As filed with the Securities and Exchange Commission on October 27, 1998
Securities Act File No. 333-33445
Investment Company Act File No. 811-4504
================================================================================
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. 3 |X|
and/or
Registration Statement Under The Investment Company Act Of 1940 |X|
Amendment No. 11 |X|
(Check appropriate box or boxes)
PILGRIM AMERICA BANK AND THRIFT FUND, INC.
(TO BE CHANGED TO PILGRIM BANK AND THRIFT FUND, INC.
EFFECTIVE NOVEMBER 16, 1998)
(Formerly Pilgrim Regional BankShares, Inc.)
(Exact Name of Registrant 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) 334-3444
James M. Hennessy, Esq.
Pilgrim America Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Name and Address of Agent for Service)
------------------------
With copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20005
It is proposed that this filing will become effective (check appropriate box):
|_| Immediately upon filing pursuant to paragraph (b)
|X| on November 2, 1998 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:
|X| This post-effective amendment designated a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM
- --------- LOCATION IN PROSPECTUS
----------------------
PART A (CAPTION)
- ------
<S> <C> <C>
Item 1. Cover Page.................................................Cover Page
Item 2. Synopsis...................................................The Equity Funds at a Glance;
Summary of Expenses
Item 3. Condensed Financial Information............................Financial Highlights
Item 4. General Description of Registrant..........................The Funds' Investment Objectives
and Policies; Investment
Practices and Risk
Considerations
Item 5. Management of the Registrant...............................Management of the Funds
Item 5A. Management's Discussion of Fund Performance................*
Item 6. Capital Stock and Other Securities.........................Dividends, Distributions & Taxes;
Additional Information
Item 7. Purchase of Securities Being Offered.......................Pilgrim America Purchase Options
Item 8. Redemption or Repurchase...................................How to Redeem Shares
Item 9. Pending Legal Proceedings..................................Not Applicable
LOCATION IN STATEMENT OF
PART B ADDITIONAL INFORMATION
- ------ ----------------------
(CAPTION)
Item 10. Cover Page.................................................Cover Page
Item 11. Table of Contents..........................................Table of Contents
Item 12. General Information and History............................General Information and History
Item 13. Investment Objectives and Policies.........................Supplemental Description of
Investments and Techniques;
Investment Restrictions
Item 14. Management of the Fund.....................................Management of the Fund
Item 15. Control Persons and Principal Holders of Securities........Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services.....................Management of the Fund
Item 17. Brokerage Allocation and Other Practices...................Portfolio Transactions
Item 18. Capital Stock and Other Securities.........................Distributions; General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered...................................Determination of Share Price;
Additional Purchase and
Redemption Information
Item 20. Tax Status.................................................Tax Considerations
Item 21. Underwriters...............................................Management of the Fund
Item 22. Calculation of Performance Data............................Performance Information
Item 23. Financial Statements.......................................Financial Statements
</TABLE>
- ----------------------------------
* Contained in the Annual Report of the Registrant
<PAGE>
Pilgrim Funds
Prospectus
November 1, 1998
40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, AZ 85004
(800) 992-0180
-------------------------
The Pilgrim Funds are a family of diversified, open-end and closed-end
management investment companies. This Prospectus describes the open-end
investment company portfolios, also known as mutual funds (the Funds), each of
which has its own investment objectives and policies.
EQUITY FUNDS
PILGRIM BANK AND THRIFT FUND
(formerly Pilgrim America Bank and Thrift Fund)
(Bank and Thrift Fund)
PILGRIM MAGNACAP FUND
(formerly Pilgrim America MagnaCap Fund)
(MagnaCap Fund)
PILGRIM MIDCAP VALUE FUND
(formerly Pilgrim America Masters MidCap Value Fund)
(MidCap Value Fund)
PILGRIM LARGECAP LEADERS FUND
(formerly Pilgrim America Masters LargeCap Value Fund)
(LargeCap Leaders Fund)
PILGRIM ASIA-PACIFIC EQUITY FUND
(formerly Pilgrim America Masters Asia-Pacific Equity Fund)
(Asia-Pacific Equity Fund)
INCOME FUNDS
PILGRIM HIGH YIELD FUND
(formerly Pilgrim America High Yield Fund)
(High Yield Fund)
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(Government Securities Income Fund)
Each Fund offers different classes of shares, with varying types and amounts of
sales and distribution charges. These Pilgrim Purchase OptionsTM permit you to
choose the method of purchasing shares that best suits your investment
strategy.
This Prospectus presents information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about each
Fund, dated November 1, 1998, as amended from time to time, has been filed with
the Securities and Exchange Commission and is incorporated by reference into
this Prospectus (that is, it is legally considered a part of this Prospectus).
This Statement is available free upon request by calling Pilgrim Group, Inc.
(Shareholder Servicing Agent) at (800) 992-0180.
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING RISK OF LOSS OF
PRINCIPAL. THE FUNDS' SHARES ARE NOT OBLIGATIONS, DEPOSITS, OR ACCOUNTS OF A
BANK AND ARE NOT GUARANTEED BY A BANK. IN ADDITION, THE FUNDS' SHARES ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
LIKE ALL MUTUAL FUND SHARES, NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSES UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
----
THE EQUITY FUNDS AT A GLANCE ............................................... 3
THE INCOME FUNDS AT A GLANCE ............................................... 4
SUMMARY OF EXPENSES ........................................................ 5
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES .............................. 8
INVESTMENT PRACTICES AND RISK CONSIDERATIONS ............................... 12
DIVERSIFICATION AND CHANGES IN POLICIES .................................... 19
YEAR 2000 COMPLIANCE ....................................................... 19
SHAREHOLDER GUIDE .......................................................... 20
Pilgrim Purchase OptionsTM ................................................ 20
Purchasing Shares ......................................................... 27
Exchange Privileges and Restrictions ...................................... 28
Systematic Exchange Privilege ............................................. 29
How to Redeem Shares ...................................................... 29
MANAGEMENT OF THE FUNDS .................................................... 30
DIVIDENDS, DISTRIBUTIONS AND TAXES ......................................... 34
PERFORMANCE INFORMATION .................................................... 36
ADDITIONAL INFORMATION ..................................................... 36
FINANCIAL HIGHLIGHTS ....................................................... 36
2
<PAGE>
THE EQUITY FUNDS AT A GLANCE*
Fund Objectives and Policies
- ----------------------- --------------------------------------------------------
Bank and Thrift Fund Long-term capital appreciation with income as a
secondary objective.
Invests primarily in equity securities of national and
state-chartered banks (other than money center
banks), thrifts, the holding or parent companies of
such depository institutions, and in savings accounts
of mutual thrifts. Up to 35% of the Fund's total assets
may be invested in equity securities of money center
banks, other financial services companies, other
issuers deemed suitable by the Investment Manager,
debt securities, and securities of other investment
companies.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for Bank and Thrift Fund.
MagnaCap Fund Long term growth of capital with income as a
secondary consideration.
Invests in equity securities that are determined to be
of high quality by the Investment Manager based
upon certain selection criteria.
Normally fully invested.
Pilgrim Investments, Inc., serves as Investment
Manager for MagnaCap Fund.
MidCap Value Fund Long-term capital appreciation.
Invests in equity securities of companies believed to
be undervalued that have a market capitalization of
between $200 million and $5 billion.
Normally fully invested.
Cramer Rosenthal McGlynn, LLC., (CRM) provides
portfolio management services for the MidCap Value
Fund.
LargeCap Leaders Long-term capital appreciation.
Fund Invests in equity securities issued by companies
believed to be undervalued that generally have a
market capitalization of at least $5 billion.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for LargeCap Leaders Fund.
Asia-Pacific Equity Long-term capital appreciation.
Fund Invests in equity securities of companies based in the
Asia-Pacific region, which includes China, Hong
Kong, Indonesia, Korea, Malaysia, Phillipines,
Singapore, Taiwan and Thailand, but not Australia
and Japan.
Normally fully invested.
HSBC Asset Management America Inc. and HSBC
Asset Management Hong Kong Limited, subsidiaries
of HSBC Holdings plc, provides portfolio
management services for Asia-Pacific Equity Fund.
<PAGE>
Fund Strategy
- ----------------------- --------------------------------------------------------
Bank and Thrift Fund Portfolio securities are selected principally on the
basis of fundamental investment value and
potential for future growth, including securities
of institutions that the Fund believes are
well-positioned to take advantage of
opportunities currently developing in the banking
and thrift industries.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities, and exposure to the financial and
market risks of the banking and thrift industries,
which may present greater risk than a portfolio
that is not concentrated in a group of related
industries. Bank and thrift stocks may be
impacted by state and federal legislation and
regulations and regional and general economic
conditions.
You can expect fluctuation in the value of the
Fund's portfolio securities and the Fund's shares.*
MagnaCap Fund The Investment Manager generally selects
companies that meet the Fund's disciplined
investment strategy: consistent payment of, or
ability to, pay dividends; substantial increases in
the ability to pay dividends; reinvested
substantial earnings; strong balance sheets; and
attractive prices.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
MidCap Value Fund CRM, a `value' manager, seeks to identify middle
capitalization companies having one or more of
the following characteristics: they are undergoing
fundamental change; are undervalued; and are
misunderstood by the investment community.
Investment prospects are viewed on a long-term
basis and not on market timing.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
LargeCap Leaders Seeks large capitalization companies believed to
Fund present a good value based upon price
compared to projected earnings.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities. You can expect fluctuation in the value
of the Fund's portfolio securities and the Fund's
shares.*
Asia-Pacific Equity Portfolio securities are selected based upon a
Fund combination of a macroeconomic overview of
the region, specific country analysis, setting
target country weightings, industry analysis and
stock selection.
Principal risk factors: exposure to financial and
market risks that accompany an investment in
equities, and exposure to changes in currency
exchange rates and other risks of foreign
investment. You can expect fluctuation in the
value of the Fund's portfolio securities and the
Fund's shares.*
* This summary description should be read in conjunction with the more complete
description of the Fund's investment objectives and policies set forth
elsewhere in this Prospectus. For information regarding the purchase and
redemption of shares of the Fund, refer to the `Shareholder Guide.' For
information regarding the risk factors of the Fund, refer to `Investment
Practices and Risk Considerations' below.
3
<PAGE>
THE INCOME FUNDS AT A GLANCE*
Fund Objectives and Policies
- ------------------ -------------------------------------------------------------
High Yield Fund High level of current income with capital
appreciation as a secondary objective.
Invests at least 65% of its assets in a diversified
portfolio of high-yielding debt securities commonly
referred to as `junk bonds.' May also invest up to
35% of its total assets in other types of fixed income
securities, preferred and common stocks, warrants
and other securities.
Normally fully invested.
Pilgrim Investments, Inc. serves as Investment
Manager for High Yield Fund.
Government High level of current income consistent with liquidity
Securities and preservation of capital.
Income Fund Normally invests at least 70% of its assets in
securities issued or guaranteed by the U.S.
Government, or certain of its agencies and
instrumentalities. The Fund does not invest in highly
leveraging derivatives, such as swaps, interest-only or
principal-only stripped mortgage-backed securities or
interest rate futures contracts.
Normally fully invested.
Pilgrim Ivestments, Inc. serves as Investment
Manager for for Government Securities Income Fund.
Fund Strategy
- ------------------ -------------------------------------------------------------
High Yield Fund The Investment Manager selects high-yielding
fixed income securities that do not, in its
opinion, involve undue risk relative to the
securities' return characteristics.
Principal risk factors: exposure to financial,
market and interest rate risks and greater credit
risks than with higher-rated bonds. You can
normally expect greater fluctuation in the value
of the Fund's shares than for the Government
Securities Income Fund, particularly in response
to economic downturns.*
Government The Investment Manager analyzes various U.S.
Securities Government securities and selects those offering
Income Fund the highest yield consistent with maintaining
liquidity and preserving capital.
Principal risk factors: exposure to financial and
interest rate risks, and prepayment risk on
mortgage related securities. You can normally
expect fluctuation in the value of the Fund's
shares in response to changes in interest rates,
and relatively little fluctuation in the absence of
such changes.*
* This summary description should be read in conjunction with the more complete
description of the Fund's investment objectives and policies set forth
elsewhere in this Prospectus. For information regarding the purchase and
redemption of shares of the Fund, refer to the `Shareholder Guide.' For
information regarding the risk factors of the Fund, refer to `Investment
Practices and Risk Considerations' below.
4
<PAGE>
SUMMARY OF EXPENSES
Shares of the Funds are available through independent financial professionals,
national and regional brokerage firms and other financial institutions
(Authorized Dealers). For each Fund, you may select from up to three separate
classes of shares: Class A, Class B and Class M.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M(1)
---------- ---------- ------------
<S> <C> <C> <C>
Maximum initial sales charge imposed on purchases of the
Equity Funds (as a percentage of offering price) ...... 5.75%(2) None 3.50%(2)
Maximum initial sales charge imposed on purchases of the
Income Funds (as a percentage of offering price) ...... 4.75%(2) None 3.25%(2)
Maximum contingent deferred sales charge (CDSC) on each
Fund (at the lower of original purchase price or the
redemption proceeds) ................................. None (3) 5.00%(4) None
The Funds have no redemption fees, exchange fees or sales charges on reinvested
dividends.
