portfolio of foreign
securities may include those of a number of foreign countries, or, depending
upon market conditions, those of a single country.
Investments in securities of issuers in non-industrialized countries
generally involve more risk and may be considered highly speculative. Although a
portion of the Fund's investment income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars and absorb the cost of currency fluctuations and the cost of
currency conversions. Investment in foreign securities involves considerations
and risks not associated with investment in securities of U.S. issuers. For
example, foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered under the Securities Act of
1933, as amended, the issuer does not have to comply with the disclosure
requirements of the Securities Exchange Act of 1934, as amended. The values of
foreign securities investments will be affected by incomplete or inaccurate
information available to the Investment Manager as to foreign issuers, changes
in currency rates, exchange control regulations or currency blockage,
expropriation or nationalization of assets, application of foreign tax laws
(including withholding taxes), changes in governmental administration or
economic or monetary policy. In addition, it is generally more difficult to
obtain court judgments outside the United States.
INVESTING IN DEVELOPING ASIA-PACIFIC SECURITIES MARKETS AND ECONOMIES. The
securities markets of developing Asia-Pacific countries are not as large as the
U.S. securities markets and have substantially less trading volume, resulting in
a lack of liquidity and high price volatility. Certain markets, such as those of
China, are in only the earliest stages of development. There is also a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region, such as in Japan. Developing Asia-Pacific brokers typically are
fewer in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements of open-end investment
companies and the restrictions on foreign investments discussed below, result in
potentially fewer investment opportunities for Asia-Pacific Equity Fund and may
have an adverse impact on the investment performance of the Fund. The Fund's
investment restrictions permit it to invest up to 15% of its net assets in
securities that are determined by the Portfolio Manager to be illiquid.
The investment objective of the Asia-Pacific Equity Fund reflects the
belief that the economies of the developing Asia-Pacific countries will continue
to grow in such a fashion as to provide attractive investment opportunities. At
the same time, emerging economies present certain risks that do not exist in
more established economies. Especially significant is that political and social
uncertainties exist for many of the developing Asia-Pacific countries. In
addition, the governments of many of such countries, such as Indonesia, have a
heavy role in regulating and supervising the economy. Another risk common to
most such countries is that the economy is heavily export oriented and,
accordingly, is dependent upon international trade. The existence of
overburdened infrastructure and obsolete financial systems also presents risks
in certain countries, as do environmental problems. Certain economies also
depend to a significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices which, in turn, may be
affected by a variety of factors. In addition, certain developing Asia-Pacific
countries, such as the Philippines, are especially large debtors to commercial
banks and foreign governments.
Archaic legal systems in certain developing Asia-Pacific countries also may
have an adverse impact on the Asia-Pacific Equity Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
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investment, the notion of limited liability is less clear in certain developing
Asia-Pacific countries. Similarly, the rights of investors in Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in
developing Asia-Pacific countries. For example, some of the currencies of
developing Asia-Pacific countries have experienced devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries face serious exchange constraints. In
addition, as mentioned above, governments of many developing Asia-Pacific
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector.
In certain cases, the government owns or controls many companies, including
the largest in the country. Accordingly, government actions in the future could
have a significant effect on economic conditions in developing Asia-Pacific
countries, which could affect private sector companies and the Asia-Pacific
Equity Fund, as well as the value of securities in the Fund's portfolio.
In addition to the relative lack of publicly available information about
developing Asia-Pacific issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
are applicable to U.S. companies, inflation accounting rules in some developing
Asia-Pacific countries require, for companies that keep accounting records in
the local currency, for both tax and accounting purposes, that certain assets
and liabilities be restated on the company's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits for certain developing Asia-Pacific
companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the
Asia-Pacific Equity Fund incurring additional costs and delays in providing
transportation and custody services for such securities outside such countries,
if possible.
As a result, the Portfolio Manager of the Asia-Pacific Equity Fund may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular developing
Asia-Pacific country. The Fund may invest in countries in which foreign
investors, including the Portfolio Manager of the Fund, have had no or limited
prior experience.
RESTRICTIONS ON FOREIGN INVESTMENTS. Some developing countries prohibit or
impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as a Fund. As
illustrations, certain countries may require governmental approval prior to
investments by foreign persons or limit the amount of investment by foreign
persons in a particular company or limit the investment by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms (including price) than securities of the company available for purchase by
nationals. Certain countries may restrict investment opportunities in issuers or
industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain
developing countries, as well as limitations on such investments, also may have
an adverse impact on the operations of a Fund that invests in such countries.
For example, the Fund may be required in certain of such countries to invest
initially through a local broker or other entity and then have the shares
purchased re-registered in the name of the Fund. Re-registration may in some
instances not be able to occur on timely basis, resulting in a delay during
which a Fund may be denied certain of its rights as an investor, including
rights as to dividends or to be made aware of certain corporate actions. There
also may be instances where a Fund places a purchase order but is subsequently
informed, at the time of re-registration, that the permissible allocation of the
investment to foreign investors has been filled, depriving the Fund of the
ability to make its desired investment at that time.
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Substantial limitations may exist in certain countries with respect to a
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. A Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. No more than 15% of a Fund's net assets may be comprised, in the
aggregate, of assets that are (i) subject to material legal restrictions on
repatriation or (ii) invested in illiquid securities. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect certain aspects of the operations of the Fund. For example, funds may
be withdrawn from the People's Republic of China only in U.S. or Hong Kong
dollars and only at an exchange rate established by the government once each
week.
In certain countries, banks or other financial institutions may be among
the leading companies or have actively traded securities. The 1940 Act restricts
each Fund's investments in any equity securities of an issuer that, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities," as defined by the rules thereunder. The provisions may
restrict the Fund's investments in certain foreign banks and other financial
institutions.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in foreign
exchange rates will affect, favorably or unfavorably, the U.S. dollar value of
foreign securities. In a period when the U.S. dollar generally rises against
foreign currencies, the returns on foreign stocks for a U.S. investor will be
diminished. By contrast, in a period when the U.S. dollar generally declines,
the returns on foreign securities will be enhanced. Unfavorable changes in the
relationship between the U.S. dollar and the relevant foreign currencies,
therefore, will adversely affect the value of a Fund's shares.
The introduction of the euro (a common currency for the European Economic
and Monetary Union) in January 1999 could have an adverse effect of the Fund's
ability to value holdings denominated in local currencies and on trading and
other administrative systems which affect such securities.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Funds that invest in foreign
securities may buy and sell securities denominated in currencies other than the
U.S. Dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. Dollar, the Funds may enter into foreign currency exchange
transactions to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. Dollar. The Funds either enter into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or uses forward foreign currency contracts
to purchase or sell foreign currencies. Asia-Pacific Equity Fund may not invest
more than 5% of its assets (taken at market value at the time of investment) in
forward foreign currency contracts.
A forward foreign currency exchange contract is an agreement to exchange
one currency for another -- for example, to exchange a certain amount of U.S.
Dollars for a certain amount of Korean Won -- at a future date. Forward foreign
currency contracts are included in the group of instruments that can be
characterized as derivatives. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the prices
of these securities should decline.
Although these transactions tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of these securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. Use of currency
hedging techniques may also be limited by management's need to protect the
status of the Fund as a regulated investment company under the Code.
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FOREIGN BANK OBLIGATIONS.
Through its investment in the Primary Fund, the Money Market Fund invests
in obligations of foreign banks and foreign branches of U.S. banks. Obligations
of foreign banks and foreign branches of U.S. banks involve somewhat different
investment risks from those affecting obligations of U.S. banks, including the
possibilities that liquidity could be impaired because of future political and
economic developments; the obligations may be less marketable than comparable
obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes
on interest income payable on those obligations; foreign deposits may be seized
or nationalized; foreign governmental restrictions (such as foreign exchange
controls) may be adopted which might adversely affect the payment of principal
and interest on those obligations; and the selection of those obligations may be
more difficult because there may be less publicly available information
concerning foreign banks. In addition, the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. In that connection, foreign banks
are not subject to examination by any U.S. government agency or instrumentality.
SOVEREIGN DEBT SECURITIES.
Certain Funds may invest in sovereign debt securities issued by governments
of foreign countries. The sovereign debt in which the Funds may invest may be
rated below investment grade. These securities usually offer higher yields than
higher rated securities but are also subject to greater risk than higher rated
securities.
BRADY BONDS.
Brady bonds represent a type of sovereign debt. These obligations were
created under a debt restructuring plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady, in which foreign entities issued these
obligations in exchange for their existing commercial bank loans. Brady Bonds
have been issued by Argentina, Brazil, Costa Rica, the Dominican Republic,
Mexico, the Philippines, Uruguay and Venezuela, and may be issued by other
emerging countries.
RISKS OF INVESTING IN FOREIGN SECURITIES.
Investments in foreign securities involve certain inherent risks, including
the following:
MARKET CHARACTERISTICS. Settlement practices for transactions in foreign markets
may differ from those in United States markets, and may include delays beyond
periods customary in the United States. Foreign security trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
Transactions in options on securities, futures contracts, futures options
and currency contracts may not be regulated as effectively on foreign exchanges
as similar transactions in the United States, and may not involve clearing
mechanisms and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and procedures
and margin requirements than in the United States. The value of a Fund's
positions may also be adversely impacted by delays in its ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States.
LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
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TAXES. The interest payable on certain of the Funds' foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
COSTS. The expense ratios of the Funds are likely to be higher than those of
investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign company,
the Investment Manager or Portfolio Manager considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located. The
extent to which a Fund will be invested in foreign companies and countries and
depository receipts will fluctuate from time to time within the limitations
described in the Prospectus, depending on the Investment Manager's or Portfolio
Manager's assessment of prevailing market, economic and other conditions.
SECURITIES SWAPS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may enter into securities swaps, a technique primarily used to
indirectly participate in the securities market of a country from which a Fund
would otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS.
Each Fund (other than the Money Market Fund, Advisory Funds, Investment
Funds, Bank and Thrift Fund, and Government Securities Income Fund) is
authorized to purchase put and call options with respect to securities which are
otherwise eligible for purchase by the Fund and with respect to various stock
indices subject to certain restrictions. The Advisory Funds may only purchase
put options on portfolio securities. Put and call options are derivative
securities traded on United States and foreign exchanges, including the American
Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange,
Pacific Stock Exchange and New York Stock Exchange. Except as indicated in
"Non-Hedging Strategic Transactions," the Funds will engage in trading of such
derivative securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Manager or Portfolio Manager perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it protects
against significant downward price movement while it allows full participation
in any upward movement. If the Fund holds a stock which the Investment Manager
or Portfolio Manager believes has strong fundamentals, but for some reason may
be weak in the near term, the Fund may purchase a put option on such security,
thereby giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, is the
amount by which the Fund hedges against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the premium paid for
the put option less any amount for which the put may be sold reduces the profit
the Fund realizes on the sale of the securities.
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If a Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Manager or Portfolio Manager believes there is an active secondary
market to facilitate closing transactions.
WRITING CALL OPTIONS.
Each Fund (other than the Money Market Fund, Investment Funds, Bank and
Thrift Fund, and Government Securities Income Fund) may write covered call
options. A call option is "covered" if a Fund owns the security underlying the
call or has an absolute right to acquire the security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by the
Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after it has been notified
of the exercise of an option.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund generally offsets, in whole or in part, any loss to the Fund resulting from
the repurchase of a call option.
The staff of the Securities and Exchange Commission (the "SEC") has taken
the position that purchased over-the-counter options ("OTC Options") and the
assets used as cover for written OTC Options are illiquid securities. A Fund
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). In connection with
these special arrangements, the Fund intends to establish standards for the
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creditworthiness of the primary dealers with which it may enter into OTC Option
contracts and those standards, as modified from time to time, will be
implemented and monitored by the Investment Manager. Under these special
arrangements, the Fund will enter into contracts with primary dealers that
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but that in no
event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, by which the option is "in-the-money." The formula will also
include a factor to account for the difference between the price of the security
and the strike price of the option if the option is written "out-of-the-money."
"Strike price" refers to the price at which an option will be exercised. "Cover
assets" refers to the amount of cash or liquid assets that must be segregated to
collateralize the value of the futures contracts written by the Fund. Under such
circumstances, the Fund will treat as illiquid that amount of the cover assets
equal to the amount by which the formula price for the repurchase of the option
is greater than the amount by which the market value of the security subject to
the option exceeds the exercise price of the option (the amount by which the
option is "in-the-money"). Although each agreement will provide that the Fund's
repurchase price shall be determined in good faith (and that it shall not exceed
the maximum determined pursuant to the formula), the formula price will not
necessarily reflect the market value of the option written. Therefore, the Fund
might pay more to repurchase the OTC Option contract than the Fund would pay to
close out a similar exchange traded option.
STOCK INDEX OPTIONS.
Each Fund (other than the Money Market Fund, Investment Funds, Bank and
Thrift Fund, and Government Securities Income Fund) may also purchase put and
call options with respect to the S&P 500 and other stock indices. The Funds may
purchase such options as a hedge against changes in the values of portfolio
securities or securities which it intends to purchase or sell, or to reduce
risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain
risks not found in stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Manager's or Portfolio Manager's ability to
predict correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if circumstances disrupt trading of certain
stocks included in the index, such as if trading were halted in a substantial
number of stocks included in the index. If this happens, the Fund could not be
able to close out options which it had purchased, and if restrictions on
exercise were imposed, the Fund might be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Funds purchase put or
call options only with respect to an index which the Investment Manager or
Portfolio Manager believes includes a sufficient number of stocks to minimize
the likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS.
There are several risks associated with transactions in options on
securities and indices. Options may be more volatile than the underlying
instruments and, therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves. There are also significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objective.
In addition, a liquid secondary market for particular options may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
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transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of option of underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events. The extent to
which a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign option exchanges do not afford to participants many of
the protections available in United States option exchanges. For example, there
may be no daily price fluctuation limits in such exchanges or markets, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, a Fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements typically associated with such option writing. See "Dealer Options"
below.
LIMITS ON USE OF OPTIONS.
A Fund may not purchase or sell options if more than 25% of its net assets
would be hedged. The Funds may write covered call options and secured put
options to seek to generate income or lock in gains on up to 25% of their net
assets.
DEALER OPTIONS.
The Funds indicated above may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While the Funds might look to a clearing corporation to exercise
exchange-traded options, if a Fund purchases a dealer option it must rely on the
selling dealer to perform if the Fund exercises the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund can realize the value of a dealer
option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used as cover until the option expires or is exercised. In the
event of insolvency of the other party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, because a Fund must maintain a secured position with respect to any
call option on a security it writes, the Fund may not sell the assets which it
has segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities at a
time when such sale might be advantageous.
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The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. A Fund
may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option. With
that exception, however, the Fund will treat dealer options as subject to the
Fund's limitation on illiquid securities. If the Commission changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may buy or sell put and call options on foreign currencies. A put
or call option on a foreign currency gives the purchaser of the option the right
to sell or purchase a foreign currency at the exercise price until the option
expires. The Funds use foreign currency options separately or in combination to
control currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of a put
option and the simultaneous sale of call option on the same currency with the
same expiration date but with different exercise (or "strike") prices.
Generally, the put option will have an out-of-the-money strike price, while the
call option will have either an at-the-money strike price or an in-the-money
strike price. Foreign currency options are derivative securities. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Funds to reduce foreign currency risk using
such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
The Funds that invest in foreign securities may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fix number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
Each of the Funds (other than the Money Market Fund, Advisory Funds,
MagnaCap Fund, Bank and Thrift Fund, and the Government Securities Income Fund)
may invest in futures contracts and in options on futures contracts as a hedge
against changes in market conditions or interest rates. As a general rule, no
Fund will purchase or sell futures if, immediately thereafter, more than 25% of
its net assets would be hedged.
FINANCIAL FUTURES CONTRACTS AND RELATED OPTIONS.
A Fund may use financial futures contracts and related options to hedge
against changes in the market value of its portfolio securities or securities
that it intends to purchase. The Fund could purchase a financial futures
contract (such as an interest rate futures contract or securities index futures
contract) to protect against a decline in the value of its portfolio or to gain
exposure to securities which the Fund otherwise wishes to purchase. Hedging is
accomplished when an investor takes a position in the futures market opposite to
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his cash market position. There are two types of hedges -- long (or buying) and
short (or selling) hedges. Historically, prices in the futures market have
tended to move in concert with cash market prices, and prices in the futures
market have maintained a fairly predictable relationship to prices in the cash
market. Thus, a decline in the market value of securities in the Fund's
portfolio may be protected against to a considerable extent by gains realized on
futures contracts sales. Similarly, it is possible to protect against an
increase in the market price of securities that the Fund may wish to purchase in
the future by purchasing futures contracts.
A Fund may purchase or sell any financial futures contracts which are
traded on a recognized exchange or board of trade. Financial futures contracts
consist of interest rate futures contracts and securities index futures
contracts. A public market presently exists in interest rate futures contracts
covering long-term U.S. Treasury bonds, U.S. Treasury notes, three-month U.S.
Treasury bills and GNMA certificates. Securities index futures contracts are
currently traded with respect to the Standard & Poor's 500 Composite Stock Price
Index and such other broad-based stock market indices as the New York Stock
Exchange Composite Stock Index and the Value Line Composite Stock Price Index. A
clearing corporation associated with the exchange or board of trade on which a
financial futures contract trades assumes responsibility for the completion of
transactions and also guarantees that open futures contracts will be performed.
An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, the interest rate securities
called for in the contract at a specified future time and at a specified price.
A stock index assigns relative values to the common stocks included in the
index, and the index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. An option on a financial futures contract
gives the purchaser the right to assume a position in the contract (a long
position if the option is a call and short position if the option is a put) at a
specified exercise price at any time during the period of the option.
In contrast to the situation when a Fund purchases or sells a security, no
security is delivered or received by the Fund upon the purchase or sale of a
financial futures contract. Initially, the Fund will be required to segregate
with its custodian bank an amount of cash and/or liquid assets. This amount is
known as initial margin and is in the nature of a performance bond or good faith
deposit on the contract. The current initial margin deposit required per
contract is approximately 5% of the contract amount. Brokers may establish
deposit requirements higher than this minimum. Subsequent payments, called
variation margin, will be made to and from the account on a daily basis as the
price of the futures contract fluctuates. This process is known as marking to
market. At the time of purchase of a futures contract or a call option on a
futures contract, an amount of cash, U. S. Government securities or other
appropriate high-grade securities equal to the market value of the futures
contract minus the Fund's initial margin deposit with respect thereto will be
segregated with the Fund's custodian bank to collateralize fully the position
and thereby ensure that it is not leveraged. The extent to which the Fund may
enter into financial futures contracts and related options may also be limited
by the requirements of the Internal Revenue Code for qualification as a
regulated investment company.
The writer of an option on a futures contract is required to deposit margin
pursuant to requirements similar to those applicable to futures contracts. Upon
exercise of an option on a futures contract, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
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is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller immediately would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss.
The Fund will pay commissions on financial futures contracts and related
options transactions. These commissions may be higher than those that would
apply to purchases and sales of securities directly.
LIMITATIONS ON FUTURES CONTRACTS AND RELATED OPTIONS.
The Funds may not engage in transactions in financial futures contracts or
related options for speculative purposes but only as a hedge against anticipated
changes in the market value of its portfolio securities or securities that it
intends to purchase. The High Yield Fund may not purchase or sell financial
futures contracts or related options if, immediately thereafter, the sum of the
amount of initial margin deposits on the Fund's existing futures and related
options positions and the premiums paid for related options would exceed 2% of
the market value of the Fund's total assets after taking into account unrealized
profits and losses on any such contracts. No Fund of the Pilgrim Mutual Funds
may purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. Those Funds also
may not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets. At the time of purchase of a futures
contract or a call option on a futures contract, an amount of cash, U.S.
Government securities or other appropriate high-grade debt obligations equal to
the market value of the futures contract minus the Fund's initial margin deposit
with respect thereto will be segregated with the Fund's custodian bank to
collateralize fully the position and thereby ensure that it is not leveraged.
The extent to which a Fund may enter into financial futures contracts and
related options also may be limited by the requirements of the Internal Revenue
Code for qualification as a regulated investment company.
RISKS RELATING TO OPTIONS AND FUTURES CONTRACTS.
The purchase of options involves certain risks. If a put option purchased
by a Fund is not sold when it has remaining value, and if the market price of
the underlying security remains equal to or greater than the exercise price, the
Fund will lose its entire investment in the option. Also, where a put option is
purchased to hedge against price movements in a particular security, the price
of the put option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position. Positions in futures contracts and related options may be closed
out only on an exchange that provides a secondary market for such contracts or
options. A Fund will enter into an option or futures position only if there
appears to be a liquid secondary market. However, there can be no assurance that
a liquid secondary market will exist for any particular option or futures
contract at any specific time. Thus, it may not be possible to close out a
futures or related option position. In the case of a futures position, in the
event of adverse price movements the Fund would continue to be required to make
daily margin payments. In this situation, if the Fund have insufficient cash to
meet daily margin requirements it may have to sell portfolio securities at a
time when it may be disadvantageous to do so. In addition, the Fund may be
required to take or make delivery of the securities underlying the futures
contracts it holds. The inability to close out futures positions also could have
an adverse impact on the Fund's ability to hedge its portfolio effectively.
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There are several risks in connection with the use of futures contracts as
a hedging device. While hedging can provide protection against an adverse
movement in market prices, it can also preclude a hedger's opportunity to
benefit from a favorable market movement. In addition, investing in futures
contracts and options on futures contracts will cause the Funds to incur
additional brokerage commissions and may cause an increase in the Fund's
portfolio turnover rate.
The successful use of futures contracts and related options also depends on
the ability of the Investment Manager to forecast correctly the direction and
extent of market movements within a given time frame. To the extent market
prices remain stable during the period a futures contract or option is held by
the Fund or such prices move in a direction opposite to that anticipated, the
Fund may realize a loss on the hedging transaction that is not offset by an
increase in the value of its portfolio securities. As a result, the return of
the Fund for the period may be less than if it had not engaged in the hedging
transaction.
The use of futures contracts involves the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
securities that are being hedged. If the price of the futures contract moves
more or less than the price of the securities being hedged, a Fund will
experience a gain or loss that will not be completely offset by movements in the
price of the securities. It is possible that, where a Fund has sold futures
contracts to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund's portfolio may decline. If
this occurred, the Fund would lose money on the futures contract and would also
experience a decline in value in its portfolio securities. Where futures are
purchased to hedge against a possible increase in the prices of securities
before the Fund is able to invest its cash (or cash equivalents) in securities
(or options) in an orderly fashion, it is possible that the market may decline;
if the Fund then determines not to invest in securities (or options) at that
time because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures that would not be offset by
a reduction in the price of the securities purchased.
The market prices of futures contracts may be affected if participants in
the futures market elect to close out their contracts through off-setting
transactions rather than to meet margin deposit requirements. In such a case,
distortions in the normal relationship between the cash and futures markets
could result. Price distortions could also result if investors in futures
contracts opt to make or take delivery of the underlying securities rather than
to engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, due to the fact that, from the
point of view of speculators, the deposit requirements in the futures markets
are less onerous than margin requirements in the cash market, increased
participation by speculators in the futures market could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of market trends may still not result in a successful transaction.
Compared to the purchase or sale of futures contracts, the purchase of put
or call options on futures contracts involves less potential risk for a Fund
because the maximum amount at risk is the premium paid for the options plus
transaction costs. However, there may be circumstances when the purchase of an
option on a futures contract would result in a loss to a Fund while the purchase
or sale of the futures contract would not have resulted in a loss, such as when
there is no movement in the price of the underlying securities.
INDEX WARRANTS. The Research Enhanced Index Fund may purchase put warrants
and call warrants whose values vary depending on the change in the value of one
or more specified securities indices ("Index Warrants"). Index Warrants are
generally issued by banks or other financial institutions and give the holder
the right, at any time during the term of the warrant, to receive upon exercise
of the warrant a cash payment from the issuer, based on the value of the
underlying index at the time of exercise. In general, if the value of the
underlying index rises above the exercise price of the Index Warrant, the holder
of a call warrant will be entitled to receive a cash payment from the issuer
upon exercise, based on the difference between the value of the index and the
exercise price of the warrant; if the value of the underlying index falls, the
holder of a put warrant will be entitled to receive a cash payment from the
issuer upon exercise, based on the difference between the exercise price of the
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warrant and the value of the index. The holder of a warrant would not be
entitled to any payments from the issuer at any time when, in the case of a call
warrant, the exercise price is greater than the value of the underlying index,
or, in the case of a put warrant, the exercise price is less than the value of
the underlying index. If the Research Enhanced Index Fund were not to exercise
an Index Warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant. The Research Enhanced Index Fund
will normally use Index Warrants in a manner similar to its use of options on
securities indices. The risks of the Fund's use of Index Warrants are generally
similar to those relating to its use of index options. Unlike most index
options, however, Index Warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution that issues the warrant. Also, Index Warrants
generally have longer terms than index options. Although the Research Enhanced
Index Fund will normally invest only in exchange-listed warrants, Index Warrants
are not likely to be as liquid as certain index options backed by a recognized
clearing agency. In addition, the terms of Index Warrants may limit the Fund's
ability to exercise the warrants at such time, or in such quantities, as the
Fund would otherwise wish to do.
FOREIGN CURRENCY FUTURES CONTRACTS.
Each Fund (other than the Money Market Fund, Advisory Funds, MagnaCap Fund,
Bank and Thrift Fund, and the Government Securities Income Fund) may use foreign
currency future contracts for hedging purposes. A foreign currency futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The Funds
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks related to the use of futures as a hedging device.
One risk arises because of the imperfect correlation between movements in the
price of the futures contract and movements in the price of the securities which
are the subject of the hedge. The price of the future may move more or less than
the price of the securities being hedged. If the price of the future moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, a Fund would be in a better position than if
it had not hedged at all. If the price of the securities being hedged has moved
in a favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Manager or Portfolio Manager
believes that over time the value of a diversified portfolio will tend to move
in the same direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
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that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement in
the stock index or cash market due to certain market distortions. All
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the index or cash market and
futures markets. In addition, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. As a result of price distortions in the futures
market and the imperfect correlation between movements in the cash market and
the price of securities and movements in the price of futures, a correct
forecast of general trends by the Investment Manager or Portfolio Manager may
still not result in a successful hedging transaction over a very short time
frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment Manager's or
Portfolio Manager's ability to predict correctly movements in the direction of
the market. For example, if the Fund hedges against the possibility of a decline
in the market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
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INTEREST RATE AND CURRENCY SWAPS
The Funds that comprise the Pilgrim Mutual Funds (other than the Money
Market Fund) may enter into interest rate and currency swap transactions and
purchase or sell interest rate and currency caps and floors, and may enter into
currency swap cap transactions. An interest rate or currency swap involves an
agreement between a Fund and another party to exchange payments calculated as if
they were interest on a specified ("notional") principal amount (e.g., an
exchange of floating rate payments by one party for fixed rate payments by the
other). An interest rate cap or floor entitles the purchaser, in exchange for a
premium, to receive payments of interest on a notional principal amount from the
seller of the cap or floor, to the extent that a specified reference rate
exceeds or falls below a predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each swap is accrued on a daily basis, and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess is maintained in a segregated
account by the Trust's custodian. If a Fund enters into a swap on other than a
net basis, or sells caps or floors, the Fund maintains a segregated account in
the full amount accrued on a daily basis of the Fund's obligations with respect
to the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap market
has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
swap documentation, and the Investment Manager or Portfolio Manager has
determined that the swap market has become relatively liquid. Swap transactions
do not involve the delivery of securities or other underlying assets or
principal, and the risk of loss with respect to such transactions is limited to
the net amount of payments that the Fund is contractually obligated to make or
receive. Caps and floors are more recent innovations for which standardized
documentation has not yet been developed; accordingly, they are less liquid than
swaps, and caps and floors purchased by a Fund are considered to be illiquid
assets.
