Pilgrim America
Bank and Thrift Fund
Annual Report
December 31, 1997
<PAGE>
Pilgrim America Bank and Thrift Fund
Annual Report
December 31, 1997
--==-o-==--
Table of Contents
Letter to Shareholders ......................2
Shareholder Letter Footnotes ................5
Comparison of a $10,000 Investment ..........6
Portfolio of Investments ....................7
Statement of Assets and Liabilities ........10
Statement of Operations ....................11
Statements of Changes in Net Assets ........12
Financial Highlights .......................13
Notes to Financial Statements ..............14
Independent Auditors Report ................17
Tax Information ............................18
Fund Advisors and Agents ...................21
--==-o-==--
1
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders,
We are extremely pleased to report that we had an exceptional year and fourth
quarter. Our net asset value ("NAV") rose 64.9%(1) in 1997, substantially
outpacing the three indices that compare to our Fund. For the year ended
December 31, 1997, the Dow Jones Industrial Average (the "Dow") rose 24.9%, the
Standard & Poor's 500 Index (the "S&P")(2) rose 33.4%, and the S&P Major
Regional Banks Index (the "MRBI")(3) rose 50.6%. According to Lipper Analytical
Services, Inc., our Fund ranked number one out of 28 funds in the open-end
financial services funds category for the one year period ended December 31,
1997(4). Additionally, Lipper ranked the Fund number 7, 6 and 9, respectively
out of 4,977, 1,569, and 768 equity funds covering the 1-, 5-, and 10-year
periods ended December 31, 1997(5), respectively. Since we changed our format
from a closed-end fund to an open-end fund in October, existing shareholders did
even better than this, as the discount to our net asset value that the stock was
trading at was eliminated. In the fourth quarter our return at NAV was 15.0%.
The Dow, S&P and MRBI were up 0.0%, 2.9% and 10.2%, respectively during this
same time period. The bank and thrift group performed very well in the quarter
and for the year. It was extremely gratifying to be able to turn in such
pleasant numbers in such a strong market since we are still running the Fund in
what we believe is a relatively conservative fashion that attempts to preserve
principal in a more adverse economic environment.
We have seen a continuous inflow of new money in each month since the Fund
changed to open-end status. From October to December we took in $69.6 million on
a net basis and an additional $43.9 million through the month of January alone.
Fourth quarter bank and thrift earnings were mostly on target with a few
disappointments. Credit card and substandard lending continue to be the problem
lending areas. We have very little exposure to these areas except for our
holding of Fleet Financial Group, Inc. which has announced that it will be
acquiring Advanta's credit card business.
In the quarter we added to our positions in Alabama National Bancorp, Fleet
Financial Group, Inc., ARM Financial Group, Inc., BankBoston Corp., Bank of the
Ozarks, Charter One Financial, Inc., Community Bank System, Inc., First National
Bank Anchorage, North Valley Bancorp, Pacific Century Financial Corp., Prime
Bancshares Inc., Reliance Group Holdings, Summit Holdings Southeast, Inc. West
Coast Bancorp and Westernbank of Puerto Rico.
We participated in three initial offerings during the quarter and also sold
these positions at a profit before the quarter's end: CIT Group, Inc., ESG RE
Limited and Friedman, Billings, Ramsey.
2
<PAGE>
Pilgrim America Bank and Thrift Fund
A small position in Navigators Group, Inc. was also acquired in the quarter and
sold at approximately a break even level as fundamentals proved to be
disappointing.
New positions were established in Alliance Capital Management, BOK Financial
Corp., Bay Bancshares, Citizens National Bank of Texas, Conning Corporation,
Continental Homes Holding Corp., First Merchants Corp., Imperial Credit
Commercial, International Aircraft Investors, Long Island Community Bank, Six
Rivers National Bank, Stirling Cooke Brown Holdings and Surety Capital Corp.
On a valuation basis our positions were partially reduced in Security First
Corp. and West Coast Bancorp.
Associated Bancorp was added to the Fund due to its merger with our holding of
First Financial Corp.
The Fund benefited from eight consolidations in the year. Two of them were not
in the bank and thrift sector and were announced in the fourth quarter:
Continental Homes Holding Corp. is being acquired by DR Horton and MacFrugal's
Bargains Close-Outs Inc. was acquired by Consolidated Stores.
After three exceptional years of performance, what can shareholders expect now?
This year is starting off on a weak note as the group is being hit by concerns
over Asia and a flat yield curve. The rise was too strong to continue in a
straight line and we are happy that a correction is taking place. Momentum
players have either left the group or are leaving and the problems that some
banks are having with their Asian exposure has spilled over to a negative
perception toward the whole group. Most of our investments have no or limited
Asian exposure. The fundamentals for the group were so good that they had to
start deteriorating a little and this is happening. This is no surprise to us
but it tends to persuade those who invest on a momentum basis to leave the
group.