</TABLE>
- ------------
(1) Bank and Thrift Fund does not offer Class M shares.
(2) Reduced for purchases of $50,000 and over. See 'Class A Shares: Initial
Sales Charge Alternative' and 'Class M Shares: Lower Initial Sales Charge
Alternative.'
(3) A CDSC of no more than 1.00% for shares redeemed in the first or second
year, depending on the amount of purchase, is 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. See 'Class A Shares: Initial Sales
Charge Alternative.'
(4) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See 'Class B Shares: Deferred Sales
Charge Alternative.'
5
<PAGE>
ANNUAL OPERATING EXPENSES AND EXAMPLES
The table below reflects the Annual Operating Expenses incurred by the Class A,
B and M shares of each Fund for the fiscal year or period ended June 30, 1998.
The Annual Operating Expenses for certain Funds are subject to waivers that are
described in the footnotes following the table. The "Examples" to the right of
the table show the cumulative expenses you would pay on a $1,000 investment,
assuming (i) reinvestment of all dividends and distributions, (ii) 5% annual
return and (iii) redemption at the end of the period (unless otherwise noted):
<TABLE>
<CAPTION>
Annual Operating Expenses
(As a Percentage of Average Net Assets)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BANK AND THRIFT FUND CLASS A CLASS B
-------- --------
Management fees 0.72% 0.72%
Distribution (12b-1 fees)(1) 0.25% 1.00%
Other Expenses 0.23% 0.23%
---- ----
Total fund
operating expenses 1.20% 1.95%
==== ====
MAGNACAP FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees 0.72% 0.72% 0.72%
Distribution (12b-1 fees)(1) 0.30% 1.00% 0.75%
Other Expenses 0.35% 0.35% 0.35%
---- ---- ----
Total fund
operating expenses 1.37% 2.07% 1.82%
==== ==== ====
MIDCAP VALUE FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees 1.00% 1.00% 1.00%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 1.75% 2.50% 2.25%
==== ==== ====
LARGECAP LEADERS FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees 1.00% 1.00% 1.00%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 1.75% 2.50% 2.25%
==== ==== ====
ASIA-PACIFIC EQUITY FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees 1.25% 1.25% 1.25%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.50% 0.50% 0.50%
---- ---- ----
Total fund
operating expenses(3) 2.00% 2.75% 2.50%
==== ==== ====
HIGH YIELD FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees(4) 0.60% 0.60% 0.60%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.15% 0.15% 0.15%
---- ---- ----
Total fund
operating expenses(3) 1.00% 1.75% 1.50%
==== ==== ====
GOVERNMENT SEC. INC. FUND CLASS A CLASS B CLASS M
-------- -------- --------
Management fees 0.50% 0.50% 0.50%
Distribution (12b-1 fees)(1) 0.25% 1.00% 0.75%
Other Expenses 0.75% 0.75% 0.75%
---- ---- ----
Total fund
operating expenses(5) 1.50% 2.25% 2.00%
==== ==== ====
<CAPTION>
Annual Operating Expenses
(As a Percentage of Average Net
Assets) EXAMPLES
- ----------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK AND THRIFT FUND CLASS A CLASS B CLASS B+
-------- --------- ----------
Management fees After 1 year $ 69 $ 70 $ 20
Distribution (12b-1 fees)(1) After 3 years 93 91 61
Other Expenses After 5 years 120 125 105
Total fund After 10 years 195 208 (2) 208 (2)
operating expenses
MAGNACAP FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees After 1 year 71 71 21 53
Distribution (12b-1 fees)(1) After 3 years 98 95 65 90
Other Expenses After 5 years 128 131 111 130
Total fund After 10 years 213 222 (2) 222 (2) 241
operating expenses
MIDCAP VALUE FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees After 1 year 74 75 25 57
Distribution (12b-1 fees)(1) After 3 years 109 108 78 103
Other Expenses After 5 years 147 153 133 151
Total fund After 10 years 252 265 (2) 265 (2) 284
operating expenses(3)
LARGECAP LEADERS FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees After 1 year 74 75 25 57
Distribution (12b-1 fees)(1) After 3 years 109 108 78 103
Other Expenses After 5 years 147 153 133 151
Total fund After 10 years 252 265 (2) 265 (2) 284
operating expenses(3)
ASIA-PACIFIC EQUITY FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees After 1 year 77 78 28 59
Distribution (12b-1 fees)(1) After 3 years 117 115 85 110
Other Expenses After 5 years 159 165 145 163
Total fund After 10 years 277 290 (2) 290 (2) 309
operating expenses(3)
HIGH YIELD FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees(4) After 1 year 57 68 18 47
Distribution (12b-1 fees)(1) After 3 years 78 85 55 78
Other Expenses After 5 years 100 115 95 112
Total fund After 10 years 164 186(2) 186 (2) 206
operating expenses(3)
GOVERNMENT SEC. INC. FUND CLASS A CLASS B CLASS B+ CLASS M
-------- --------- ---------- --------
Management fees After 1 year 62 73 23 52
Distribution (12b-1 fees)(1) After 3 years 93 100 70 93
Other Expenses After 5 years 125 140 120 137
Total fund After 10 years 218 240 (2) 240 (2) 258
operating expenses(5)
</TABLE>
(Footnotes on next page.)
6
<PAGE>
- ------------
+ Assumes no redemption at end of period.
++ The Fund changed its year end from December 31 to June 30, therefore, the
expenses reflected are for the six months ended June 30, 1998 annualized.
(1) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc. (NASD).
(2) Assumes Class B shares converted to Class A shares at the end of the eighth
year following purchase.
(3) The Investment Manager has entered into expense limitation agreements under
which it will limit expenses, excluding distribution fees, interest,
taxes, brokerage and extraordinary expenses, to 1.50% for MidCap Value
Fund and LargeCap Leaders Fund, 1.75% for Asia-Pacific Equity Fund, and
0.75% for High Yield Fund. These expense limitations will apply to each
Fund individually until at least December 31, 1998. Prior to the waiver
and reimbursement of Fund expenses, Other Expenses and Total Fund
Operating Expenses for the fiscal year ended June 30, 1998 for the
following Funds were: for MidCap Value Fund, 0.53% and 1.78% for Class A,
0.53% and 2.53% for Class B, and 0.53% and 2.28% for Class M; for LargeCap
Leaders Fund, 1.03% and 2.28% for Class A, 1.03% and 3.03% for Class B,
and 1.03% and 2.78% for Class M; for Asia-Pacific Equity Fund, 1.30% and
2.80% for Class A, 1.30% and 3.55% for Class B, and 1.30% and 3.30% for
Class M; and for High Yield Fund, 0.32% and 1.17% for Class A, 0.32% and
1.92% for Class B, and 0.32% and 1.67% for Class M.
(4) The management fees for High Yield Fund have been restated to reflect
current fees.
(5) The Investment Manager has agreed to reimburse the Government Securities
Income Fund to the extent that the gross operating costs and expenses of
the Fund, excluding any interest, taxes, brokerage commissions,
amortization of organizational expenses, extraordinary expenses, and
distribution fees on Class B and Class M shares in excess of an annual
rate of 0.25% of the average daily net assets of these classes, exceed
1.50% of the Fund's average daily net assets on 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. Without such waiver, Other Expenses and Total
Fund Operating Expenses for the fiscal year ended June 30, 1998 would have
been 0.83% and 1.58% for Class A, 0.83% and 2.33% for Class B, and 0.83%
and 2.08% for Class M.
The purpose of the table on the previous page is to assist you in understanding
the various costs and expenses that you will bear directly or indirectly as a
shareholder in a Fund. For more complete descriptions of the various costs and
expenses, please refer to 'Shareholder Guide' and 'Management of the Funds.'
Use of the assumed 5% return in the Examples is required by the Securities and
Exchange Commission. The Examples are not an illustration of past or future
investment results, and should not be considered a representation of past or
future expenses, actual expenses may be more or less than those shown.
7
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
BANK AND THRIFT FUND. The Fund primarily seeks long-term capital appreciation;
a secondary objective is income. The Fund pursues its objectives by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of (i) national and state-chartered banks (other than money center
banks), (ii) thrifts, (iii) the holding or parent companies of such depository
institutions, and (iv) in savings accounts of mutual thrifts, which investment
may entitle the investor to participate in future stock conversions of the
mutual thrifts. These portfolio securities are selected principally on the
basis of fundamental investment value and potential for future growth,
including securities of institutions that the Fund believes are well positioned
to take advantage of the attractive investment opportunities developing in the
banking and thrift industries. In making decisions concerning the selection of
portfolio securities for the Fund, the Investment Manager conducts its own
evaluation of the depository institution which is a potential investment by the
Fund and does not take into account the credit rating of the debt securities
issued by such institution. These equity securities include common stocks and
securities convertible into common stock (including convertible bonds,
convertible preferred stock, and warrants) but do not include non-convertible
preferred stocks or adjustable rate preferred stocks.
An investment in the Fund's shares cannot be considered a complete investment
program. Because the Fund's investment portfolio will be concentrated in
specific segments of the banking and thrift industries, the shares may be
subject to greater risk than the shares of a fund whose portfolio is less
concentrated.
The Investment Manager believes that a number of factors may contribute to the
potential for growth in the value of equity securities of depository
institutions, including the fact that such depository institutions are:
(i) located in geographic regions experiencing strong economic growth
and able to participate in such growth;
(ii) well-managed and currently providing above-average returns on
assets and shareholders' equity;
(iii) attractive candidates for acquisition by a money center bank or
another regional bank, as defined in 'The Banking and Thrift Industries,'
below, or attractive partners for business combinations, as a result of
opportunities created by the trend towards deregulation and interstate
banking or in order to create larger, more efficient banking combinations;
(iv) expanding their business into new financial services or
geographic areas that have become or may become permissible due to an
easing of regulatory constraints; or
(v) investing assets in technology that is intended to increase
productivity.
The Investment Manager also believes that factors may contribute to increased
earnings of securities of depository institutions, including the following:
(i) changes in the sources of revenues of banks, such as the
implementation of certain new transaction-based fees;
(ii) a focus on variable rate pricing of bank products, which is less
sensitive than fixed pricing to cyclical interest rate changes;
(iii) the ability, as a result of liberalization of regulation, to
offer financial products and services which may have a higher rate of
return than traditional banking and financial services products;
(iv) the recent implementation of share repurchase programs by certain
banks; or
(v) a trend towards increased savings and investing as the average age
of the population of the United States gets older.
The Fund's policy of investing under normal market conditions at least 65% of
its total assets in the equity securities of (i) national and state-chartered
banks (other than money center banks), (ii) thrifts, (iii) the holding or
parent companies of such depository institutions, and (iv) in savings accounts
of mutual thrifts is fundamental and may only be changed with approval of the
shareholders of the Fund.
8
<PAGE>
The Fund invests the remaining 35% of its total assets in the equity securities,
including preferred stocks or adjustable rate preferred stocks, of money center
banks, other financial services companies, other issuers deemed suitable by the
Investment Manager (which may include companies that are not in financial
services industries), in securities of other investment companies and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) that are either issued or guaranteed by the
United States Government or agency thereof or issued by a corporation or other
issuer and rated investment grade or comparable quality by at least one
nationally recognized rating organization. The Fund may also invest in
short-term, investment grade debt securities, as described in `Risk
Considerations -- Temporary Defensive and Other Short-Term Positions.'
MAGNACAP FUND. The Fund's objective is growth of capital, with dividend income
as a secondary consideration. In selecting investments for the Fund,
preservation of capital is also an important consideration. The Fund normally
seeks its objectives by investing primarily in equity securities issued by
companies that the Investment Manager determines are of high quality based upon
the selection criteria described below. The equity securities in which the Fund
may invest include common stocks, securities convertible into common stocks,
rights or warrants to subscribe for or purchase common stocks, repurchase
agreements, and foreign securities (including American Depositary Receipts
(ADRs)). Although it is anticipated that the Fund normally will be invested as
fully as practicable in equity securities in accordance with its investment
policies, assets of the Fund not invested in equity securities may be invested
in high quality debt securities, as described in `Risk Considerations --
Temporary Defensive and other Short-Term Positions.' In a period that the
Investment Manager believes presents weakness in the stock market or in
economic conditions, the Fund may establish a defensive position to attempt to
preserve capital and increase its investment in these instruments.
MagnaCap Fund is managed in accordance 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. Normally, stocks
are acquired only if at least 65% of the Fund's assets are invested in
companies that meet the following criteria:
1. 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.
2. 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.
3. REINVESTED EARNINGS. Dividend payout must be less than 65% of current
earnings.
4. 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.
5. 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 Investment Manager may also consider other factors in selecting investments
for the Fund. The remainder of the Fund's assets may be invested in equity
securities that the Investment Manager believes have growth potential because
they represent an attractive value. Also, MagnaCap Fund may not invest more than
5% of its total assets in the securities of companies which, including
predecessors, have not had a record of at least three years of continuous
operations, and it may not invest in any restricted securities.