INTEREST RATE SWAPS.
As indicated above, an interest rate swap is a contract between two
entities ("counterparties") to exchange interest payments (of the same currency)
between the parties. In the most common interest rate swap structure, one
counterparty agrees to make floating rate payments to the other counterparty,
which in turn makes fixed rate payments to the first counterparty. Interest
payments are determined by applying the respective interest rates to an agreed
upon amount, referred to as the "notional principal amount." In most such
transactions, the floating rate payments are tied to the London Interbank
Offered Rate, which is the offered rate for short-term Eurodollar deposits
between major international banks. As there is no exchange of principal amounts,
an interest rate swap is not an investment or a borrowing.
CROSS-CURRENCY SWAPS.
A cross-currency swap is a contract between two counterparties to exchange
interest and principal payments in different currencies. A cross-currency swap
normally has an exchange of principal at maturity (the final exchange); an
exchange of principal at the start of the swap (the initial exchange) is
optional. An initial exchange of notional principal amounts at the spot exchange
rate serves the same function as a spot transaction in the foreign exchange
market (for an immediate exchange of foreign exchange risk). An exchange at
maturity of notional principal amounts at the spot exchange rate serves the same
function as a forward transaction in the foreign exchange market (for a future
transfer of foreign exchange risk). The currency swap market convention is to
use the spot rate rather than the forward rate for the exchange at maturity. The
economic difference is realized through the coupon exchanges over the life of
the swap. In contrast to single currency interest rate swaps, cross-currency
swaps involve both interest rate risk and foreign exchange risk.
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SWAP OPTIONS.
The Funds indicated above may invest in swap options. A swap option is a
contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts at some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or
American-style (exercisable during a designated period). The right pursuant to a
swap option must be exercised by the right holder. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.
CAPS AND FLOORS.
The Funds indicated above may invest in interest rate caps and floors and
currency swap cap transactions. An interest rate cap is a right to receive
periodic cash payments over the life of the cap equal to the difference between
any higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate move
above the strike. An interest rate floor is the right to receive periodic cash
payments over the life of the floor equal to the difference between any lower
actual level of interest rates in the future and a specified strike (or "floor")
level. The floor buyer purchases protection for a floating rate move below the
strike. The strikes are typically based on the three-month LIBOR (although other
indices are available) and are measured quarterly. Rights arising pursuant to
both caps and floors are exercised automatically if the strike is in the money.
Caps and floors eliminate the risk that the buyer fails to exercise an
in-the-money option.
RISKS ASSOCIATED WITH SWAPS.
The risks associated with interest rate and currency swaps and interest
rate caps and floors are similar to those described above with respect to dealer
options. In connection with such transactions, a Fund relies on the other party
to the transaction to perform its obligations pursuant to the underlying
agreement. If there were a default by the other party to the transaction, the
Fund would have contractual remedies pursuant to the agreement, but could incur
delays in obtaining the expected benefit of the transaction or loss of such
benefit. In the event of insolvency of the other party, the Fund might be unable
to obtain its expected benefit. In addition, while each Fund will seek to enter
into such transactions only with parties which are capable of entering into
closing transactions with the Fund, there can be no assurance that a Fund will
be able to close out such a transaction with the other party, or obtain an
offsetting position with any other party, at any time prior to the end of the
term of the underlying agreement. This may impair a Fund's ability to enter into
other transactions at a time when doing so might be advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS. A Fund's options, futures and swap
transactions will generally be entered into for hedging purposes -- to protect
against possible changes in the market values of securities held in or to be
purchased for the Fund's portfolio resulting from securities markets, currency
or interest rate fluctuations, to protect the Fund's unrealized gains in the
values of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchase or sale of particular securities. However, in
addition to the hedging transactions referred to above, the Strategic Income
Fund may enter into options, futures and swap transactions to enhance potential
gain in circumstances where hedging is not involved. Each Fund's net loss
exposure resulting from transactions entered into for each purposes will not
exceed 5% of the Fund's net assets at any one time and, to the extent necessary,
the Fund will close out transactions in order to comply with this limitation.
Such transactions are subject to the limitations described above under
"Options," "Futures Contracts," and "Interest Rate and Currency Swaps."
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RESTRICTED AND ILLIQUID SECURITIES.
Each Fund may invest in an illiquid or restricted security if the Investment
Manager or Portfolio Manager believes that it presents an attractive investment
opportunity, except that MagnaCap Fund may not invest in restricted securities.
Generally, a security is considered illiquid if it cannot be disposed of within
seven days. Its illiquidity might prevent the sale of such a security at a time
when a Portfolio Manager might wish to sell, and these securities could have the
effect of decreasing the overall level of a Fund's liquidity. Further, the lack
of an established secondary market may make it more difficult to value illiquid
securities, requiring the Funds to rely on judgments that may be somewhat
subjective in determining value, which could vary from the amount that a Fund
could realize upon disposition.
Each Fund (except MagnaCap Fund) may purchase restricted securities (I.E.,
securities the disposition of which may be subject to legal restrictions) and
securities that may not be readily marketable. Because of the nature of these
securities, a considerable period of time may elapse between the Funds' decision
to dispose of these securities and the time when the Funds are able to dispose
of them, during which time the value of the securities could decline. The
expenses of registering restricted securities (excluding securities that may be
resold by the Funds pursuant to Rule 144A) may be negotiated at the time such
securities are purchased by the Funds. When registration is required before the
securities may be resold, a considerable period may elapse between the decision
to sell the securities and the time when the Funds would be permitted to sell
them. Thus, the Funds may not be able to obtain as favorable a price as that
prevailing at the time of the decision to sell. The Funds may also acquire
securities through private placements. Such securities may have contractual
restrictions on their resale, which might prevent their resale by the Funds at a
time when such resale would be desirable. Securities that are not readily
marketable will be valued by the Funds in good faith pursuant to procedures
adopted by the Company's Board of Directors.
Restricted securities, including private placements, are subject to legal
or contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Funds' procedures, restricted securities
could be treated as liquid. However, some restricted securities may be illiquid
and restricted securities that are treated as liquid could be less liquid than
registered securities traded on established secondary markets. The Funds may not
invest more than 15% of its net assets in illiquid securities, measured at the
time of investment. Each Fund will adhere to a more restrictive investment
limitation on its investments in illiquid or restricted securities as required
by the securities laws of those jurisdictions where shares of the Funds are
registered for sale.
The Emerging Countries Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the Fund treats foreign
securities whose principal market is abroad as not subject to the investment
limitation on securities subject to legal or contractual restrictions on resale.
OTHER INVESTMENT COMPANIES
The LargeCap Leaders Fund, MidCap Value Fund, Bank and Thrift Fund
Asia-Pacific Equity Fund and the Pilgrim Mutual Funds each may invest in other
investment companies ("Underlying Funds"). Each Fund may not (i) invest more
than 10% of its total assets in Underlying Funds, (ii) invest more than 5% of
its total assets in any one Underlying Fund, or (iii) purchase greater than 3%
of the total outstanding securities of any one Underlying Fund. The Funds
(except the Money Market Fund) may also make indirect foreign investments
through other investment companies that have comparable investment objectives
and policies as the Funds. In addition to the advisory and operational fees a
Fund bears directly in connection with its own operation, the Fund would also
bear its pro rata portions of each other investment company's advisory and
operational expenses.
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INVESTMENT COMPANIES THAT INVEST IN SENIOR LOANS. The Funds that comprise the
Pilgrim Mutual Funds, and in particular the Strategic Income and Balanced Funds,
may invest in investment companies that invest primarily in interests in
variable or floating rate loans or notes ("Senior Loans"). Senior Loans in most
circumstances are fully collateralized by assets of a corporation, partnership,
limited liability company, or other business entity. Senior Loans vary from
other types of debt in that they generally hold a senior position in the capital
structure of a borrower. Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.
Substantial increases in interest rates may cause an increase in loan
defaults as borrowers may lack resources to meet higher debt service
requirements. The value of a Fund's assets may also be affected by other
uncertainties such as economic developments affecting the market for Senior
Loans or affecting borrowers generally.
Senior Loans usually include restrictive covenants which must be maintained
by the borrower. Under certain interests in Senior Loans, an investment company
investing in a Senior Loan may have an obligation to make additional loans upon
demand by the borrower. Senior Loans, unlike certain bonds, usually do not have
call protection. This means that interests, while having a stated one to
ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
CREDIT RISK. Information about interests in Senior Loans generally is not
be in the public domain, and interests are generally not currently rated by any
nationally recognized rating service. Senior Loans are subject to the risk of
nonpayment of scheduled interest or principal payments. Issuers of Senior Loans
generally have either issued debt securities that are rated lower than
investment grade, or, if they had issued debt securities, such debt securities
would likely be rated lower than investment grade. However, unlike other types
of debt securities, Senior Loans are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments
on Senior Loans, an investment company investing in that Senior Loan could
experience a reduction in its income, and would experience a decline in the
market value of the particular Senior Loan so affected, and may experience a
decline in the NAV or the amount of its dividends. In the event of a bankruptcy
of the borrower, the investment company could experience delays or limitations
with respect to its ability to realize the benefits of the collateral securing
the Senior Loan.
COLLATERAL. Senior Loans typically will be secured by pledges of collateral
from the borrower in the form of tangible assets and intangible assets. In some
instances, an investment company may invest in Senior Loans that are secured
only by stock of the borrower or its subsidiaries or affiliates. The value of
the collateral may decline below the principal amount of the Senior Loan
subsequent to an investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
there is a risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized.
LIMITED SECONDARY MARKET. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
Senior Loans may be illiquid. In addition, Senior Loans generally require the
consent of the borrower prior to sale or assignment. These consent requirements
may delay or impede a fund's ability to sell Senior Loans. In addition, because
the secondary market for Senior Loans may be limited, it may be difficult to
value Senior Loans. Market quotations may not be available and valuation may
require more research than for liquid securities. In addition, elements of
judgment may play a greater role in the valuation, because there is less
reliable, objective data available.
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HYBRID LOANS. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). With
Hybrid Loans, a fund may not possess a senior claim to all of the collateral
securing the Hybrid Loan. Hybrid Loans also may not include covenants that are
typical of Senior Loans, such as covenants requiring the maintenance of minimum
interest coverage ratios. As a result, Hybrid Loans present additional risks
besides those associated with traditional Senior Loans, although they may
provide a relatively higher yield. Because the lenders in Hybrid Loans waive or
forego certain loan covenants, their negotiating power or voting rights in the
event of a default may be diminished. As a result, the lenders' interests may
not be represented as significantly as in the case of a conventional Senior
Loan. In addition, because an investment company's security interest in some of
the collateral may be subordinate to other creditors, the risk of nonpayment of
interest or loss of principal may be greater than would be the case with
conventional Senior Loans.
SUBORDINATED AND UNSECURED LOANS. Certain investment companies may invest
in subordinated and unsecured loans. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans.
There are some potential disadvantages associated with investing in other
investment companies. For example, you would indirectly bear additional fees.
The Underlying Funds pay various fees, including, management fees,
administration fees, and custody fees. By investing in those Underlying Funds
indirectly, you indirectly pay a proportionate share of the expenses of those
funds (including management fees, administration fees, and custodian fees), and
you also pay the expenses of the Fund.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
respect to its portfolio securities. Pursuant to such agreements, the Fund
acquires securities from financial institutions such as banks and broker-dealers
as are deemed to be creditworthy by the Investment Manager or Portfolio Manager,
subject to the seller's agreement to repurchase and the Fund's agreement to
resell such securities at a mutually agreed upon date and price. The repurchase
price generally equals the price paid by the Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the underlying portfolio security). Securities subject to repurchase
agreements will be held by the Custodian or in the Federal Reserve/Treasury
Book-Entry System or an equivalent foreign system. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities at
not less than 102% (100% for the Money Market Fund) of the repurchase price
under the agreement. If the seller defaults on its repurchase obligation, the
Fund holding the repurchase agreement will suffer a loss to the extent that the
proceeds from a sale of the underlying securities is less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause the Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the Investment
Company Act.
Pursuant to an Exemptive Order under Section 17(d) and Rule 17d-1 obtained
by the SmallCap Opportunities, Growth Opportunities, Balance Sheet
Opportunities, and the High Yield III Funds, on March 5, 1991, such Funds may
deposit uninvested cash balances into a single joint account to be used to enter
into repurchase agreements.
As an alternative to using repurchase agreements, the funds which comprise
the Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and High Yield Fund III may, from time to time, invest up to 5% of its
assets in money market investment companies sponsored by a third party for
short-term liquidity purposes. Such investments are subject to the
non-fundamental investment limitations described herein.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL TRANSACTIONS.
The Government Securities Income Fund and the funds which comprise the Pilgrim
Mutual Funds, Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and High Yield Fund III may enter into reverse repurchase agreement
transactions. Such transactions involve the sale of U.S. Government securities
held by the Fund, with an agreement that the Fund will repurchase such
securities at an agreed upon price and date. The Fund will employ reverse
repurchase agreements when necessary to meet unanticipated net redemptions so as
to avoid liquidating other portfolio investments during unfavorable market
conditions. At the time it enters into a reverse repurchase agreement, the Fund
will place in a segregated custodial account cash and/or liquid assets having a
dollar value equal to the repurchase price. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act"). Reverse repurchase agreements, together with other permitted borrowings,
may constitute up to 33 1/3% of the Fund's total assets. Under the 1940 Act, the
Fund is required to maintain continuous asset coverage of 300% with respect to
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities or the Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances) which may or may not exceed
the income received from the securities purchased with borrowed funds.
In order to enhance portfolio returns and manage prepayment risks,
Government Securities Income Fund and the funds which comprise the Pilgrim
Mutual Funds, Mayflower Trust, Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Trust, Government Securities
Fund, and High Yield Fund III may engage in dollar roll transactions with
respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar roll
transaction, a Fund sells a mortgage security held in the portfolio to a
financial institutional such as a bank or broker-dealer, and simultaneously
agrees to repurchase a substantially similar security (same type, coupon and
maturity) from the institution at a later date at an agreed upon price. The
mortgage securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories. During the period between the sale and
repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments, together with any
additional fee income received on the sale, could generate income for the Fund
exceeding the yield on the sold security. When a Fund enters into a dollar roll
transaction, cash and/or liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
with its custodian at the trade date. These securities are marked daily and are
maintained until the transaction is settled.
Whether a reverse repurchase agreement or dollar-roll transaction produces
a gain for a Fund depends upon the "costs of the agreements" (e.g., a function
of the difference between the amount received upon the sale of its securities
and the amount to be spent upon the purchase of the same or "substantially the
same" security) and the income and gains of the securities purchased with the
proceeds received from the sale of the mortgage security. If the income and
gains on the securities purchased with the proceeds of the agreements exceed the
costs of the agreements, then a Fund's net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains on such
securities purchased fail to exceed the costs of the structure, net asset value
will decline faster than otherwise would be the case. Reverse repurchase
agreements and dollar-roll transactions, as leveraging techniques, may increase
a Fund's yield in the manner described above; however, such transactions also
increase a Fund's risk to capital and may result in a shareholder's loss of
principal.
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PARTICIPATION INTERESTS.
The High Yield Fund may invest in participation interests, subject to the
limitation on its net assets that may be invested in illiquid investments.
Participation interests provide the Fund an undivided interest in a loan made by
a bank or other financial institution in the proportion that the Fund's
participation interest bears to the total principal amount of the loan. No more
than 5% of the Fund's net assets can be invested in participation interests of
the same issuing bank. The Fund must look to the creditworthiness of the
borrowing corporation, which is obligated to make payments of principal and
interest on the loan. In the event the borrower fails to pay scheduled interest
or principal payments, the Fund would experience a reduction in its income and
might experience a decline in the net asset value of its shares. In the event of
a failure by the bank to perform its obligations in connection with the
participation agreement, the Fund might incur certain costs and delays in
realizing payment or may suffer a loss of principal and/or interest.
LENDING OF PORTFOLIO SECURITIES.
In order to generate additional income, each Fund may lend portfolio securities
in an amount up to 33-1/3% of total Fund assets to broker-dealers, major banks,
or other recognized domestic institutional borrowers of securities (up to 30% of
the value of the total assets in the case of the International Value and the
Emerging Markets Value Funds). No lending may be made with any companies
affiliated with the Investment Manager. The Funds may lend securities only to
financial institutions such as banks, broker/ dealers and other recognized
institutional investors in amounts up to 30% of the Fund's total assets. These
loans earn income for the Funds and are collateralized by cash, securities or
letters of credit. The Funds might experience a loss if the financial
institution defaults on the loan. Loans by the Primary Fund in which the Money
Market Fund invests will not exceed 25% of the Fund's total assets.
The borrower at all times during the loan must maintain with the Fund cash
or cash equivalent collateral or provide to the Funds an irrevocable letter of
credit equal in value to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the Funds
any interest paid on such securities, and the Funds may invest the cash
collateral and earn additional income, or it may receive an agreed-upon amount
of interest income from the borrower who has delivered equivalent collateral or
a letter of credit. Loans are subject to termination at the option of the Funds
or the borrower at any time. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially.
LOAN PARTICIPATIONS AND ASSIGNMENTS.
Each Fund may invest in loan participations and loan assignments. A Fund's
investment in loan participations typically will result in the Fund having a
contractual relationship only with the Lender and not with the borrower. The
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participations and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any right of set-off against the borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund may be subject to the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower.
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When a Fund purchases a loan assignment from Lenders, it will acquire
direct rights against the borrowers on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and a Fund's ability to dispose
of particular assignments or participations when necessary to meet redemptions
of Fund shares, to meet the Fund's liquidity needs or when necessary in response
to a specific economic event, such as deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for assignments and
participations also may make it more difficult for a Fund to value these
securities for purposes of calculating its net asset value.
PAIRING-OFF TRANSACTIONS.
Government Securities Income Fund engages in a pairing-off transaction when the
Fund commits to purchase a security at a future date ("delayed delivery" or
"when issued"), and then prior to the predetermined settlement date, the Fund
"pairs-off" the purchase with a sale of the same security prior to, or on, the
original settlement date. At all times when the Fund has an outstanding
commitment to purchase securities, cash and/or liquid assets equal to the value
of the outstanding purchase commitments will be segregated from general
investible funds and marked to the market daily.
When the time comes to pay for the securities acquired on a delayed
delivery basis, Government Securities Income Fund will meet its obligations from
the available cash flow, sale of the securities held in the separate account,
sale of other securities or, although it would not normally expect to do so,
from sale of the when-issued securities themselves (which may have a market
value greater or less than the Fund's payment obligation).
Whether a pairing-off transaction produces a gain for Government Securities
Income Fund, depends upon the movement of interest rates. If interest rates
decrease, then the money received upon the sale of the same security will be
greater than the anticipated amount needed at the time the commitment to
purchase the security at the future date was entered. Consequently, the Fund
will experience a gain. However, if interest rates increase, than the money
received upon the sale of the same security will be less than the anticipated
amount needed at the time the commitment to purchase the security at the future
date was entered. Consequently, the Fund will experience a loss.
The Pilgrim Mutual Funds and the Mayflower Trust, Equity Trust, Balance
Sheet Opportunities Fund, Government Securities Fund, and High Yield Fund III
may enter into To Be Announced ("TBA") sale commitments wherein the unit price
and the estimated principal amount are established upon entering into the
contract, with the actual principal amount being within a specified range of the
estimate. A Fund will enter into TBA sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, the Fund will maintain, in a segregated account, cash or marketable
securities in an amount sufficient to meet the purchase price. Unsettled TBA
sale commitments are valued at current market value of the underlying
securities. If the TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, the Fund realizes a gain or loss on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the Fund delivers securities under the commitment, the Fund
realizes a gain or loss from the sale of the securities, based upon the unit
price established at the date the commitment was entered into.
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FLOATING OR VARIABLE RATE INSTRUMENTS.
The Funds that comprise the Mayflower Trust, Equity Trust, SmallCap
Opportunities Fund, Growth Opportunities Fund, Balance Sheet Opportunities Fund,
Government Securities Fund, and High Yield Fund III may purchase floating or
variable rate bonds, which normally provide that the holder can demand payment
of the obligation on short notice at par with accrued interest. Such bonds are
frequently secured by letters of credit or other credit support arrangements
provided by banks. Floating or variable rate instruments provide for adjustments
in the interest rate at specified intervals (weekly, monthly, semiannually,
etc.). A Fund would anticipate using these bonds as cash equivalents, pending
longer term investment of its funds. Other longer term fixed-rate bonds, with a
right of the holder to request redemption at certain times (often annually,
after the lapse of an intermediate term), may also be purchased by a Fund. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates), while providing greater opportunity
than comparable intermediate term bonds since the Fund may retain the bond if
interest rates decline. By acquiring these kinds of bonds, a Fund obtains the
contractual right to require the issuer of the security, or some other person
(other than a broker or dealer), to purchase the security at an agreed upon
price, which right is contained in the obligation itself rather than in a
separate agreement with the seller or some other person.
A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss. When a Fund engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
SHORT SALES
The Pilgrim Mutual Funds, Mayflower Trust, Mid-Cap Value Fund, Equity
Trust, SmallCap Opportunities Fund, Growth Opportunities Fund, Balance Sheet
Opportunities Fund, Government Securities Fund, and the High Yield Fund III, may
make short sales of securities they own or have the right to acquire at no added
cost through conversion or exchange of other securities they own (referred to as
short sales "against the box") and short sales of securities which they do not
own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security generally from
the broker through which the short sale is made) in order to make delivery to
the buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with the
broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
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Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share tends to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although a Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, a Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a technique
to hedge against market risks when the Investment Manager or Portfolio Manager
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund's
long position would be reduced by a gain in the short position. The extent to
which such gains or losses in the long position are reduced will depend upon the
amount of securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and any
such collateral required to be deposited with a broker in connection with the
sale (not including the proceeds from the short sale), which difference is
adjusted daily for changes in the value of the securities sold short. The total
value of the cash, U.S. Government securities or other liquid debt or equity
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. Each Fund will comply with these requirements. In addition, as a
matter of policy, the Trust's Board of Trustees has determined that no Fund will
make short sales of securities or maintain a short position if to do so could
create liabilities or require collateral deposits and segregation of assets
aggregating more than 25% of the Fund's total assets (no more than 5% for the
Mid-Cap Value Fund), taken at market value.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
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INVESTMENT TECHNIQUES AND PROCESSES
The investment techniques and processes used by the Portfolio Manager for
the Pilgrim Mutual Funds, which it has used in managing institutional portfolios
for many years, are described generally in the Funds' prospectus of the Funds it
manages. In making decisions with respect to equity securities for the Funds,
growth over time(R) is the Portfolio Manager's underlying goal. It's how the
Portfolio Manager built its reputation. Over the past ten years, the Portfolio
Manager has built a record as one of the finest performing investment managers
in the United States. It has successfully delivered growth over time to many
institutional investors, pension plans, foundations, endowments and high net
worth individuals. The Portfolio Manager's methods have proven their ability to
achieve growth over time through a variety of investment vehicles.
The Portfolio Manager emphasizes growth over time through investment in
securities of companies with earnings growth potential. The Portfolio Manager's
style is a "bottom-up" growth approach that focuses on the growth prospects of
individual companies rather than on economic trends. It builds portfolios stock
by stock. The Portfolio Manager's decision-making is guided by three critical
questions: Is there a positive change? Is it sustainable? Is it timely? The
Portfolio Manager uses these three factors because it focuses on discovering
positive developments when they first show up in an issuer's earnings, but
before they are fully reflected in the price of the issuer's securities. The
Portfolio Manager is always looking for companies that are driving change and
surpassing analysts' expectations. It seeks to identify companies poised for
rapid growth. The Portfolio Manager focuses on recognizing successful companies,
regardless of their capitalization or whether they are domestic or foreign
companies.
DIVERSIFICATION
Each Fund (other than the Money Market Fund) is "diversified" within the
meaning of the Investment Company Act. In order to qualify as diversified, a
Fund must diversify its holdings so that at all times at least 75% of the value
of its total assets is represented by cash and cash items (including
receivables), securities issued or guaranteed as to principal or interest by the
United States or its agencies or instrumentalities, securities of other
investment companies, and other securities (for this purpose other securities of
any one issuer are limited to an amount not greater than 5% of the value of the
total assets of the Fund and to not more than 10% of the outstanding voting
securities of the issuer). The Primary Institutional Fund in which the Money
Market Fund will invest substantially all of its assets is a non-diversified
fund. However, the Primary Institutional Fund intends to comply with the
diversification requirement of Rule 2a-7 under the Investment Company Act which
generally limits a money-market fund to investing no more than 5% of its total
assets in the securities, except U.S. government securities, of any one issuer.
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Portfolio Manager
in approximately equal amounts, and the Investment Manager or Portfolio Manager
attempts to stay fully invested within the applicable percentage limitations set
forth in the Prospectus. In addition, for each issuer whose securities are added
to an investment portfolio, the Investment Manager or Portfolio Manager sells
the securities of one of the issuers currently included in the portfolio.
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BORROWING.
Each Advisory Fund may borrow money from banks solely for temporary or
emergency purposes, but not in an amount exceeding one-third of the value of its
total assets. The Pilgrim Mutual Funds may each borrow up to 20% (other than the
Money Market Fund which is limited to 5%). Magna Fund and High Yield Fund may
borrow from banks solely for temporary or emergency purposes, but not in an
amount exceeding 5% of the value of its total assets. Bank and Thrift Fund may
borrow, only in an amount up to 15% of its total assets to obtain such
short-term credits as are necessary for the clearance of securities
transactions. Government Securities Income Fund may borrow money from banks
solely for temporary or emergency purposes, but not in an amount in excess of
10% of the value of its total assets.