There is also some concern over the impact that increased prepayments will have
on thrifts in this low interest rate environment. The impact will vary from
thrift to thrift and depend on how long rates stay low. Some approximations can
be made which we are attempting to come up with. The thrifts have had a severe
correction primarily as a result of the above and so opportunities may be
present as a result. This group still has some potential goodwill claims and if
prices stay depressed may become attractive consolidation targets.
Consolidation should continue and might even be accelerated in 1998 before it
slows down temporarily in 1999 due to the year 2000 problem. This will continue
to be a driving force for both the bank and thrift groups.
3
<PAGE>
Pilgrim America Bank and Thrift Fund
We believed that a correction was necessary and indeed this occurred in the
first part of 1998. We thought the correction might last longer but it appears
to have run its course. In our opinion, the long-term story for banks and
thrifts is still intact and there is still good relative value in these groups
compared to the market as a whole.
We wish to remind shareholders that the Fund offers an automatic dividend
reinvestment plan, which provides an easy and cost-effective way to acquire
additional shares in the Fund, without incurring a sales charge. Should you
decide to switch from cash dividends to automatic reinvestment, please notify
your broker or contact the Transfer Agent, c/o DST Systems Inc., P.O. Box
419338, Kansas City, MO 64141-6338, or call (800) 992-0180.
We thank you for giving us this opportunity to help you work towards your
investment needs. Please do not hesitate to contact us if you have any questions
or need additional information.
Sincerely,
/s/ Robert W Stallings
Robert W. Stallings
Chairman and Chief Executive Officer
Pilgrim America Group, Inc.
/s/ Carl Dorf
Carl Dorf, C.F.A.
Senior Vice President and Senior Portfolio Manager
Pilgrim America Investments, Inc.
4
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
SHAREHOLDER LETTER FOOTNOTES
- --------------------------------------------------------------------------------
(1) Total return for Class A shares calculated at NAV and assuming reinvestment
of all dividends and distributions. Sales charges or commissions are not
reflected in these total returns.
Average annual total returns based on NAV, assuming reinvestment of all
dividends and distributions and including the deduction of the maximum
Class A sales charge of 5.75% were 55.4%, 28.3% and 23.6% for the one, five
and ten-year periods ended December 31, 1997, respectively.
Prior to October 20, 1997, the Fund operated as a closed-end investment
company. All performance information prior to this date reflects the
historical expense levels of the Fund as a closed-end investment company
without adjustment for the higher annual expenses of the Fund's Class A
shares. Performance would have been lower if adjusted for these charges and
expenses. Performance information for periods after October 20, 1997
includes Class A expenses. Five and ten-year returns assume no
participation in the 1992 rights offering and full participation in the
1993 rights offering.
The Fund also offers Class B shares which are subject to different fees and
expenses which will affect their performance.
(2) The S&P is an unmanaged index of 500 common stocks and is a generally
accepted measure of stock market performance.
(3) The S&P Major Regional Banks Index is a capitalization-weighted index
designed to measure the performance of the major regional banks within the
Standard & Poor's 500 Index.
(4) For the five and ten-year periods ended December 31, 1997 Lipper ranked our
Fund 3 and 6 out of 15 and 11 funds, respectively, in the open-end
financial services funds category. Rankings are based on total returns
assuming reinvestment of all dividends and distributions and excluding
sales charges.
(5) Lipper rankings are based on total returns assuming reinvestment of all
dividends and distributions and excluding sales charges.
Performance data represents past performance and is no assurance of future
results. Investment return and principal value of an investment in the Fund will
fluctuate. Shares, when sold, may be worth more or less than their original
cost.
Principal risk factors: Because the Fund's portfolio is concentrated in the
banking and thrift industry it may be subject to greater risk than a portfolio
that is not concentrated in one industry.
This letter contains statements that may be "forward-looking statements." Actual
results may differ materially from those projected in the "forward-looking
statements."
The views expressed in this report reflect those of the portfolio manager, only
through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
Pilgrim America Bank and Thrift Fund's primary investment objective is long-term
capital appreciation, with income as a secondary objective. The Fund seeks to
achieve its objectives by investing primarily in the equity securities of banks
and thrifts.
5
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
COMPARISON OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
The line graph below shows the growth of an initial investment of $10,000 in
Pilgrim America Bank and Thrift Fund compared to the performance of two relevant
unmanaged indices, the Standard & Poor's 500 and the Standard & Poor's Major
Regional Banks Index. Note that the indices have inherent performance advantages
over any fund since they have no cash in their portfolios, impose no sales
charges and incur no operating expenses. An investor cannot invest directly in
an index. The Fund's performance is shown both with and without the imposition
of the maximum sales load of 5.75% currently associated with Class A shares of
the Fund.