MIDCAP VALUE FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investment in
equity securities issued by companies with middle market capitalizations, i.e.,
market capitalizations between $200 million and $5 billion, although the Fund
may also invest to a limited degree in companies that have larger or smaller
market capitalizations. The equity securities in which the Fund may invest
include common stock, convertible securities, preferred stock and warrants. The
Fund will normally be invested as fully as practicable (at least 80%) in equity
securities of
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companies with middle market capitalizations. The Fund may also invest in
high-quality debt securities, as described in `Risk Considerations -- Temporary
Defensive and Other Short-Term Positions.'
The Fund is managed in accordance with the disciplined investment style that
the Portfolio Manager, Cramer Rosenthal McGlynn, LLC (CRM), employs in managing
midcap value portfolios. As a value adviser, CRM does not attempt to time
market fluctuations; rather it relies on stock selection to achieve investment
results, seeking out those stocks that are undervalued and, in some cases,
neglected by financial analysts. The Portfolio Manager's investment philosophy
is to take advantage of periodic inefficiencies that develop in the valuation
of publicly traded companies. Generally, its approach to finding such companies
is to first identify dynamic change that can be material to a company's
operations. Dynamic change means change within a company that is likely to have
a material impact on its operations. Examples include new senior management,
new products or markets, or any material divestitures, acquisitions, or
mergers. The philosophy is that this type of change often creates
misunderstanding in the marketplace that can result in a company's stock being
undervalued relative to its future prospects and peer group. The Portfolio
Manager seeks to identify this change at an early stage and conduct an
evaluation of the company's business. In applying this approach, the Portfolio
Manager focuses on middle capitalization companies where dynamic change can be
material.
CRM seeks companies that it believes will look different in the future in terms
of their operations, finances, and/or management. Once change is identified,
the Portfolio Manager conducts an evaluation of a company that includes
creating a financial model based principally upon projected cash flow, as
opposed to reported earnings. The company's stock is evaluated in the context
of what the market is willing to pay for the shares of comparable companies and
what a strategic buyer would pay for the whole company. CRM also evaluates the
degree of investor recognition of a company by monitoring the number of sell
side analysts who closely follow the company and the nature of the shareholder
base. Before deciding to purchase a stock CRM conducts a business analysis to
corroborate its observations and assumptions, including, in most instances,
discussions with management, customers and suppliers. Also, an important
consideration is the extent to which management holds an ownership interest in
a company. In its overall assessment, CRM seeks stocks that have a favorable
risk/reward ratio over an 18 to 24 month holding period.
LARGECAP LEADERS FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investing
primarily in equity securities issued by companies with large market
capitalizations that the Portfolio Manager believes sell at reasonable prices
relative to their projected earnings. The Investment Manager seeks companies
that it believes are leaders in their industries and considers whether these
companies have a sustainable competitive edge. The Portfolio Manager's
investment goal is to participate in up markets while cushioning the portfolio
during a downturn. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to have large
market capitalization, 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, ADRs, and warrants. The Fund will
normally be invested as fully as practicable (at least 80%) in equity
securities and will normally invest at least 65% of its assets in companies
with large market capitalizations. The Fund may also invest in high-quality
debt securities, as described in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
ASIA-PACIFIC EQUITY FUND. This Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective through investment 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,
ADRs, European Depositary Receipts and other depositary receipts. The Fund will
normally be invested as fully as practicable (at least 80%) in equity
securities of Asia-Pacific issuers. The Fund may also invest in high-quality
debt securities, as described in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
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The Fund will be managed using the investment philosophy that the Portfolio
Manager, HSBC Asset Management Americas, Inc. and HSBC Asset Management Hong
Kong Limited (HSBC), employs in managing private Asia-Pacific portfolios.
Investment decisions are based upon a disciplined approach that takes into
consideration the following factors: (i) macroeconomic overview of the region;
(ii) specific country analysis; (iii) setting target country weightings; (iv)
evaluation of industry sectors within each country; and (v) selection of
specific stocks. Decisions on company selection include 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. HSBC seeks to take profits when the
Portfolio Manager believes that a market or stock has risen fairly or
disproportionately to other investment opportunities.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: (1) the country in which the issuer was organized; (2)
the country in which the principal securities market for that issuer is
located; (3) 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 (4) the country in which the issuer has at least 50% of its
assets situated.
HIGH YIELD FUND. This Fund's primary investment objective is to seek a high
level of current income and its secondary objective is capital appreciation,
with preservation of capital as a consideration. The Fund normally seeks to
achieve its objectives by investing at least 65% of its assets in a diversified
portfolio of higher yielding debt securities, including preferred stock and
convertible securities (High Yield Securities), that do not in the opinion of
the Investment Manager involve undue risk relative to their expected return
characteristics. High Yield Securities, which are commonly known as junk bonds,
are ordinarily lower rated and include equivalent unrated securities.
Assets of the Fund not invested in High Yield Securities (ordinarily not to
exceed 35% of the Fund's assets) may be invested in common stocks; preferred
stocks rated Baa or better by Moody's Investor Services, Inc. (Moody's) or BBB
or better by Standard and Poor's Corporation (S&P); debt obligations of all
types rated Baa or higher by Moody's or BBB or better by S&P; U.S. Government
securities; warrants; foreign debt securities of any rating (not to exceed 10%
of the Fund's total assets at the time of investment); money market
instruments, including repurchase agreements on U.S. Government securities;
other mortgage-related securities; financial futures and related options; and
participation interests and assignments in floating rate loans and notes. See
`Investment Practices and Risk Considerations -- High Yield Securities' for
information on High Yield Securities.
GOVERNMENT SECURITIES INCOME FUND. This Fund's investment objective is to seek
high current income, consistent with liquidity and preservation of capital. The
Fund normally seeks to achieve its objectives by investing 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: GNMA, Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC). The 70% threshold may not be met due to changes in value
of the Fund's portfolio or due to the sale of portfolio securities due to
redemptions. In such instances, further purchases by the Fund will be of 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 U.S. Government securities in which the Fund may invest include, but are
not limited to, the following: (1) direct obligations of the U.S. Treasury
including Treasury bills (maturities of one year or less), Treasury notes
(maturities of one to ten years), and Treasury bonds (generally maturities of
greater than ten years and up to 30 years), and (2) mortgage-backed securities
that are issued or guaranteed by GNMA, FNMA, or FHLMC. The Fund may invest in
short-term, intermediate-term and long-term U.S. Government securities. The
Investment Manager will determine the exact composition and weighted average
maturity of the Fund's portfolio on the basis of its judgment of existing
market conditions. 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.
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INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The following pages contain information about certain types of securities in
which one or more of the Funds may invest and strategies the Funds may employ
in pursuit of the investment objectives. See the Statement of Additional
Information of each Fund for more detailed information on these investment
techniques and the securities in which the Funds may invest.
RISK CONSIDERATIONS
The investment objectives and policies of the Funds described above should be
carefully considered before investing. There is no assurance that a Fund will
achieve its investment objectives. As with any security, an investment in a
Fund's shares involves certain risks, including loss of principal. Each Fund is
subject to varying degrees of financial, market and credit risks.
TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS. Each Fund's assets 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 the Fund to
meet redemption requests; and (iv) for temporary defensive purposes. Bank and
Thrift Fund, MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund and
Asia-Pacific Equity Fund 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.
BANK AND THRIFT FUND: SECURITIES OF BANKS AND THRIFTS. 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
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has shown significant fluctuation as a result of volatile interest rate levels.
In addition, general economic conditions are important to the operations of
these concerns, with exposure to credit losses resulting from financial
difficulties of borrowers.
Changes in state and Federal law are producing significant changes in the
banking and financial services industries. Deregulation has resulted in the
diversification of certain financial products and services offered by banks and
financial services companies, creating increased competition between them. In
addition, state and federal legislation authorizing interstate acquisitions as
well as interstate branching has facilitated the increasing consolidation of
the banking and thrift industries. Although regional banks involved in
intrastate and interstate mergers and acquisitions may benefit from such
regulatory changes, those which do not participate in such consolidation may
find that it is increasingly difficult to compete effectively against larger
banking combinations. Proposals to change the laws and regulations governing
banks and companies that control banks are frequently introduced at the federal
and state levels and before various bank regulatory agencies. The likelihood of
any changes and the impact such changes might have are impossible to determine.
The last few years have seen a significant amount of regulatory and legislative
activity focused on the expansion of bank powers and diversification of
services that banks may offer. These expanded powers have exposed banks to
well-established competitors and have eroded the distinctions between regional
banks, community banks, thrifts and other financial institutions.
The thrifts in which the Bank and Thrift Fund invests generally are subject to
the same risks as banks discussed above. Such risks include interest rate
changes, credit risks, and regulatory risks. Because thrifts differ in 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.
MIDCAP COMPANY EQUITY SECURITIES. The MidCap Value Fund will invest
substantially all of its assets, and MagnaCap Fund, Bank and Thrift Fund,
LargeCap Leaders Fund and Asia-Pacific Equity Fund may invest, in the equity
securities of middle capitalization companies. Investment in middle
capitalization companies may involve greater risk than is customarily
associated with securities of larger, more established companies. These
securities may be less marketable and subject to more abrupt or erratic market
movements than securities of larger companies.
INVESTMENTS IN FOREIGN SECURITIES. Asia-Pacific Equity Fund invests primarily,
and MagnaCap Fund may invest up to 5% of its total assets, in certain foreign
securities (including ADRs). 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.
LargeCap Leaders Fund may invest in ADRs. ADRs are dollar-denominated receipts
issued generally by domestic banks and representing a deposit with the bank of
a security of a foreign issuer, and are publicly traded in the U.S.
There are certain risks in owning foreign securities, including those resulting
from: (i) fluctuations in currency exchange rates; (ii) devaluation of
currencies; (iii) political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; (iv) reduced availability of public information concerning
issuers; (v) accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; and (vi) settlement and clearance
procedures in some countries that may not be reliable and can result in delays
in settlement; (vii) higher transactional and custodial expenses than for
domestic securities; and (viii) 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
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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.
EMERGING MARKET INVESTMENTS. Asia-Pacific Equity Fund may invest in emerging
market securities issued by companies based in emerging market countries in the
Asia-Pacific region. An emerging market country is generally considered to be a
country whose economy is less developed or mature than economies in other more
developed countries or whose markets are undergoing a process of relatively
basic development. `Emerging market countries' consist of all countries
determined by the World Bank or the United Nations to have developing or
emerging economies and markets. 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.
In addition to the risks generally of investing in emerging market securities,
there are particular risks associated with investing in developing Asia-Pacific
countries including: (i) certain markets, such as those of China, being in the
earliest stages of development; (ii) 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; (iii) political and social uncertainties; (iv) over-dependence
financial intermediaries; (iii) political and social uncertainties; (iv)
over-dependence on exports, especially with respect to primary commodities,
making these economies vulnerable to changes in commodity prices; (v)
overburdened infrastructure and obsolete financial systems; (vi) environmental
problems; (vii) less well developed legal systems than many other industrialized
nations; and (viii) less reliable custodial services and settlement practices.
CORPORATE DEBT SECURITIES. High Yield Fund may invest in corporate debt
securities. In addition, High Yield Fund may also invest in high quality
short-term corporate debt for temporary defensive purposes. See "Temporary
Defensive and Other Short-Term Positions" above. 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.
HIGH YIELD SECURITIES. High Yield Fund may invest in High Yield Securities,
which are high yield/high risk debt securities that are rated lower than Baa by
Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent
quality. 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. Generally, the Fund will invest in
securities rated no lower than B by Moody's or S&P, unless the Investment
Manager believes the financial condition of the issuer or other available
protections reduce the risk to the Fund. For example, the Fund may invest in
such a security if the Investment Manager believes the issuer's assets are
sufficient for the issuer to repay its outstanding obligations. Nevertheless,
the Fund may invest in securities rated C or D if the Investment Manager
perceives greater value in these securities than it believes is reflected in
such securities' prevailing market price.
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. 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. A projection of an economic downturn or
of a period of rising interest rates, for example, could cause a decline in
High Yield Securities prices. 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 therefore tend to be more volatile
than securities that pay interest periodically and in cash.
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The secondary market in which High Yield Securities are traded is generally
less liquid than the market for higher grade bonds. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a High Yield Security, and could adversely affect the daily net
asset value of the Fund's shares. 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. In pursuing
the Fund's objectives, the Investment Manager seeks to identify situations in
which the rating agencies have not fully perceived the value of the security.
Based upon the weighted average ratings of all High Yield Securities held
during High Yield Fund's most recent fiscal year ended June 30, 1998, the
percentage of the Fund's total High Yield Securities represented by (1) High
Yield Securities rated by a nationally recognized statistical rating
organization, separated into each applicable rating category (Aaa, Baa, Ba, B,
Caa, or Ca by Moody's or AAA, BBB, BB, B, CCC, or CC by S&P) by monthly
dollar-weighted average is AAA -- 0%, BBB -- 0%, BB -- 4.61%, B -- 58.6%, CCC
- -- 2.42%, CC -- 0.40%, and D -- 0.34%, respectively, and (2) unrated High Yield
Securities as a group -- 33.60%.