For the Government Securities Income Fund, no additional investment may be
made while any such borrowings are in excess of 5% of total assets. For purposes
of this investment restriction, the Fund's entry into reverse repurchase
agreements and dollar-rolls and delayed delivery transactions, including those
relating to pair-offs, shall not constitute borrowings. Such borrowings,
together with reverse repurchase agreements, may constitute up to 33% of the
Fund's total assets. The Government Securities Income Fund may not mortgage,
pledge or hypothecate its assets, except to the extent necessary to secure
permitted borrowings and to the extent related to the deposit of assets in
escrow in connection with the Fund's purchasing of securities on a forward
commitment or delayed delivery basis, entering into reverse repurchase
agreements and engaging in dollar-roll transactions.
Under the Investment Company Act of 1940, each Fund is required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint.
When a Fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. If a Fund makes additional
investments while borrowings are outstanding, this may be construed as a form of
leverage.
Leveraging by means of borrowing may exaggerate the effect of any increase
or decrease in the value of portfolio securities or the Fund's net asset value,
and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
INVESTMENT RESTRICTIONS -- THE ADVISORY FUNDS
The Funds have adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. None of the Funds may:
(1) invest in a security if, with respect to 75% of the total assets, more
than 5% of the total assets (taken at market value at the time of such
investment) would be invested in the securities of any one issuer,
except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities;
(2) invest in a security if, with respect to 75% of its assets, it
would hold more than 10% (taken at the time of such investment)
of the outstanding voting securities of any one issuer, except
securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities;
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(3) invest in a security if more than 25% of its total assets (taken
at market value at the time of such investment) would be invested
in the securities of companies primarily engaged in any one
industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities (or repurchase agreements with
respect thereto);
(4) lend any funds or other assets, except that a Fund may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the SEC and any guidelines
established by the Board of Directors;
(5) borrow money or pledge, mortgage, or hypothecate its assets, (a)
except that a Fund may borrow from banks, but only if immediately
after each borrowing and continuing thereafter there is asset
coverage of 300%; and (b) and except that the following shall not
be considered a pledge, mortgage, or hypothecation of a Fund's
assets for these purposes: entering into reverse repurchase
agreements; transactions in options, futures, options on futures,
and forward currency contracts; the deposit of assets in escrow
in connection with the writing of covered put and call options;
and the purchase of securities on a "when-issued" or delayed
delivery basis; collateral arrangements with respect to initial
or variation margin and other deposits for futures contracts,
options on futures contracts, and forward currency contracts;
(6) issue senior securities, except insofar as a Fund may be deemed
to have issued a senior security by reason of borrowing money in
accordance with that Fund's borrowing policies, and except for
purposes of this investment restriction, collateral or escrow
arrangements with respect to the making of short sales, purchase
or sale of futures contracts or related options, purchase or sale
of forward currency contracts, writing of stock options, and
collateral arrangements with respect to margin or other deposits
respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior
security;
(7) act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities,
a Fund may be deemed to be an underwriter under the federal
securities laws;
(8) purchase or sell real estate (other than marketable securities
representing interests in, or backed by, real estate or
securities of companies that deal in real estate or mortgages).
The Funds are also subject to the following restrictions and policies that
are not fundamental and may, therefore, be changed by the Board of Directors
(without shareholder approval). Unless otherwise indicated, a Fund may not:
(1) invest in securities that are illiquid if, as a result of such
investment, more than 15% of the total assets of the Fund (taken
at market value at the time of such investment) would be invested
in such securities;
(2) invest in companies for the purpose of exercising control or
management;
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(3) purchase or sell physical commodities or commodities contracts
(which, for purposes of this restriction, shall not include
foreign currency or forward foreign currency contracts), except
any Fund may engage in interest rate futures contracts, stock
index futures contracts, futures contracts based on other
financial instruments or securities, and options on such futures
contracts;
(4) invest directly in interests in oil, gas or other mineral
exploration or development programs or mineral leases (other than
marketable securities of companies engaged in the business of
oil, gas, or other mineral exploration).
(5) invest more than 5% of its total assets in warrants, whether or
not listed on the New York or American Stock Exchanges, including
no more than 2% of its total assets which may be invested in
warrants that are not listed on those exchanges. Warrants
acquired by a Fund in units or attached to securities are not
included in this restriction;
(6) purchase securities of issuers which are restricted from being
sold to the public without registration under the Securities Act
of 1933 (unless such securities are deemed to be liquid under the
Company's Liquidity Procedures) if by reason of such investment
the Fund's aggregate investment in such securities will exceed
10% to the Fund's total assets;
(7) invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous operation
less than three years;
(8) invest in puts, calls, straddles, spreads or any combination
thereof if, as a result of such investment, more than 5% of the
total assets of the Fund (taken at market value at the time of
such investment) would be invested in such securities;
(9) loan portfolio securities unless collateral values are
continuously maintained at no less than 100% by "marking to
market" daily;
(10) invest in real estate limited partnerships.
Other non-fundamental policies include the following: each Fund may not
purchase securities on margin; make short sales, except for short sales "against
the box," or purchase or retain in its portfolio any security if an officer or
Director of the Company or the Investment Manager or any Portfolio Manager owns
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
and in the aggregate such persons own beneficially more than 5% of the
outstanding securities of such issuer.
INVESTMENT RESTRICTIONS -- THE MAGNACAP FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund MAY NOT:
(1) Engage in the underwriting of securities of other issuers.
(2) Invest in "restricted securities" which cannot in the absence of an
exemption be sold without an effective registration statement under
the Securities Act of 1933, as amended.
(3) Engage in the purchase and sale of interests in real estate,
commodities or commodity contracts (although this does not preclude
marketable securities of companies engaged in these activities).
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(4) Engage in the making of loans to other persons, except (a) through the
purchase of a portion of an issue of publicly distributed bonds,
debentures or other evidences of indebtedness customarily purchased by
institutional investors or (b) by the loan of its portfolio securities
in accordance with the policies described under "Lending of Portfolio
Securities."
(5) Borrow money except from banks for temporary or emergency purposes,
and then not in excess of 5% of the value of its total assets.
(6) Mortgage, pledge or hypothecate its assets in any manner, except in
connection with any authorized borrowings and then not in excess of
10% of the value of its total assets.
(7) Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of its
portfolio transactions.
(8) Effect short sales, or purchase or sell puts, calls, spreads or
straddles.
(9) Buy or sell oil, gas, or other mineral leases, rights or royalty
contracts, or participate on a joint or joint and several basis in any
securities trading account.
(10) Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of
assets.
(11) Invest more than 25% of the value of its total assets in any one
industry.
(12) Purchase or retain in its portfolio any security if an Officer or
Director of the Fund or its investment manager owns beneficially more
than 1/2 of 1% of the outstanding securities of such issuer, and in
the aggregate such persons own beneficially more than 5% of the
outstanding securities of such issuer.
(13) Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security by reason of borrowing money in
accordance with the Fund's borrowing policies or investment
techniques, and except for purposes of this investment restriction,
collateral, escrow, or margin or other deposits with respect to the
making of short sales, the purchase or sale of futures contracts or
related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to
be an issuance of a senior security.
The Fund is also subject to the following restrictions and policies that
are not fundamental and may, therefore, be changed by the Board of Directors
without shareholder approval. The Fund will limit its investments in warrants,
valued at the lower of cost or market, to 5% of its net assets. Included within
that amount, but not to exceed 2% of the Fund's net assets, may be warrants that
are not listed on the New York or American Stock Exchange. The Fund will not
engage in the purchase or sale of real estate or real estate limited
partnerships. The Fund also will not make loans to other persons unless
collateral values are continuously maintained at no less than 100% by "marking
to market" daily. The Fund also may not invest more than 5% of its total assets
in securities of companies which, including predecessors, have not had a record
of at least three years of continuous operations, and may not invest in any
restricted securities.
INVESTMENT RESTRICTIONS -- THE SMALLCAP
OPPORTUNITIES FUND, GROWTH OPPORTUNITIES FUND,
GOVERNMENT SECURITIES FUND, AND HIGH YIELD III FUND
The Funds have adopted investment restrictions numbered 1 through 12 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the Investment Company Act of 1940, as
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amended (the "1940 Act")) of such Fund's outstanding voting shares. Investment
restrictions numbered 13 through 21 are not fundamental policies and may be
changed by vote of a majority of the Trust's Board members at any time. Each
Fund may not:
(1) Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset
coverage of 300% for all borrowings;
(2) Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets
would be invested in that issuer, or the Fund would own or hold more
than 10% of the outstanding voting securities of the issuer; PROVIDED,
HOWEVER, that up to 25% of the Fund's total assets may be invested
without regard to these limitations;
(3) Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the Fund
may be deemed to be an underwriter;
(4) Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities);
(5) Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily
marketable securities that are secured by interest in real estate or
issued by companies that deal in real estate, including real estate
investment and mortgage investment trusts; and (b) engage in financial
futures contracts and related options, as described herein and in the
Fund's Prospectus;
(6) Make loans, except that each of these Funds may: (a) invest in
repurchase agreements, and (b) loan its portfolio securities in
amounts up to one-third of the market or other fair value of its total
assets;
(7) Issue senior securities, except as appropriate to evidence
indebtedness that it is permitted to incur, provided that the deposit
or payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered the
issuance of senior securities;
(8) Borrow money in excess of 5% of its total assets (taken at market
value);
(9) Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in
connection with futures contracts and related options is not
considered a pledge or hypothecation of assets);
(10) Purchase more than 10% of the voting securities of any one issuer,
except U.S. government securities;
(11) Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that
cannot be disposed of within the normal course of business at
approximately the amount at which the Fund has valued the securities,
excluding restricted securities that have been determined by the
Trustees of the Fund (or the persons designated by them to make such
determinations) to be readily marketable;
(12) Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S.
government securities and obligations issued or guaranteed by any
foreign government or its agencies or instrumentalities, if such
purchase would cause the investments of a Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market value;
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(13) Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities (the deposit or payment by a Fund of initial
or maintenance margin in connection with futures contracts or related
options is not considered the purchase of a security on margin);
(14) Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total
assets in options transactions, other than options on futures
contracts;
(15) Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the
Fund, and premiums paid on related options held by the Fund, does not
exceed more than 5% of the Fund's total assets, unless the transaction
meets certain "bona fide hedging," criteria (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5%);
(16) Invest in securities of any issuer if any officer or Trustee of the
Fund or any officer or director of Pilgrim owns more than 1/2 of 1% of
the outstanding securities of the issuer, and such officers, directors
and Trustees own in the aggregate more than 5% of the securities of
such issuer;
(17) Invest in interests in oil, gas or other mineral exploration or
development programs, (although it may invest in issuers that own or
invest in such interests);
(18) Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer
results from such purchase, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets;
(19) Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in
other investment companies; (20) Purchase warrants if, as a result,
warrants taken at the lower of cost or market value would represent
more than 5% of the value of the Fund's net assets or if warrants that
are not listed on the New York or American Stock Exchanges or on an
exchange with comparable listing requirements, taken at the lower of
cost or market value, would represent more than 2% of the value of the
Fund's net assets (for this purpose, warrants attached to securities
will be deemed to have no value); or
(21) Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in
kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions.
INVESTMENT RESTRICTIONS -- THE MIDCAP OPPORTUNITIES FUND
The Fund has adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting shares. Investment restrictions numbered 12 through 15 are not
fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Fund may not:
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(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up
to 10% of its net assets for temporary purposes but only if,
immediately after such borrowing there is asset coverage of 300%, and
(b) enter into transactions in options, futures, and options on
futures and other transactions not deemed to involve the issuance of
senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (the Fund may purchase marketable securities of companies
that deal in real estate or interests therein, including real estate
investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to
brokers or dealers or other financial institutions not affiliated with
the Fund or Pilgrim, subject to conditions established by Pilgrim),
and may purchase or hold participations in loans, in accordance with
the investment objectives and policies of the Fund, as described in
the current Prospectus and SAI of the Fund;
(6) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(7) Sell short, except that the Fund may enter into short sales against
the box;
(8) Invest more than 25% of its assets in any one industry or related
group of industries;
(9) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(10) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(11) Borrow money in excess of 10% of its net assets for temporary
purposes;
(12) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that the Fund may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(13) Make an investment for the purpose of exercising control over
management;
(14) Invest more than 15% of its net assets in illiquid securities; or
(15) Borrow any amount in excess of 10% of the Fund's assets, other than
for temporary emergency or administrative purposes. In addition, the
Fund will not make additional investments when its borrowings exceed
5% of total assets.
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INVESTMENT RESTRICTIONS -- THE GROWTH + VALUE FUND
The Fund has adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 12 through 15 are
not fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Fund may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but
only if, immediately after such borrowing there is asset coverage of
300%, and (b) enter into transactions in options, futures, and options
on futures and other transactions not deemed to involve the issuance
of senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities
of companies that deal in real estate or interests therein, including
real estate investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to
brokers or dealers or other financial institutions not affiliated with
the Fund or Pilgrim, subject to conditions established by Pilgrim)
(See "Lending Portfolio Securities" in this SAI), and may purchase or
hold participations in loans, in accordance with the investment
objectives and policies of the Fund, as described in the cur-rent
Prospectus and SAI of the Fund;
(6) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(7) Sell short, except that these Funds may enter into short sales against
the box;
(8) Invest more than 25% of its assets in any one industry or related
group of industries;
(9) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(10) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding VOTING securities of
an issuer, would be held by the Fund;
(11) Borrow money except to the extent permitted under the 1940 Act;
(12) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that these Funds may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(13) Make an investment for the purpose of exercising control over
management;
(14) Invest more than 15% of its net assets in illiquid securities; or
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(15) Borrow any amount in excess of 10% of their respective assets, other
than for temporary emergency or administrative purposes. In addition,
the Fund will not make additional investments when its borrowings
exceed 5% of total assets.
INVESTMENT RESTRICTIONS -- THE INTERNATIONAL
VALUE FUND AND THE EMERGING MARKETS VALUE FUND
The Funds have adopted investment restrictions numbered 1 through 6 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 7 through 12 are not
fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Funds may not:
(1) Issue senior securities, except to the extent permitted under the 1940
Act, borrow money or pledge its assets, except that the Fund may
borrow on an unsecured basis from banks for temporary or emergency
purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (not including the amount borrowed), provided
that it will not make investments while borrowings are in excess of 5%
of the value of its total assets are outstanding;
(2) Act as underwriter (except to the extent the Fund may be deemed to be
an underwriter in connection with the sale of securities in its
investment portfolio);
(3) Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than
U.S. government securities), except that the Fund reserves the right
to invest all of its assets in shares of another investment company;
(4) Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell
securities which are secured by real estate, securities of companies
which invest or deal in real estate and securities issued by real
estate investment trusts);
(5) Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts for
hedging purposes to the extent permitted under applicable federal and
state laws and regulations and except that the Fund may engage in
foreign exchange forward contracts;
(6) Make loans (except for purchases of debt securities consistent with
the investment policies of the Fund and except for repurchase
agreements);
(7) Make short sales of securities or maintain a short position, except
for short sales against the box;
(8) Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions;
(9) Write put or call options, except that the Fund may (i) write covered
call options on individual securities and on stock indices; (ii)
purchase put and call options on securities which are eligible for
purchase by the Fund and on stock indices; and (iii) engage in closing
transactions with respect to its options writing and purchases, in all
cases subject to applicable federal and state laws and regulations;
(10) Purchase any security if as a result the Fund would then hold more
than 10% of any class of voting securities of an issuer (taking all
common stock issues as a single class, all preferred stock issues as a
single class, and all debt issues as a single class), except that the
Fund reserves the right to invest all of its assets in a class of
voting securities of another investment company;
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<PAGE>
(11) Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment
company's voting securities or make any other investment in other
investment companies except as permitted by federal and state law,
except that the Fund reserves the right to invest all of its assets in
another investment company;
(12) Invest more than 15% of its net assets in illiquid securities.
INVESTMENT RESTRICTIONS -- THE RESEARCH ENHANCED INDEX FUND
The Fund has adopted investment restrictions numbered 1 through 8 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting shares. Investment restrictions numbered 9 through 14 are not fundamental
policies and may be changed by vote of a majority of the Trust's Board members
at any time. The Fund may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up
to 33'/3% of its net assets for temporary purposes but only if,
immediately after such borrowing there is asset coverage of 300%, and
(b) enter into transactions in options, futures, and options on
futures and other transactions not deemed to involve the issuance of
senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real estate, including real estate limited
partnerships (the Fund may purchase marketable securities of companies
that deal in real estate or interests therein, including real estate
investment trusts);
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33'/3% of net assets at the time the loan is made,
to brokers or dealers or other financial institutions not affiliated
with the Fund or Pilgrim, subject to conditions established by
Pilgrim) (See "Lending Portfolio Securities" in this SAI), and may
purchase or hold participations in loans, in accordance with the
investment objectives and policies of the Fund, as described in the
current Prospectus and SAI of the Fund;
(6) Invest more than 25% of its assets in any one industry;
(7) With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the
value of total assets of the Fund would be invested in securities of a
single issuer;
(8) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(9) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(10) Sell short, except that the Fund may enter into short sales against
the box;
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(11) Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except
that the Fund may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act, rules
thereunder or any order pursuant thereto or by any state in which
shares of the Fund are registered;
(12) Make an investment for the purpose of exercising control over
management;
(13) Invest more than 15% of its net assets in illiquid securities; or
(14) Borrow any amount in excess of 331/3% of the Fund's assets, other than
for temporary emergency or administrative purposes.
As a fundamental policy, this Fund may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
this Fund does not intend to borrow any amount in excess of 10% of its assets,
and would do so only for temporary emergency or administrative purposes. In
addition, to avoid the potential leveraging of assets, this Fund will not make
additional investments when its borrowings, including those investment
techniques which are regarded as a form of borrowing, are in excess of 5% of
total assets. If this Fund should determine to expand its ability to borrow
beyond the current operating policy, the Fund's Prospectus would be amended and
shareholders would be notified.
In addition to the above noted investment policies, the Research Enhanced
Index Fund's Sub-Adviser intends to monitor the sector and security weightings
of its portfolio relative to the composition of the S&P 500 Index. In that
regard, the Sub-Adviser intends to manage the Fund so that its sector weightings
and securities holdings closely approximate the sector and securities weightings
of the Index. As noted in the prospectus, the Sub-Adviser may vary modestly the
weightings of portfolio securities so that index securities that appear to be
overvalued may be underweighted and securities that may appear to be
underweighted may be overvalued. Steps will be taken periodically to rebalance
positions consistent with maintaining reasonable transaction costs and
reasonable weightings relative to the Index. While the Fund seeks to modestly
outperform the S&P 500 Index, the Fund expects that its returns will have a
coefficient correlation of 0.90% or better to the S&P 500 Index.
INVESTMENT RESTRICTIONS -- THE INCOME & GROWTH FUND,
HIGH TOTAL RETURN FUND II, AND THE HIGH TOTAL RETURN FUND
The Funds have adopted investment restrictions numbered 1 through 11 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 12 through 17 are
not fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Funds may not:
(1) Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but
only if, immediately after such borrowing there is asset coverage of
300%, and (b) enter into transactions in options, futures, and options
on futures and other transactions not deemed to involve the issuance
of senior securities;
(2) Underwrite the securities of others;
(3) Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities
of companies that deal in real estate or interests therein, including
real estate investment trusts);
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<PAGE>
(4) Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
(5) Make loans to other persons (but the Funds may, however, lend
portfolio securities, up to 33% of net assets at the time the loan is
made, to brokers or dealers or other financial institutions not
affiliated with the Funds or Pilgrim, subject to conditions
established by Pilgrim) (See "Lending Portfolio Securities" in this
SAI), and may purchase or hold participations in loans, in accordance
with the investment objectives and policies of the Fund, as described
in the current Prospectus and SAI of the Fund;
(6) Participate in any joint trading accounts;
(7) Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts will not be deemed to be purchases of securities on
margin);
(8) Sell short, except that these Funds may enter into short sales against
the box;
(9) Invest more than 25% of its assets in any one industry or related
group of industries;
(10) Purchase a security (other than U.S. government obligations) if, as a
result, more than 5% of the value of total assets of the Fund would be
invested in securities of a single issuer;
(11) Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of
an issuer, would be held by the Fund;
(12) Invest in a security if, as a result of such investment, more than 5%
of its total assets (taken at market value at the time of such
investment) would be invested in securities of issuers (other than
issuers of federal agency obligations) having a record, together with
predecessors or unconditional guarantors, of less than three years of
continuous operation;
(13) Purchase securities of other investment companies, except in
connection with a- merger, consolidation or sale of assets, and except
that these Funds may purchase shares of other investment companies,
subject to such restrictions as may be imposed by the 1940 Act and
rules thereunder or by any state in which shares of the Fund are
registered;
(14) Purchase or retain securities of any issuer if 5% of the securities of
such issuer are owned by those officers and directors or trustees of
the Fund or of Pilgrim who each own beneficially more than '/2 Of I%
of its securities;
(15) Make an investment for the purpose of exercising control over
management;
(16) Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities, including securities subject to
legal or contractual restrictions on resale (which may include private
placements and those 144A securities for which the Trustees, pursuant
to procedures adopted by the Fund, have not determined there is a
liquid secondary market), repurchase agreements maturing in more than
seven days, options traded over the counter that a Fund has purchased,
securities being used to cover options a Fund has written, securities
for which market quotations are not readily available, or other
securities that, legally or in the Adviser's or Trustees' opinion, may
be deemed illiquid; or
(17) Invest in interests in oil, gas or other mineral exploration
development programs (including oil, gas or other mineral leases).
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As a fundamental policy, these Funds may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
these Funds do not intend to borrow any amount in excess of 10% of their
respective assets, and would do so only for temporary emergency or
administrative purposes. In addition, to avoid the potential leveraging of
assets, neither of these Funds will make additional investments when its
borrowings, including those investment techniques which are regarded as a form
of borrowing, are in excess of 5% of total assets. If any of these three Funds
should determine to expand its ability to borrow beyond the current operating
policy, the Fund's Prospectus would be amended and shareholders would be
notified.
In addition to the restrictions described above, each of these Funds may,
from time to time, agree to additional investment restrictions for purposes of
compliance with the securities laws of those foreign jurisdictions where that
Fund intends to offer or sell its shares.
INVESTMENT RESTRICTIONS -- THE BALANCE SHEET OPPORTUNITIES FUND
The Funds have adopted investment restrictions numbered 1 through 12 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of such Fund's outstanding voting shares. Investment
restrictions numbered 13 through 21 are not fundamental policies and may be
changed by vote of a majority of the Trust's Board members at any time. The Fund
may not:
(1) Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset
coverage of 300% for all borrowings;
(2) Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets
would be invested in that issuer, or the Fund would own or hold more
than 10% of the outstanding voting securities of the issuer; PROVIDED,
HOWEVER, that up to 25% of the Fund's total assets may be invested
without regard to these limitations;
(3) Underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities, the Fund
may be deemed to be an underwriter;
(4) Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities);
(5) Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily
marketable securities that are secured by interest in real estate or
issued by companies that deal in real estate, including real estate
investment and mortgage investment trusts; and (b) engage in financial
futures contracts and related options, as described herein and in the
Fund's Prospectus;
(6) Make loans, except that each of these Funds may: (a) invest in
repurchase agreements, and (b) loan its portfolio securities in
amounts up to one-third of the market or other fair value of its total
assets;
(7) Issue senior securities, except as appropriate to evidence
indebtedness that it is permitted to incur, provided that the deposit
or payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered the
issuance of senior securities;
(8) Borrow money in excess of 5% of its total assets (taken at market
value);
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(9) Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in
connection with futures contracts and related options is not
considered a pledge or hypothecation of assets);
(10) Purchase more than 10% of the voting securities of any one issuer,
except U.S. Government securities;
(11) Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that
cannot be disposed of within the normal course of business at
approximately the amount at which the Fund has valued the securities,
excluding restricted securities that have been determined by the
Trustees of the Fund (or the persons designated by them to make such
determinations) to be readily marketable;
(12) Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S.
Government securities and obligations issued or guaranteed by any
foreign government or its agencies or instrumentalities, if such
purchase would cause the investments of a Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market value;
(13) Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities (the deposit or payment by a Fund of initial
or maintenance margin in connection with futures contracts or related
options is not considered the purchase of a security on margin);
(14) Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total
assets in options transactions, other than options on futures
contracts;
(15) Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the
Fund, and premiums paid on related options held by the Fund, does not
exceed more than 5% of the Fund's total assets, unless the transaction
meets certain "bona fide hedging," criteria (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5%);
(16) Invest in securities of any issuer if any officer or Trustee of the
Fund or any officer or director of Pilgrim owns more than 1/2 of 1% of
the outstanding securities of the issuer, and such officers, directors
and trustees own in the aggregate more than 5% of the securities of
such issuer;
(17) Invest in interests in oil, gas or other mineral exploration or
development programs, (although it may invest in issuers that own or
invest in such interests);
(18) Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer
results from such purchase, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets;
(19) Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in
other investment companies;
(20) Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the
Fund's net assets or if warrants that are not listed on the New York
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or American Stock Exchanges or on an exchange with comparable listing
requirements, taken at the lower of cost or market value, would
represent more than 2% of the value of the Fund's net assets (for this
purpose, warrants attached to securities will be deemed to have no
value); or
(21) Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in
kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions.
In addition to the restrictions described above, the Fund may, from time to
time, agree to additional investment restrictions for purposes of compliance
with the securities laws of those state and foreign jurisdictions where that
fund intends to offer or sell its shares.
INVESTMENT RESTRICTIONS -- THE PILGRIM MUTUAL FUNDS
The Funds have adopted the following fundamental policies that cannot be
changed without the affirmative vote of a majority of the outstanding shares of
the appropriate Fund (as defined in the Investment Company Act).
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In addition,
no Fund:
(22) May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities
of such issuer, except that up to 25% of a Fund's total assets may be
invested without regard to this restriction and a Fund will be
permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund.
This restriction also does not apply to investments by a Fund in
securities of the U.S. Government or any of its agencies and
instrumentalities.
(23) May purchase more than 10% of the outstanding voting securities, or of
any class of securities, of any one issuer, or purchase the securities
of any issuer for the purpose of exercising control or management,
except that a Fund will be permitted to invest all or a portion of its
assets in another diversified, open-end management investment company
with substantially the same investment objective, policies and
restrictions as the Fund.
(24) May invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that a
Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions
as the Fund. This restriction does not apply to investments by a Fund
in securities of the U.S. Government or its agencies and
instrumentalities or to investments by the Money Market Fund in
obligations of domestic branches of U.S. banks and U.S. branches of
foreign banks which are subject to the same regulation as U.S. banks.
(25) May purchase or sell real estate. However, a Fund may invest in
securities secured by, or issued by companies that invest in, real
estate or interests in real estate.