Growth of initial investment of $10,000,
with reinvestment of dividends and distributions
Bank & Bank & S&P Major
Thrift Thrift S&P 500 Regional
Fund(1) Fund(2) Index Banks Index
------- ------- ----- -----------
12/31/87 $ 9,425 $10,000 $10,000 $10,000
12/31/88 11,550 12,260 11,655 12,677
12/31/89 13,952 14,810 15,343 15,315
12/31/90 11,427 12,129 14,869 10,921
12/31/91* 17,083 18,134 19,391 19,545
12/31/92 22,618 24,009 20,867 24,879
12/31/93 24,383 25,881 22,966 26,377
12/31/94 23,919 25,390 23,269 24,926
12/31/95 35,807 38,008 32,004 39,248
12/31/96 50,524 53,630 39,349 53,617
12/31/97 83,314 88,436 52,472 80,511
*Carl Dorf, the Fund's Portfolio Manager, began managing the Fund in January
1991.
- -----------------------
(1) Excluding current sales charge
(2) Including current sales charge
--------------------------------------------------------------------------
Average Annual Total Returns One Three Five Ten
Ended 12/31/97 Year Years Years Years
--------------------------------------------------------------------------
Bank & Thrift Fund
(excluding current sales charge) 64.9% 51.6% 29.8% 24.3%
--------------------------------------------------------------------------
Bank & Thrift Fund
(including current sales charge) 55.4% 48.6% 28.3% 23.6%
--------------------------------------------------------------------------
S&P 500 Index 33.4% 31.1% 20.3% 18.1%
--------------------------------------------------------------------------
S&P Major Regional Banks Index 50.6% 47.9% 26.5% 22.9%
--------------------------------------------------------------------------
- -----------------
All performance information above for the Fund assumes no participation in the
1992 rights offering and full participation in the 1993 rights offering. The
Fund's total returns assume reinvestment of all dividends and distributions. The
Indices' total returns assume investment of interest income.
Prior to October 20, 1997, the Fund operated as a closed-end investment company.
All performance information prior to this date reflects the historical expense
levels of the Fund as a closed-end investment company without adjustment for the
annual expenses of the Fund's Class A shares. Performance would have been lower
if adjusted for these charges and expenses. Performance information for periods
after October 20, 1997 includes class A expenses.
6
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
COMMON STOCKS: 93.3%
Market
Shares Industry/Issuer Value
------ --------------- -----
Automotive: 0.1%
30,000 (a) Keystone Automotive Industries, Inc. $ 712,500
----------
Banks: 84.7%
102,500 Alabama National Bancorp (AL) 2,703,438
3,346 Associated Bancorp (WI) 184,448
151,155 BB&T Corp. (NC) 9,683,367
114,000 (a) BNC Corp. (ND) 1,866,750
77,250 BOK Financial Corp. (OK) 2,998,266
218,175 BSB Bancorp, Inc. (NY) 7,799,756
270,000 Bank of New York Company, Inc. (NY) 15,609,375
123,200 Bank of the Ozarks (AR) 3,141,600
150,000 BankBoston Corp. (MA) 14,090,625
88,000 Banknorth Group, Inc. (VT) 5,654,000
34,500 (a) Bay Bancshares (TX) 681,375
44,500 CCB Financial Corp. (NC) 4,783,750
446,900 Charter One Financial, Inc. (OH) 28,210,562
105,600 Citizens National Bank of Texas (TX) 1,320,000
100,500 Columbia Bancorp (MD) 3,417,000
349,000 Comerica Inc. (MI) 31,497,250
102,812 Commerce Bancshares, Inc. (MO) 6,965,513
368,250 Commercial Federal Corp. (NE) 13,095,891
166,000 Community Bank System, Inc. (NY) 5,197,875
107,737 Community First Bankshares, Inc. (ND) 5,736,995
195,000 Compass Bancshares, Inc. (AL) 8,531,250
253,758 CoreStates Financial Corp. (PA) 20,316,500
6,000 First Merchants Corp. (IN) 223,500
1,118 First National Bank Anchorage (AK) 2,750,280
278,437 First Security Corp. (UT) 11,659,549
211,704 Fleet Financial Group, Inc. (RI) 15,864,569
91,160 Greater Bay Bancorp (CA) 4,375,680
10,000 (a) Hamilton Bancorp Inc. (FL) 291,250
20,250 Home Federal Bancorp (IN) 526,500
117,047 Independent Bank Corp. (MI) 4,740,403
55,000 InterWest Bancorp, Inc. (WA) 2,076,250