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.
OTHER INVESTMENT COMPANIES. LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund and Bank and Thrift Fund may each 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.
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.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities (except MagnaCap Fund, which may not invest in restricted
securities). A Fund may invest in an illiquid or restricted security if the
Investment Manager believes that it presents an attractive investment
opportunity. Generally, a security is considered illiquid if it cannot be
disposed of within seven days at approximately the value at which it is
carried. This illiquidity might prevent the sale of the security at a time when
the Investment Manager might wish to sell, and these securities 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, requiring the Fund to rely on judgments that may be
somewhat subjective in determining value, which could vary from the amount the
Fund could realize upon disposition. Each Fund may only invest up to 15% of its
net assets in illiquid securities.
Restricted securities, including private placements, are subject to legal or
contractual restrictions on resale. They can be eligible for purchase without
Securities and Exchange Commission registration by certain institutional
investors known as `qualified institutional buyers,' and under the Fund's
procedures, restricted
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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.
MORTGAGE-RELATED SECURITIES. Government Securities Income Fund and High Yield
Fund may invest up to 100% of their assets in certain types of mortgage-related
securities. High Yield Fund may invest up to 35% of its total assets in
mortgage-related securities. Investments in mortgage-related securities involve
certain risks. 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 (1) the
mortgages will be subject to normal principal amortization, and (2) may be
prepaid prior to maturity due to the sale of the underlying property, the
refinancing of the loan or foreclosure. Early prepayment may expose a Fund to a
lower rate of return upon reinvestment of the principal. Prepayment rates vary
widely and cannot be accurately predicted. They may be affected by changes in
market interest rates. Therefore, prepayments will be reinvested at rates that
are available upon receipt, which likely will be higher or lower than the
original yield on the certificates. Accordingly, the actual maturity and
realized yield on mortgage-backed securities will vary from the designated
maturity and yield on the original security based upon the prepayment
experience of the underlying pool of mortgages.
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.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities.
U.S. Government securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations directly issued
or guaranteed by U.S. Government agencies or instrumentalities. Some
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government are backed by the full faith and credit of the U.S. Government (such
as GNMA certificates); others are backed only by the right of the issuer to
borrow from the U.S. Treasury (such as obligations of FNMA); and still others
are backed only by the credit of the instrumentality (such as obligations of
FHLMC), and thus may be subject to varying degrees of credit risk. While U.S.
Government securities provide substantial protection against credit risk, they
do not protect investors against price declines in the securities due to
changing interest rates. Investors also should refer to the discussion of
`Mortgage-Related Securities.'
Investment Techniques
BORROWING. Bank and Thrift Fund may borrow money from banks to obtain
short-term credits as are necessary for the clearance of securities
transactions, but not in an amount exceeding 15% of its total assets. All Funds
except Bank and Thrift may borrow from banks solely for temporary or emergency
purposes up to certain amounts (10% of total assets in the case of Government
Securities Income Fund, 5% of total assets in the case of MagnaCap Fund and
High Yield Fund, and 33 1/3% of total assets in the case of MidCap Value Fund,
LargeCap Leaders Fund and Asia-Pacific Equity Fund). Government Securities
Income Fund may not make any additional investment while any such borrowings
exceed 5% of its total assets. The Government Securities Income Fund's entry
into reverse repurchase agreements and dollar-roll transactions and any Fund's
entry into delayed delivery transactions (including those related to pair-offs)
shall not be subject to the above limits on borrowings. Borrowing may
exaggerate the effect of any increase or decrease in the value of portfolio
securities or the net asset value (NAV) of a Fund, and money borrowed will be
subject to interest costs.
16
<PAGE>
FOREIGN CURRENCY TRANSACTIONS. Substantially all of the assets of the
Asia-Pacific Equity Fund will be invested in securities denominated in foreign
currencies and a corresponding portion of the Fund's revenues will be received
in such currencies. Unfavorable changes in the relationship between the U.S.
dollar and the relevant foreign currencies, therefore, will adversely affect
the value of the Fund's shares. The Asia-Pacific Equity Fund ordinarily will
not engage in hedging transactions to guard against the risk of currency
fluctuation. However, the Fund reserves the right to do so, and, toward this
end, may enter into forward foreign currency contracts. This investment
technique is described in the Fund's Statement of Additional Information.
DOLLAR ROLL TRANSACTIONS. Government Securities Income Fund may engage in
dollar roll transactions with respect to mortgage-backed securities issued by
GNMA, FNMA and FHLMC in order to enhance portfolio returns and manage
prepayment risks. In a dollar roll transaction, the Fund sells a mortgage
security held in the portfolio to a financial institution such as a bank or
broker-dealer, and simultaneously agrees to repurchase a substantially similar
security from the institution at a later date at an agreed upon price. 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 it enters into a dollar roll transaction, the Fund will maintain with its
custodian in a segregated account cash and/or liquid assets in a dollar amount
sufficient to make payment for the obligations to be repurchased. These
securities are marked to market daily and are maintained until the transaction
is settled.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, MagnaCap
Fund, High Yield Fund and Government Securities Income 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. No lending may be made with any companies affiliated with the
Investment Manager. The borrower at all times during the loan must maintain
with that Fund cash or high quality securities or 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 Fund
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. 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.
PAIRING OFF TRANSACTIONS. Government Securities Income Fund engages in a
pairing-off transaction when it 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. At all times when the
Fund has an outstanding commitment to purchase securities, the Fund will
maintain with its custodian in a segregated account cash and/or liquid assets
equal to the value of the outstanding purchase commitments. When the time comes
to pay for the securities acquired on a delayed delivery basis, the Fund will
meet its obligations from the available cash flow, sale of the securities held
in the separate account, sale of other securities or, although it would not
normally expect to do so, from sale of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). Whether a pairing-off transaction produces a gain for the Fund
depends upon the movement of interest rates. If interest rates decrease, then
the money received upon the sale of the same security will be greater than the
anticipated amount needed at the time the commitment to purchase the security
at the future date was entered and the Fund will experience a gain. However, 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.
REVERSE REPURCHASE AGREEMENTS. Government Securities Income Fund may enter into
reverse repurchase agreement transactions, which involve the sale of U.S.
Government Securities held by the Fund, with an agreement that the Fund will
repurchase the securities at an agreed upon price and date. The Fund will
employ reverse repurchase agreements when necessary to meet unanticipated net
redemptions and avoid liquidation of portfolio investments during unfavorable
market conditions. At the time it enters into a reverse repurchase agreement,
the Fund will place in a segregated account with its custodian cash and/or
17
<PAGE>
liquid assets having a dollar value equal to the repurchase price. Reverse
repurchase agreements, together with the Fund's other borrowings, may not
exceed 33 1/3% of the Fund's total assets.
Use of 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. The Funds will not invest in
highly leveraging derivatives, such as interest-only or principal-only stripped
mortgage-backed securities or swaps. In the case of 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, which give
the Fund the right to sell a security it holds at a specified price. A Fund
would purchase an option 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 Funds will not engage in any
other type of options transactions.
Another use of derivatives that only may be employed by the Asia-Pacific Equity
Fund is to enter into forward currency contracts and foreign exchange futures
('futures') contracts, which provide for delivery of a certain amount of
foreign currency to the Fund on a specified date. The Fund would enter into a
forward currency or futures contract when it intends to purchase or sell a
security denominated in a foreign currency and it desires to `lock in' the U.S.
dollar price of the security. The Funds will not engage in any other type of
forward contracts or futures contracts. For additional information on options
and foreign currency contracts, see `Options on Securities' and `Foreign
Currency Exchange Transactions' in the Fund's Statement of Additional
Information.
Government Securities Income Fund and High Yield Fund may invest in U.S.
Government agency mortgage-backed securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, including GNMA, FNMA,
and FHLMC. These instruments might be considered derivatives. The primary risks
associated with these instruments is the risk that their value will change with
changes in interest rates and prepayment risk. For information on
mortgage-backed securities, see 'Investment Practices and Risk Considerations
- -- Mortgage-Related Securities' in this Prospectus, `U.S. Government
Securities' in Government Securities Income Fund's Statement of Additional
Information, and `Mortgage-Related Securities' in High Yield Fund's Statement
of Additional Information.
Other uses of derivatives that may be employed only by High Yield Fund include
writing covered call options; purchasing call options; and engaging in
financial futures and related options. It is expected that these instruments
ordinarily will not be used for High Yield Fund; however, the Fund may make
occasional use of these techniques. When a Fund writes a covered call option,
it receives a premium for entering into a contract to sell a security in the
future at an agreed upon price and date. A Fund would write a call option if it
believes that the premium would increase total return. The primary risk of
writing call options is that, during the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying securities above the exercise
price. A Fund may purchase call options for the purpose of `closing out' a
position on a security on which it has already written a call option.
High Yield Fund also may use financial futures contracts and related options
for 'hedging' purposes. A Fund would 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. A risk of
using financial futures contracts for hedging purposes is that the Investment
Manager might imperfectly judge the market's direction, so that the hedge might
not correlate to the market's movements and may be ineffective. Furthermore, if
a Fund buys a futures contract to gain exposure to securities, the Fund is
exposed to the risk of change in the value of the underlying securities. For
information on options on securities and financial futures and related options,
see `Option Writing' and `Financial Futures Contracts and Related Options' in
High Yield Fund's Statement of Additional Information.
18
<PAGE>
DIVERSIFICATION AND CHANGES IN POLICIES
Each Fund is diversified, so that with respect to 75% of its assets, it may not
invest more than 5% of its assets (measured at market value at the time of
investment) in securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.
The first sentence in the description of each Fund under `The Funds' Investment
Objectives and Policies,' above, states the Fund's investment objectives. These
investment objectives are `fundamental.' The other investment policies of
Government Securities Income Fund described in the first paragraph under `The
Funds' Investment Objectives and Policies -- Government Securities Income Fund'
are also `fundamental.' Fundamental policies may only be changed with the
approval of a majority of shareholders of the pertinent Fund. Unless otherwise
specified, other investment policies of any of the Funds may be changed by the
Board of Directors of that Fund without shareholder approval. Each Fund is
subject to investment restrictions that are described in that Fund's Statement
of Additional Information under `Investment Restrictions.' Some of those
restrictions are designated as `fundamental.' These fundamental restrictions as
well as the diversified status of each Fund require a vote of a majority of the
shareholders of the relevant Fund to be changed.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager 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. The Investment Manager
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Funds' other
major service providers. It is not anticipated that the Funds will directly bear
any material costs associated with the Investment Manager and the Fund's 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.
19
<PAGE>
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
Depending upon the Fund, you may select from two or three separate classes of
shares: Class A, Class B and Class M, each of which represents an identical
interest in a Fund's investment portfolio but are offered with different sales
charges and distribution fee (Rule 12b-1) arrangements. These sales charges and
fees are shown and contrasted in the chart below.
<TABLE>
<CAPTION>
Class A Class B Class M(1)
----------- ----------- ------------
<S> <C> <C> <C>
Maximum Initial Sales Charge on Purchases
Bank and Thrift Fund ........................... 5.75%(2) None N/A
MagnaCap Fund, MidCap Value Fund, LargeCap
Leaders Fund, Asia-Pacific Equity Fund ........ 5.75%(2) None 3.50%
High Yield Fund and Government Securities
Income Fund ................................... 4.75%(2) None 3.25%
CDSC ............................................. None(3) 5.00%(4) None
Annual Distribution Fees(5) ...................... 0.25%(6) 1.00% 0.75%
Maximum Purchase ................................. Unlimited $250,000 $1,000,000
Automatic Conversion to Class A .................. N/A 8 Years N/A
</TABLE>
- ------------
(1) Bank and Thrift Fund does not offer Class M shares.
(2) Imposed upon purchase. Reduced for purchases of $50,000 or more.
(3) For investments of $1 million or more, a CDSC of no more than 1% is
assessed on redemptions made within one or two years from purchase,
depending on the amount of purchase. See `Class A Shares: Initial Sales
Charge Alternative.'
(4) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See `Class B Shares: Deferred Sales
Charge Alternative.'
(5) Annual asset-based distribution charge.
(6) MagnaCap Fund imposes an annual distribution fee of 0.30%.
When choosing between classes, investors should carefully consider the ongoing
annual expenses along with the initial sales charge or CDSC. The relative
impact of the initial sales charges and ongoing annual expenses will depend on
the length of time a share is held. 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 Authorized Dealer.
CLASS A SHARES: Initial Sales Charge Alternative. Class A shares of the Funds
are sold at the NAV per share in effect plus a sales charge as described in the
following table. For waivers or reductions of the Class A shares sales charges,
see `Special Purchases without a Sales Charge' and `Reduced Sales Charges.'