(26) May make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter
into repurchase agreements. Each Fund reserves the authority to make
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loans of its portfolio securities in an aggregate amount not exceeding
30% of the value of its total assets. This restriction does not apply
to the Money Market Fund.
(27) May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total
assets at the time of the borrowing, provided that, pursuant to the
Investment Company Act, a Fund may borrow money if the borrowing is
made from a bank or banks and only to the extent that the value of the
Fund's total assets, less its liabilities other than borrowings, is
equal to at least 300% of all borrowings (including proposed
borrowings), and provided, further that the borrowing may be made only
for temporary, extraordinary or emergency purposes or for the
clearance of transactions in amounts not exceeding 20% of the value of
the Fund's total assets at the time of the borrowing. If such asset
coverage of 300% is not maintained, the Fund will take prompt action
to reduce its borrowings as required by applicable law.
(28) May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness
permitted by restriction 6 above. This restriction shall not prohibit
the Funds from engaging in options, futures and foreign currency
transactions, and shall not apply to the Money Market Fund.
(29) May underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
(30) May invest more than 15% (10% in the case of the Money Market Fund) of
the value of its net assets in securities that at the time of purchase
are illiquid.*
(31) May purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that a Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of securities.
(32) May engage in short sales (other than the MidCap Growth, SmallCap
Growth, Worldwide Growth, International Core Growth, International
SmallCap Growth, Strategic Income and High Yield II Funds), except
that a Fund may use such short-term credits as are necessary for the
clearance of transactions.
(33) May invest in securities of other investment companies, except (a)
that a Fund will be permitted to invest all or a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions
as the Fund; (b) in compliance with the Investment Company Act and
applicable state securities laws, or (c) as part of a merger,
consolidation, acquisition or reorganization involving the Fund.
(34) May issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Funds from engaging in short sales, options, futures and
foreign currency transactions.
(35) May enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest
in stock index, currency and financial futures contracts and related
options in accordance with any rules of the Commodity Futures Trading
Commission.
(36) May purchase or write options on securities, except for hedging
purposes (except in the case of the Strategic Income Fund, which may
do so for non-hedging purposes) and then only if (i) aggregate
premiums on call options purchased by a Fund do not exceed 5% of its
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net assets, (ii) aggregate premiums on put options purchased by a Fund
do not exceed 5% of its net assets, (iii) not more than 25% of a
Fund's net assets would be hedged, and (iv) not more than 25% of a
Fund's net assets are used as cover for options written by the Fund.
This restriction does not apply to the Money Market Fund.
- - - - - - - - - ----------
* For the LargeCap Growth, MidCap Growth, Worldwide Growth, Emerging
Countries, High Yield II and Balanced Funds, as of the date of this
Statement of Additional Information this investment restriction reads: "May
invest more than 15% of the value of its net assets in securities that at
the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid." At a Meeting of Shareholders on May 21, 1999, a
change to this investment restriction was approved by the shareholders of
all Funds except the LargeCap Growth, MidCap Growth, Worldwide Growth,
Emerging Countries, High Yield II and Balanced Funds. The Meeting has been
adjourned with respect to those Funds, and upon shareholder approval the
investment restriction will be changed as described above.
For purposes of investment restriction number 5, the Trust considers the
restriction to prohibit the Funds from entering into instruments that have the
character of a loan, I.E., instruments that are negotiated on a case-by-case
basis between a lender and a borrower. The Trust considers the phrase "publicly
distributed debt instruments" in that investment restriction to include, among
other things, registered debt securities and unregistered debt securities that
are offered pursuant to Rule 144A under the Securities Act of 1933. As a result,
the Funds may invest in such securities. Further, the Trust does not consider
investment restriction number 5 to prevent the Funds from investing in
investment companies that invest in loans.
INVESTMENT RESTRICTIONS -- THE HIGH YIELD FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(1) Issue senior securities. Good faith hedging transactions and similar
investment strategies will not be treated as senior securities for
purposes of this restriction so long as they are covered in accordance
with applicable regulatory requirements and are structured consistent
with current SEC interpretations.
(2) Underwrite securities of other issuers.
(3) Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies,
indexes and options on futures contracts or indexes and currencies
underlying or related to any such futures contracts.
(4) Make loans to persons except (a) through the purchase of a portion of
an issue of publicly distributed bonds, notes, debentures and other
evidences of indebtedness customarily purchased by institutional
investors, (b) by the loan of its portfolio securities in accordance
with the policies described under "Lending of Portfolio Securities,"
or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
(5) Purchase the securities of another investment company or investment
trust, except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
(6) Purchase any securities on margin or effect a short sale of a
security. (This restriction does not preclude the Fund from obtaining
such short-term credits as may be necessary for the clearance of
purchases and sales of its portfolio securities.)
(7) Buy securities from or sell securities to its investment adviser or
principal distributor or any of their affiliates or any affiliates of
its Directors, as principal.
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(8) Buy, lease or hold real property except for office purposes. (This
restriction does not preclude investment in marketable securities of
companies engaged in real estate activities.)
(9) As to 75% of the value of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer (other
than the United States Government) or acquire more than 10% of the
outstanding voting securities of any one issuer; but as to the
remaining 25% of its total assets, it retains freedom of action.
(10) Borrow money except from banks for temporary or emergency purposes and
not for investment purposes, and then only in amounts not in excess of
5% of the value of its total assets.
(11) Invest in the securities of any company that, including its
predecessors, has not been in business for at least three years.
(12) Invest more than 25% of the value of its total assets in any one
industry.
(13) Invest in securities of any one issuer for the purpose of exercising
control or management.
The Fund is also subject to the following restrictions and policies that
are not fundamental and may, therefore, be changed by the Board of Directors
without shareholder approval. Notwithstanding the restrictions above, the High
Yield Fund will not, so long as its shares are registered for sale in the State
of South Dakota: (i) have more than 10% of its total assets invested in
securities of issuers that the Fund is restricted from selling to the public
without registration under the Securities Act of 1933, as amended; (ii) have
more than 10% of its total assets invested in real estate investment trusts or
investment companies; (iii) have more than 5% of its assets invested in options,
financial futures or stock index futures, other than hedging positions or
positions that are covered by cash or securities; (iv) have more than 5% of its
assets invested in equity securities of issuers that are not readily marketable
and securities of issuers that have been in operation for less than three years;
and (v) invest any part of its total assets in real estate or interests in real
estate, excluding readily marketable securities and real estate used for office
purposes; commodities, other than precious metals not to exceed 10% of the
Fund's total assets; commodity futures contracts or options other than as
permitted by investment companies qualifying for an exemption from the
definition of commodity pool operator; or interests in commodity pools or oil,
gas or other mineral exploration or development programs.
The High Yield Fund will not, so long as its shares are registered for sale
in the State of Texas, invest in oil, gas or other mineral leases or in real
estate limited partnerships. The Fund will limit its investments in warrants,
valued at the lower of cost or market, to 5% of its net assets. Included within
that amount, but not to exceed 2% of the Fund's net assets, may be warrants that
are not listed on the New York or American Stock Exchange. The Fund will not
make loans unless collateral values are continuously maintained at no less than
100% by "marking to market" daily.
The High Yield Fund will not, so long as its shares are registered for sale
in the State of Ohio: (i) purchase or retain securities of any issuer if the
officers or directors of the Fund, its adviser or manager owning beneficially
more than one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer, or (ii)
borrow, pledge, mortgage or hypothecate its assets in excess of 1/3 of total
Fund assets. The Fund will only borrow money for emergency or extraordinary
purposes.
INVESTMENT RESTRICTIONS -- THE BANK AND THRIFT FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
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present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(1) Invest more than 25% of its total assets in any industry or group of
related industries other than the banking and thrift industries,
except for temporary or defensive positions.
(2) Borrow, except that it may borrow in an amount up to 15% of its total
assets to obtain such short-term credits as are necessary for the
clearance of securities transactions.
(3) Invest in repurchase agreements maturing in more than 7 days, if as a
result of such investment more than 10% of the Fund's total assets
would be invested in such repurchase agreements.
(4) Purchase securities for which there are legal or contractual
restrictions on resale, if as a result of such purchase more than 10%
of the Fund's total assets would be invested in such securities.
(5) Invest more than 5% of the value of its net assets in marketable
warrants to purchase common stock.
(6) Purchase securities of any one issuer, other than U.S. Government
securities, if immediately after such purchase more than 5% of the
value of the Fund's total assets would be invested in such issuer or
the Fund would own more than 10% of the outstanding voting securities
of an issuer or more than 10% of any class of securities of an issuer,
except that up to 25% of the Fund's total assets may be invested
without regard to the restrictions in this Item 6. For this purpose,
all outstanding bonds and other evidences of indebtedness shall be
deemed within a single class regardless of maturities, priorities,
coupon rates, series, designations, conversion rights, security or
other differences.
(7) Act as an underwriter of securities of other issuers, except, to the
extent that it may be deemed to act as an underwriter in certain cases
when disposing of restricted securities (See also Item 4 above.).
(8) Purchase or sell real estate, commodities, commodity futures
contracts, or oil or gas exploration or development programs; or sell
short, or write, purchase, or sell straddles, spreads or combinations
thereof.
(9) Make loans, except that the Fund may purchase or hold Debt Securities
in accordance with its investment policies and objectives.
(10) Purchase securities on margin or hypothecate, mortgage or pledge any
of its assets except for the purpose of securing borrowings permitted
by Item 2 above and then only in an amount up to 15% of the value of
the Fund's total assets at the time of borrowing.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval. Appropriate
notice will be given of any changes in these restrictions made by the Board of
Directors. The Fund may not:
(11) Participate on a joint or joint and several basis in any trading
account in securities.
(12) Purchase securities of any issuer for the purposes of exercising
control or management, except in connection with a merger,
consolidation, acquisition or reorganization.
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(13) Invest more than 5% of the Fund's total assets in securities of any
issuer which, together with its predecessors, has been in continuous
operation less than three years.
(14) Purchase or retain the securities of any issuer if those officers or
Directors of the Fund or officers or Directors of the Investment
Manager who each own beneficially more than 1/2 of 1% of the
securities of that issuer together own more than 5% of the securities
of such issuer.
(15) Invest in illiquid securities if, as a result, more than 15% of the
Fund's net assets would be invested in such securities.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in a percentage from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing restrictions.
INVESTMENT RESTRICTIONS -- THE GOVERNMENT SECURITIES INCOME FUND
The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund MAY NOT:
(1) Purchase any securities other than obligations issued or guaranteed by
the United States Government or its agencies, some of which may be
subject to repurchase agreements. There is no limit on the amount of
the Fund's assets that may be invested in the securities of any one
issuer of such obligations.
(2) Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) to the extent the entry into a repurchase agreement is deemed to
be a loan or (c) by the loan of its portfolio securities in accordance
with the policies described under "Investment Objective and Policies."
(3) (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total assets
(at the lower of cost or fair market value). No additional investment
may be made while any such borrowing are in excess of 5% of total
assets. For purposes of this investment restriction, the entry into
reverse repurchase agreements, dollar-rolls and delayed delivery
transactions, including those relating to pair-offs, shall not
constitute borrowing.
(b) Mortgage, pledge or hypothecate any of its assets except to the
extent necessary to secure permitted borrowing and to the extent
related to the deposit of assets in escrow in connection with (i)
the purchase of securities on a forward commitment or delayed
delivery basis, and (ii) reverse repurchase agreements and
dollar-rolls.
(c) Borrow money, including the entry into reverse repurchase
agreements and dollar roll transactions and purchasing securities
on a delayed delivery basis, if, as a result of such borrowing,
more than 33-1/3 of the total assets of the Fund, taken at market
value at the time of such borrowing, is derived from borrowing.
For purposes of this limitation, a delay between purchase and
settlement of a security that occurs in the ordinary course for
the market on which the security is purchased or issued is not
considered a purchase of a security on a delayed delivery basis.
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(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.
OPERATING RESTRICTIONS - FOR THE PILGRIM MUTUAL FUNDS
As a matter of operating (not fundamental) policy adopted by the
Board of Trustees of the Trust, no Fund:
(1) May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships,
although a Fund may invest in the securities of companies which invest
in or sponsor such programs.
(2) May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount
not less than 100% of the value of the loaned securities by marking to
market daily.
PRIMARY FUND RESTRICTIONS FOR THE PILGRIM MUTUAL FUNDS
The following are the fundamental operating restrictions of the Primary
Fund in which the Money Market Fund invests substantially all of its assets:
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The Primary Fund cannot:
(37) borrow money except as a temporary or emergency measure and not in an
amount to exceed 5% of the market value of its total assets;
(38) issue securities senior to its capital stock;
(39) act as an underwriter with respect to the securities of others;
(40) concentrate investments in any particular industry except to the
extent that its investments are concentrated exclusively in U.S.
government securities and bank obligations or repurchase agreements
secured by such obligations;
(41) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts;
(42) lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
(43) sell any security short or write, sell or purchase any futures
contract or put or call option;
(44) invest in voting securities or in companies for the purpose of
exercising control;
(45) invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940 ("1940 Act");
(46) make investments on a margin basis;
(47) purchase or sell any securities (other than securities of the Primary
Fund) from or to any officer or Trustee of the Primary Fund, the
investment adviser or affiliated person except in compliance with the
1940 Act.
PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement
authorizes the Investment Manager or Portfolio Manager to select the brokers or
dealers that will execute the purchase and sale of investment securities for
each Fund. In all purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreements and Portfolio
Management Agreements, each Investment Manager or Portfolio 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 Funds and which brokers are
to be eligible to execute portfolio transactions of the Fund. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of an Investment Manager
or Portfolio Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, each Investment Manager or Portfolio
Manager will use its best efforts to choose a broker capable of providing the
brokerage services necessary to obtain the most favorable price and execution
available. The full range and quality of brokerage services available will be
considered in making these determinations, such as the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors. With
respect to Bank and Thrift Fund, such other Factors would include the firm's
ability to engage in transactions in shares of banks and thrifts that are not
listed on an organized stock exchange. The Investment Managers or Portfolio
Manager will seek to obtain the best commission rate available from brokers that
are believed to be capable of providing efficient execution and handling of the
orders. In those instances where it is reasonably determined that more than one
broker can offer the brokerage services needed to obtain the most favorable
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price and execution available, consideration may be given to those brokers that
supply research and statistical information to a Fund, the Investment Manager,
and/or the Portfolio Manager, and provide other services in addition to
execution services. Each Investment Manager or Portfolio Manager considers such
information, which is in addition to and not in lieu of the services required to
be performed by the Investment Manager or Portfolio Manager to be useful in
varying degrees, but of indeterminable value. Consistent with this policy,
portfolio transactions may be executed by brokers affiliated with the Pilgrim
Group or any of the Investment Managers or Portfolio Managers, so long as the
commission paid to the affiliated broker is reasonable and fair compared to the
commission that would be charged by an unaffiliated broker in a comparable
transaction. The placement of portfolio brokerage with broker-dealers who have
sold shares of a Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc. ("NASD") Provided the Fund's officers are satisfied
that the Fund is receiving the most favorable price and execution available, the
Fund may also consider the sale of the Fund's shares as a factor in the
selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Funds' general policy to seek first to
obtain the most favorable price and execution available, in selecting a broker
to execute portfolio transactions for a Fund, the Fund may also give weight to
the ability of a broker to furnish brokerage and research services to the Fund,
the Investment Manager or the Portfolio Manager, even if the specific services
were not imputed to the Fund and were useful to the Investment Manager and/or
Portfolio Manager in advising other clients. In negotiating commissions with a
broker, the Fund may therefore pay a higher commission than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission has been determined in good faith by the
Investment Manager or Portfolio Manager to be reasonable in relation to the
value of the brokerage and research services provided by such broker.
Purchases of securities for a Fund also may be made directly from issuers
or from underwriters. Where possible, purchase and sale transactions will be
effected through dealers which specialize in the types of securities which the
Fund will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate
for other clients served by that Fund's Investment Manager or Portfolio Manager.
If the purchase or sale of securities consistent with the investment policies of
a Portfolio and one or more of these other clients serviced by the Investment
Manager or Portfolio Manager is considered at or about the same time,
transactions in such securities will be allocated among the Fund and the
Investment Manager's or Portfolio Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager or Portfolio Manager. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by a Investment Manager or Portfolio Manager, and the
results of such allocations, are subject to periodic review by the Board of
Directors. To the extent any of Funds seek to acquire the same security at the
same time, one or more of the Funds may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price for
such security. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a specific
Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Investment Manager, except for any sales of portfolio securities that may
legally be made pursuant to a tender offer, in which event the Investment
Manager will offset against its management fee a part of any tender fees that
may be legally received and retained by an affiliated broker-dealer.
Purchases and sales of fixed income securities will usually be principal
transactions. Such securities often will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. Each Fund may also
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purchase such securities in underwritten offerings and will, on occasion,
purchase securities directly from the issuer. Generally, fixed income securities
are traded on a net basis and do not involve brokerage commissions. The cost of
executing fixed income securities transactions consists primarily of dealer
spreads and underwriting commissions.
In purchasing and selling fixed income securities, it is the policy of each
Fund to obtain the best results, while taking into account the dealer's general
execution and operational facilities, the type of transaction involved and other
factors, such as the dealer's risk in positioning the securities involved. While
Pilgrim generally seeks reasonably competitive spreads or commissions, the Funds
will not necessarily pay the lowest spread or commission available.
Brokerage commissions paid by each Fund for each of the last three fiscal
years are as follows:
June 30 March 31
--------------------- --------------------
1999 1999 1998 1997
--------- ---------- --------- ---------
International Core Growth Fund $ 337,039 $1,150,595 $ 464,615 $ 24,643
Worldwide Growth Fund 390,084 1,166,321 1,065,153 970,564
International SmallCap Growth Fund 247,580 873,671 745,259 692,326
Emerging Countries Fund 1,036,293 3,945,783 3,634,338 1,427,861
LargeCap Growth Fund 58,467 115,558 30,907 4,620
MidCap Growth Fund 344,683 1,291,517 1,809,755 1,139,938
SmallCap Growth Fund 156,586 974,722 1,002,867 987,245
Convertible Fund 15,340 158,049 130,017 114,243
Balanced Fund 38,023 25,782 43,966 35,105
Strategic Income Fund 3,257 0 100 0
Money Market Fund N/A N/A N/A N/A
FOR THE FISCAL YEARS ENDED JUNE 30, 1999
--------------------------------
1999 1998 1997
--------- --------- ---------
Asia-Pacific Equity Fund $203,029 $302,383 $320,036
MidCap Value Fund 364,903 $ 16,687 $146,795
LargeCap Leaders Fund 55,028 $ 50,835 $ 56,375
MagnaCap Fund 300,524 $456,000 $600,000
High Yield Fund 0 $ 0 $ 0
Bank and Thrift Fund (1) 584,160 316,000 90,000
Government Securities Income Fund 0 $ 0 $ 0
- - - - - - - - - ----------
(1) For the Bank and Thrift Fund, for the years ended December 31, 1997 and the
six-month period ended June 30, 1998.
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
Growth + Value Fund...................... $339,495 $170,986
International Value Fund(1).............. $995,910 $421,452
Emerging Markets Value Fund(2)........... $ 33,868 N/A
Research Enhanced Index Fund(3).......... N/A N/A
Income & Growth Fund..................... $ 93,492 $507,638
High Total Return Fund II................ $ -- $ --
High Total Return Fund................... $ -- $ 222
- - - - - - - - - ----------
(1) Prior to April 21, 1997, the International Value Fund was operated as the
Brandes International Fund, a series of the Brandes Investment Trust, and
distributed by Worldwide Value Distributors, L.L.C.
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1999 1998 1997
--------- --------- ---------
SmallCap Opportunities Fund.............. $957,784 $874,698
Mid-Cap Opportunities Fund(1)............ $ 54,968 N/A
Growth Opportunities Fund................ $423,680 $169,066
Balance Sheet Opportunities Fund......... $ 13,025 $ 81,371
Government Securities Fund............... $193,230 $ --
High Yield Fund III...................... $ -- $ --
Of the total commissions paid during the fiscal period ended June 30, 1999,
$__________, (_____%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
During the three months period ended June 30, 1999, the following Funds (or
their predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: Worldwide Growth Fund-Goldman Sachs Group; MidCap Growth Fund-Donaldson
Lufkin & Jenrette; Convertible Fund-Merrill Lynch & Co., Morgan Stanley Dean
Witter Discover Co.; Balanced Fund-Donaldson Lufkin & Jenrette, Goldman Sachs
Group, Merrill Lynch & Co., Morgan Stanley Dean Witter Discover & Co.; Strategic
Income-Donaldson Lufkin & Jenrette, J.P. Morgan & Co., Goldman Sachs Group,
Morgan Stanley Dean Witter Discover & Co.; LargeCap Growth Fund-Godlman Sachs
Group. The holdings of securities of such brokers and dealers were as follows as
of June 30, 1999: Worldwide Growth Fund-Goldman Sachs Group ($3,872,600);
Convertible Fund-Merrill Lynch & Co. ($4,288,288); Morgan Stanley Dean Witter
Discover Co. ($7,328,441); Balanced Fund-Donaldson Lufkin & Jenrette ($248,135),
Merrill Lynch & Co. ($150,051), Morgan Stanley Dean Witter Discover & Co.
($421,616), Goldman Sachs Group ($155,772); Strategic Income-Donaldson Lufkin &
Jenrette ($480,120), J.P. Morgan & Co. ($621,224), Morgan Stanley Dean Witter
Discover & Co. ($202,361), Goldman Sachs Group ($233,658); LargeCap Growth
Fund-Goldman Sachs Group ($2,528,750); MidCap Growth Fund-Donaldson Lufkin &
Jenrette ($2,096,700).
As of October 31, 1999, the following Funds held securities of their
regular brokers or dealers: Research Enhanced Index - Goldman Sachs, Income
Growth - First Union Corp. The holdings of such brokers and dealers were as
follows as of October 31, 1999: Research Enhanced Index - Goldman Sachs
($923,000), Income and Growth - First Union Corp. ($2,645,994).
ABOUT THE MONEY MARKET FUND.
With respect to the Primary Fund in which the Money Market Fund invests its
assets, Reserve Management Company, Inc. is responsible for decisions to buy and
sell securities, broker-dealer selection and negotiation of commission rates. As
investment securities transactions made by the Primary Fund are normally
principal transactions at net prices, the Primary Fund does not normally incur
brokerage commissions. Purchases of securities from underwriters involve a
commission or concession paid by the issuer to the underwriter and aftermarket
transactions with dealers involve a spread between the bid and asked prices. The
Primary Fund has not paid any brokerage commissions during the past three fiscal
years.
The Primary Fund's policy of investing in debt securities maturing within
13 months results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a material, adverse effect
upon the net asset value ("NAV") or yield of the Primary Fund.
Subject to the overall supervision of the officers of the Primary Fund and
the Board of Trustees, Reserve Management Company, Inc. places all orders for
the purchase and sale of the Primary Fund's investment securities. In general,
in the purchase and sale of investment securities, Reserve Management Company,
Inc. will seek to obtain prompt and reliable execution of orders at the most
favorable prices and yields. In determining best price and execution, Reserve
Management Company, Inc. may take into account a dealer's operational and
financial capabilities, the type of transaction involved, the dealer's general
relationship with Reserve Management Company, Inc., and any statistical,
research, or other services provided by the dealer to Reserve Management
Company, Inc. To the extent such non-price factors are taken into account the
execution price paid may be increased, but only in reasonable relation to the
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benefit of such non-price factors to the Primary Fund as determined by Reserve
Management Company, Inc. Brokers or dealers who execute investment securities
transactions may also sell shares of the Primary Fund; however, any such sales
will be neither a qualifying nor disqualifying factor in the selection of
brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Primary Fund and other investment companies
managed by Reserve Management Company, Inc., the transactions are allocated as
to amount in accordance with each order placed for each fund. However, Reserve
Management Company, Inc. may not always be able to purchase or sell the same
security on identical terms for all investment companies affected.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased,
redeemed or exchanged appears in the Prospectus under "Shareholder Guide."
Shares of the Funds are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Company's
transfer agent, DST Systems, Inc. ("Transfer Agent"), plus, for Class A and
Class M shares, a varying sales charge depending upon the class of shares
purchased and the amount of money invested, as set forth in the Prospectus.
Certain investors may purchase shares of the Funds with liquid assets with
a value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Portfolio Manager intends to retain the security in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
Company reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE.
Class A or Class M shares of the Funds may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
Shares of a Fund (or shares of other funds managed by the Investment Manager in
accordance with the terms of such privileges established for such funds) within
the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent, or be postmarked, within 90 days after the date
of redemption. This privilege may only be used once per calendar year. Payment
must accompany the request and the purchase will be made at the then current net
asset value of the Fund. Such purchases may also be handled by a securities
dealer who may charge a shareholder for this service. If the shareholder has
realized a gain on the redemption, the transaction is taxable and any
reinvestment will not alter any applicable Federal capital gains tax. If there
has been a loss on the redemption and a subsequent reinvestment pursuant to this
privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
Class A Shares of the Funds may also be purchased at net asset value by any
person who can document that Fund shares were purchased with proceeds from the
redemption (within the previous 90 days) of shares from any unaffiliated mutual
fund on which a sales charge was paid or which were subject at any time to a
CDSC, and the Distributor has determined in its discretion that the unaffiliated
fund invests primarily in the same types of securities as the Pilgrim Fund
purchased.
Additionally, Class A or Class M Shares of the Funds may also be purchased
at net asset value by any charitable organization or any state, county, or city,
or any instrumentality, department, authority or agency thereof that has
determined that a Fund is a legally permissible investment and that is
prohibited by applicable investment law from paying a sales charge or commission
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in connection with the purchase of shares of any registered management
investment company ("an eligible governmental authority"). If an investment by
an eligible governmental authority at net asset value is made though a dealer
who has executed a selling group agreement with respect to the Company (or the
other open-end Pilgrim Funds) the Distributor may pay the selling firm 0.25% of
the Offering Price.
Shareholders of Pilgrim General Money Market Shares who acquired their
shares by using all or a portion of the proceeds from the redemption of Class A
or Class M shares of other open-end Pilgrim Funds distributed by the Distributor
may reinvest such amount plus any shares acquired through dividend reinvestment
in Class A or Class M Shares of a Fund at its current net asset value, without a
sales charge.
The officers, directors and bona fide full-time employees of the Company
and the officers, directors and full-time employees of the Investment Manager,
any Portfolio Manager, the Distributor, any service provider to a Fund or
affiliated corporations thereof or any trust, pension, profit-sharing or other
benefit plan for such persons, broker-dealers, for their own accounts or for
members of their families (defined as current spouse, children, parents,
grandparents, uncles, aunts, siblings, nephews, nieces, step-relations,
relations at-law, and cousins) employees of such broker-dealers (including their
immediate families) and discretionary advisory accounts of the Investment
Manager or any Portfolio Manager, may purchase Class A or Class M Shares of a
Fund at net asset value without a sales charge. Such purchaser may be required
to sign a letter stating that the purchase is for his own investment purposes
only and that the securities will not be resold except to the Fund. The Company
may, under certain circumstances, allow registered investment adviser's to make
investments on behalf of their clients at net asset value without any commission
or concession.