179,400 KeyCorp (OH) 12,703,763
42,437 Laurel Capital Group, Inc. (PA) 1,379,202
20,000 Long Island Community Bank (NY) 325,000
20,000 MainStreet BankGroup, Inc. (VA) 557,500
345,000 Mercantile Bankshares Corp. (MD) 13,498,125
19,250 (a) National City Bancorporation (MN) 567,875
See Accompanying Notes to Financial Statements
7
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
Market
Shares Industry/Issuer Value
------ --------------- -----
Banks (continued)
251,600 National City Corp. (OH) $16,542,700
42,694 (a) North Dallas Bank & Trust Co. (TX) 1,878,536
22,125 North Valley Bancorp (CA) 708,000
157,500 Pacific Century Financial Corp. (HI) 3,898,125
162,000 Peoples Heritage Financial Group (ME) 7,452,000
124,000 Popular Inc. (PR) 6,138,000
83,000 Prime Bancshares Inc. (TX) 1,732,625
65,400 Regions Financial Corp. (AL) 2,759,063
200,000 Security First Corp. (OH) 4,175,000
290,575 (a)(b) Security Shares, Inc. (TX) 3,196,325
68,500 (a) Six Rivers National Bank (CA) 1,215,875
55,000 Southtrust Corp. (AL) 3,489,062
323,125 Sterling Bancshares Inc. (TX) 6,543,281
375,900 Summit Bancorp (NJ) 20,016,675
248,400 Summit Bancshares, Inc. (TX) 5,216,400
191,100 (a) Surety Capital Corp. (TX) 1,337,700
70,200 TCF Financial Corp. (MN) 2,382,413
171,900 Union Planters Corp. (TN) 11,678,456
85,000 UnionBanCal Corp. (CA) 9,137,500
64,300 USBANCORP, Inc. (PA) 4,693,900
40,000 West Coast Bancorp (OR) 1,010,000
18,451 Westamerica Bancorp (CA) 1,886,615
286,000 Westernbank Puerto Rico (PR) 6,792,500
-----------
388,905,783
-----------
Construction: 0.5%
200,000 (a) Schuff Steel Co. 2,175,000
-----------
Finance: 1.9%
170,000 Alliance Capital Management 6,768,125
82,000 (a) First Enterprise Financial Group 194,750
210,000 (a) International Aircraft Investors 1,968,750
-----------
8,931,625
-----------
Home Building: 0.2%
22,300 Continental Homes Holding Corp. 897,575
-----------
Insurance: 2.7%
201,000 ARM Financial Group, Inc. Class A 5,301,375
5,000 (a) Conning Corporation 83,750
341,000 Reliance Group Holdings 4,816,625
5,000 (a) Stirling Cooke Brown Holdings 122,500
98,000 (a) Summit Holding Southeast, Inc. 2,192,750
-----------
12,517,000
-----------
See Accompanying Notes to Financial Statements
8
<PAGE>
Pilgrim America Bank and Thrift Fund
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PORTFOLIO OF INVESTMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Industry/Issuer Value
------ --------------- -----
<S> <C> <C>
Printing: 0.9%
93,200 (a) Devon Group, Inc. $ 4,287,200
-----------
Real Estate and Financial Services: 0.6%
175,000 Imperial Credit Commercial 2,559,375
-----------
Retail: 1.7%
129,900 (a) MacFrugal's Bargains Close-Outs, Inc. 5,342,138
80,000 (a) Michael's Stores, Inc. 2,340,000
-----------
7,682,138
-----------
Total Common Stocks (Cost $175,219,813) 428,668,196
-----------
</TABLE>
SHORT-TERM INVESTMENTS: 6.5%
<TABLE>
<CAPTION>
Principal
Amount Value
------ -----
<S> <C> <C> <C>
Discount Notes: 2.1%
$ 9,790,000 Federal Home Loan Bank Discount Notes, 4.75%
due 01/02/98 9,788,708
---------
Repurchase Agreements: 4.4%
20,000,000 Merrill Lynch Repurchase Agreement, 5.50% due 01/02/98
(Collateralized by $18,935,000 U.S. Treasury Bonds,
8.00% Due 05/15/01) 20,000,000
----------
Total Short-Term Investments (Cost $29,788,708) 29,788,708
----------
Total Investments in Securities (Cost $205,008,521) 99.8% 458,456,904
Cash and Other Assets in Excess of Liabilities-Net 0.2% 887,846
----- -----------
Total Net Assets 100.0% $459,344,750
===== ============
</TABLE>
- ------------
Cost for federal income tax purposes is $205,008,521. Net unrealized
appreciation consists of:
<TABLE>
<S> <C>
Gross Unrealized Appreciation $254,274,007
Gross Unrealized Depreciation (825,624)
------------
Net Unrealized Appreciation $253,448,383
============
</TABLE>
(a) Non-income producing security
(b) Affiliated company and a direct placement security restricted as to resale.
It has been valued at fair value as determined by policies set by the
Fund's Board of Directors.