BANK AND THRIFT FUND, MAGNACAP FUND, MIDCAP VALUE FUND,
LARGECAP LEADERS FUND AND ASIA-PACIFIC EQUITY FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- ----------------------------------------- -------------------- ----------- ----------------
<S> <C> <C> <C>
Less than $50,000 ..................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ......... 4.50% 4.71% 3.75%
$100,000 but less than $250,000 ......... 3.50% 3.63% 2.75%
$250,000 but less than $500,000 ......... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 ...... 2.00% 2.04% 1.75%
</TABLE>
20
<PAGE>
HIGH YIELD FUND
AND GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- ---------------------------------------- -------------------- ----------- ----------------
<S> <C> <C> <C>
Less than $50,000 ..................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000 ......... 4.50% 4.71% 4.00%
$100,000 but less than $250,000. ...... 3.50% 3.63% 3.00%
$250,000 but less than $500,00 ......... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...... 2.00% 2.04% 1.75%
</TABLE>
There is no initial sales charge on purchases of $1,000,000 or more. However,
the Distributor will pay Authorized Dealers of record commissions at the rates
shown in the table below for investments subject to a CDSC. If shares are
redeemed within one or two years of purchase, depending on the amount of the
purchase, a CDSC will be imposed on certain redemptions as follows:
PERIOD
DEALER DURING WHICH
ON PURCHASES OF: CDSC ALLOWANCE CDSC APPLIES
- ------------------------------------------ ------- ---------- ------------
$1,000,000 but less than $2,500,000 ...... 1.00% 1.00% 2 Years
$2,500,000 but less than $5,000,000 ...... 0.50% 0.50% 1 Year
$5,000,000 and over ..................... 0.25% 0.25% 1 Year
Class B Shares: Deferred Sales Charge Alternative. If you choose the deferred
sales charge alternative, you will purchase Class B shares at their NAV per
share without the imposition of a sales charge at the time of purchase. Class B
shares that are redeemed within six years of purchase, however, will be subject
to a CDSC as described in the table that follows. Class B shares of the Funds
are subject to a distribution fee at an annual rate of 1.00% of the average
daily net assets of the Class, which is higher than the distribution fees of
Class A or Class M shares. The higher distribution fees mean a higher expense
ratio, so Class B shares pay correspondingly lower dividends and may have a
lower NAV than Class A or Class M shares. In connection with sales of Class B
shares, the Distributor compensates Authorized Dealers at a rate of 4% of
purchase payments subject to a CDSC. Orders for Class B shares in excess of
$250,000 will be accepted as orders for Class A shares or declined.
The amount of the CDSC is determined as a percentage of the lesser of the NAV
of the Class B shares at the time of purchase or redemption. No charge will be
imposed for any net increase in the value of shares purchased during the
preceding six years in excess of the purchase price of such shares or for
shares acquired either by reinvestment of net investment income dividends or
capital gain distributions. The percentage used to calculate the CDSC will
depend on the number of years since you invested the dollar amount being
redeemed according to the following table:
YEAR OF REDEMPTION AFTER PURCHASE CDSC
--------------------------------- ------
First ......................... 5%
Second ......................... 4%
Third ............................ 3%
Fourth ......................... 3%
Fifth ............................ 2%
Sixth ......................... 1%
Seventh and following .......... 0%
To determine the CDSC payable on redemptions of Class B shares, the Funds will
first redeem shares in accounts that are not subject to a CDSC; second, shares
acquired through reinvestment of net investment income dividends and capital
gain distributions; third, shares purchased more than 6 years prior to
redemption; and fourth, shares subject to a CDSC in the order in which such
shares were purchased. Using this method, your sales charge, if any, will be at
the lowest possible rate.
21
<PAGE>
Class B shares will automatically convert into Class A shares approximately
eight years after purchase. For additional information on the CDSC and the
conversion of Class B shares, see each Fund's Statement of Additional
Information.
CLASS M SHARES: Lower Initial Sales Charge Alternative. An investor who
purchases Class M shares pays a sales charge at the time of purchase that is
lower than the sales charge applicable to Class A shares and does not pay any
CDSC upon redemption. Class M shares have a higher annual distribution fee than
Class A shares, but lower than Class B. The higher distribution fees mean a
higher expense ratio than Class A but lower than Class B. Class M shares pay
correspondingly lower dividends and may have a lower NAV per share than Class A
shares, but generally pay higher dividends and have a higher NAV per share than
Class B shares. Orders for Class M shares in excess of $1,000,000 will be
accepted as orders for Class A shares or declined. The public offering price of
Class M shares is the NAV of each Fund plus a sales charge, which, as set forth
below, varies based on the size of the purchase:
MAGNACAP FUND, MIDCAP VALUE FUND,
LARGECAP LEADERS FUND AND ASIA-PACIFIC EQUITY FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------- -------------------- ----------- ----------------
<S> <C> <C> <C>
Less than $50,000..................... 3.50% 3.63% 3.00%
$50,000 but less than $100,000 ...... 2.50% 2.56% 2.00%
$100,000 but less than $250,000 ...... 1.50% 1.52% 1.00%
$250,000 but less than $500,000 ...... 1.00% 1.01% 1.00%
$500,000 and over..................... None None None
</TABLE>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
<TABLE>
<CAPTION>
DEALERS'
REALLOWANCE
AS A % OF OFFERING AS A % OF AS A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------- -------------------- ----------- ----------------
<S> <C> <C> <C>
Less than $50,000 .................. 3.25% 3.36% 3.00%
$50,000 but less than $100,000 ...... 2.25% 2.30% 2.00%
$100,000 but less than $250,000 ...... 1.50% 1.52% 1.25%
$250,000 but less than $500,000 ...... 1.00% 1.01% 1.00%
$500,000 and over .................. None None None
</TABLE>
Class M shares are not offered by Bank and Thrift Fund and do not convert to
Class A.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced sales
charge on a purchase of Class A or Class M shares of a Fund or other open-end
funds in the Pilgrim Funds which offer Class A shares, Class M Shares, or
shares with front-end sales charges (`Participating Funds') by completing the
Letter of Intent section of the Application. Executing the Letter of Intent
expresses an intention to invest during the next 13 months a specified amount,
which, if made at one time, would qualify for a reduced sales charge. An amount
equal to the Letter amount multiplied by the maximum sales charge imposed on
purchases of the applicable Fund and class will be restricted within your
account to cover additional sales charges that may be due if your actual total
investment fails to qualify for the reduced sales charges. See the New Account
Application or the Statement of Additional Information for details on the
Letter of Intent option or contact the Shareholder Servicing Agent at (800)
992-0180 for more information.
The sales charge for your investment may also be reduced by taking into account
the current value of your existing holdings in the Fund or any other open-end
funds in the Pilgrim Funds (excluding Pilgrim General Money Market Shares and
Pilgrim Money Market Fund-Class B) (`Rights of Accumulation'). The reduced
sales charges 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
account(s) for the benefit of a child under the Uniform Gifts to Minors Act;
(iv) a trustee or other
22
<PAGE>
fiduciary of a single trust estate or a single fiduciary account (including a
pension, profit-sharing and other employee benefit plans qualified under
Section 401 of the Internal Revenue Code); and (v) by trust companies,
registered investment advisers, banks and bank trust departments for accounts
over which they exercise exclusive discretionary investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar capacity. See
the New Account Application or the Statement of Additional Information for
details or contact the Shareholder Servicing Agent at (800) 992-0180 for more
information.
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.
WAIVERS OF CDSC. The CDSC on Class A or Class B shares will be waived in the
following cases. In determining whether a CDSC is applicable, it will be
assumed that shares held in the shareholder's account that are not subject to
such charge are redeemed first.
1) The CDSC on Class A or Class B shares will be waived in the case of
redemption following the death or permanent disability of a shareholder if
made within one year of death or initial determination of permanent
disability. The waiver is available for total or partial redemptions of
shares of each Fund owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for those shares held at
the time of death or initial determination of permanent disability.
2) The CDSC also may be waived for Class B Shares redeemed 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.
3) The CDSC also will be waived in the case of a total or partial
redemption of shares in a Fund in connection with any mandatory
distribution from a tax-deferred retirement plan or an IRA. The
shareholder must have attained the age of 70 1/2 to qualify for the CDSC
waiver relating to mandatory distributions. The waiver does not apply in
the case of a tax-free rollover or transfer of assets, other than one
following a separation of service. The shareholder must notify the
Transfer Agent either directly or through the Distributor, at the time of
redemption, that the shareholder is entitled to a waiver of the CDSC. The
CDSC Waiver Form included in the New Account Application must be completed
and provided to the Transfer Agent at the time of the redemption request.
The waiver will be granted subject to confirmation of the grounds for the
waiver. The foregoing waivers may be changed at any time.
REINSTATEMENT PRIVILEGE. Class B shareholders who have redeemed their shares in
any open-end Pilgrim Fund within the previous 90 days may repurchase Class B
shares at NAV (at the time of reinstatement) in an amount up to the redemption
proceeds. Reinstated Class B 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, 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 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. See `Tax
Considerations' in the Statement of Additional Information.
SPECIAL PURCHASE WITHOUT A SALES CHARGE. Class A or Class M shares may be
purchased at NAV without a sales charge by:
1) Class A or Class M shareholders who have redeemed their shares in any
open-end Pilgrim Fund within the previous 90 days. These shareholders may
repurchase shares at NAV in an amount equal to their net redemption
proceeds. Authorized Dealers who handle these purchases may charge fees for
this service.
2) 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 which unaffiliated fund was: with
respect to purchases of Bank and Thrift Fund, a fund invested primarily in
financial services entities;
23
<PAGE>
with respect to purchases of MagnaCap Fund, a domestic growth fund; with
respect to purchases of the MidCap Value Fund, a mid-cap fund; with respect
to purchases of the LargeCap Leaders Fund, a large-cap fund; with respect
to purchases of the Asia-Pacific Equity Fund, a fund investing in companies
based in the Asia-Pacific region; with respect to purchases of High Yield
Fund, a high yield bond fund; and with respect to purchases of Government
Securities Income Fund, a government securities fund.
3) Any charitable organization or governmental entity that has
determined that a Fund is a legally permissible investment and which is
prohibited by applicable law from paying a sales charge or commission in
connection with the purchase of shares of any mutual fund.
4) Officers, directors and full-time employees, and their families of
Pilgrim America Capital Corporation (Pilgrim) and its subsidiaries.
5) Certain fee based broker-dealers or registered representatives
thereof or registered investment advisers under certain circumstances
making investments on behalf of their clients.
6) 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.
7) 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 Fund
alone or in any combination of shares of any Fund plus Class A shares of
certain other Participating Funds as described herein under `Pilgrim
Purchase OptionsTM -- Reduced Sales Charges', during the 13 month period
commencing with the first investment pursuant hereto equals at least $1
million. The Distributor may pay Authorized Dealers through which purchases
are made an amount up to 0.50% of the amount invested, over a 12 month
period following the transaction.
8) 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).
9) 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.
10) Accounts as to which a banker or broker-dealer charges an account
management fee (`wrap accounts').
11) Any registered investment company for which Pilgrim Investments,
Inc. serves as investment manager.
The Funds may terminate or amend the terms of offering shares at NAV to these
investors at any time. For additional information, contact the Shareholder
Servicing Agent at (800) 992-0180, or see the Statement of Additional
Information.
INCENTIVES. The Distributor, at its expense, will provide additional
promotional incentives to Authorized Dealers in connection with sales of shares
of the Funds and other open-end Pilgrim Funds. In some instances, additional
compensation or promotional incentives will be offered to Authorized Dealers
that have sold or may sell significant amounts of shares during specified
periods of time. Such compensation and incentives may include, but are not
limited to, cash, merchandise, trips and financial assistance 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 to various locations for such seminars or
training programs, seminars for the public, advertising and sales campaigns
regarding the Funds or other open-end Pilgrim Funds and/or other events
sponsored by Authorized 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)
24
<PAGE>
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.
RULE 12B-1 PLAN. Each Fund has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares of that Fund (Rule 12b-1 Plan).
Under the Rule 12b-1 Plan, the Distributor may receive from each Fund an annual
fee in connection with the offering, sale and shareholder servicing of the
Fund's Class A, Class B and Class M shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Funds and in connection with services rendered to shareholders of each
Fund, each Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of each Fund's
average daily net assets attributable to that class):
CLASS A SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------- ----------- -------------
Bank and Thrift Fund, MidCap
Value Fund, LargeCap Leaders Fund,
Asia-Pacific Equity Fund ............... 0.25% n/a*
MagnaCap Fund ........................... 0.25% 0.05%
High Yield Fund and
Government Securities Income Fund ...... 0.25% n/a
------------
* Subject to increase by action of the Fund's Directors to a rate not
exceeding .10% per annum.
CLASS B SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------- ----------- -------------
All Funds ................................ 0.25% 0.75%
CLASS M SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------- ----------- -------------
All Funds except Bank and Thrift Fund ...... 0.25% 0.50%*
------------
* Subject to increase by action of the Fund's Directors to a rate not
exceeding 0.75% per annum.