Class A or M shares may also be purchased at net asset value by certain fee
based registered investment advisers, trust companies and bank trust departments
under certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another open-end fund managed by the Investment Manager or from
Pilgrim Prime Rate Trust.
Class A or Class M shares may also be purchased without a sales charge by
(i) shareholders who have authorized the automatic transfer of dividends from
the same class of another Pilgrim Fund distributed by the Distributor or from
Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies
and bank trust departments investing in Class A shares on their own behalf or on
behalf of their clients, provided that the aggregate amount invested in any one
or more Funds, during the 13 month period starting with the first investment,
equals at least $1 million; (iii) broker-dealers, who have signed selling group
agreements with the Distributor, and registered representatives and employees of
such broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles, aunts,
siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv)
broker-dealers using third party administrators for qualified retirement plans
who have entered into an agreement with the Pilgrim Funds or an affiliate,
subject to certain operational and minimum size requirements specified from
time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or
broker-dealer charges an account management fee (`wrap accounts'); and (vi) any
registered investment company for which Pilgrim Investments, Inc. serves as
adviser.
Shares of the MagnaCap Fund are acquired at net asset value by Investors
Fiduciary Trust Company, Kansas City, Missouri, as Custodian for Pilgrim
Investment Plans, a unit investment trust for the accumulation of shares of the
Fund. As of June 30, 1999, less than 2% of the Fund's then total outstanding
shares were held by said Custodian for the account of such plan holders.
The Funds may terminate or amend the terms of these sales charge waivers at
any time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION.
An investor may immediately qualify for a reduced sales charge on a
purchase of Class A or Class M shares of any of the Funds which offers Class A
shares, Class M shares or shares with front-end sales charges, by completing the
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Letter of Intent section of the Shareholder Application in the Prospectus (the
"Letter of Intent" or "Letter"). By completing the Letter, the investor
expresses an intention to invest during the next 13 months a specified amount
which if made at one time would qualify for the reduced sales charge. At any
time within 90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund. After the Letter
of Intent is filed, each additional investment made will be entitled to the
sales charge applicable to the level of investment indicated on the Letter of
Intent as described above. Sales charge reductions based upon purchases in more
than one investment in the Pilgrim Funds will be effective only after
notification to the Distributor that the investment qualifies for a discount.
The shareholder's holdings in the Investment Manager's funds (excluding Pilgrim
General Money Market Shares) acquired within 90 days before the Letter of Intent
is filed will be counted towards completion of the Letter of Intent but will not
be entitled to a retroactive downward adjustment of sales charge until the
Letter of Intent is fulfilled. Any redemptions made by the shareholder during
the 13-month period will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge as specified below,
depending upon the amount actually purchased (less redemption) during the
period.
An investor acknowledges and agrees to the following provisions by
completing the Letter of Intent section of the Shareholder Application in the
Prospectus. A minimum initial investment equal to 25% of the intended total
investment is required. An amount equal to the maximum sales charge or 5.75% of
the total intended purchase will be held in escrow at Pilgrim Funds, in the form
of shares, in the investor's name to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The shares in
escrow will be included in the total shares owned as reflected on the monthly
statement; income and capital gain distributions on the escrow shares will be
paid directly by the investor. The escrow shares will not be available for
redemption by the investor until the Letter of Intent has been completed, or the
higher sales charge paid. If the total purchases, less redemptions, equal the
amount specified under the Letter, the shares in escrow will be released. If the
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by the Distributor and the dealer with
whom purchases were made pursuant to the Letter of Intent (to reflect such
further quantity discount) on purchases made within 90 days before, and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the applicable offering price.
If the total purchases, less redemptions, are less than the amount specified
under the Letter, the investor will remit to the Distributor an amount equal to
the difference in dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the redemption of an appropriate number of shares
in escrow to realize such difference will be made. If the proceeds from a total
redemption are inadequate, the investor will be liable to the Distributor for
the difference. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the Investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the Distributor as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the purpose of paying any additional sales charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the proceeds as directed by the Distributor. The investor or the
securities dealer must inform the Transfer Agent or the Distributor that this
Letter is in effect each time a purchase is made.
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
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Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other open-end funds
distributed by the Distributor (excluding Pilgrim General Money Market Shares)
can be combined with a current purchase to determine the reduced sales charge
and applicable offering price of the current purchase. The reduced sales charge
apply to quantity purchases made at one time or on a cumulative basis over any
period of time by (i) an investor, (ii) the investor's spouse and children under
the age of majority, (iii) the investor's custodian accounts for the benefit of
a child under the Uniform gift to Minors Act, (iv) a trustee or other fiduciary
of a single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies' registered investment advisors, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
The reduced sales charge also apply on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.
Shares of the Fund and other open-end Pilgrim Funds (excluding Pilgrim
General Money Market Shares) purchased and owned of record or beneficially by a
corporation, including employees of a single employer (or affiliates thereof)
including shares held by its employees, under one or more retirement plans, can
be combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase, provided such transactions
are not prohibited by one or more provisions of the Employee Retirement Income
Security Act or the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules applicable to
retirement plans before investing.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim Funds which impose a CDSC may
be combined with Class A or Class M shares for a reduced sales charge but will
not affect any CDSC which may be imposed upon the redemption of shares of a Fund
which imposes a CDSC.
REDEMPTIONS.
Payment to shareholders for shares redeemed will be made within seven days
after receipt by the Fund's Transfer Agent of the written request in proper
form, except that a Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but under
abnormal conditions that make payment in cash unwise, a Fund may make payment
wholly or partly in securities at their then current market value equal to the
redemption price. In such case, an investor may incur brokerage costs in
converting such securities to cash. However, each Company has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Act, which contain a
formula for determining the minimum amount of cash to be paid as part of any
redemption. In the event a Fund must liquidate portfolio securities to meet
redemptions, it reserves the right to reduce the redemption price by an amount
equivalent to the pro-rated cost of such liquidation not to exceed one percent
of the net asset value of such shares.
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Due to the relatively high cost of handling small investments, each Fund
Company reserves the right, upon 30 days written notice, to redeem, at net asset
value (less any applicable deferred sales charge), the shares of any shareholder
whose account has a value of less than $1,000 in the Fund, other than as a
result of a decline in the net asset value per share. Before the Fund redeems
such shares and sends the proceeds to the shareholder, it will notify the
shareholder that the value of the shares in the account is less than the minimum
amount and will allow the shareholder 30 days to make an additional investment
in an amount that will increase the value of the account to at least $1,000
before the redemption is processed. This policy will not be implemented where a
Fund has previously waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of the portfolio securities
at the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may
be subject to a CDSC. Shareholders will be charged a CDSC if certain of those
shares are redeemed within the applicable time period as stated in the
prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares, or (iii) were exchanged for
shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares
upon (i) the death or permanent disability of a shareholder, or (ii) in
connection with mandatory distributions from an Individual Retirement Account
("IRA") or other qualified retirement plan. The CDSC or redemption fee will be
waived in the case of a redemption of shares following the death or permanent
disability of a shareholder if the redemption is made within one year of death
or initial determination of permanent disability. The waiver is available for
total or partial redemptions of shares owned by an individual or an individual
in joint tenancy (with rights of survivorship), but only for redemptions of
shares held at the time of death or initial determination of permanent
disability. The CDSC or redemption fee will also be waived in the case of a
total or partial redemption of shares in connection with any mandatory
distribution from a tax-deferred retirement plan or an IRA. The waiver does not
apply in the case of a tax-free rollover or transfer of assets, other than one
following a separation from services, except that a CDSC or redmption fee may be
waived in certain circumstances involving redemptions in connection with a
distribution from a qualified employer retirement plan in connection with
termination of employment or termination of the employer's plan and the transfer
to another employer's plan or to an IRA. The shareholder must notify the Fund
either directly or through the Distributor at the time of redemption that the
shareholder is entitled to a waiver of CDSC or redemption fee. The waiver will
then be granted subject to confirmation of the shareholder's entitlement. The
CDSC or redemption fee, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered investment advisors,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients. These waivers may be changed at any time.
REINSTATEMENT PRIVILEGE.
If you sell Class B or Class C shares of a Pilgrim Fund, you may reinvest
some or all of the proceeds in the same share class within 90 days without a
sales charge. Reinstated Class B and Class C shares will retain their original
cost and purchase date for purposes of the CDSC. The amount of any CDSC also
will be reinstated. To exercise this privilege, the written order for the
purchase of shares must be received by the Transfer Agent or be postmarked
within 90 days after the date of redemption. This privilege can be used only
once per calendar year. If a loss is incurred on the redemption and the
reinstatement privilege is used, some or all of the loss may not be allowed as a
tax deduction.
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CONVERSION OF CLASS B SHARES.
A shareholder's Class B shares will automatically convert to Class A shares
in the Fund on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs, together with a pro
rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. The conversion of Class B
shares into Class A shares is subject to the continuing availability of an
opinion of counsel or an Internal Revenue Service ("IRS") ruling, if the
Investment Manager deems it advisable to obtain such advice, to the effect that
(1) such conversion will not constitute taxable events for federal tax purposes;
and (2) the payment of different dividends on Class A and Class B shares does
not result in the Fund's dividends or distributions constituting "preferential
dividends" under the Internal Revenue Code of 1986. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes.
CDSC SCHEDULE FOR SHARES OF THE EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND,
GROWTH OPPORTUNITIES FUND, MAYFLOWER TRUST, BALANCE SHEET OPPORTUNITIES FUND,
GOVERNMENT SECURITIES FUND, AND THE HIGH YIELD FUND III PURCHASED BEFORE
NOVEMBER 1, 1999
Effective November 1, 1999, the above listed Funds adopted a new CDSC
schedule, as set forth in the prospectus. Class B shares of those Funds
purchased before November 1, 1999 are subject to the following contingent sales
deferred change schedule:
Years After You CDSC As A Percentage
Bought the Shares of Amount Redeemed
----------------- ------------------
1st Year 5.00%
2nd Year 4.00%
3rd Year 3.00%
4th Year 2.00%
5th Year 2.00%
After 5 Years --
DEALER COMMISSIONS AND OTHER INCENTIVES.
In connection with the sale of shares of the Funds, the Distributor may pay
Authorized Dealers of record a sales commission as a percentage of the purchase
price. In connection with the sale of Class A and Class M shares, the
Distributor will reallow to Authorized Dealers of record from the sales charge
on such sales the following amounts:
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EQUITY FUNDS
Dealers' Reallowance as a
Percentage of Offering Price
----------------------------
AMOUNT OF TRANSACTION CLASS A CLASS M
- - - - - - - - - --------------------- ------- -------
Less than $50,000 5.00% 3.00%
$50,000 - $99,999 3.75% 2.00%
$100,000 - $249,999 2.75% 1.00%
$250,000 - $499,000 2.00% 1.00%
$500,000 - $999,999 1.75% None
$1,000,000 and over See below None
INCOME FUNDS
Dealers' Reallowance as a
Percentage of Offering Price
----------------------------
AMOUNT OF TRANSACTION CLASS A CLASS M
- - - - - - - - - --------------------- ------- -------
Less than $50,000 4.25% 3.00%
$50,000 - $99,999 4.00% 2.00%
$100,000 - $249,999 3.00% 1.25%
$250,000 - $499,000 2.25% 1.00%
$500,000 - $999,999 1.75% None
$1,000,000 and over See below None
The Distributor may pay to Authorized Dealers out of its own assets
commissions on shares sold in Classes A, B and C, at net asset value, which at
the time of investment would have been subject to the imposition of a contingent
deferred sales charge ("CDSC") if redeemed. There is no sales charge on
purchases of $1,000,000 or more of Class A shares. However, such purchases may
be subject to a CDSC, as disclosed in the Prospectus. The Distributor will pay
Authorized Dealers of record commissions at the rates shown in the table below
for purchases of Class A shares that are subject to a CDSC:
Dealer Commission as a
Amount of Transaction Percentage of Amount Invested
- - - - - - - - - --------------------- -----------------------------
$1,000,000 to $2,499,000 1.00%
$2,500,000 to $4,999,999 0.50%
$5,000,000 and over 0.25%
Also, the Distributor will pay out of its own assets a commission of 1% of
the amount invested for purchases of Class A shares of less than $1 million by
qualified employer retirement plans with 50 or more participants.
The Distributor will pay out of its own assets a commission of 4% of the
amount invested for purchases of Class B shares subject to a CDSC. For purchases
of Class C shares subject to a CDSC, the Distributor may pay out of its own
assets a commission of 1% of the amount invested of each Fund other than
Strategic Income Fund and 0.75% of the amount invested of Strategic Income Fund.
The Distributor may, from time to time, at its discretion, allow a selling
dealer to retain 100% of a sales charge, and such dealer may therefore be deemed
an "underwriter" under the Securities Act of 1933, as amended. The Distributor,
at its expense, may also provide additional promotional incentives to dealers.
The incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualifying registered representatives
and members of their families to locations within or outside of the United
States, merchandise or other items. For more information on incentives, see
"Management of the Funds -- 12b-1 Plans" in this Statement of Additional
Information.
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DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each
class of each Fund's shares will be determined once daily as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) during each day on which that Exchange is open for trading. As of the date
of this Statement of Additional Information, the New York Stock Exchange is
closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the mean between the last reported
bid and asked prices on the valuation day. Portfolio securities underlying
traded call options written by the High Yield Fund will be valued at their
market price as determined above; however, the current market value of the
option written by the High Yield Fund will be subtracted from net asset value.
In cases in which securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Short-term obligations maturing in
less than 60 days will generally be valued at amortized cost. This involves
valuing a security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Fund would receive if it sold the instrument. See "How
Net Asset Value is Determined" in the Prospectus. The mortgage securities held
in a Fund's portfolio will be valued at the mean between the most recent bid and
asked prices as obtained from one or more dealers that make markets in the
securities when over-the counter market quotations are readily available.
Securities for which quotations are not readily available and all other assets
will be valued at their respective fair values as determined in good faith by or
under the direction of the Board of Directors of the Company. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of a
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of a Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to a Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Directors.
In computing a class of a Fund's net asset value, all class-specific
liabilities incurred or accrued are deducted from the class' net assets. The
resulting net assets are divided by the number of shares of the class
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
daily expense accruals of the higher distribution fees applicable to Class B,
Class C and Class M shares. It is expected, however, that the per share net
asset value of the classes will tend to converge immediately after the payment
of dividends or distributions that will differ by approximately the amount of
the expense accrual differentials between the classes.
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Orders received by dealers prior to the close of regular trading on the New
York Stock Exchange will be confirmed at the offering price computed as of the
close of regular trading on the Exchange provided the order is received by the
Distributor prior to its close of business that same day (normally 4:00 P.M.
Pacific time). It is the responsibility of the dealer to insure that all orders
are transmitted timely to the Fund. Orders received by dealers after the close
of regular trading on the New York Stock Exchange will be confirmed at the next
computed offering price as described in the Prospectus.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Fund will not normally be
issued to shareholders. The Transfer Agent will maintain an account for each
shareholder upon which the registration and transfer of shares are recorded, and
any transfers shall be reflected by bookkeeping entry, without physical
delivery.
The Transfer Agent will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
Each Company reserves the right, if conditions exist that make cash
payments undesirable, to honor any request for redemption or repurchase order
with respect to shares of a Fund by making payment in whole or in part in
readily marketable securities chosen by the Fund and valued as they are for
purposes of computing the Fund's net asset value (redemption-in-kind). If
payment is made in securities, a shareholder may incur transaction expenses in
converting theses securities to cash. Each Company has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which a Fund is
obligated to redeem shares with respect to any one shareholder during any 90-day
period solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund at the beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds provide a Pre-Authorized
Investment Program for the convenience of investors who wish to purchase shares
of a Fund on a regular basis. Such a Program may be started with an initial
investment ($1,000 minimum) and subsequent voluntary purchases ($100 minimum)
with no obligation to continue. The Program may be terminated without penalty at
any time by the investor or the Funds. The minimum investment requirements may
be waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
For investors purchasing shares of a Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of a Fund on a
periodic basis, the Fund may, in lieu of furnishing confirmations following each
purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in
their accounts, which will also show the total number of Fund shares owned by
each shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of a fund will not be issued
unless the shareholder requests them in writing.
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SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS.
For self-employed individuals and corporate investors that wish to purchase
shares of a Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Funds.) The annual contract maintenance fee may be
waived from time to time. For further details, including the right to appoint a
successor Custodian, see the Plan and Custody Agreements as provided by the
Company. Employers who wish to use shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
INDIVIDUAL RETIREMENT ACCOUNTS.
Investors having earned income are eligible to purchase shares of a Fund
under an IRA pursuant to Section 408(a) of the Internal Revenue Code. An
individual who creates an IRA may contribute annually certain dollar amounts of
earned income, and an additional amount if there is a non-working spouse. Simple
IRA plans that employers may establish on behalf of their employees are also
available. Roth IRA plans that enable employed and self-employed individuals to
make non-deductible contributions, and, under certain circumstances, effect
tax-free withdrawals, are also available. Copies of a model Custodial Account
Agreement are available from the Distributor. Investors Fiduciary Trust Company,
Kansas City, Missouri, will act as the Custodian under this model Agreement, for
which it will charge the investor an annual fee of $12.00 for maintaining the
Account (such fee is in addition to the normal custodial charges paid by the
Funds). Full details on the IRA are contained in an IRS required disclosure
statement, and the Custodian will not open an IRA until seven (7) days after the
investor has received such statement from the Company. An IRA using shares of a
Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are
also available. Section 403(b) plans are arrangements by a public school
organization or a charitable, educational, or scientific organization that is
described in Section 501(c)(3) of the Internal Revenue Code under which
employees are permitted to take advantage of the federal income tax deferral
benefits provided for in Section 403(b) of the Code. It is advisable for an
investor considering the funding of any retirement plan to consult with an
attorney or to obtain advice from a competent retirement plan consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES.
As discussed in the Prospectus, the telephone redemption and exchange
privileges are available for all shareholder accounts; however, retirement
accounts may not utilize the telephone redemption privilege. The telephone
privileges may be modified or terminated at any time. The privileges are subject
to the conditions and provisions set forth below and in the Prospectus.
(48) 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).
(49) Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
(50) Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
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(51) Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on
the registration. This address cannot reflect any change within
the previous sixty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
(52) If the exchange involves the establishment of a new account, the
dollar amount being exchanged must at least equal the minimum
investment requirement of the Pilgrim Fund being acquired.
(53) Any new account established through the exchange privilege will have
the same account information and options except as stated in the
Prospectus.
(54) Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141
and deposited into your account before any transaction may be
processed.
(55) If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares
of the Pilgrim Fund to be purchased on the exchange having the same
aggregate net asset value as the shares being exchanged shall be
substituted in the escrow account. Shares held in escrow may not be
redeemed until the Letter of Intent has expired and/or the appropriate
adjustments have been made to the account.
(56) Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Funds' then-current
prospectus.
(57) Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by
the bank upon which it was drawn.
SYSTEMATIC WITHDRAWAL PLAN.
You may elect to make periodic withdrawals from your account in any fixed
amount in excess of $100 ($1,000 in the case of Class Q) to yourself, or to
anyone else you properly designate, as long as the account has a current value
of at least $10,000 ($250,000 in the case of Class Q). To establish a systematic
cash withdrawal, complete the Systematic Withdrawal Plan section of the Account
Application. To have funds deposited to your bank account, follow the
instructions on the Account Application. You may elect to have monthly,
quarterly, semi-annual or annual payments. Redemptions are normally processed on
the fifth day prior to the end of the month, quarter or year. Checks are then
mailed or proceeds are forwarded to your bank account on or about the first of
the following month. You may change the amount, frequency and payee, or
terminate the plan by giving written notice to the Transfer Agent. A Systematic
Withdrawal Plan may be modified at any time by the Fund or terminated upon
written notice by the relevant Fund.
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During the withdrawal period, you may purchase additional shares for
deposit to your account, subject to any applicable sales charge, if the
additional purchases are equal to at least one year's scheduled withdrawals, or
$1,200 ($12,000 in the case of Class Q), whichever is greater. There are no
separate charges to you under this Plan, although a CDSC may apply if you
purchased Class A, B or C shares. Shareholders who elect to have a systematic
cash withdrawal must have all dividends and capital gains reinvested. As shares
of a Fund are redeemed under the Plan, you may realize a capital gain or loss
for income tax purposes.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting
both income dividends and capital gains distributions, if any, in additional
shares of a respective class of a Fund at the then current net asset value, with
no sales charge. The Funds' management believes that most investors desire to
take advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and its shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and shareholders are
advised to consult their own tax advisers with respect to the particular
federal, state, local and foreign tax consequences to them of an investment in
the Funds. This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations issued thereunder, and judicial and
administrative authorities as in effect on the date of this Statement of
Additional Information, all of which are subject to change, which change may be
retroactive.
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each Fund
must, among other things: (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing
that foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
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The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund currently
intends to make distributions in accordance with the calendar year distribution
requirement.
DISTRIBUTIONS.
Dividends of investment company taxable income (including net short-term
capital gains) are taxable to shareholders as ordinary income. Distributions of
investment company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to a Fund's dividend
income from U.S. corporations, and if other applicable requirements are met.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by a Fund as capital gain dividends are not eligible for the
dividends-received deduction and will generally be taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been held by a shareholder, and are not eligible for the dividends-received
deduction. Net capital gains from assets held for one year or less will be taxed
as ordinary income. Generally, dividends and distributions are taxable to
shareholders, whether received in cash or reinvested in shares of a Fund. Any
distributions that are not from a Fund's investment company taxable income or
net capital gain may be characterized as a return of capital to shareholders or,
in some cases, as capital gain. Shareholders will be notified annually as to the
federal tax status of dividends and distributions they receive and any tax
withheld thereon.
Dividends, including capital gain dividends, declared in October, November,
or December with a record date in such month and paid during the following
January will be treated as having been paid by a Fund and received by
shareholders on December 31 of the calendar year in which declared, rather than
the calendar year in which the dividends are actually received.
Distributions by a Fund reduce the net asset value of the Fund shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, the distribution nevertheless may be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by a Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
ORIGINAL ISSUE DISCOUNT.
Certain debt securities acquired by a Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount that accrues on a debt
security in a given year generally is treated for federal income tax purposes as
interest and, therefore, such income would be subject to the distribution
requirements of the Code.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
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discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivable or accrues expenses or other liabilities denominated in a
foreign currency and the time a Fund actually collects such receivable or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of a
Fund's net investment income to be distributed to its shareholders as ordinary
income.
PASSIVE FOREIGN INVESTMENT COMPANIES.
A Fund may invest in stocks of foreign companies that are classified under
the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which a Fund held the PFIC stock. A Fund itself will be subject to
tax on the portion, if any, of the excess distribution that is allocated to that
Fund's holding period in prior taxable years (and an interest factor will be
added to the tax, as if the tax had actually been payable in such prior taxable
years) even though the Fund distributes the corresponding income to
shareholders. Excess distributions include any gain from the sale of PFIC stock
as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. Alternatively, another
election may be available that involves marking to market the Funds' PFIC stock
at the end of each taxable year with the result that unrealized gains are
treated as though they were realized and are reported as ordinary income; any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are reported as ordinary loss to the extent of any net mark-to-market gains
included in income in prior years.
FOREIGN WITHHOLDING TAXES.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other income or similar taxes imposed by such
countries. If more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, that Fund
will be eligible and may elect to "pass through" to the Fund's shareholders the
amount of foreign income and similar taxes paid by that Fund. Pursuant to this
election, a shareholder will be required to include in gross income (in addition
to taxable dividends actually received) his pro rata share of the foreign taxes
paid by a Fund, and will be entitled either to deduct (as an itemized deduction)
his pro rata share of foreign income and similar taxes in computing his taxable
income or to use it as a foreign tax credit against his U.S. federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each shareholder will be
notified within 60 days after the close of the relevant Fund's taxable year
whether the foreign taxes paid by the Fund will "pass through" for that year.
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Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of a Fund's income flows through to its shareholders. With respect to a
Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by a Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund. The foreign tax credit limitation rules do not apply to certain
electing individual taxpayers who have limited creditable foreign taxes and no
foreign source income other than passive investment-type income. The foreign tax
credit is eliminated with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Fund are held by the Fund or the
shareholders, as the case may be, for less than 16 days (46 days in the case of
preferred shares) during the 30-day period (90-day period for preferred shares)
beginning 15 days (45 days for preferred shares) before the shares become
ex-dividend. Foreign taxes may not be deducted in computing alternative minimum
taxable income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by a Fund will be treated as United States
source income.
OPTIONS AND HEDGING TRANSACTIONS.
The taxation of equity options (including options on narrow-based stock
indices) and over-the-counter options on debt securities is governed by Code
Section 1234. Pursuant to Code Section 1234, with respect to a put or call
option that is purchased by a Fund, if the option is sold, any resulting gain or
loss will be a capital gain or loss, and will be short-term or long term,
depending upon the holding period of the option. If the option expires, the
resulting loss is a capital loss and is short-term or long-term, depending upon
the holding period of the option. If the option is exercised, the cost of the
option, in the case of a call option, is added to the basis of the purchased
security and, in the case of a put option, reduces the amount realized on the
underlying security in determining gain or loss.
Certain options and financial contracts in which the Funds may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by a Fund at the end of each taxable
year (and on certain other dates as prescribed under the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
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Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not
loss) from a constructive sale of certain "appreciated financial positions" if
the Fund enters into a short sale, notional principal contract, futures or
forward contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment does not apply to certain transactions closed in the 90-day
period ending with the 30th day after the close of the Fund's taxable year, if
certain conditions are met.
Requirements relating to each Fund's tax status as a regulated investment
company may limit the extent to which a Fund will be able to engage in
transactions in options and foreign currency forward contracts.
SHORT SALES AGAINST THE BOX.
If a Fund sells short "against the box," unless certain constructive sale
rules (discussed above) apply, it may realize a capital gain or loss upon the
closing of the sale. Such gain or loss generally will be long- or short-term
depending upon the length of time the Fund held the security which it sold
short. In some circumstances, short sales may have the effect of reducing an
otherwise applicable holding period of a security in the portfolio. The
constructive sale rule, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully under "Options and Hedging Transactions" above.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future Treasury regulations may apply similar
treatment to other transactions with respect to property that becomes
substantially worthless.
OTHER INVESTMENT COMPANIES.
It is possible that by investing in other investment companies, a Fund may
not be able to meet the calendar year distribution requirement and may be
subject to federal income and excise tax. The diversification and distribution
requirements applicable to each Fund may limit the extent to which each Fund
will be able to invest in other investment companies.