See Accompanying Notes to Financial Statements
9
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of December 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments in securities at market value
Unaffiliated Issuers (Cost $173,549,007) $425,471,871
Affiliated Issuers (Cost $1,670,806) 3,196,325
Short-term investments at amortized cost 29,788,708
Cash 15,630
Receivables:
Dividends and interest 796,451
Fund shares sold 6,421,195
Prepaid expenses 22,324
------------
Total assets 465,712,504
------------
LIABILITIES:
Payable for fund shares redeemed 3,563,366
Investment securities purchased 2,411,853
Payable to affiliate 13,706
Accrued expenses 378,829
------------
Total liabilities 6,367,754
------------
NET ASSETS $459,344,750
============
Net Assets Consist of:
Paid-in capital $205,896,367
Accumulated undistributed net investment income --
Accumulated undistributed net realized gains --
Net unrealized appreciation of investments 253,448,383
------------
Net assets $459,344,750
============
Class A:
Net assets $382,913,274
Shares authorized ($0.001 par value) 100,000,000
Shares outstanding 14,800,092
Net assets value and redemption price per share $ 25.87
Maximum offering price per share (1) $ 27.45
Class B:
Net assets $ 76,431,476
Shares authorized ($0.001 par value) 100,000,000
Shares outstanding 2,956,461
Net assets value and redemption price per share $ 25.85
Maximum offering price per share (2) $ 25.85
- ------------
(1) Maximum offering price is computed at 100/94.25 of net asset value. On
purchases of $50,000 or more, the offering price is reduced.
(2) Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.
See Accompanying Notes to Financial Statements
10
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $10,962) $ 6,710,470
Interest 627,412
Redemption fee income 630,157
-------------
Total investment income 7,968,039
-------------
EXPENSES:
Investment management fees 2,361,103
Distribution expenses
Class A 182,388
Class B 76,709
Conversion expenses 399,900
Reports to shareholders 129,937
Miscellaneous expenses 96,884
Recordkeeping and pricing fees 79,151
Custodian fees 72,373
Transfer agent and registrar fees 65,986
Professional fees 47,889
Trustees' fees 22,408
Shareholder servicing fees 18,586
Insurance expense 13,766
-------------
Total expenses 3,567,080
Less: Earnings credits (7,361)
-------------
Net expenses 3,559,719
-------------
Net investment income 4,408,320
-------------
REALIZED AND UNREALIZED GAIN FROM INVESTMENTS:
Net realized gain on investments 40,749,713
Change in unrealized appreciation of investments 117,597,499
-------------
Net gain on investments 158,347,212
-------------
Net increase in net assets resulting from operations $ 162,755,532
=============
See Accompanying Notes to Financial Statements
11
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year
Ended Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 4,408,320 $ 4,482,008
Net realized gain on investments 40,749,713 29,471,619
Change in unrealized appreciation of investments 117,597,499 43,705,991
------------ ------------
Net increase in net assets resulting from operations 162,755,532 77,659,618
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
Class A shares (4,332,270) (4,482,008)
Class B shares (76,050) --
Distributions in excess of net investment income
Class A shares (55,332) (395,707)
Class B shares (4,451) --
Distributions from capital gains
Class A shares (36,807,832) (30,200,965)
Class B shares (3,941,881) --
Distributions in excess of capital gains
Class A shares (119,078) --
Class B shares -- --
Tax return of capital
Class A shares (2,537,766) --
Class B shares (549,279) --
------------ ------------
Total distributions (48,423,939) (35,078,680)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares 115,009,912 --
Shares resulting from dividend reinvestment 20,808,444 8,065
Cost of shares redeemed (43,147,277) --
------------ ------------
Net increase in net assets resulting from capital share
transactions 92,671,079 8,065
------------ ------------
NET ASSETS:
Beginning of year 252,342,078 209,753,075
------------ ------------
End of year (including accumulated distributions in excess
of net investment income of $0 and $431,916,
respectively) $459,344,750 $252,342,078
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
12
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995(b) 1994
------------------------ ------- ------- --------
Class A Class B(a)
------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value, beginning of
year $ 17.84 $ 25.25 $ 14.83 $ 10.73 $ 11.87
------- --------- ------- ------- --------
Income (loss) from investment
operations:
Net investment income 0.34 0.04 0.32 0.31 0.26
Net realized and unrealized
gain (loss) on investments 10.83 2.92 5.18 4.78 ( 0.53)
------- --------- ------- ------- --------
Total from investment
operations 11.17 2.96 5.50 5.09 ( 0.27)
------- --------- ------- ------- --------
Less distributions:
Net investment income 0.31 0.04 0.32 0.31 0.22
Excess of net investment
income -- -- 0.03 0.03 --
Realized capital gains 2.65 2.04 2.14 0.65 0.65
Tax return of capital 0.18 0.28 -- -- --
-------- --------- ------- ------- --------
Total distributions 3.14 2.36 2.49 0.99 0.87
------- --------- ------- ------- --------
Other:
Reduction in net asset value
from rights offering -- -- -- -- --
------- --------- ------- ------- --------
Net asset value,
end of year $ 25.87 $ 25.85 $ 17.84 $ 14.83 $ 10.73