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of the
Distributor from the sale of Class A, Class B or Class M shares of the Funds,
including payments to Authorized Dealers, and for shareholder servicing. These
fees may be used to pay the costs of the following: payments to Authorized
Dealers; 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; supplemental payments to
Authorized Dealers that provide shareholder services; interest on accrued
distribution expenses; and costs of administering the Rule 12b-1 Plan. 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. With respect to Class A shares of MagnaCap Fund, High
Yield Fund and Government Securities Income Fund, the Distributor will be
reimbursed for its actual expenses incurred under the 12b-1
25
<PAGE>
Plan. 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
$4,916,710 for MagnaCap Fund (1.11% of its net assets), $1,561,725 for High
Yield Fund (0.56% of its net assets), and $927,642 for Government Securities
Income Fund (3.42% of its net assets) as of June 30, 1998. With respect to
Class A shares of all other Funds and the Class B and Class M shares of each
Fund, the Distributor will receive payment without regard to actual
distribution expenses that it incurs. Fees paid by one of the Funds under the
Rule 12b-1 Plan may be used to finance distribution of the shares of that Fund
and the servicing of shareholders of the Fund as well as the other Pilgrim
Funds.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis
to Authorized Dealers for distribution and shareholder servicing as set forth
below.
CLASS A AND B SHARES
SERVICING
FUND FEE
-------------------------------------------- -----------
All Funds ................................... .25%
CLASS M SHARES
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------- ----------- -------------
Magna Cap Fund, MidCap
Value Fund, LargeCap Leaders Fund,
Asia-Pacific Equity Fund ................. .25% .40%
High Yield Fund and Government
Securities Income Fund .................... .25% .15%
Payments are calculated as a percentage of the Fund's average daily NAV
attributed to each class 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. Rights to these ongoing
payments begin to accrue in the 13th month following a purchase of Class A or B
shares and on the anniversary date in the 1st month following the date of
purchase of Class M shares, and they cease upon exchange (or purchase) into
Pilgrim General Money Market Shares. The payments are also subject to the
continuation of the relevant distribution plan, the terms of the service
agreements between dealers and the Distributor, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.
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.
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<PAGE>
PURCHASING SHARES
Your Authorized Dealer can help you establish and maintain your account,
and the Shareholder Servicing Agent is available to assist you with any
questions you may have.
The Fund reserves the right to liquidate sufficient shares to recover
annual Transfer Agent fees should the investor fail to maintain his/her account
value at a minimum of $1,000.00 ($250.00 for IRA's).
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
- --------------------- ----------------------------------------------- --------------------------------------------
<S> <C> <C>
By contacting your The minimum initial investment in a Fund is The minimum for additional investment in a
Authorized Dealer $1,000 ($250 for IRAs). Fund is $100.
By Mail Visit or consult an Authorized Dealer. Visit or consult your Authorized Dealer.
Make your check payable to the Pilgrim Fill out the Account Additions form
Funds and mail it, along with a included on the bottom of your account
completed Application, to the address statement along with your check payable to
indicated on the Application. Please the Fund and mail them in the envelope
indicate an Authorized Dealer on the New provided with the account statement.
Account Application. Remember to write your account number on
the check.
By wire Call the Pilgrim Operations Department Call the Pilgrim Operations Dept.
at (800) 336-3436 to obtain an account at (800) 336-3436 to obtain a wire
number and indicate an Authorized Dealer on reference number. Give that number to your
the account. Instruct your bank to wire bank and have them wire the
funds to the Fund in care of: same manner described under `Initial
Investors Fiduciary Trust Co. Investment.'
ABA #101003621
Kansas City, MO
credit to:
Pilgrim
_______________________________(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
New Account Application and send it to:
Pilgrim Funds.
P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>
The Funds and the Distributor reserve the right to reject any purchase order.
Please note cash, traveler's 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 Investment Manager reserves the right to waive minimum
investment amounts.
PRICE OF SHARES. Purchase, sale and exchange orders are effected at NAV for the
respective class of shares of each Fund, determined after the order is received
by the Transfer Agent or Distributor, plus any applicable sales charge (Public
Offering Price).
Purchases of each class of a Fund's shares are effected at that Fund's Public
Offering Price determined after a purchase order has been received in proper
form. A purchase order will be deemed to be in proper form when all of the
required steps set forth above under "Purchase of Shares" have been completed.
In the case of an investment 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. A shareholder who purchases by wire must submit an application
form in a timely fashion. If an order or payment by wire is received after the
close 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
27
<PAGE>
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.
DETERMINATION OF NET ASSET VALUE. The NAV of each class of each Fund's shares
will be determined daily as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time) on each day that it is
open for business. Each class' NAV represents that class' pro rata share of
that Fund's net assets as adjusted for any class specific expenses (such as
fees under a Rule 12b-1 plan), and divided by that class' outstanding shares.
In general, the value of each Fund's assets is based on actual or estimated
market value, with special provisions for assets not having readily available
market quotations and short-term debt securities. The NAV per share of each
class of each Fund will fluctuate in response to changes in market conditions
and other factors. Portfolio securities for which market quotations are readily
available are stated at market value. 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. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Directors, although the
actual calculations will be made by persons acting under the supervision of the
Board. For information on valuing foreign securities, see each Fund's Statement
of Additional Information.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized investment
plan to purchase shares with automatic bank account debiting. For further
information on pre-authorized investment plans, see the New Account Application
or contact the Shareholder Servicing Agent at (800) 992-0180.
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 custodian fee annually for the maintenance of
such accounts.
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: (i) recording telephone instructions for
exchanges and expedited redemptions; (ii) requiring the caller to give certain
specific identifying information; and (iii) 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. Telephone redemptions may be executed on all accounts
other than retirement accounts.
EXCHANGE PRIVILEGES AND RESTRICTIONS. An exchange privilege is available.
Exchange requests may be made in writing to the Transfer Agent or by calling the
Transfer Agent at (800) 992-0180. There is no specific limit on exchange
frequency; however, the Funds are intended for long term investment and not as a
trading vehicle. The Investment Manager reserves the right to prohibit excessive
exchanges (more than four per year). The Investment Manager reserves the right,
upon 60 days' prior notice, to restrict the frequency of, otherwise modify, or
impose charges of up to $5.00 upon exchanges. The total value of shares being
exchanged must at least equal the minimum investment requirement of the fund
into which they are being exchanged.
Shares of one class of a Fund may be exchanged for shares of that same class of
any other open-end Pilgrim Fund other than Pilgrim General Money Market Shares
(`Money Market'), at NAV without payment of any additional sales charge. If you
exchange and subsequently redeem your shares, any applicable CDSC will be based
on the full period of the share ownership. Shares of a Fund that are not
subject to a CDSC may be exchanged for shares of Money Market, and shares of
Money Market acquired in the exchange may subsequently be exchanged for shares
of an open-end Pilgrim Fund of the same class as the original shares
28
<PAGE>
acquired. Shares of a Fund that are subject to a CDSC may be exchanged for
shares of Pilgrim Money Market Fund-Class B (Money Market-Class B), and shares
of Money Market-Class B acquired in the exchange may subsequently be exchanged
for shares of any other Pilgrim Fund. Shareholders exercising the exchange
privilege with any other open-end Pilgrim Fund should carefully review the
prospectus of that Fund. Exchanges of shares are sales and may result in a gain
or loss for federal and state income tax purposes. You will automatically be
assigned the telephone exchange privilege unless you mark the box on the Account
Application that signifies you do not wish to have this privilege. The exchange
privilege is only available in states where shares of the Fund being acquired
may be legally sold.
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. The exchange privilege may
be modified at any time or terminated upon 60 days written notice to
shareholders.
HOW TO REDEEM SHARES
Shares of each Fund will be redeemed at the NAV (less any applicable CDSC
and/or federal income tax withholding) next determined after receipt of a
redemption request in good form on any day the New York Stock Exchange is open
for business.
<TABLE>
<CAPTION>
METHOD PROCEDURES
- -------------------------------- ----------------------------------------------------------------------------------------
<S> <C>
Redemption By Contacting Your Authorized Dealers may communicate redemption orders by wire or telephone to
Authorized Dealer the Distributor. These firms may charge for their services in connection with your
redemption request, but neither the Funds nor the Distributor imposes any such
charge.
Redemption By Mail A written request for redemption must be received by the Transfer Agent in order
to constitute a valid tender. If certificated shares have been issued, the certificate
must accompany the written request. The Transfer Agent may also require a signa-
ture guarantee by an eligible guarantor. It will also be necessary for corporate in-
vestors and other associations to have an appropriate certification on file
authorizing redemptions by a corporation or an association before a redemption
request will be considered in proper form. A suggested form of such certification
is provided on the New Account Application. If you are entitled to a CDSC
waiver, you must complete the CDSC waiver form in the New Account Applica-
tion. To determine whether a signature guarantee or other documentation is re-
quired, shareholders may call the Shareholder Servicing Agent at (800) 992-0180.
Expedited Redemption By Check
The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (maximum $100,000) mailed
to an address which has been on record with the Pilgrim Funds for at least 30
days. This privilege is automatically assigned to you unless you check the box on
the New Account Application which signifies that you do not wish to utilize such
option.
By Wire
The Expedited Redemption Privilege additionally allows you to effect a liquidation
from your account and have the proceeds (minimum $5,000) wired to your pre-
designated bank account. But, this aspect of the Expedited Redemption privilege
will NOT automatically be assigned to you. If you want to take advantage of this
aspect of the privilege, please check the appropriate box and attach a voided
check to the New Account Application. Under normal circumstances, proceeds
will be transmitted to your bank on the business day following receipt of
your instructions, provided redemptions may be made. To effect an Expedited Re-
demption, please call the Transfer Agent at (800) 992-0180 and select option 3. In
the event that share certificates have been issued, you may not request a wire re-
demption by telephone or wire. This option is not available for retirement
accounts.
</TABLE>
29
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount in excess of $100 made to
yourself, or to anyone else you properly designate, as long as the account has
a current value of at least $10,000. During the withdrawal period, you may
purchase additional shares for deposit to your account if the additional
purchases are equal to at least one year's scheduled withdrawals, or $1,200
whichever is greater. There are no separate charges to you under this Plan,
although a CDSC may apply if you purchased Class A or B shares.
The number of full and fractional shares equal in value to the amount of the
payment will be redeemed at NAV (less any applicable CDSC). Such 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. Shareholders who elect to have a
systematic cash withdrawal must have all dividends and capital gains
reinvested. To establish a systematic cash withdrawal, please complete the
Systematic Withdrawal Plan section of the New Account Application. To have
funds deposited to your bank account, follow the instructions on the New
Account Application.
You may change the amount, frequency and payee, or terminate this plan by
giving written notice to the Transfer Agent. As shares of a Fund are redeemed
under the Plan, you may realize a capital gain or loss for income tax purposes.
A Systematic Withdrawal Plan may be modified at any time by the Fund or
terminated upon written notice by you or the relevant Fund.
PAYMENTS. Payment to shareholders for shares redeemed or repurchased ordinarily
will be made within three days after receipt by the Transfer Agent of a written
request in good order. A Fund may delay the mailing of a redemption check until
the check used to purchase the shares being redeemed has cleared which may take
up to 15 days or more. To reduce such delay, all purchases should be made by
bank wire or federal funds. A Fund may suspend the right of redemption under
certain extraordinary circumstances in accordance with the Rules of the
Securities and Exchange Commission. 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. 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, 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.
MANAGEMENT OF THE FUNDS
MORE ABOUT THE FUNDS. Bank and Thrift Fund is the single series of Pilgrim Bank
and Thrift Fund, Inc., which is a registered investment company that was
incorporated in Maryland in November, 1985 as a closed-end, diversified
management investment company. 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.
MagnaCap Fund and High Yield Fund are series of Pilgrim Investment Funds, Inc.,
which is a registered investment company that was organized as a Maryland
corporation in July 1969.
MidCap Value Fund, LargeCap Leaders Fund and Asia-Pacific Equity Fund are
series of Pilgrim Advisory Funds, Inc., which is a registered investment
company that was organized as a Maryland corporation in April, 1995.
Government Securities Income Fund is the single series of Pilgrim Government
Securities Income Fund, Inc., which is a registered investment company that was
organized as a California corporation in May 1984.
Each Fund is governed by its Board of Directors, which oversees the operations
of the Fund. The majority of Directors are not affiliated with the Investment
Manager.
INVESTMENT MANAGER. The Investment Manager has overall responsibility for the
management of the Funds. Each Fund and the Investment Manager have entered into
an agreement that requires the Investment Manager to provide or oversee all
investment advisory and portfolio management services for the Fund.
30
<PAGE>
Each agreement also requires the Investment Manager to assist 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. The
Investment Manager provides the Funds with office space, equipment and
personnel necessary to administer the Funds. Each agreement with the Investment
Manager can be canceled by the Board of Directors of each Fund upon 60 days
written notice. Organized in December 1994, the Investment Manager is
registered as an investment adviser with the Securities and Exchange
Commission. The Investment Manager acquired certain assets of the previous
adviser to the Funds in a transaction that closed on April 7, 1995.