SALE OR OTHER DISPOSITION OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, which generally may be eligible
for reduced Federal tax rates, depending on the shareholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in a Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
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
127
<PAGE>
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING.
Each Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish a Fund with the shareholder's correct taxpayer identification
number or social security number and to make such certifications as a Fund may
require, (2) the IRS notifies the shareholder or a Fund that the shareholder has
failed to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the shareholder's federal income tax
liability.
FOREIGN SHAREHOLDERS.
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder. If the income from the Fund is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends (including distributions of any net short term capital gains) will be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon
the gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares of
the Fund, and distributions of net long term capital gains that are designated
as capital gain dividends. If the income from the Fund is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then ordinary
income dividends, capital gain dividends and any gains realized upon the sale of
shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
OTHER TAXES.
Distributions also may be subject to state, local and foreign taxes. U.S.
tax rules applicable to foreign investors may differ significantly from those
outlined above. This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. Shareholders are advised to consult
their own tax advisers for details with respect to the particular tax
consequences to them of an investment in a Fund.
PURCHASES IN-KIND OF THE INTERNATIONAL VALUE FUND.
Investors may, subject to the approval of the International Value Fund, the
Investment Manager and Brandes, purchase shares of the International Value Fund
with liquid securities that are eligible for purchase by the Fund and that have
a value that is readily ascertainable. These transactions will be effected only
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<PAGE>
if the Investment Manager or Brandes intends to retain the securities in the
Fund as an investment. The Fund reserves the right amend or terminate this
practice at any time.
REDEMPTIONS.
The right to redeem shares may be suspended and payment therefor postponed
during periods when the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or, if permitted by rules of the SEC, during
periods when trading on the Exchange is restricted, during any emergency that
makes it impracticable for any Fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by
order of the SEC for the protection of investors. Furthermore, the Transfer
Agent will not mail redemption proceeds until checks received for shares
purchased have cleared, but payment will be forwarded immediately upon the funds
becoming available. Shareholders will be subject to the applicable deferred
sales charge, if any, for their shares at the time of redemption.
The contingent deferred sales charge will be waived with respect to Class T
shares in the following instances: (i) any partial or complete redemption of
shares of a shareholder who dies or becomes disabled, so long as the redemption
is requested within one year of death or the initial determination of
disability; (ii) any partial or complete redemption in connection with
distributions under Individual Retirement Accounts ("IRAs") or other qualified
retirement plans in connection with a lump sum or other form of distribution
following retirement within the meaning of Section 72(t)(2)(A) (iv) or (v) of
the Code, disability or death, or after attaining the age of 59 1/2 in the case
of an IRA, Keogh Plan or custodial account pursuant to Section 403(b)(7) of the
Code, or on any redemption that results from a tax free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code or Section 4979(f)
of the Code; (iii) redemptions effected pursuant to the Funds' right to
liquidate a shareholder's account if the aggregate net asset value of the shares
held in the account is less than $500; (iv) redemptions effected by (A)
employees of The Advest Group, Inc. ("AGI") and its subsidiaries, (B) IRAs,
Keogh plans and employee benefit plans for those employees, and (C) spouses and
minor children of those employees, so long as orders for shares are placed on
behalf of the spouses or children by the employees; (v) redemptions effected by
accounts managed by investment advisory subsidiaries of AGI registered under the
Investment Advisers Act of 1940; and (vi) redemptions in connection with
exchanges of Fund Class T shares, including shares of the Class T account of the
Money Market Portfolio.
EXCHANGES.
The following conditions must be met for all exchanges among the Funds and
the Money Market Portfolio: (i) the shares that will be acquired in the exchange
(the "Acquired Shares") are available for sale in the shareholder's state of
residence; (ii) the Acquired shares will be registered to the same shareholder
account as the shares to be surrendered (the "Exchanged Shares"); (iii) the
Exchanged Shares must have been held in the shareholder's account for at least
30 days prior to the exchange; (iv) except for exchanges into the Money Market
Portfolio, the account value of the Fund whose shares are to be acquired must
equal or exceed the minimum initial investment amount required by that Fund
after the exchange is implemented; and (v) a properly executed exchange request
has been received by the Transfer Agent.
Each Fund reserves the right to delay the actual purchase of the Acquired
Shares for up to five business days if it determines that it would be
disadvantaged by an immediate transfer of proceeds from the redemption of
Exchanged Shares. Normally, however, the redemption of Exchanged Shares and the
purchase of Acquired Shares will take place on the day that the exchange request
is received in proper form. Each Fund reserves the right to terminate or modify
its exchange privileges at any time upon prominent notice to shareholders. Such
notice will be given at least 60 days in advance. It is the policy of Pilgrim to
discourage and prevent frequent trading by shareholders among the Funds in
response to market fluctuations. Accordingly, in order to maintain a stable
asset base in each Fund and to reduce administrative expenses borne by each
Fund, Pilgrim reserves the right to reject any exchange request.
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CONVERSION FEATURE.
Class B and Class T shares of each Fund will automatically convert to Class
A shares without a sales charge at the relative net asset values of each of the
classes after eight years from the acquisition of the Class B or Class T shares,
and as a result, will thereafter be subject to the lower distribution fee (but
same service fee) under the Class A Rule 12b-1 plan for each Fund.
CALCULATION OF PERFORMANCE DATA
Each Fund may, from time to time, include "total return" in advertisements
or reports to shareholders or prospective investors. Quotations of average
annual total return will be expressed in terms of the average annual compounded
rate of return of a hypothetical investment in a Fund over periods of 1, 5 and
10 years (up to the life of the Fund), calculated pursuant to the following
formula which is prescribed by the SEC:
n
P(1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period.
All total return figures assume that all dividends are reinvested when
paid.
From time to time, a Fund may advertise its average annual total return
over various periods of time. These total return figures show the average
percentage change in value of an investment in the Fund from the beginning date
of the measuring period. These figures reflect changes in the price of the
Fund's shares and assume that any income dividends and/or capital gains
distributions made by the Fund during the period were reinvested in shares of
the Fund. Figures will be given for one, five and ten year periods (if
applicable) and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis).
Prior to October 17, 1997, the Bank and Thrift Fund operated as a
closed-end investment company. Upon conversion of the Fund to an open-end
investment company on October 17, 1997, all outstanding shares of Common Stock
of the Fund were designated as Class A shares. Performance information for the
period prior to October 17, 1997 reflects the performance of the Fund as a
closed-end fund. Performance information presented by the Fund for all periods
is restated to reflect the current maximum front-end sales load payable by the
Class A shares of the Fund. Performance information for the period prior to
October 17, 1997 has not been adjusted to reflect annual Rule 12b-1 fees of
Class A shares plus additional expenses incurred in connection with operating as
an open-end investment company. Performance would have been lower if adjusted
for these charges and expenses. Performance information for all periods after
October 17, 1997 reflects Class A's annual Rule 12b-1 fees and other expenses
associated with open-end investment companies.
Government Securities Income Fund earned income and realized capital gains
as a result of entering into reverse repurchase agreements during the six-month
period from July to December 1992 that caused the Fund to exceed its 10%
investment restriction on borrowing. Therefore, the Fund's performance was
higher than it would have been had the Fund adhered to its borrowing
restriction.
Quotations of yield for a Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
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a-b 6
Yield= 2[(---) + 1) - 1]
cd
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
A Fund may also from time to time advertise its yield based on a 30-day or
90-day period ended on a date other than the most recent balance sheet included
in the Fund's Registration Statement, computed in accordance with the yield
formula described above, as adjusted to conform with the differing period for
which the yield computation is based. Any quotation of performance stated in
terms of yield (whether based on a 30-day or 90-day period) will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
A Fund may also publish a distribution rate in sales literature and in
investor communications preceded or accompanied by a copy of the current
Prospectus. The current distribution rate for a Fund is the annualization of the
Fund's distribution per share divided by the maximum offering price per share of
a Fund at the respective month-end. The current distribution rate may differ
from current yield because the distribution rate may contain items of capital
gain and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures
will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load, including any applicable contingent deferred
sales charge.
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ADDITIONAL PERFORMANCE QUOTATIONS.
Advertisements of total return will always show a calculation that includes
the effect of the maximum sales charge but may also show total return without
giving effect to that charge. Because these additional quotations will not
reflect the maximum sales charge payable, these performance quotations will be
higher than the performance quotations that reflect the maximum sales charge.
Total returns and yields are based on past results and are not necessarily
a prediction of future performance.
PERFORMANCE COMPARISONS.
In reports or other communications to shareholders or in advertising
material, a Fund may compare the performance of its Class A, Class B, Class C,
Class M, Class Q, and Class T shares with that of other mutual funds as listed
in the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY and THE WALL
STREET JOURNAL. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results. Prior to October
17, 1997, the Bank and Thrift Fund was rated as a closed-end fund, which had a
different fee structure. Fee structures are incorporated into certain ratings.
If the Fund had been rated using the fee structure of an open-end fund, ratings
for those periods may have been different.
The yield for the various classes of Pilgrim fixed income funds for the
month ended June 30, 1999 (October 31, 1999 for Mayflower Trust) was as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class C Class M Class Q Class T
- - - - - - - - - ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income & Growth Fund............... 1.70% 1.09% 1.23% N/A N/A N/A
Government Securities Fund......... 5.65% 5.24% 5.18% N/A N/A 5.60%
High Yield Fund III................ 8.98% 8.69% 8.67% N/A N/A 9.06%
High Total Return Fund II.......... 11.38% 11.20% 11.19% N/A N/A N/A
High Total Return Fund............. 11.46% 11.28% 11.28% N/A N/A N/A
Balance Sheet Opportunities Fund... 2.41% 1.88% 1.87% N/A N/A 2.09%
High Yield Fund.................... 9.71% 9.45% 9.43% 9.36% N/A N/A
Convertible Fund................... 1.72% 1.19% 1.19% N/A 1.93% N/A
Strategic Income Fund.............. 5.19% 5.30% 5.30% N/A 5.80% N/A
Balanced Fund...................... 1.88% 1.34% 1.36% N/A 2.09% N/A
High Yield Fund II................. 9.82% 9.69% 9.75% N/A 10.72% N/A
</TABLE>
The average annual total returns, including sales charges, for each class
of shares of each Fund for the one-five-and ten-year periods ended June 30, 1999
(October 31, 1999 for Emerging Markets Value Fund, Growth + Value Fund, High
Total Return Fund, High Total Return Fund II, Income & Growth Fund,
International Value Fund, and Research Enhanced Index Fund), if applicable, and
for classes that have not been in operation for ten years, the average annual
total return from for the period from commencement of operations to June 30,
1999, is as follows:
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Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ----------- ---------
ASIA-PACIFIC EQUITY FUND(1)
Class A 52.64% N/A N/A (9.46%) 9/1/95
Class B 55.64% N/A N/A (9.53%) 9/1/95
Class C N/A N/A N/A N/A N/A
Class M 55.04% N/A N/A (9.46%) 9/1/95
LARGECAP LEADERS FUND(1)
Class A 13.70% N/A N/A 19.41% 9/1/95
Class B 14.71% N/A N/A 19.89% 9/1/95
Class C N/A N/A N/A 1.30% 6/17/99
Class M 15.83% N/A N/A 19.56% 9/1/95
MIDCAP VALUE FUND(1)
Class A (4.83%) N/A N/A 14.53% 9/1/95
Class B (4.41%) N/A N/A 14.91% 9/1/95
Class C N/A N/A N/A 1.43% 6/2/99
Class M (3.06%) N/A N/A 14.61% 9/1/95
MAGNACAP FUND(2)
Class A 10.51% 20.59% 14.97% 13.06% 8/30/73
Class B 10.12% N/A N/A 20.62% 7/17/95
Class C N/A N/A N/A 3.02% 6/17/99
Class M 11.4% N/A N/A 20.25% 7/17/95
HIGH YIELD FUND3
Class A (10.10%) 7.77% 8.56% 13.06% 7/1/74
Class B (10.5%) N/A N/A 6.92% 7/17/95
Class C N/A N/A N/A (0.66%) 5/27/99
Class M (8.88%) N/A N/A 6.91% 7/17/95
Class Q N/A N/A N/A 0.34% 6/17/99
BANK AND THRIFT FUND(4)
Class A (13.7%) 24.32% 18.66% 15.83% 1/24/86
Class B (13.73%) N/A N/A 2.18% 10/20/97
GOVERNMENT SECURITIES
INCOME FUND(5)
Class A (2.93%) 4.78% 5.54% 6.53% 1/1/85
Class B (3.70%) N/A N/A 3.50% 7/17/95
Class C N/A N/A N/A 0.55% 6/11/99
Class M (1.96%) N/A N/A 3.57% 7/17/95
INTERNATIONAL CORE
GROWTH FUND
Class A 0.02% N/A N/A 17.22% 2/28/97
Class B 0.45% N/A N/A 19.52% 2/28/97
Class C 4.47% N/A N/A 20.26% 2/28/97
Class Q 6.47% N/A N/A 21.65% 2/28/97
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Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ----------- ---------
WORLDWIDE GROWTH FUND
Class A 29.96% 20.47% N/A 19.27% 4/19/93
Class B 32.05% N/A N/A 25.06% 5/31/95
Class C 36.05% 21.16% N/A 19.66% 4/19/93
Class Q 38.25% N/A N/A 25.62% 8/31/95
INTERNATIONAL SMALLCAP
GROWTH FUND
Class A 15.79% N/A N/A 16.38% 8/31/94
Class B 16.96% N/A N/A 22.04% 5/31/95
Class C 20.98% N/A N/A 16.94% 8/31/94
Class Q 23.04% N/A N/A 23.83% 8/31/95
EMERGING COUNTRIES FUND
Class A 6.68% N/A N/A 7.41% 11/28/94
Class B 7.44% N/A N/A 9.04% 5/31/95
Class C 11.43% N/A N/A 7.81% 11/28/94
Class Q 13.57% N/A N/A 9.24% 8/31/95
LARGECAP GROWTH FUND
Class A 60.73% N/A N/A 49.59% 7/21/97
Class B 64.49% N/A N/A 51.83% 7/21/97
Class C 68.26% N/A N/A 53.21% 7/21/97
Class Q 70.98% N/A N/A 54.53% 7/21/97
MIDCAP GROWTH FUND
Class A 17.96% 19.71% N/A 15.62% 4/19/93
Class B 19.36% N/A N/A 21.79% 5/31/95
Class C 23.33% 20.44% N/A 16.02% 4/19/93
Class Q 25.52% 21.45% N/A 21.45% 6/30/94
SMALLCAP GROWTH FUND
Class A 13.23% 18.90% N/A 14.69% 12/27/93
Class B 14.36% N/A N/A 18.93% 5/31/95
Class C 18.36% 19.59% N/A 15.21% 12/27/93
Class Q 20.78% N/A N/A 16.67% 8/31/95
CONVERTIBLE FUND
Class A 16.74% 18.10% N/A 16.80% 4/19/93
Class B 18.09% N/A N/A 21.92% 5/31/95
Class C 22.02% 18.74% N/A 17.14% 4/19/93
Class Q 24.23% N/A N/A 21.79% 8/31/95
BALANCED FUND
Class A 9.24% 17.03% N/A 14.04% 4/19/93
Class B 10.23% N/A N/A 24.80% 5/31/95
Class C 14.23% 17.65% N/A 14.42% 4/19/93
Class Q 16.22% N/A N/A 17.39% 8/31/95
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Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ----------- ---------
HIGH YIELD II FUND
Class A (4.67%) N/A N/A (2.38%) 3/27/98
Class B (4.93%) N/A N/A (1.93%) 3/27/98
Class C (1.27%) N/A N/A (0.97%) 3/27/98
Class Q 0.26% N/A N/A (1.68%) 3/27/98
STRATEGIC INCOME FUND
Class A N/A N/A N/A (2.43%) 7/27/98
Class B N/A N/A N/A (2.87%) 7/27/98
Class C N/A N/A N/A (0.98%) 7/27/98
Class Q N/A N/A N/A 2.55% 7/27/98
GROWTH + VALUE FUND
Class A 80.29% N/A N/A 24.61% 11/18/96
Class B 82.95 N/A N/A 25.12% 11/18/96
Class C 86.85% N/A N/A 25.75% 11/18/96
INTERNATIONAL
VALUE FUND
Class A 26.98% N/A N/A 16.76% 3/06/95
Class B 26.55% N/A N/A 18.21% 4/18/97
Class C 30.50% N/A N/A 17.24% 3/06/95
EMERGING MARKETS
VALUE FUND
Class A 34.82% N/A N/A 1.96% 1/1/98
Class B 35.41% N/A N/A 1.85% 1/1/98
Class C 39.49% N/A N/A 3.87% 1/1/98
RESEARCH ENHANCED
INDEX FUND
Class A N/A N/A N/A 6.10% 12/30/98
Class B N/A N/A N/A 5.90% 12/30/98
Class C N/A N/A N/A 9.90% 12/30/98
Class I N/A N/A N/A 11.70% 12/30/98
INCOME & GROWTH FUND
Class A 6.70% 10.24% N/A 8.92% 11/8/93
Class B 7.11% 10.27% N/A 8.33% 2/9/94
Class C 10.29% 10.54% N/A 8.98% 3/21/94
HIGH TOTAL RETURN FUND
Class A (6.57%) 4.40% N/A 3.11% 11/8/93
Class B (6.93%) 4.41% N/A 2.32% 2/9/94
Class C (3.12%) 4.77% N/A 2.77% 3/21/94
HIGH TOTAL RETURN FUND II
Class A (7.73%) N/A N/A 1.01% 1/31/97
Class B (8.36%) N/A N/A 1.19% 1/31/97
Class C (4.65%) N/A N/A 2.17% 1/31/97
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Since Inception
1 Year 5 Year 10 Year Inception(1) Date
------ ------ ------- ----------- ---------
SMALLCAP OPPORTUNITIES FUND
Class A 16.62% N/A N/A 17.88% 6/5/95
Class B 16.56% N/A N/A 18.20% 6/5/95
Class C 20.54% N/A N/A 18.47% 6/5/95
Class T 17.66% 15.91% 14.74% 11.63% 2/3/86
Class I
MID-CAP OPPORTUNITIES FUND
Class A N/A N/A N/A 62.21% 8/20/98
Class B N/A N/A N/A 67.00% 8/20/98
Class C N/A N/A N/A 70.50% 8/20/98
Class I N/A N/A N/A 72.70% 8/20/98
GROWTH OPPORTUNITIES FUND
Class A 31.17% N/A N/A 25.63% 6/5/95
Class B 37.96% N/A N/A 26.10% 6/5/95
Class C 42.23% N/A N/A 26.34% 6/5/95
Class T 39.03% 24.04% 17.78% 15.14% 2/3/86
GOVERNMENT SECURITIES FUND
Class A (5.10%) N/A N/A 3.82% 6/5/95
Class B (5.63%) N/A N/A 3.99% 6/5/95
Class C (2.05%) N/A N/A 4.34% 6/5/95
Class T (4.45%) 6.36% 7.51% 6.57% 2/3/86
HIGH YIELD FUND III
Class A (6.56%) N/A N/A 6.59% 6/5/95
Class B (7.14%) N/A N/A 6.72% 6/5/95
Class C (3.48%) N/A N/A 7.09% 6/5/95
Class T (5.77%) 7.89% 9.61% 9.47% 5/30/89
BALANCE SHEET
OPPORTUNITIES FUND
Class A
Class B 2.47% N/A N/A 13.84% 6/5/95
Class C 2.01% N/A N/A 14.12% 6/5/95
Class T 6.07% N/A N/A 14.44% 6/5/95
Class B 3.27% 14.19% 11.55% 10.72% 2/3/86
- - - - - - - - - ----------
(1) Class A, B and M shares of Asia-Pacific Equity Fund, the LargeCap Leaders
Fund, and MidCap Value Fund commenced on September 1, 1995. The inception
date for Class A, B and C shares of the Growth + Value Fund is November 18,
1997. The inception date for Class A and C shares of the International
Value Fund is March 6, 1995; the inception date for Class B shares of the
international Value Fund is April 18, 1997. The inception date for Class A,
B and C shares of the Emerging Markets Value Fund is January 1, 1998. The
inception date for Class A, B and C shares of the Research Enhanced Index
Fund is December 30, 1998. The inception date of Class A. B and C shares of
the Income & Growth Fund and High Total Return Fund is November 8, 1993,
February 9, 1994 and March 21, 1994, respectively. The inception date for
Class A, B and C shares of the High Total Return Fund 11 is January 31,
1997.
(2) Class B and M shares of MagnaCap Fund commenced operations on July 17,
1995.
(3) Class B and M shares of High Yield commenced operations on July 17, 1995.
(4) Class B shares of Bank and Thrift Fund commenced operations on October 20,
1997.
(5) Class B and M shares of Government Securities Income commenced operations
on July 17, 1995. Government Securities Income Fund earned income and
realized capital gains as a result of entering into reverse repurchase
agreements during the six-month period from July to December 1992 that
caused the Fund to exceed its 10% investment restriction on borrowing.
Therefore, the Fund's performance was higher than it would have been had
the Fund adhered to its borrowing restriction.
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No performance information is provided for the Money Market Fund because it
had not yet commenced operations as of June 30, 1999.
Reports and promotional literature may also contain the following
information: (i) a description of the gross national or domestic product and
populations, including but not limited to age characteristics, of various
countries and regions in which a Fund may invest, as compiled by various
organizations, and projections of such information; (ii) the performance of
worldwide equity and debt markets; (iii) the capitalization of U.S. and foreign
stock markets prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial organization; (iv)
the geographic distribution of a Fund's portfolio; (v) the major industries
located in various jurisdictions; (vi) the number of shareholders in the Funds
or other Pilgrim Funds and the dollar amount of the assets under management;
(vii) descriptions of investing methods such as dollar-cost averaging, best
day/worst day scenarios, etc.; (viii) comparisons of the average price to
earnings ratio, price to book ratio, price to cash flow and relative currency
valuations of the Funds and individual stocks in a Fund's portfolio, appropriate
indices and descriptions of such comparisons; (ix) quotes from the portfolio
manager of a Fund or other industry specialists; (x) lists or statistics of
certain of a Fund's holdings including, but not limited to, portfolio
composition, sector weightings, portfolio turnover rate, number of holdings,
average market capitalization, and modern portfolio theory statistics; (xi)
NASDAQ symbols for each class of shares of each Fund; and descriptions of the
benefits of working with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Portfolio Managers, Pilgrim Capital,
Pilgrim Group, Inc. or affiliates of the Company, the Investment Manager, the
Portfolio Managers, Pilgrim Capital or Pilgrim Group, Inc. including: (i)
performance rankings of other funds managed by the Investment Manager or a
Portfolio Manager, or the individuals employed by the Investment Manager or a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Fund, including rankings of mutual funds published by Lipper Analytical
Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating
services, companies, publications or other persons who rank mutual funds or
other investment products on overall performance or other criteria; (ii) lists
of clients, the number of clients, or assets under management; (iii) information
regarding the acquisition of the Pilgrim Funds by Pilgrim Capital; (iv) the past
performance of Pilgrim Capital and Pilgrim Group, Inc.; (v) the past performance
of other funds managed by the Investment Manager; and (vi) information regarding
rights offerings conducted by closed-end funds managed by the Investment
Manager.
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. The authorized capital stock of the Advisory
Funds consists of 1,000,000,000 shares having par value of $.01 per share. The
authorized capital stock of Pilgrim Investment Funds, Inc. consists of
500,000,000 shares of $.10 par value each, of which 200,000,000 shares are
classified as shares of MagnaCap Fund, 200,000,000 shares are classified as
shares of the High Yield Fund, and 100,000,000 are not classified. The
authorized capital stock of the Bank and Thrift Fund, Inc. consists of
100,000,000 shares of common stock having a par value of $0.00/per share.
Holders of shares of the Advisory Funds and Bank and Thrift Fund have one vote
for each share held, and a proportionate fraction of a vote for each fraction of
a share held. The authorized capital stock of the Government Securities Income
Fund, Inc. consists of 5,000,000 shares. The authorized capital of the Pilgrim
Mutual Funds, Equity Trust, Small Cap Opportunities Fund, Growth Opportunities
Fund, Mayflower Trust, Balance Sheet Opportunities Fund, Government Securities
Fund, and High Yield Fund II is in each case an unlimited number of shares of
beneficial interest. All shares when issued are fully paid, non-assessable, and
redeemable. Shares have no preemptive rights. All shares have equal voting,
dividend and liquidation rights. Shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so, and in such
event the holders of the remaining shares voting for the election of Directors
will not be able to elect any person or persons to the Board of Directors.
Generally, there will not be annual meetings of shareholders. There will
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normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with a Fund's charter, cause a meeting, of
shareholders to be held for the purpose of voting on the removal of Trustees.
Meetings of the shareholders will be called upon written request of shareholders
holding in the aggregate not less than 10% of the outstanding shares of the
affected Fund or class having voting rights. Except as set forth above and
subject to the 1940 Act, the Trustees will continue to hold office and appoint
successor Trustees.
The Board of Directors may classify or reclassify any unissued shares into
shares of any series by setting or changing in any one or more respects, from
time to time, prior to the issuance of such shares, the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
qualifications of such shares. Any such classification or reclassification will
comply with the provisions of the 1940 Act. The Board of Directors may create
additional series (or classes of series) of shares without shareholder approval.
Any series or class of shares may be terminated by a vote of the shareholders of
such series or class entitled to vote or by the Directors of the Company by
written notice to shareholders of such series or class. Shareholders may remove
Directors from office by votes cast at a meeting of shareholders or by written
consent.
CUSTODIAN.
The cash and securities owned by the International Core Growth, Worldwide
Growth, International SmallCap Growth and Emerging Countries Funds are held by
Brown Brothers Harriman, 40 Water Street, Boston, Massachusetts 02109-3661, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
The cash and securities owned by the Mayflower Trust, Pilgrim Equity Trust,
Balance Sheet Opportunities, Government Securities, Growth Opportunities, High
Yield Fund III, and SmallCap Opportunities Funds are held by State Street, One
Heritage Drive, North Quincy, MA 02171, as Custodian, which takes no part in the
decisions relating to the purchase or sale of a Fund's portfolio securities.
The cash and securities owned by each other Fund are held by Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
LEGAL COUNSEL.
Legal matters for each Company are passed upon by Dechert Price & Rhoads,
1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS.
KPMG LLP, 355 South Grand Ave., Los Angeles, California 90071, acts as
independent auditors for Advisory Funds, Investment Funds, Bank & Thrift Fund,
Government Securities Income Fund and Pilgrim Mutual Funds.
PricewaterhouseCooper, LLP, 1301 Avenue of the Americas, New York, NY 10019,
acts as independent auditors for Small Cap Opportunities Fund, Growth
Opportunities Fund, Equity Trust, Mayflower Trust, Balance Sheet Opportunities
Fund, Government Securities Fund and High Yield III.