======= ========= ======= ======= ========
Closing market price, end of
year -- -- $ 15.75 $ 12.88 $ 9.13
Total investment return at
Market Value(c) -- -- 43.48% 52.81% ( 8.85)%
Total investment return at Net
Asset Value(e) 64.86% 11.88% 41.10% 49.69% ( 1.89)%
Ratios/Supplemental Data
Net assets, end of year
($ millions) $ 383 $ 76 $ 252 $ 210 $ 152
Ratios to average net assets:
Expenses 1.10% 1.85% (h) 1.01% 1.05% 1.28%
Net investment income 1.39% 0.99% (h) 1.94% 2.37% 2.13%
Portfolio turnover rate 22% 22% 21% 13% 14%
Average commission rate paid $ 0.013 $ 0.013 -- -- --
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
--------- --------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value, beginning of
year $ 12.46 $ 10.12 $ 7.49 $ 10.26 $ 9.54 $ 8.17
--------- --------- ------- --------- ------- -------
Income (loss) from investment
operations:
Net investment income 0.26 0.22 0.24 0.31 0.30 0.31
Net realized and unrealized
gain (loss) on investments 0.75 2.93 3.33 ( 2.20) 1.50 1.43
--------- --------- ------- --------- ------ -------
Total from investment
operations 1.01 3.15 3.57 ( 1.89) 1.80 1.74
--------- --------- ------- --------- ------ -------
Less distributions:
Net investment income 0.26 0.22 0.24 0.31 0.31 0.37
Excess of net investment
income -- -- -- -- -- --
Realized capital gains 0.73 0.47 -- -- 0.44 --
Tax return of capital -- 0.12 0.70 0.57 0.33 --
--------- --------- ------- --------- ------ -------
Total distributions 0.99 0.81 0.94 0.88 1.08 0.37
--------- --------- ------- --------- ------ -------
Other:
Reduction in net asset value
from rights offering ( 0.61) -- -- -- -- --
--------- --------- ------- --------- ------ -------
Net asset value,
end of year $ 11.87 $ 12.46 $ 10.12 $ 7.49 $10.26 $ 9.54
========= ========= ======= ========= ====== =======
Closing market price, end of
year $ 10.88 $ 11.63 $ 9.50 $ 7.13 $ 9.13 $ 7.75
Total investment return at
Market Value(c) 1.95% (d) 31.53% 47.52% (12.45)% 32.25% 30.17%
Total investment return at Net
Asset Value(e) 7.79% (f) 32.36% (g) 49.49% (18.14)% 20.79% 22.58%
Ratios/Supplemental Data
Net assets, end of year
($ millions) $ 168 $ 141 $ 101 $ 75 $ 103 $ 96
Ratios to average net assets:
Expenses 0.91% 1.24% 1.31% 1.29% 1.26% 1.18%
Net investment income 2.08% 2.00% 2.68% 3.59% 4.15% 3.28%
Portfolio turnover rate 17% 20% 31% 46% 63% 43%
Average commission rate paid -- -- -- -- -- --
</TABLE>
- -----------
(a) From the period October 20, 1997 (initial offering of Class B shares)
through December 31, 1997.
(b) On April 7, 1995, the Investment Manager acquired the rights to manage the
Fund and certain other mutual funds previously managed by Pilgrim
Management Corporation.
(c) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
(d) Calculation of total return excludes the effect of the per share dilution
resulting from the 1993 rights offering as the total account value of a
fully subscribed shareholder was minimally impacted.
(e) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(f) Total return is calculated assuming full participation in the 1993 rights
offering.
(g) Total return is calculated assuming no particpation in the 1992 rights
offering.
(h) Annualized.
See Accompanying Notes to Financial Statements
13
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Pilgrim America Bank and Thrift Fund, Inc. ("The Fund"), is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end,
management investment company. The investment objective of the Fund is to invest
at least 65% of its total assets in equity securities of regional banks and
their holding companies with consolidated assets of less than $1 billion,
state-chartered banks, thrift institutions and savings accounts of mutual
thrifts. On October 20, 1997, the Fund converted from a closed-end fund to an
open-end fund. Upon conversion, the Fund offered two classes of shares: Class A
and Class B. Each class represents interests in the same assets, and the classes
are identical except for their sales charge structure and ongoing distribution
fees. In addition, Class B shares along with their prorata reinvested dividend
shares, automatically convert to Class A shares approximately eight years after
purchase.
The following is a summary of the significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation. Investments in securities traded on a national
securities exchange or included on the NASDAQ National Market System are
valued at the last reported sale price. Securities traded on an exchange or
NASDAQ for which there has been no sale and securities traded in the
over-the-counter market are valued at the mean between the last reported
bid and asked prices. Securities for which market quotations are not
readily available are valued at their respective fair values as determined
in good faith and in accordance with policies set by the Board of
Directors. Investments in securities maturing in less than 60 days are
valued at cost, which when combined with accrued interest, approximates
market value.
B. Security Transactions and Revenue Recognition. Securities transactions are
accounted for on the trade date. Realized gains or losses are reported on
the basis of identified cost of securities delivered. Interest income is
recorded on an accrual basis and dividend income is recorded on the
ex-dividend date.
C. Federal Income Taxes. It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision is
required.