The Investment Manager and Pilgrim Securities, Inc. (Distributor), the Funds'
principal underwriter, are indirect, wholly owned subsidiaries of Pilgrim
America Capital Corporation (NASDAQ: PACC). Through its subsidiaries, Pilgrim
America Capital Corporation engages in the financial services business, focusing
on providing investment advisory, administrative and distribution services to
open-end and closed-end investment companies and private accounts. For more
information on Pilgrim America Capital Corporation please see each Fund's
Statement of Additional Information.
The Investment Manager bears its expenses of providing the services described
above. Bank and Thrift Fund pays the Investment Manager a fee at an annual rate
of 1.00% of the first $30,000,000 of average daily net assets, 0.75% of the
next $95,000,000 of average daily net assets, and 0.70% of average daily net
assets in excess of $125,000,000. These fees are computed and accrued daily and
paid monthly.
MagnaCap Fund pays the Investment Manager a fee at an annual rate of 1.00% of
the average daily net assets of the Fund up to $30 million; 0.75% of the
average daily net assets above $30 million to $250 million; 0.625% of the
average daily net assets above $250 million to $500 million; and 0.50% of the
average daily net assets in excess of $500 million.
High Yield Fund pays the Investment Manager a fee at an annual rate of 0.60% of
the average daily net assets of the Fund. LargeCap Leaders Fund and MidCap
Value Fund each pay the Investment Manager a fee at an annual rate of 1.00% of
the Fund's average daily net assets, and the Asia-Pacific Fund pay the
Investment Manager a fee at an annual rate of 1.25% of the Fund's average daily
net assets.
Government Securities Income Fund pays the Investment Manager a fee at an
annual rate of 0.50% of the average daily net assets of the Fund up to $500
million; 0.45% of the average daily net assets above $500 million to $1
billion; and 0.40% of the average daily net assets in excess of $1 billion. The
agreement with the Investment Manager for the Government Securities Income Fund
provides that the Investment Manager will reimburse the Government Securities
Income Fund to the extent that the gross operating costs and expenses of that
Fund, excluding any interest, taxes, brokerage commissions, amortization of
organizational expenses, extraordinary expenses, and distribution (Rule 12b-1)
fees on Class B and Class M shares in excess of an annual rate of 0.25% of the
average daily net assets of these classes, exceed 1.50% of the Fund's average
daily net asset value for the first $40 million of net assets and 1.00% of
average daily net assets in excess of $40 million for any one fiscal year. This
reimbursement policy cannot be changed unless the agreement is amended, which
would require shareholder approval.
The Investment Manager has entered into expense limitation agreements with
respect to certain of the Funds, 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 these Funds (excluding interest,
taxes, brokerage commissions, extraordinary expenses such as litigation, other
expenses not incurred in the ordinary course of such Fund's business, expenses
of any counsel or other persons or services retained by the Company's directors
who are not "interested persons" of the Investment Manager, and distribution
(12b-1) fees) do not exceed: 0.75% for High Yield Fund; 1.50% for LargeCap
Leaders Fund and MidCap Value Fund; and 1.75% for Asia-Pacific Equity Fund.
The expense limitation agreements provide that these expense limitations shall
continue until December 31, 1998 for High Yield Fund, LargeCap Leaders Fund,
MidCap Value Fund and Asia-Pacific Equity Fund. The Investment Manager may
extend, but may not shorten, the period of these limitations without the
consent of the Funds, so long as the extension is at the same expense
limitation amount discussed above. Each Fund described above 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
31
<PAGE>
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. Each expense limitation agreement will terminate
automatically upon termination of the respective investment management
agreement with the Investment Manager, and may be terminated by the Investment
Manager or the Fund upon 90 days written notice.
THE PORTFOLIO MANAGERS. For Asia-Pacific Equity Fund and MidCap Value Fund, the
Investment Manager has engaged two of the most respected institutional
investment advisers in the world. For portfolios similar to these Funds, these
firms usually require large investment minimums to open an account, and their
services for these types of portfolios are typically available only to wealthy
individuals and large institutional clients. The Portfolio Managers 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.
ASIA-PACIFIC EQUITY FUND. HSBC Asset Management Americas Inc. and HSBC Asset
Management Hong Kong Limited (collectively, HSBC) serve jointly as Portfolio
Manager to the 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
$49 billion of assets worldwide for a wide variety of institutional, retail and
private clients, with a minimum investment size for private accounts of $10
million for Asia-Pacific investors. 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.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
Ian Burden, Chief Investment Officer, HSBC Hong Kong, and Man Wing Chung,
Director, 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. Burden has been with HSBC for 17 years, and
has 24 years investment experience. Mr. Chung has been with HSBC for 5 years,
and has 10 years investment experience.
MIDCAP VALUE FUND. Cramer Rosenthal McGlynn, LLC. (CRM) serves as Portfolio
Manager to the MidCap Value Fund. CRM's predecessor was founded in 1973 to
manage portfolios for a select number of high net worth individuals and their
related foundations, endowment funds, pension plans and other entities, and CRM
currently manages approximately $4 billion for more than 200 individual and
institutional clients, with a minimum investment size for private accounts of
$5 million. The three founding principals of CRM have each spent over 35 years
in the investment business. The firm has managed investments in small and
middle capitalization companies for years. Accounts managed by Cramer
Rosenthal own in the aggregate approximately % of the outstanding voting
securities of Pilgrim.
Gerald B. Cramer, Chairman of CRM, Edward D. Rosenthal, Vice Chairman of CRM,
Ronald H. McGlynn, Manager, President and Chief Executive Officer of CRM, Jay
B. Abramson, Executive Vice President and Director of Research of CRM, and
Michael Prober, Portfolio Manager and Research Analyst, are primarily
responsible for portfolio management of MidCap Value Fund. Messrs. Cramer,
Rosenthal and McGlynn founded CRM's predecessor in 1973. Mr. Abramson has been
with CRM or its predecessor for 13 years. Mr. Prober has been with CRM for 6
years.
Each Portfolio Manager serves the pertinent Fund under an agreement with the
Investment Manager. Each Portfolio Manager has discretion to purchase and sell
securities for the portfolio of its respective Fund in accordance with that
Fund's objectives, policies and restrictions. Although the Portfolio Managers
are subject to the general supervision by the Board of Directors and the
Investment Manager, the Board and/or the Investment Manager do not evaluate the
investment merits of specific securities transactions. The agreement with each
Portfolio Manager may be terminated by the Board of Directors of the Funds, by
the Investment Manager or by the Portfolio Manager. Thus, it is possible that
in the future, one or more of the current Portfolio Managers would no longer be
engaged for a Fund. It is not anticipated that Portfolio Managers will be
replaced in the ordinary course of operations.
32
<PAGE>
As compensation for their services to the Funds, the Investment Manager (and
not the Fund) pays HSBC and CRM fees at annual rates of 0.50% of the average
daily net assets of the Asia-Pacific Equity and MidCap Value Funds,
respectively.
INVESTMENT PERSONNEL
HOWARD N. KORNBLUE, Senior Vice President, Head of Equity and Senior Portfolio
Manager for the Investment Manager. Mr. Kornblue is a co-manager of MagnaCap
Fund and has served as a portfolio manager of MagnaCap Fund since 1989. Prior
to joining Pilgrim Group (and its predecessor) in 1986, Mr. Kornblue was Vice
President, Director of Research and Portfolio Manager at First Wilshire
Securities Management; supervised mergers and acquisitions for Getty Oil
Company; was portfolio manager and research analyst in both the fixed-income
and equity departments for Western Asset Management Company; and was research
analyst and pension fund manager at Southern California Edison Company. Mr.
Kornblue received a B.S. from U.C.L.A., and M.S. and M.B.A. from U.S.C.
CARL DORF, C.F.A., 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 the Investment Manager's predecessor. Mr. Dorf is also a Senior Vice
President of the Investment Manager. Prior to joining the Investment Manager's
predecessor, he was a principal of Dorf & Associates Investment Counsel. His 35
plus years of portfolio management and research experience include positions
with Moody's Investors Service, Inc., as an analyst in the Banking & Finance
Department; with Nuveen Corp. as a financial securities analyst; with Loews
Corp. as a fund manager with responsibility for $150 to $250 million in utility
and financial stocks; with BA Investment Management Corp. as a senior financial
stock analyst; and with RNC Capital Management as manager of 150 individual,
pension, and profit-sharing accounts. A Chartered Financial Analyst, Mr. Dorf
earned both BBA/Finance and Investments and MBA/Finance and Investments degrees
from the Bernard Baruch School of Business and Public Administration, The City
College of New York.
G. DAVID UNDERWOOD, C.F.A., Vice President, Director of Research and Senior
Portfolio Manager for the Investment Manager, is a co-manager of MagnaCap Fund
and Portfolio Manager of LargeCap Leaders Fund. Prior to joining the Investment
Manager 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 and two years
with C.S. McKee Investment Advisors as a Portfolio Manager. A Chartered
Financial Analyst and past president of the Pittsburgh Society of Financial
Analysts, Mr. Underwood received his B.S. degree from Arizona State University
and has done graduate work in economics and finance at Washington and Jefferson
College. He is a graduate of Pennsylvania Bankers Trust School.
JEFFERY B. CROSS, Vice President of the Investment Manager, is a co-manager of
MagnaCap Fund. Mr. Cross joined Pilgrim in August 1997 from Delta Ventures
Financial Council, Inc., where he was in charge of equity analysis. Prior to
joining Delta Ventures in 1991, he was executive vice president of a
manufacturing engineer consulting firm. Mr. Cross began his business career in
the 1970's working as a junior equity analyst for John Cross & Associates, an
SEC-registered investment advisor in Cincinnati, Ohio. He is an advisory
director of the CAD Institute. Mr. Cross has three Magna Cum Laude Bachelor of
Science degrees from Miami University, Oxford, Ohio, in Chemistry, Physics, and
Mathematics. He has a masters degree from Stanford University and has done
post-graduate work in business and chemical engineering at Arizona State
University.
KEVIN G. MATHEWS, Senior Vice President and Senior Portfolio Manager of the
Investment Manager, 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 the Investment
Manager, Mr. Mathews was a Vice President and Senior Portfolio Manager with Van
Kampen American Capital. Since 1987, Mr. Mathews' responsibilities included the
management of open-end high yield bond funds, two New York Stock Exchange
listed closed-end bond funds, variable annuity high yield products and
individual institutional high yield asset managed accounts. In a prior
position, Mr. Mathews was a high yield portfolio fixed income credit analyst.
Mr. Mathews received a B.A. from the University of Illinois and an M.B.A. from
Drake University.
33
<PAGE>
CHARLES G. ULLERICH, C.F.A. and C.I.A., Vice President of the Investment
Manager, has served as Portfolio Manager of Government Securities Income Fund
since September 1996 and served as Assistant Portfolio Manager of that Fund
from August 1995 to September 1996. Prior to joining Pilgrim Group, Mr.
Ullerich was Vice President of Treasury Services for First Liberty Bank of
Macon, GA, where he was Portfolio Manager for a conservatively-managed $150
million mortgage and treasury securities portfolio, since 1991. Before that, he
was an internal auditor for Georgia Federal Bank in Atlanta. Mr. Ullerich
received a B.S. from Arizona State University, and he holds the professional
designations of Chartered Financial Analyst and Certified Internal Auditor. He
is Past President of the Georgia Chapter of the Arizona State University Alumni
Association.
DISTRIBUTOR. In addition to providing for the expenses discussed above, the
Rule 12b-1 Plan also recognizes that the Investment Manager may use its
investment management fees or other resources to pay expenses associated with
activities primarily intended to result in the promotion and distribution of
the Funds' shares. The Distributor will, from time to time, pay to Authorized
Dealers in connection with the sale or distribution of shares of a Fund
material compensation in the form of merchandise or trips. Salespersons and any
other person entitled to receive any compensation for selling or servicing Fund
shares may receive different compensation with respect to one particular class
of shares over another in a Fund.
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.
PORTFOLIO TRANSACTIONS. The Investment Manager, or Portfolio Manager in the
case of MidCap Value Fund and Asia-Pacific Equity Fund, will place orders to
execute securities transactions that are designed to implement each Fund's
investment objectives and policies. The Investment Manager, or Portfolio
Manager, will use its reasonable efforts to place all purchase and sale
transactions with brokers, dealers and banks (`brokers') that provide `best
execution' of these orders. In placing purchase and sale transactions, the
Investment Manager, or Portfolio Managers, may consider brokerage and research
services provided by a broker to Portfolio Manager or the Investment Manager or
their affiliates, and a Fund may pay a commission for effecting a securities
transaction that is in excess of the amount another broker would have charged
if the Investment Manager or Portfolio Manager determines in good faith that
the amount of commission is reasonable in relation to the value of the
brokerage and research services provided by the broker. Consistent with this
policy, portfolio transactions may be executed by brokers affiliated with a
Portfolio Manager or the Investment Manager, 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. In
addition, the Investment Manager or Portfolio Manager may place securities
transactions with brokers that provide certain services to a Fund. The
Investment Manager or Portfolio Manager also may consider a broker's sale of
Fund shares if the Investment Manager is satisfied that the Fund would receive
best execution of the transaction from that broker.