OTHER INFORMATION.
Each Company is registered with the SEC as an open-end management
investment company. Such registration does not involve supervision of the
management or policies of the Company by any governmental agency. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in each Company's Registration Statement filed with the SEC and copies
of this information may be obtained from the SEC upon payment of the prescribed
fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statement audited by independent
certified public accountants.
REPORTS TO SHAREHOLDERS.
The fiscal year of the Funds which comprise the Mayflower Trust ends on
October 31. The fiscal year of the Funds which comprise the Bank and Thrift
Fund, Advisory Funds, Investment Funds, Pilgrim Mutual Funds, and the Government
Securities Income Fund, ends on June 30. The fiscal year of Funds which comprise
the Equity Trust, SmallCap Opportunities Fund, Growth Opportunities Fund,
Balance Sheet Opportunities Fund, Government Securities Fund, and the High Yield
Fund III ends on December 31. Each Fund will send financial statements to its
shareholders at least semiannually. An annual report containing financial
statements audited by the independent accountants will be sent to shareholders
each year.
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YEAR 2000 COMPLIANCE.
The services provided to the Funds by the Investment Manager, the
Sub-Advisers, the Administrator and the Funds' other service providers are
dependent on those service providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative
implication on handling securities trades, pricing and account services. The
Investment Manager, the Sub-Advisers, the Administrator and the Funds' other
service providers are taking steps that each believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that they use.
Although there can be no assurances, the Funds believe these steps will be
sufficient to avoid any material adverse impact on the Funds. The costs or
consequences of incomplete or untimely resolution of the Year 2000 Issue are
unknown to the Investment Manager, Sub-Advisers, Administrator and the Funds'
other service providers at this time but could have a material adverse impact on
the operations of the Funds and the Investment Manager, Sub-Advisers,
Administrator and the Funds' other service providers. Further, there can be no
assurances, that the systems of the companies in which the Funds invest will be
timely converted or that the value of such investments will not be adversely
affected by the Year 2000 Issue.
DECLARATION OF TRUST.
The Equity Trust, SmallCap Opportunities Fund, Growth Opportunities Fund,
Mayflower Trust, Balance Sheet Opportunities Fund, Government Securities Fund,
and High Yield Fund III are organized as Massachusetts business trusts. The
Declaration of Trust of each of these Funds provides that obligations of the
Fund are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trust or its investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Fund shall be enforceable against the assets and property of such
Fund only, and not against the assets or property of any other Fund or the
investors therein.
FINANCIAL STATEMENTS
The financial statements from the Funds' June 30, 1999 Annual Reports (for
Bank and Thrift Fund, Advisory Funds, Investment Funds, Pilgrim Mutual Funds,
and Government Securities Income Fund), December 31, 1998 Annual Report and June
30, 1999 Semi-Annual Report (Equity Trust, SmallCap Opportunities Fund, Growth
Opportunities Fund, Balance Sheet Opportunities Fund, Government Securities
Fund, and High Yield Fund III), and October 31, 1999 Annual Report (for
Mayflower Trust) are incorporated herein by reference. Copies of the Funds'
Annual and Semi-Annual Reports may be obtained without charge by contacting
Pilgrim Funds at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004,
(800) 992-0180. There are no financial statements for the Money Market Fund at
this time.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust (1) and (3)
(b) By-laws. (1)
(c) N/A
(d) Investment Advisory Contracts. (1)
(e) Form of Underwriting Contracts - Class B Shares.
(f) N/A
(g) Custodian Agreements. (1)
(h) Other Material Contracts. (1) and (2)
(i) Legal Opinion. (4)
(j) (i) Consent of Dechert Price & Rhoads
(ii) Consent of Independent Public Accountants
(k) N/A
(l) N/A
(m) Form of Rule 12b-1 Plan
(n) Form of Rule 18f-3 Plan
(p) Code of Ethics to be filed after March 1, 2000
- - - - - - - - - ----------
(1) Previously filed as an Exhibit to the Registrant's Post-Effective Amendment
No. 15 and incorporated herein by reference.
(2) Previously filed as an Exhibit to the Registrant's Post-Effective Amendment
No. 16 and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant's Post-Effective Amendment
No. 20 and incorporated herein by reference.
(4) Previously filed as an Exhibit to the Registrant's Post-Effective Amendment
No. 23 filed on February 27, 1998 and incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
There are no persons controlled by or under common control with
Registrant.
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ITEM 25. INDEMNIFICATION
Section 5.4 of Registrant's Declaration of Trust provides the
following:
(a) Subject to Paragraph (c) hereof every person who is, or has been, a
Trustee, Officer, employee or agent of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against all liability and against
all expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee, Officer, employee or agent and
against amounts paid or incurred by him in the settlement thereof in such
manner, provided, that to the extent any claim, action, suit or proceeding
involves any particular Series or Classes of Shares of the Trust or the assets
or operations of one or more Series or Classes of Shares, such indemnification
shall be provided only from the assets (or proceeds thereof or income therefrom
of such one or more Series or Classes of Shares and not from the assets (or
proceeds thereof or income therefrom) of any other Series or Class of Shares of
the Trust.
(b) The words "claim", "action", "suit" or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, or other including
appeals), actual or threatened; and the words "liability" and "expenses" shall
include without limitation, attorneys fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(c) No indemnification shall be provided hereunder to a Trustee or
Officer:
(i) against any liability to the Trust, a series thereof, or the
Shareholders by reason of a final adjudication by a court or other body before
which a proceeding was brought or that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in reasonable belief that
his action was in the best interest of the Trust; and
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or (b)(ii)
resulting in a payment by a Trustee or Officer, unless there has been a
determination that such Trustee or Officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office:
(A) by the court or other body approving the settlement or
other disposition; or
(B) based upon the review of readily available facts (as
opposed to full trial-type inquiry) by (x) vote of a
majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or (y)
written opinion of independent legal counsel.
(d) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or Officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
Officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust other than Trustees and
Officers may be entitled by contract or otherwise under law.
(e) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section may be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section, provided that either;
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient or the Trust shall be insured
against losses arising out of any such advances; or
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(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees act on the
matter) or an independent legal counsel in a written opinion shall determine,
based upon a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately will be
found entitled to indemnification.
As used in this Section, a "Disinterested Trustee" is one who is not
(i) an Interested Person of the Trust (including anyone who has been exempted
from being an Interested Person by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, Officer or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Trustee, Officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy, as expressed in the Act and be governed by final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS.
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Investment Manager in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-44637) filed
under the Investment Advisers Act of 1940 and is incorporated herein by
reference thereto.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Pilgrim Securities, Inc. is the principal underwriter for the
Registrant and for Pilgrim Investment Funds, Inc., Pilgrim Advisory Funds, Inc.,
Pilgrim Government Securities Income Fund, Inc., Pilgrim Bank and Thrift Fund,
Inc., Pilgrim Prime Rate Trust, Pilgrim Mutual Funds, Pilgrim Equity Trust,
Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities Fund, Pilgrim
Mayflower Trust, Pilgrim Government Securities Fund, and Pilgrim High Yield Fund
III.
(b) Information as to the directors and officers of Pilgrim Securities,
Inc., together with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by the directors and officers
of the Distributor in the last two years, is included in its application for
registration as a broker-dealer on Form BD (File No. 8-48020) filed under the
Securities Exchange Act of 1934 and is incorporated herein by reference thereto.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
State Street Bank and Trust Co. maintains the following records at 1776
Heritage Drive, North Quincy, MA 02171 as Custodian and Fund Accounting Agent
for Registrant:
(1) Receipts and delivery of securities including certificate numbers;
(2) Receipts and disbursement of cash;
(3) Records of securities in transfer, securities in physical
possession, securities owned and securities loaned; and
(4) Fund Accounting Records.
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DST Systems, Inc. ("DST") maintains the following records at 210 West
10th Street, 8th Floor, Kansas City, MO 64105, as Transfer Agent and Blue Sky
Administrator for the Registrant:
(1) Shareholder Records;
(2) Share accumulation accounts: Details as to dates and number
of shares of each accumulation, price of each accumulation;
(3) Fund Accounting Records; and
(4) State Securities Registration Records
All other records required by item 30(a) are maintained at the office
of the Administrator, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
(a) Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a Trustee or Trustees when
requested in writing to do so by the holders of at least 10% of the Trusts'
outstanding shares of beneficial interest and in connection with such meeting to
comply with the provisions of Section 16(c) of the Investment Company Act of
1940 relating to shareholder communications.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix and the State of
Arizona on the 29th day of December, 1999.
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
By: /s/ James M. Hennessy
--------------------------------------
James M. Hennessy,
Executive Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Trustee and Chairman December 29, 1999
- - - - - - - - - ---------------------------
John G. Turner*
- - - - - - - - - --------------------------- Trustee and President December 29, 1999
Robert W. Stallings* (Chief Executive Officer)
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Mark L. Lipson*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
John R. Smith*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Paul S. Doherty*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
David W. Wallace*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Robert B. Goode, Jr.*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Alan L. Gosule*
C-5
<PAGE>
Trustee December 29, 1999
- - - - - - - - - ---------------------------
David W.C. Putnam*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Walter H. May, Jr.*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Al Burton*
Trustee December 29, 1999
- - - - - - - - - ---------------------------
Jock Patton*
/s/ Michael J. Roland Senior Vice President December 29, 1999
- - - - - - - - - --------------------------- and Principal Financial
Michael J. Roland Officer
*By: /s/ James M. Hennessy
---------------------------
James M. Hennessy,
Executive Vice President
and Secretary
Attorney-in-Fact**
** Executed pursuant to powers of attorney filed herewith.
C-6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-1A applicable to
the Pilgrim Balance Sheet Opportunities Fund and any amendment or supplement
thereto, and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: November 16, 1999
-------------------
----------------------------
Mary A. Baldwin, Ph.D
/s/ Al Burton /s/ Paul S. Doherty
- - - - - - - - - ------------------------- ----------------------------
Al Burton Paul S. Doherty
/s/ Robert B, Goode /s/ Alan L. Gosule
- - - - - - - - - ------------------------- ----------------------------
Robert B. Goode, Jr. Alan L. Gosule
/s/ Mark Lipson /s/ Walter H. May
- - - - - - - - - ------------------------- ----------------------------
Mark Lipson Walter H. May
/s/ Jock Patton /s/ David W.C. Putnam
- - - - - - - - - ------------------------- ----------------------------
Jock Patton David W.C. Putnam
/s/ John R. Smith /s/ Robert W. Stallings
- - - - - - - - - ------------------------- ----------------------------
John R. Smith Robert W. Stallings
/s/ John G. Turner /s/ David W. Wallace
- - - - - - - - - ------------------------- ----------------------------
John G. Turner David W. Wallace
C-7
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
- - - - - - - - - -------------- ---------------
(e) Form of Underwriting Contract - Class B Shares
(j)(i) Consent of Dechert Price & Rhoads
(j)(ii) Consent of PriceWaterhouseCoopers LLP
(m) Form of Amended and Restated Distribution and Service Plan
(n) Form of Amended and Restated Multiple Class Plan Pursuant
to Rule 18f-3
AMENDED AND RESTATED UNDERWRITING AGREEMENT FOR
CLASS B SHARES OF
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
WHEREAS, Northstar Distributors, Inc., a Minnesota corporation, and Northstar
Balance Sheet Opportunities Fund, a Massachusetts business trust (the "Fund"),
have entered into an Underwriting Agreement pursuant to which Northstar
Distributors, Inc. served as principal distributor of the Class B shares of the
Fund; and
WHEREAS, Northstar Distributors, Inc. has merged with Pilgrim Securities, Inc.,
a Delaware corporation, which merged entity shall be known as Pilgrim
Securities, Inc.; and
WHEREAS, the name of the Fund has been changed to Pilgrim Balance Sheet
Opportunities Fund; and
WHEREAS, the Board of the Fund wishes to amend and restate the Underwriting
Agreement to reflect that Pilgrim Securities, Inc. shall serve as the new
principal distributor of the Class B shares of the Fund ("the Underwriter") and
the new name of the Fund is Pilgrim Balance Sheet Opportunities Fund.
NOW, THEREFORE, the Agreement is hereby restated as follows:
1. The Fund hereby appoints the Underwriter as its exclusive agent to
promote the sale and to arrange for the sale of Class B shares of beneficial
interest of the Fund, including both unissued shares and treasury shares,
through broker-dealers or otherwise, in all parts of the United States and
elsewhere throughout the world. The Fund agrees to sell and deliver its Class B
shares, upon the terms hereinafter set forth, as long as it has unissued and/or
treasury Class B shares available for sale.
(a) The Fund hereby authorizes the Underwriter, subject to law and
the Declaration of Trust of the Fund, to accept, for the account of the Fund,
orders for the purchase of its Class B shares, satisfactory to the Underwriter,
as of the time of receipt of such orders by the dealer--or as otherwise
described in the Prospectus of the Fund.
(b) The public offering price of Class B shares shall be the net
asset value per share (as determined by or on behalf of the Fund) of the
outstanding Class B shares of the Fund. The net asset value shall be regularly
determined on every business day as of the time of the regular closing of the
New York Stock Exchange and the public offering price shall become effective as
set forth from time to time in the Fund's Prospectus; such net asset value shall
also be regularly determined, and the public offering price shall become
effective, as of such other times for the regular determination of net asset
value as may be required or permitted by rules of the National Association of
Securities Dealers, Inc. ("NASD") or of the Securities and Exchange Commission
("SEC"). The Fund shall furnish, or cause to be furnished, daily to the
Underwriter, with all possible promptness, a detailed computation of net asset
value of its Class B shares.
<PAGE>
(c) (i) In consideration of the Underwriter's services as principal
distributor of the Fund's Class B shares pursuant to this Agreement and in
accordance with the provisions of the Fund's Amended and Restated Distribution
and Service Plan (the "Plan") in respect of such shares the Fund agrees: (I) to
pay to the Underwriter or, at the Underwriter's direction, to a third party,
monthly in arrears on or prior to the 5th business day of the following calendar
month (A) a service fee (the "Service Fee") equal to 0.25 of 1% per annum of the
average daily net asset value of the Class B shares of the Fund outstanding from
time to time, and (B) the Underwriter's "Allocable Portion" (as hereinafter
defined) of a fee (the "Distribution Fee") equal to 0.75 of 1% per annum of the
average daily net asset value of the Class B shares of the Fund outstanding from
time to time, and (II) to withhold from redemption proceeds in respect of Class
B shares of the Fund the Underwriter's Allocable Portion of the Contingent
Deferred Sales Charges ("CDSCs") payable in respect of such redemption as
provided in the Prospectus of the Fund and to pay the same over to the
Underwriter or, at the Underwriter's direction, to a third party, at the time
the redemption proceeds in respect of such redemption are payable to the holder
of the Class B shares redeemed.
(ii) The Underwriter will be deemed to have performed all
services required to be performed in order to be entitled to receive its
Allocable Portion of the Distribution Fee payable in respect of the Class B
shares of the Fund upon the settlement date of each sale of a "Commission Share"
(as defined in the Allocation Schedule attached hereto as Schedule B) of the
Fund taken into account in determining the Underwriter's Allocable Portion of
such Distribution Fees.
(iii) Notwithstanding anything to the contrary set forth in this
Agreement or (to the extent waiver thereof is permitted thereby) applicable law,
the Fund's obligation to pay the Underwriter's Allocable Portion of the
Distribution Fees payable in respect of the Class B shares of the Fund shall not
be terminated or modified for any reason (including a termination of this
Agreement) except to the extent required by a change in the Investment Company
Act of 1940 (the "Act"), the rules thereunder or the Conduct Rules of the NASD,
in each case enacted or promulgated after November 16, 1999, or in connection
with a "Complete Termination" (as hereinafter defined) of the Plan.
(iv) The Fund will not take any action to waive or change any
CDSC in respect of the Class B shares of the Fund, except as provided in the
Fund's Prospectus or statement of additional information as in effect as of the
date hereof, without the consent of the Underwriter and the permitted assigns of
all or any portion of its rights to its Allocable Portion of the CDSCs.
(v) Notwithstanding anything to the contrary in this Agreement,
neither the termination of the Underwriter's role as principal distributor of
the Class B shares of the Fund, nor the termination of this Agreement nor the
termination of the Plan will terminate the Underwriter's right to its Allocable
Portion of the CDSCs in respect of the Class B shares of the Fund.
(vi) Notwithstanding anything to the contrary in this Agreement,
the Underwriter may assign, sell or pledge (collectively, "Transfer") its rights
to the Service Fees and its Allocable Portion of the Distribution Fees and CDSCs
(but not its obligations to the Fund under this Agreement) to raise funds to
2
<PAGE>
make the expenditures related to the distribution of Class B shares of the Fund
and in connection therewith, upon receipt of notice of such Transfer, the Fund
shall pay, or cause to be paid, to the assignee, purchaser or pledgee
(collectively with their subsequent transferees, "Transferees") such portion of
the Underwriter's Service Fees Allocable Portion of the Distribution Fees and
CDSCs in respect of the Class B shares of the Fund so Transferred. Except as
provided in (iii) above and notwithstanding anything to the contrary set forth
elsewhere in this Agreement, to the extent the Underwriter has Transferred its
rights thereto to raise funds as aforesaid, the Fund's obligation to pay the
Underwriter's Allocable Portion of the Distribution Fees and CDSCs payable in
respect of the Class B shares of the Fund shall be absolute and unconditional
and shall not be subject to dispute, offset, counterclaim or any defense
whatsoever, at law or equity, including, without limitation, any of the
foregoing based on the insolvency or bankruptcy of the Underwriter (it being
understood that such provision is not a waiver of the Fund's right to pursue the
Underwriter and enforce such claims against the assets of the Underwriter other
than the Underwriter's right to the Distribution Fees and CDSCs in respect of
the Class B shares of the Fund, which have been so transferred in connection
with such Transfer). The Fund agrees that each such Transferee is a third party
beneficiary of the provisions of this clause (vi) but only insofar as those
provisions relate to Distribution Fees and CDSCs transferred to such Transferee.
(vii) For purposes of this Agreement, the term Allocable Portion
of Distribution Fees and CDSCs payable in respect of the Class B shares of the
Fund shall mean the portion of such Distribution Fees and CDSCs allocated to the
Underwriter in accordance with the Allocation Schedule attached hereto as
Schedule B.
(viii) For purposes of this Agreement, the term "Complete
Termination" of the Plan in respect of the Fund means a termination of the Plan
involving the complete cessation of the payment of Distribution Fees in respect
of all Class B shares of the Fund, and the termination of the distribution plans
and the complete cessation of the payment of distribution fees pursuant to every
other Distribution Plan pursuant to Rule 12b-1 under the Act in respect of the
Class B shares of the Fund and any successor fund or any fund acquiring a
substantial portion of the assets of the Fund and for every future class of
shares which has substantially similar characteristics to the Class B shares of
the Fund taking into account the manner of payment and amount of sales charge,
contingent deferred sales charge or other similar charges borne directly or
indirectly by the holders of such shares.
(d) The Underwriter may reallow any or all of the Distribution and
Services Fees and CDSCs which it is paid under this Agreement to such dealers as
the Underwriter may from time to time determine.
(e) The Underwriter may fix quantity discounts and other similar
variances or waivers of the CDSC not inconsistent with the provisions of the
Act; provided however, that the Underwriter shall not impose any commission,
permit any quantity discount, or impose any other similar waiver or variance in
connection with the sale of Class B shares except as disclosed in the Prospectus
of the Fund.
2. The Underwriter agrees to devote reasonable time and effort to enlist
investment dealers to sell Class B shares of the Fund and otherwise promote the
sale and distribution and act as Underwriter for the sale and distribution of
3
<PAGE>
the Class B shares of the Fund as such arrangements may profitably be made; but
so long as its does so, nothing herein contained shall prevent the Underwriter
from entering into similar arrangements with other funds and to engage in other
activities. The Fund reserves the right to issue Class B shares in connection
with any merger or consolidation of the Fund with any other investment company
or any personal holding company or in connection with offers of exchange
exempted from Section 22(d) of the Act.
3. To the extent the Fund shall offer (as set forth in the Fund's
Prospectus) to provide physical certificates evidencing ownership of Class B
shares, upon receipt by the Fund at its principal place of business of a written
order from the Underwriter, together with delivery instructions, the Fund shall,
as promptly as practicable, cause certificates for the Class B shares called for
in such order to be delivered or credited in such amounts and in such names as
shall be specified by the Underwriter, against payment therefor in such manner
as may be acceptable to the Fund.
4. All sales literature and advertisements used by the Underwriter in
connection with sales of the Class B shares of the Fund shall be subject to the
approval of the Fund. The Fund authorizes the Underwriter in connection with the
sale or arranging for the sale of its Class B shares to give only such
information and to make only such statements or representations as are contained
in the Prospectus or in sales literature or advertisements approved by the Fund
or in such financial statements and reports as are furnished to the Underwriter
pursuant to paragraph 6 below. The Fund shall not be responsible in any way for
any information, statements or representations given or made by the Underwriter
or its representatives or agents other than such information, statements and
representations.
5. The Underwriter, as agent of the Fund, is authorized, subject to the
direction of the Fund, to accept Class B shares for redemption at prices
determined as prescribed in the Prospectus of the Fund. Such price shall reflect
the subtraction of the applicable CDSC, if any, computed in accordance with and
in the manner set forth in the Fund's Prospectus. The Fund shall reimburse the
Underwriter monthly for its out-of-pocket expenses reasonably incurred on behalf
of the Fund in carrying out the foregoing authorization. The Underwriter shall
report all redemptions promptly to the Fund.
6. The Fund shall keep the Underwriter fully informed with regard to its
affairs, shall furnish the Underwriter with a certified copy of all financial
statements, and a signed copy of each report, prepared by independent public
accountants and with such reasonable number of printed copies of each annual and
other periodic report of the Fund as the Underwriter may request, and shall
cooperate fully in the efforts of the Underwriter to sell and arrange for the
sale of its Class B shares and in the performance by the Underwriter of all its
duties under this Agreement.
7. The Fund will pay or cause to be paid expenses (including counsel fees
and disbursements) of any registration of its Class B shares of beneficial
interest under, but not limited to, Federal, state or other regulatory
authority, fees of filing periodic reports with regulatory bodies and of
preparing, setting in type and printing the Prospectus and any amendments
thereto prepared for use in connection with the offering of Class B shares of
the Fund, for fees and expenses incident to the issuance of Class B shares of
beneficial interest, such as the cost of stock certificates (if offered),
4
<PAGE>
issuance taxes, fees of the transfer agent, including the cost of preparing and
mailing notices to shareholders pertaining to transactions with respect to
shareholders' accounts, dividend disbursing agent's costs, including the cost
for preparing and mailing notices confirming shares acquired by shareholders
pursuant to the reinvestment of dividends and distributions, and the mailing to
shareholders of prospectuses, and notices and reports as may be required from
time to time by regulatory bodies or for such other purposes, except for
purposes of sales by the Underwriter as outlined in paragraph 8 hereof.
8. The Underwriter shall pay all of its own costs and expenses (other
than expenses and costs heretofore deemed payable by the Fund and other than
expenses which one or more dealers may bear pursuant to any agreement with the
Underwriter) incident to the sale and distribution of the shares issued or sold
hereunder including (a) expenses of printing copies of the Prospectus to be used
in connection with the sale of Class B shares of the Fund at printer's overrun
costs; (b) expenses of printing and distributing or disseminating any other
literature, advertising or selling aids in connection with the offering of Class
B shares for sale (however, the expenses referred to in (a) and (b) do not
include expenses incurred in connection with the preparation, printing and
distribution of the Prospectus or any report or other communication to
shareholders, to the extent that such expenses are necessarily incurred to
effect compliance by the Fund with any Federal or state law or other regulatory
bodies); and (c) expenses of advertising in connection with such offering;
provided, however, that the Underwriter shall not be required to pay for any
such expenses to the extent that they are paid pursuant to the Fund's
distribution plan adopted pursuant to Rule 12b-1 under the Act.
9. The Fund agrees to register, from time to time as necessary,
additional Class B shares with the SEC, State and other regulatory bodies and to
pay the related filing fees therefor and to file such amendments, reports and
other documents as may be necessary in order that there may be no untrue
statement of a material fact in the Registration Statement or Prospectus or that
their may be no omission to state a material fact therein necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As used in this Agreement, the term "Registration
Statement" shall mean the Registration Statement most recently filed by the Fund
with the SEC and effective under the Securities Act of 1933, as amended, as such
Registration Statement is amended from time to time, and the term "Prospectus"
shall mean the most recent form of prospectus authorized by the Fund for use by
the Underwriter and by dealers.
10. This Agreement may be terminated at any time on not more than 60 days
written notice, without payment of a penalty, by the Underwriter, by vote of a
majority of the outstanding voting securities as defined in the Act of the Class
B shares of the Fund or by vote of a majority of the Trustees who are not
"interested persons" of the Fund as defined in the Act and who have no direct or
indirect financial interest in the operation of the Plan or in any agreements.
11. This Agreement shall terminate automatically in the event of its
assignment. The term "assignment" for this purpose shall have the meaning
defined in Section 2(a)(4) of the Act.
12. This Agreement has been approved by the Trustees of the Fund and shall
continue in effect for two years from its effective date. Thereafter, this
Agreement shall continue for successive annual periods, provided that such
continuance is specifically approved annually by a majority of the Trustees of
the Fund who are not interested persons of the parties hereto as defined in the
Act and either (a) by vote of a majority of the Trustees of the Fund or (b) by
vote of a majority of the outstanding voting securities of the Class B shares of
the Fund, as defined in the Act.
13. A copy of the Declaration of Trust of the Fund is on file with the
Secretary of State of The Commonwealth of Massachusetts and notice is hereby
given that this Agreement is executed on behalf of the Trustees of the Fund as
trustees and not individually and that the obligations of this instrument are
not binding upon the Trustees or holders of shares of the Fund individually but
are binding only upon the assets and property of the Fund.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers thereunto duly authorized and to become effective as of this
16th day of November, 1999.
Attest: PILGRIM BALANCE SHEET
OPPORTUNITIES FUND
By: By:
--------------------------------- ------------------------------------
Attest: PILGRIM SECURITIES, INC.