D. Distributions to Shareholders. The Fund records distributions to its
shareholders on the ex-date. The amount of distributions from net
investment income, and net realized capital gains are determined in
accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. Key differences are the
treatment of short-term capital gains, wash sales and other temporary
differences. To the extent that these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their
federal tax-basis treatment; temporary differences do not require
reclassifications. Distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as distributions in excess of net investment income
and/or realized capital gains. To the extent they exceed net investment
income and net realized capital gains for tax purposes, they are reported
as tax return of capital. Accordingly, amounts as of December 31, 1997 have
been reclassified to reflect a decrease in paid in capital of $6,198,118,
an increase in accumulated undistributed net investment income of
$3,518,353 and an increase in accumulated undistributed net realized gains
on investments of $2,679,765.
14
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
E. Dividend Reinvestments. Until the date of conversion to an open-end fund,
the Fund maintained an Automatic Dividend Reinvestment Plan whereby
Investors Fiduciary Trust Co., the Plan Agent, could purchase, from time to
time, shares of the Fund's common stock on the open market to satisfy
dividend reinvestments. Such shares were purchased only when the closing
sale or bid price, plus commission, was less than the net asset value per
share of the stock. If the market price plus commissions were equal to or
exceeded the net asset value, new shares valued at the net asset value most
recently calculated were issued.
F. Repurchase Agreement. The Repurchase Agreement held at December 31, 1997
was entered on December 31, 1997 and matures on January 2, 1998. The Fund's
custodian takes possession of the collateral pledged for investments in
repurchase agreements. The underlying collateral is valued daily on a
mark-to-market basis to ensure that the value, including accrued interest,
is at least equal to the repurchase price. In the event of default of the
obligations to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other
party to the agreement, realization and/or retention of the collateral may
be subject to legal proceedings.
G. Use of Estimates. Management of the Fund has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
NOTE 2 -- INVESTMENTS
For the year ended December 31, 1997, the cost of purchases and the proceeds
from the sale of securities, excluding short-term notes, were $66,830,203 and
$68,927,039, respectively.
NOTE 3 -- INVESTMENT IN AFFILIATE
Affiliated companies, as defined in Section 2(a)(3) of the Investment Company
Act of 1940, are companies 5% or more of whose outstanding voting shares are
held by the Fund. At December 31, 1997, the Fund had the following holdings in
affiliated companies:
<TABLE>
<CAPTION>
Acquisition Shares Market % of
Date Held Cost Value Net Assets
---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C>
Security Shares, Inc. September, 1994 290,575 $1,670,806 $3,196,325 0.70%
</TABLE>
There was no dividend income from affiliates during the year ended December 31,
1997.
NOTE 4 -- INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS
WITH AFFILIATES
The Fund has an Investment Management Agreement with Pilgrim America
Investments, Inc. (the "Manager"), a wholly owned subsidiary of Pilgrim America
Group, Inc., to provide investment management and administrative services.
Pursuant to this Investment Management Agreement, the Manager furnishes all
investment advice, office space and salaries of personnel needed by the Fund,
except those involved with portfolio trading activity (up to a maximum of
$15,000 per annum). As compensation for its services, the Manager is paid a
monthly fee at an annual rate of 1% on the first $30 million of average daily
net assets of the Fund, 0.75% of the next $95 million of average daily net
assets and 0.70% on average daily net assets in excess of $125 million.
15
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of December 31, 1997
- --------------------------------------------------------------------------------
Upon conversion to an open-end fund each share class of the Fund adopted a Plan
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plan"), whereby Pilgrim
America Securities, Inc. (the "Distributor") is reimbursed or compensated
(depending on the class of shares) by the Fund for expenses incurred in the
distribution of the Fund's shares. Pursuant to the 12b-1 Plan, the Distributor
is entitled to payment each month for actual expenses incurred in the
distribution and promotion of the Fund's shares, including the printing of
prospectuses and reports used for sales purposes, expenses of preparation and
printing of sales literature and other such distribution related expenses,
including any distribution or service fees paid to securities dealers who have
executed a distribution agreement with the Distributor.
Under the 12b-1 Plan, the Fund pays the Distributor at the annual rate of 0.25%
of the average daily net assets of Class A shares and 1.00% of the average
daily net assets of Class B shares.
In addition to the 12b-1 Plan, the current prospectus allows that until October
17, 1998 a 2% fee will be imposed on redemptions or exchanges of Class A shares
acquired prior to October 17, 1997. Such redemption fee is payable to the Fund
and is reflected as redemption fee income in the accompanying financial
statements.
The Fund has entered into a Service Agreement with Pilgrim America Group, Inc.
("PAG") whereby PAG will act as the Shareholder Service Agent for the Fund. The
agreement provides that PAG will be compensated for incoming and outgoing
shareholder telephone calls and letters, and all reasonable out-of-pocket
expenses incurred in connection with the performance of such services.
NOTE 5 -- INVESTMENT TRANSACTIONS
Transactions in capital shares and dollars were as follows for the year ended
December 31, 1997:
Number of Shares Class A Shares Class B Shares
- ---------------- -------------- --------------
Shares sold 1,562,472 2,911,186
Shares issued as reinvestment of dividends 705,087 111,936
Shares redeemed (1,608,708) (66,661)
------------- -------------
Net increase in shares outstanding 658,851 2,956,461
------------- -------------
Dollars Class A Shares Class B Shares
- ------- -------------- --------------
Shares sold $ 40,159,509 $ 74,850,403
Shares issued as reinvestment of dividends 17,958,557 2,849,887
Shares redeemed (41,390,698) (1,756,579)
------------- -------------
Net increase in shares outstanding $ 16,727,368 $ 75,943,711
------------- -------------
NOTE 7 -- CUSTODIAL AGREEMENT
Investors Fiduciary Trust Company ("IFTC") serves as the Fund's custodian and
recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based
on the cash balances held by IFTC for the Fund. For the year ended December 31,
1997, the Fund received earnings credits of $7,361.
16
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS REPORT
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Pilgrim America Bank and Thrift Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Pilgrim America Bank and Thrift Fund (the
"Fund") as of December 31, 1997, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the
years in the two-year period then ended and financial highlights for each of
the years in the three year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. For all periods ending prior to
January 1, 1995, the financial highlights were audited by other auditors whose
report thereon dated January 19, 1995, expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Pilgrim America Bank and Thrift Fund as of December 31, 1997, the results of its
operations for the year then ended, and the changes in its net assets for each
of the years in the two-year period then ended, and financial highlights for
each of the years in the three-year period then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 4, 1998
17
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (December
31, 1997) as to the federal tax status of distributions received by the Fund's
shareholders. Accordingly, the Fund is hereby advising you that the following
dividends were declared during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Type of Distribution Per Share Amount Declaration Date Payable Date
-------------------- ---------------- ---------------- ------------
<S> <C> <C> <C>
Ordinary income (including
short-term capital gains
dividend)
Class A $ 0.1108 06/30/97 07/22/97
$ 0.3185 12/15/97 12/23/97
Class B $ 0.1566 12/15/97 12/23/97
Long-term capital gains dividend(1)
Class A $ 0.6129 06/30/97 07/22/97
$ 1.9233 12/15/97 12/23/97
Class B $ 1.9233 12/15/97 12/23/97
Return of capital distribution
Class A $ 0.0470 06/30/97 07/22/97
$ 0.1351 12/15/97 12/23/97
Class B $ 0.2840 12/15/97 12/23/97
</TABLE>
(1) Supplementary Tax Information:
The % of original long-term capital gain distribution attributable to "28%
Rate Gains" (Mid-Term & Pre-Effective Date Gains) is 68%.
The % of original long-term capital gain distribution attributable to "20%
Rate Gains" is 32%.
Corporate shareholders are generally entitled to take the dividend received
deduction on the portion of the Funds' dividend distribution that qualifies
under tax law. The percentage of the Fund's fiscal year 1997 net investment
income dividends that qualify for the corporate dividend received deductions is
99.65%.
Shareholders are strongly advised to consult their own tax advisers with
respect to the tax consequences of their investments in the Funds. In January
1998, shareholders (excluding corporate shareholders) will received an IRS Form
1099 DIV regarding the federal tax status of the dividends and distributions
received by you in calendar year 1997.
18
<PAGE>
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19
<PAGE>
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20
<PAGE>
Pilgrim America Bank and Thrift Fund
- --------------------------------------------------------------------------------
FUND ADVISORS AND AGENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Pilgrim America Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona85004
DISTRIBUTOR
Pilgrim America Securities, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona85004
SHAREHOLDER SERVICING AGENT
Pilgrim America Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona85004
TRANSFER AGENT
DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141-6368
CUSTODIAN
Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City , Missouri 64105
LEGAL COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, California 90017
WRITTEN REQUESTS
Please mail all account inquiries and other comments to:
Pilgrim America Bank and Thrift Fund Account
Services
c/o Pilgrim America Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
TOLL-FREE SHAREHOLDER INFORMATION
Call us from 9:00 a.m. to 7:00 p.m. Eastern time on
any business day for account or other
information, at 1-800-331-1080.
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Fund. This report is not
authorized for distribution to prospective investors in the Fund unless preceded
or accompanied by an effective prospectus.
<PAGE>
Pilgrim America Funds
MASTERS SERIES
--------------
Pilgrim America Masters
Asia-Pacific Equity Fund
Pilgrim America Masters
MidCap Value Fund
Pilgrim America Masters
LargeCap Value Fund
ELITE SERIES
------------
Pilgrim America
MagnaCap Fund
Pilgrim America
High Yield Fund
Pilgrim Government
Securities Income Fund
Pilgrim America
Funds
"Our goal is for every investor to have a successful investment experience."
Prospectuses containing more complete information regarding the funds, including
charges and expenses, may be obtained by calling Pilgrim America Securities,
Inc. Distributor at 1-800-334-3444. Please read the prospectuses carefully
before you invest or send money.
16-SS-020598-022898