By: By:
--------------------------------- ------------------------------------
6
[LETTERHEAD OF DECHERT PRICE & RHOADS]
January 4, 2000
Pilgrim Balance Sheet Opportunities Fund
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim Balance Sheet Opportunities Fund
(File Nos. 33-850 and 811-2239)
Dear Sirs:
We hereby consent to the incorporation by reference to our opinion as an
exhibit to Post-Effective Amendment No. 27 to the Registration Statement of
Pilgrim Balance Sheet Opportunities Fund, and to all references to our firm
therein. In giving such consent, however, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
CONSENT OF INDEPENDENT ACCOUNTANTS
-------------------
We consent to the incorporation by reference in this Post-Effective Amendment
No. 27 to the Registration Statement of Pilgrim Balance Sheet Opportunities Fund
on Form N-1A (File Nos. 33-850 and 811-2239) of our reports dated December 16,
1999, February 5, 1999 and February 5, 1999, on our audits of the financial
statements and financial highlights of Pilgrim Mayflower Trust, Northstar Equity
Trust and Northstar Funds, respectively, which reports are included in the
Annual Reports to Shareholders for the years ended October 31, 1999, December
31, 1998 and December 31, 1998, respectively, which are also incorporated by
reference in this Post-Effective Amendment to the Registration Statement.
We also consent to the reference to our firm under the caption "Financial
Highlights" in the Prospectus and under the caption "Independent Accountants" in
the Statement of Additional Information.
/s/ PriceWaterhouseCoopers LLP
New York, New York
December 30, 1999
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
AMENDED AND RESTATED DISTRIBUTION AND SERVICE PLAN
This Amended and Restated Plan (the "Plan") constitutes the Distribution and
Service Plan of PILGRIM BALANCE SHEET OPPORTUNITIES FUND, a Massachusetts
business trust (the "Fund").
SECTION 1. SERVICE FEE. The Fund will pay to PILGRIM SECURITIES, INC., a
Delaware corporation, and each successor principal distributor of the Fund's
shares pursuant to this Plan (each thereof, a "Distributor"), so long as it
shall be providing shareholder services, as compensation for providing, or
arranging for the provision of, shareholder services in respect of the Fund, a
monthly service fee (the "Service Fee") at the annual rate of 0.25 of 1% of the
average net asset value of the Fund, as determined at the close of each business
day during the month. The Distributor may pay all or any portion of the Service
Fee to securities dealers as service fees pursuant to agreements with such
dealers for providing personal services to investors in shares of the Fund
and/or the maintenance of shareholder accounts, or may use all or any portion of
the Service Fee to pay for expenses of the Distributor (including overhead
expenses) incurred in connection with the provision of personal services
provided to investors in shares of the Fund and/or the maintenance of
shareholder accounts, including without limitation, expenses of personnel and
communications equipment used in servicing shareholder accounts. All payments of
Service Fees under this plan are intended to qualify as "service fees" within
the meaning of the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD"), as in effect from time to time.
SECTION 2. DISTRIBUTION FEE. In addition to the Service Fee, the Fund will
pay to each Distributor, as compensation for acting as principal distributor in
respect of each class of the Fund's shares and as reimbursement of the
distribution expenditures incurred in connection therewith, including those
listed below, its "Allocable Portion" (as hereinafter defined) of a fee (the
"Distribution Fee") computed in respect of such class of shares as follows: (i)
at the annual rate of 0.75 of 1% of the average net asset value of the Fund
attributable to Class B shares and Class C shares; (ii) at the annual rate of
0.70 of 1% (or such lower rate as the Trustees of the Fund may establish from
time to time) of the average net asset value of the Fund attributable to Class T
shares; and (iii) at the annual rate of 0.05 of 1% (or such lower rate as the
Trustees of the Fund may establish from time to time) of the average net asset
value of the Fund attributable to Class A shares, as determined at the close of
each business day during the month. Such expenditures may consist of: (i)
commissions to sales personnel for selling shares of the Fund (including
interest and other financing costs in the case of Class B, Class C and Class T
shares) (ii) compensation, sales incentives and payments to sales, marketing and
service personnel; (iii) payments to broker-dealers and other financial
institutions which have entered into agreements with the Distributor in the form
of the Seller Group Agreement for Pilgrim Funds for distribution services
rendered in connection with the sale and distribution of shares of the Fund;
(iv) payment of expenses incurred in sales and promotional activities, including
advertising expenditures related to each class of shares of the Funds; (v) the
costs of preparing and distributing promotional materials; (vi) the cost of
printing the Fund's Prospectus and Statement of Additional Information for
distribution to potential investors; and (vii) such other similar services that
the Trustees determine are reasonably calculated to result in sales of shares of
the Fund.
<PAGE>
With respect to that portion of the Distribution Fee derived from Class T
shares, the Distributor may use all or a portion of that amount to compensate
Advest, Inc. for services provided to holders of Class T shares, and to
compensate Advest, Inc. for distribution-related expenses previously incurred by
Advest, Inc. together with interest thereon, including but not limited to
commissions paid by Advest, Inc. to selling dealers in connection with the sale
of Class T shares.
Any payment of Distribution Fees under this Plan is intended to constitute an
"asset-based sales charge" within the meaning of the Conduct Rules of the NASD.
The underwriting agreement or distribution contract between the Fund and each
Distributor relating to the Class B shares of the Fund (the "Distributor's
Contract") shall provide that: (I) the Distributor will be deemed to have
performed all services required to be performed in order to be entitled to
receive its Allocable Portion of the Distribution Fee payable in respect of the
Class B shares of the Fund upon the settlement date of each sale of a
"Commission Share" (as defined below) of such class taken into account in
determining such Distributor's Allocable Portion of such Distribution Fee in
respect of such class; (II) the Fund's obligation to pay such Distributor its
Allocable Portion of the Distribution Fee payable in respect of such class shall
not be terminated or modified for any reason (including a termination of the
Distributor's Contract between such Distributor and the Fund) except to the
extent required by a change in the Investment Company Act of 1940 (the "Act"),
the rules thereunder or the Conduct Rules of the NASD, in each case enacted or
promulgated after November 16, 1999, or in connection with a "Complete
Termination" (as hereinafter defined) of this Plan in respect of the Class B
shares of the Fund; (III) the Fund will not take any action to waive or change
any contingent deferred sales charge ("CDSC") in respect of the Class B shares
of the Fund, except as provided in the Fund's Prospectus or Statement of
Additional Information without the consent of such Distributor or its assigns;
(IV) neither the termination of such Distributor's role as principal distributor
of the Class B shares of the Fund, nor the termination of such Distributor's
Contract nor the termination of this Plan will terminate such Distributor's
right to its Allocable Portion of the CDSCs; and (V) such Distributor may
assign, sell or pledge (collectively, "Transfer") its rights to the Service Fees
and its Allocable Portion of the Distribution Fees and CDSCs (but not such
Distributor's obligations to the Fund under the Distributor's Contract) to raise
funds to make the expenditures related to the distribution of Class B shares of
the Fund and in connection therewith, upon receipt of notice of such Transfer,
the Fund shall pay to the assignee, purchaser or pledgee (collectively with
their subsequent transferees, "Transferees"), as third party beneficiaries, such
portion of such Distributor's Service Fees, Allocable Portion of the
Distribution Fees or CDSCs in respect of the Class B shares of the Fund so
Transferred and except as provided in (II) above notwithstanding anything to the
contrary set forth in this Plan or in the Distributor's Contract, to the extent
such Distributor has Transferred its rights to its Allocable Portion of the
Distribution Fees and CDSCs, the Fund's obligation to pay such Distributor's
Allocable Portion of the Distribution Fees and CDSCs payable in respect of the
Class B shares of the Fund shall be absolute and unconditional and shall not be
subject to dispute, offset, counterclaim or any defense whatsoever, at law or
equity, including, without limitation, any of the foregoing based on the
2
<PAGE>
insolvency or bankruptcy of such Distributor (it being understood that such
provision is not a waiver of the Fund's right to pursue such Distributor and
enforce such claims against the assets of such Distributor other than its right
to the Distribution Fees and CDSCs in respect of the Class B shares of the Fund
transferred in connection with such Transfer). For purposes of this Plan, the
term "Allocable Portion" of Distribution Fees or CDSCs payable in respect of the
Class B shares of the Fund as applied to any Distributor shall mean the portion
of Distribution Fees or CDSCs payable in respect of the Fund allocated to such
Distributor in accordance with the Allocation Schedule (as defined in the
Distributor's Contract as it relates to the Class B shares of the Fund). For
purposes of this Plan, the term "Complete Termination" of this Plan in respect
of any Class B shares of the Fund means a termination of this Plan involving the
complete cessation of the payment of Distribution Fees in respect of all Class B
shares of the Fund, and the termination of the distribution plans and the
complete cessation of the payment of distribution fees pursuant to every other
Distribution Plan pursuant to Rule 12b-1 in respect of the Class B shares of the
Fund and any successor fund or any fund acquiring a substantial portion of the
assets of the Fund and for every future class of shares which has substantially
similar characteristics to the Class B shares of the Fund taking into account
the manner of payment and amount of sales charge, contingent deferred sales
charge or other similar charges borne directly or indirectly by the holders of
such shares.
SECTION 3. This Plan shall not take effect with respect to any class until
it has been approved by the vote of a majority of the outstanding voting
securities of such class of the Fund.
SECTION 4. This Plan shall not take effect with respect to any class until
it has been approved, together with any related agreements, by votes of the
majority (or whatever greater percentage may, from time to time, be required by
Section 12(b) of the Act or the rules and regulations thereunder) of both (a)
the Trustees of the Fund, and (b) the Qualified Trustees of the Fund, cast in
person at a meeting called for the purpose of voting on this Plan or such
agreement.
SECTION 5. This Plan shall continue in effect for a period of more than one
year after it takes effect only so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Section 4.
SECTION 6. Any person authorized to direct the disposition of monies paid
or payable by the Fund pursuant to this Plan or any related agreement shall
provide to the Trustees of the Fund, and the Trustees shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
SECTION 7. This Plan may be terminated in its entirety or with respect to
any class at any time by vote of a majority of the Qualified Trustees, or, with
respect to any class, by the vote of a majority of the outstanding voting
securities of such class of the Fund.
SECTION 8. All agreements with any person relating to implementation of
this Plan shall be in writing, and any agreement related to this Plan shall
provide:
3
<PAGE>
A. That such agreement may be terminated at any time in its entirety with
respect to a class, without payment of any penalty, by vote of a
majority of the Qualified Trustees or with respect to any class, by
vote of a majority of the outstanding voting securities of such class
of the Fund, on not more than 60 days' written notice to any other
party to the agreement, and
B. That such agreement shall terminate automatically in the event of its
assignment.
SECTION 9. This Plan may not be amended to increase materially the amount
of distribution fees paid by any class of shares of the Fund pursuant to Section
1 or Section 2 hereof without the vote of a majority of the outstanding voting
securities of such class of the Fund, and all material amendments to this Plan
shall be approved in the manner provided for approval of this Plan in Section 4.
SECTION 10. As used in this Plan, (a) the term "Qualified Trustees" shall
mean those Trustees of the Fund who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it, and (b) the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the respective meanings specified in the Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
SECTION 11. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Act) shall be
committed to the discretion of the Disinterested Trustees then in office.
SECTION 12. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Section 6 hereof, and any
information, estimates, projections and other materials, that serve as a basis
therefor, considered by the Trustees, for a period of not less than six years
from the date of this Plan, or the agreements or reports, as the case may be,
the first two years in an easily accessible place.
SECTION 13. The Declaration of Trust, establishing the Fund, a copy of
which together with all amendments thereto (the "Declaration") is on file in the
office of the Secretary of the Commonwealth of Massachusetts, provides that the
name "Pilgrim Balance Sheet Opportunities Fund" refers to the Trustees under the
Declaration collectively as trustees, but not individually or personally; and no
Trustee, shareholder, officer, employee or agent of the Fund may be held to any
personal liability, nor may resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of the Fund, but the Fund property only shall be liable.
SECTION 14. The provisions of this Plan are severable for each Class of
shares of the Fund and if the provisions of the Plan applicable to a particular
class of shares are terminated, the remainder of the Plan provisions application
to the other remaining classes shall not be invalidated thereby and shall be
given full force and effect.
4
<PAGE>
In witness whereof, the Fund has executed this Amended and Restated Plan on
November 16, 1999.
PILGRIM BALANCE SHEET
OPPORTUNITIES FUND
By:
------------------------------------
Attest:
- - - - - - - - - ----------------------------------
5
AMENDED AND RESTATED
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
FOR
PILGRIM EQUITY TRUST
PILGRIM SMALLCAP OPPORTUNITIES FUND
PILGRIM GROWTH OPPORTUNITIES FUND
PILGRIM MAYFLOWER TRUST
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
PILGRIM GOVERNMENT SECURITIES FUND
PILGRIM HIGH YIELD FUND III
I. INTRODUCTION
Pilgrim Equity Trust, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth
Opportunities Fund, Pilgrim Mayflower Trust, Pilgrim Balance Sheet
Opportunities Fund, Pilgrim Government Securities Fund and Pilgrim High
Yield Fund III (the "Trusts") hereby adopt this Multiple Class Plan (the
"Plan") pursuant to Rule 18f-3 under the Investment Company Act of 1940
(the "1940 Act") on behalf of the series listed on Appendix A hereto and
any funds or series thereof that may be established in the future (referred
to herein collectively as the "Funds" and individually as a "Fund").
II. MULTIPLE CLASS STRUCTURE
Each of the Funds continuously offers three classes of shares: "Class A
Shares," "Class B Shares," and "Class C Shares." Pilgrim Growth
Opportunities Fund, Pilgrim MidCap Opportunities Fund, Pilgrim Growth +
Value Fund, Pilgrim SmallCap Opportunities Fund, Pilgrim International
Value Fund, and Pilgrim Research Enhanced Index Portfolio Fund offer a
fourth class of shares, designated as "Class Q shares." Pilgrim Growth
Opportunities Fund, Pilgrim SmallCap Opportunities Fund, Pilgrim Research
Enhanced Index Fund and Pilgrim Mid-Cap Opportunities Fund also offer a
fifth class of shares designated "Class I Shares." In addition, prior to
June 5, 1995, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth
Opportunities Fund, Pilgrim Balance Sheet Opportunities Fund, Pilgrim
Government Securities Fund and Pilgrim High Yield Fund III each offered
only one class of shares, which is currently designated as "Class T
shares." Class T shares are no longer offered for sale by the Funds, except
in connection with reinvestment of dividends and other distributions, upon
exchanges of Class T shares of another Fund, and upon exchange of shares
from the Class T Account of The Cash Management Fund of Salomon Brothers
Investment Series (the "Money Market Portfolio") or Class B shares of
Pilgrim Money Market Fund that were originally obtained upon an exchange of
Class T shares of a Fund.
Shares of each class of a Fund shall represent an equal pro rata interest
in such Fund and, generally, shall have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions,
limitations, qualifications and terms and conditions, except that: (a) each
class shall have a different designation; (b) each class shall bear any
Class Expenses, as defined in Section C below; and (c) each class shall
<PAGE>
have exclusive voting rights on any matter submitted to shareholders that
relates solely to its distribution arrangement and each class shall have
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. In
addition, Class A, Class B, Class C, Class I, Class Q and Class T shares
shall have the features described below.
A. SALES CHARGE STRUCTURE
(1) CLASS A SHARES. Class A shares of a Fund shall be offered at net
asset value plus an initial sales charge. The front-end sales
charge shall be in such amount as is disclosed in the Funds'
prospectus or supplements thereto and shall be subject to
reductions for larger purchases and such waivers or reductions as
are disclosed in the Funds' prospectus or supplements thereto.
Class A shares generally shall not be subject to a contingent
deferred sales charge; however, a contingent deferred sales
charge in such amount as may be described in the Funds'
prospectus or supplements thereto may be imposed on redemptions
of Class A shares acquired in a purchase of over a million
dollars that are redeemed within 18 months of their purchase.
Additional contingent deferred sales charges may be imposed in
such other cases as the Board may approve and as are disclosed in
the Funds' prospectus or supplements thereto.
(2) CLASS B SHARES. Class B shares of a Fund shall be offered at net
asset value without the imposition of an initial sales charge. A
contingent deferred sales charge in such amount as is described
in the Funds' prospectus or supplements thereto shall be imposed
on Class B shares, subject to such waivers or reductions as are
disclosed in the Funds' prospectus or supplements thereto.
(3) CLASS C SHARES. Class C shares of a Fund shall be offered at net
asset value without the imposition of a sales charge at the time
of purchase. A contingent deferred sales charge in such amount as
is described in the Funds' prospectus or supplements thereto
shall be imposed on redemptions of Class C shares made within one
year from the first day of the month after purchase, subject to
waivers or reductions as are disclosed in the Funds' prospectus
or supplements thereto.
(4) CLASS I SHARES. Class I shares are offered to certain
institutional investors without the imposition of an initial
sales charge or a contingent deferred sales charge.
(5) CLASS Q SHARES. Class Q shares of a Fund shall be offered at the
then-current net asset value without the imposition of a
front-end sales charge. Class Q shares shall not be subject to a
contingent deferred sales charge.
(6) CLASS T SHARES. Class T shares are no longer offered for sale by
the Funds but may be obtained pursuant to the methods described
above. A contingent deferred sales charge in such amount as is
described in the Funds' prospectus or supplements thereto shall
<PAGE>
be imposed on redemptions of Class T shares made within four
years after their purchase, subject to waivers or reductions as
are disclosed in the Funds' prospectus or supplements thereto.
B. SERVICE AND DISTRIBUTION PLANS
Each Fund has adopted a 12b-1 plan for each class of shares of that
Fund (other than Class I Shares of the Pilgrim Growth Opportunities
Fund) with the following terms:
(1) CLASS A SHARES. Class A shares of each Fund, shall pay Pilgrim
Securities, Inc. (the "Underwriter") 0.25% annually of the
average daily net assets of each Fund's Class A shares for
service activities, as defined in the rules of the National
Association of Securities Dealers, and 0.05% annually of the
average daily net assets of each Fund's Class A shares for
distribution activities.
(2) CLASS B SHARES. Class B shares of each Fund, shall pay the
Underwriter 0.25% annually of the average daily net assets of
each Fund's Class B shares for service activities, as defined in
the rules of the National Association of Securities Dealers, and
0.75% annually of the average daily net assets of each Fund's
Class B shares for distribution activities.
(3) CLASS C SHARES. Class C shares of each Fund shall pay the
Underwriter 0.25% annually of the average daily net assets of
each Fund's Class C shares for service activities, as defined in
the rules of the National Association of Securities Dealers, and
0.75% annually of the average daily net assets of each Fund's
Class C shares for distribution activities.
(4) CLASS I SHARES. Class I shares of each Fund pay no service or
distribution fees.
(5) CLASS Q SHARES. Class Q shares of each Fund shall pay the
underwriter 0.25% annually of the average daily net assets of
each Fund's Class Q shares for service activities, as defined in
the rules of the National Association of Securities Dealers, Inc.
(6) CLASS T SHARES. Class T shares of the Pilgrim Growth
Opportunities Fund and Pilgrim SmallCap Opportunities Fund shall
pay the Underwriter 0.95% annually of the average daily net
assets of those Funds' Class T shares; Class T shares of the
Pilgrim Balance Sheet Opportunities Fund shall pay the
Underwriter 0.75% annually of the average daily net assets of
that Fund's Class T shares; and the Pilgrim Government Securities
Fund and Pilgrim High Yield Fund III shall pay 0.65% of the
average daily net assets of those Funds' Class T shares. In each
case, 0.25% of the average daily net assets of each Fund's Class
T shares, which is paid annually to the Underwriter pursuant to
the 12b-1 plans, shall be allocated to pay for service
activities, as defined in the rules of the National Association
of Securities Dealers, Inc., with the remainder allocated toward
payment for distribution activities.
<PAGE>
C. ALLOCATION OF INCOME AND EXPENSES
(1) The gross income of each Fund shall, generally, be allocated to
each class on the basis of net assets. To the extent practicable,
certain expenses (other than Class Expenses as defined below
which shall be allocated more specifically) shall be subtracted
from the gross income on the basis of the net assets of each
class of each Fund. These expenses include:
(a) Expenses incurred by each Trust (for example, fees of
Trustees, auditors and legal counsel) not attributable to a
particular Fund or to a particular class of shares of a Fund
("Trust Level Expenses"); and
(b) Expenses incurred by a Fund not attributable to any
particular class of the Fund's shares (for example, advisory
fees, custodial fees, or other expenses relating to the
management of the Fund's assets) ("Fund Expenses").
(2) Expenses attributable to a particular class ("Class Expenses")
shall be limited to: (i) payments made pursuant to a 12b-1 plan;
(ii) transfer agency fees and expenses, including any expenses of
broker-dealers and other third parties providing shareholder
services to shareholders of a specific class; (iii) printing and
postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current
shareholders of a specific class; (iv) Blue Sky registration fees
incurred by a class; (v) SEC registration fees incurred by a
class; (vi) the expense of administrative personnel and services
to support the shareholders of a specific class; (vii) litigation
or other legal expenses relating solely to one class; and (viii)
Trustees' fees incurred as a result of issues relating to one
class. Expenses in category (i) and (ii) above must be allocated
to the class for which such expenses are incurred. All other
"Class Expenses" listed in categories (iii)-(viii) above may be
allocated to a class but only if the President and Treasurer have
determined, subject to Board approval or ratification, which of
such categories of expenses will be treated as Class Expenses,
consistent with applicable legal principles under the Act and the
Internal Revenue Code of 1986, as amended.
Therefore, expenses of a Fund shall be apportioned to each class
of shares depending on the nature of the expense item. Trust
Expenses and Fund Expenses will be allocated among the classes of
shares based on their relative net asset values. Approved Class
Expenses shall be allocated to the particular class to which they
are attributable.
In the event a particular expense is no longer reasonably
allocable by class or to a particular class, it shall be treated
as a Trust Expense or Fund Expense, and in the event a Trust
Expense or Fund Expense becomes allocable at a different level,
including as a Class Expense, it shall be so allocated, subject
to compliance with Rule 18f-3 and to approval or ratification by
the Board of Trustees.
<PAGE>
The initial determination of expenses that will be allocated as
Class Expenses and any subsequent changes thereto shall be
reviewed by the Board of Trustees and approved by such Board and
by a majority of the Trustees who are not "interested persons,"
as defined in the 1940 Act.
D. EXCHANGE PRIVILEGES. Shareholders may exchange shares of a Fund for
the same class of shares of another Fund except that Class I Shares of
the Pilgrim Growth Opportunities Fund do not provide for any exchange
privileges. Class T shares may be exchanged for Class B shares of
Pilgrim Money Market Fund. Shareholders who exchange Class T shares
for Class B shares of the Pilgrim Money Market Fund may only exchange
the Class B shares of Money Market Fund for Class T shares of a Fund.
Exchanges are effected at net asset value per share next computed
following receipt of a properly executed exchange request, without a
sales charge, provided, however, that in the case of a exchanges into
Class A shares of a Fund after a direct purchase of shares of the
Pilgrim Money Market Fund, the applicable sales charge shall be
imposed. Collection of the contingent deferred sales charge shall be
deferred on shares subject to a charge that are exchanged for shares
of the same class of another Fund. Under these circumstances, the
combined holding period of shares in each Fund shall be used to
calculate the conversion period discussed below, if applicable, and to
determine the deferred sales charge due upon redemption. Each Fund
reserves the right to terminate or modify its exchange privileges at
any time.
E. CONVERSION FEATURES. Class B and Class T shares automatically convert
to Class A shares after eight years from purchase in the case of Class
B shares, and on the later of May 31, 1998 or eight years after
purchase in the case of Class T shares.
For purposes of conversion to Class A shares, shares purchased through
the reinvestment of dividends and distributions paid in respect of
Class B or Class T shares in a shareholder's Fund account will be
considered to be held in a separate subaccount. Each time any Class B
or Class T shares in the shareholder's Fund account (other than those
in the subaccount) convert to Class A, an equal pro rata portion of
the Class B or Class T shares in the subaccount will also convert to
Class A.
Shares shall be converted at the relative net asset values of the two
classes without the imposition of a sales charge, fee or other charge.
If the amount of Class A 12b-1 expenses of any Fund is increased
materially without the approval of the Class B and Class T
shareholders, any conversion will only take place in a manner
permitted by Rule 18f-3.
F. Waiver or Reimbursement of Expenses. Expenses may be waived or
reimbursed by any adviser, by the Underwriter or any other provider of
services to the Funds without the prior approval of the Board of
Trustees.
<PAGE>
III. BOARD REVIEW
A. INITIAL APPROVAL
The Board of Trustees, including a majority of the Trustees who are
not "interested persons" of the Funds and the Trusts as defined in the
1940 Act, initially approved the Plan, with regard to the Funds and
classes thereof that were offered at the time, on October 29, 1996,
approved amendments to the Plan on July 29, 1998, and December 16,
1998, and approved this amended and restated plan on November 16,
1999. These approvals were based on a determination that the Plan,
including the expense allocation, is in the best interests of each
class and Fund individually and of the Trusts. Their determination was
based on their review of information furnished to them which they
deemed reasonably necessary and sufficient to evaluate the Plan.
B. APPROVAL OF AMENDMENTS
The Plan may not be amended materially unless the Board of Trustees,
including a majority of the Trustees who are not "interested persons"
of the Funds and the Trusts as defined in the 1940 Act, have found
that the proposed amendment, including any proposed related expense
allocation, is in the best interests of each class and Fund
individually and of the Trusts. Such finding shall be based on
information requested by the Board and furnished to them which the
Board deems reasonably necessary to evaluate the proposed amendment.
C. PERIODIC REVIEW
The Board shall review reports of expense allocations and such other
information as they request at such times, or pursuant to such
schedule, as they may determine consistent with applicable legal
requirements.
IV. MISCELLANEOUS
A. LIMITATION OF LIABILITY
The Board of Trustees and the shareholders of each Fund shall not be
liable for any obligations of the Trusts or any Fund under this Plan,
and the Underwriter or any other person, in asserting any rights or
claims under this Plan, shall look only to the assets and property of
the Trusts or such Funds in settlement of such right or claim, and not
to such Trustees or shareholders.
<PAGE>
IN WITNESS WHEREOF, the Trusts, on behalf of the Funds, have adopted this
amended and restated Multiple Class Plan as of this 16th day of November, 1999.
Pilgrim Equity Trust
Pilgrim SmallCap Opportunities Fund
Pilgrim Growth opportunities fund
Pilgrim Mayflower Trust
Pilgrim Balance Sheet Opportunities Fund
Pilgrim Government Securities Fund
Pilgrim High Yield Fund III
By:
------------------------------------
Title: Vice President and Treasurer
<PAGE>
APPENDIX A
PILGRIM EQUITY TRUST
Pilgrim MidCap Opportunities Fund
PILGRIM SMALLCAP OPPORTUNITIES FUND
PILGRIM GROWTH OPPORTUNITIES FUND
PILGRIM MAYFLOWER TRUST
Pilgrim Emerging Markets Value Fund
Pilgrim Growth + Value Fund
Pilgrim High Total Return Fund
Pilgrim High Total Return Fund II
Pilgrim Income & Growth Fund
Pilgrim International Value Fund
Pilgrim Research Enhanced Index Fund
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
PILGRIM GOVERNMENT SECURITIES FUND
PILGRIM HIGH YIELD FUND III