DIVIDENDS, DISTRIBUTIONS & TAXES
DIVIDENDS AND DISTRIBUTIONS. In the case of Bank and Thrift Fund, MidCap Value
Fund, LargeCap Leaders Fund, and Asia-Pacific Equity Fund, dividends and
distributions from net investment income and capital gains, if any, will be
paid at least annually. MagnaCap Fund makes semi-annual payments from net
investment income and one or more payments from net realized capital gains, if
any. High Yield Fund and Government Securities Income Fund each have a policy
of paying monthly dividends from their net investment income, and paying
capital gains, if any, annually. Dividends and distributions will be determined
on a class basis.
Any dividends and distributions paid by a Fund will be automatically reinvested
in additional shares of the respective class of that Fund, unless you elect to
receive distributions in cash. When a dividend or distribution is paid, the NAV
per share is reduced by the amount of the payment.
You may, upon written request or by completing the appropriate section of the
New Account Application in this Prospectus, elect to have all dividends and
other distributions paid on a Class A, B or M account in
34
<PAGE>
a Fund invested into a Pilgrim Fund which offers Class A, B or M shares. Both
accounts must be of the same class. 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 which offers Class A, B, or M
shares. Distributions are invested into the selected funds at the net asset
value as of the payable date of the distribution only if shares of such
selected funds have been registered for sale in the investor's state.
FEDERAL TAXES. Each Fund intends to operate as a `regulated investment company'
under the Internal Revenue Code. To qualify, a Fund must meet certain income,
asset diversification and distribution requirements. In any fiscal year in
which a Fund so qualifies and distributes to shareholders all of its taxable
income and gains, the Fund itself generally is relieved of federal income and
excise taxes.
Dividends paid out of a Fund's investment company taxable income (including
dividends, interest and short-term capital gains) will be taxable to a U.S.
shareholder as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Fund may be eligible for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses), if any, designated as capital gain
dividends will be taxable as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares.
All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Early each year, you will be notified as to the amount and federal
tax status of all dividends and capital gains paid during the prior year. Such
dividends and capital gains may also be subject to state or local taxes.
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.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a gain or loss which will be a capital gain or loss if the shares are
held as a capital asset and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.
If you have not furnished a certified correct taxpayer identification number
(generally your Social Security number) and have not certified that withholding
does not apply, or if the Internal Revenue Service has notified the Fund that
the taxpayer identification number listed on your account is incorrect
according to their records or that you are subject to backup withholding,
federal law generally requires the Fund to withhold 31% from any dividends
and/or redemptions (including exchange redemptions). Amounts withheld are
applied to your federal tax liability; a refund may be obtained from the
Service if withholding results in overpayment of taxes. Federal law also
requires the Fund to withhold 30% or the applicable tax treaty rate from
ordinary dividends paid to certain nonresident alien, non-U.S. partnership and
non-U.S. corporation shareholder accounts.
Certain of the Funds, and in particular Asia-Pacific Equity Fund, may make
investments outside the U.S. If a Fund has income from sources within foreign
countries, that income may be subject to withholding and other taxes imposed by
such countries, which could reduce the Fund's investment income.
This is a brief summary of some of the tax laws that affect your investment in
a Fund. Please see each Fund's Statement of Additional Information and your tax
adviser for further information.
35
<PAGE>
PERFORMANCE INFORMATION
From time to time, a Fund may advertise its average annual total return over
various periods of time as well as the Fund's current yield. The total return
figures show the average percentage change in value of an investment in the
Fund from the beginning date of the measuring period. The 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).
Total returns and current yield are based on past results and are not
necessarily a prediction of future performance. The Fund will compute its yield
by dividing its net investment income per share during a 30-day base period by
the maximum offering price on the last day of the base period. This 30-day
yield is then compounded over six monthly periods and multiplied by two to
provide an annualized yield.
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.
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.
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS. Each Fund's Articles of Incorporation permit the
Directors to authorize the creation of additional series, each of which may
issue separate classes of shares. A Fund may be terminated and liquidated under
certain circumstances.
SHAREHOLDERS HAVE CERTAIN VOTING RIGHTS. Each share of each Fund is given one
vote. Matters such as approval of new investment advisory agreements and
changes in fundamental policies of a Fund will require the affirmative vote of
the shareholders of that Fund. Matters affecting a certain class of a Fund will
only be voted on by shareholders of that particular class and Fund. The Funds
are not required to hold annual shareholder meetings, although special
shareholder meetings may be held from time to time.
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
The following tables present condensed financial information about each Fund.
The tables present historical information based upon a share outstanding
through each Fund's fiscal year. This information has been derived from the
financial statements that are in the Funds' Annual Report dated as of June 30,
1998. Further information about each Fund's performance is contained in the
Funds' Annual Report, which may be obtained without charge.
36
<PAGE>
PILGRIM BANK AND THRIFT FUND
For 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 Peat Marwick
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>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------
JUNE 30, 1998* 1997**
----------------------------- --------------------------
CLASS A CLASS B CLASS A CLASS B(a)
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
beginning of year $ 25.87 $ 25.85 $ 17.84 $ 25.25
------------ ------------ --------- ------------
Income (loss) from investment
operations:
Net investment income 0.11 0.01 0.34 0.04
Net realized and unrealized
gain (loss) on investments 1.54 1.54 10.83 2.92
------------ ------------ --------- ------------
Total from investment operations 1.65 1.55 11.17 2.96
------------ ------------ --------- ------------
Less distributions:
Net investment income -- -- 0.31 0.04
Excess of net investment in-
come -- -- -- --
Realized capital gains -- -- 2.65 2.04
Tax return of capital -- -- 0.18 0.28
------------ ------------ --------- ------------
Total distributions 0.00 0.00 3.14 2.36
------------ ------------ --------- ------------
Other:
Reduction in net asset value
from rights offering -- -- -- --
------------ ------------ --------- ------------
Net asset value, end of year $ 27.52 $ 27.40 $ 25.87 $ 25.85
============ ============ ========= ============
Closing market price, end of year -- -- -- --
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) -- -- -- --
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(e) 6.38% 6.00% 64.86% 11.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($millions) $ 549 $ 360 $ 383 $ 76
Ratios to average net assets:
Expenses 1.20%(h) 1.95%(h) 1.10% 1.89%(h)
Net investment income 0.94%(h) 0.19%(h) 1.39% 0.99%(h)
Portfolio turnover rate 2% 2% 22% 22%
Average commission rate paid(i) $ 0.023 $ 0.023 $ 0.013 $ 0.013
<CAPTION>
1996 1995(b) 1994 1993 1992 1991
------------ ------------ ------------ -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
beginning of year $ 14.83 $ 10.73 $ 11.87 $ 12.46 $ 10.12 $ 7.49
--------- --------- ---------- ----------- ------------ ---------
Income (loss) from investment
operations:
Net investment income 0.32 0.31 0.26 0.26 0.22 0.24
Net realized and unrealized
gain (loss) on investments 5.18 4.78 (0.53) 0.75 2.93 3.33
--------- --------- ---------- ----------- ------------ ---------
Total from investment operations 5.50 5.09 (0.27) 1.01 3.15 3.57
--------- --------- ---------- ----------- ------------ ---------
Less distributions:
Net investment income 0.32 0.31 0.26 0.26 0.22 0.24
Excess of net investment in-
come 0.03 0.03 -- -- -- --
Realized capital gains 2.14 0.65 0.65 0.73 0.47 --
Tax return of capital -- -- -- -- 0.12 0.70
--------- --------- ---------- ----------- ------------ ---------
Total distributions 2.49 0.99 0.87 0.99 0.81 0.94
--------- --------- ---------- ----------- ------------ ---------
Other:
Reduction in net asset value
from rights offering -- -- -- (0.61) -- --
--------- --------- ---------- ----------- ------------ ---------
Net asset value, end of year $ 17.84 $ 14.83 $ 10.73 $ 11.87 $ 12.46 $ 10.12
========= ========= ========== =========== ============ =========
Closing market price, end of year $ 15.75 $ 12.88 $ 9.13 $ 10.88 $ 11.63 $ 9.50
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) 43.48% 52.81% (8.85)% 1.95%(d) 31.53% 47.52%
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(e) 41.10% 49.69% (1.89)% 7.79%(f) 32.36%(g) 49.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($millions) $ 252 $ 210 $ 152 $ 168 $ 141 $ 101
Ratios to average net assets:
Expenses 1.01% 1.05% 1.28% 0.91% 1.24% 1.31%
Net investment income 1.94% 2.37% 2.13% 2.08% 2.00% 2.68%
Portfolio turnover rate 21% 13% 14% 17% 20% 31%
Average commission rate paid(i) -- -- -- -- -- --
<CAPTION>
1990 1989 1988
------------ ------------ ------------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value,
beginning of year $ 10.26 $ 9.54 $ 8.17
---------- --------- ---------
Income (loss) from investment
operations:
Net investment income 0.31 0.30 0.31
Net realized and unrealized
gain (loss) on investments (2.20) 1.50 1.43
---------- --------- ---------
Total from investment operations (1.89) 1.80 1.74
---------- --------- ---------
Less distributions:
Net investment income 0.31 0.31 0.37
Excess of net investment in-
come -- -- --
Realized capital gains -- 0.44 --
Tax return of capital 0.57 0.33 --
---------- --------- ---------
Total distributions 0.88 1.08 0.37
---------- --------- ---------
Other:
Reduction in net asset value
from rights offering -- -- --
---------- --------- ---------
Net asset value, end of year $ 7.49 $ 10.26 $ 9.54
========== ========= =========
Closing market price, end of year $ 7.13 $ 9.13 $ 7.75
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) (12.45)% 32.25% 30.17%
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(e) (18.14)% 20.79% 22.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($millions) $ 75 $ 103 $ 96
Ratios to average net assets:
Expenses 1.29% 1.26% 1.18%
Net investment income 3.59% 4.15% 3.28%
Portfolio turnover rate 46% 63% 43%
Average commission rate paid(i) -- -- --
</TABLE>
Footnotes on next page
37
<PAGE>
PILGRIM BANK AND THRIFT FUND
(Continued)
* Effective June 30, 1998, Bank and Thrift Fund changed its year end to
June 30.
** The Fund converted from a closed-end investment company to an open-end
investment company on October 17, 1997.
(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 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.
(i) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
38
<PAGE>
PILGRIM MAGNACAP FUND
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG Peat Marwick LLP, independent
auditors. For all periods ending prior to July 1, 1994, the financial
information was audited by another independent auditor.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995(a)
----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.92 $ 16.69 $ 14.03 $ 12.36
------- ------- ---------- ----------
Income from investment
operations:
Net investment income (loss) 0.04 0.10 0.09 0.12
Net realized and unrealized gain
on investments 3.02 4.16 2.87 2.29
------- ------- ---------- ----------
Total from investment operations 3.06 4.26 2.96 2.41
------- ------- ---------- ----------
Less distributions from:
Net investment income 0.04 0.10 0.06 0.14
Distributions in excess of net
investment income 0.02 0.02 -- --
Realized gains on investment 1.85 4.91 0.24 0.60
------- ------- ---------- ----------
Total distributions 1.91 5.03 0.30 0.74
------- ------- ---------- ----------
Net asset value, end of period $ 17.07 $ 15.92 $ 16.69 $ 14.03
======== ======== ========== ==========
TOTAL RETURN(c) 20.53% 30.82% 21.31% 20.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $348,759 $290,355 $ 235,393 $ 211,330
Ratios to average net assets:
Expenses 1.37% 1.46% 1.68% 1.59%
Net investment income 0.29% 0.64% 0.54% 0.98%
Portfolio turnover rate 53% 77% 15% 6%
Average commission rate paid(e) $ 0.0422 $ 0.0686 -- --
<CAPTION>
1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.05 $ 11.98 $ 10.93 $ 10.74 $ 10.52 $ 9.12
---------- ---------- ---------- -------- --------- ---------
Income from investment
operations:
Net investment income (loss) 0.15 0.14 0.13 0.20 0.15 0.17
Net realized and unrealized gain
on investments 0.89 0.82 1.16 0.33 1.24 1.39
---------- ---------- ---------- -------- --------- ---------
Total from investment operations 1.04 0.96 1.29 0.53 1.39 1.56
---------- ---------- ---------- -------- --------- ---------
Less distributions from:
Net investment income 0.14 0.12 0.24 0.16 0.17 0.16
Distributions in excess of net
investment income -- -- -- -- -- --
Realized gains on investment 0.59 0.77 -- 0.18 1.00 --
---------- ---------- ---------- -------- --------- ---------
Total distributions 0.73 0.89 0.24 0.34 1.17 0.16
---------- ---------- ---------- -------- --------- ---------
Net asset value, end of period $ 12.36 $ 12.05 $ 11.98 $ 10.93 $ 10.74 $ 10.52
========== ========== ========== ======== ========= =========
TOTAL RETURN(c) 9.13% 8.21% 11.93% 5.21% 13.84% 17.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 190,435 $ 197,250 $ 196,861 $199,892 $ 224,059 $ 204,552
Ratios to average net assets:
Expenses 1.53% 1.53% 1.60% 1.50% 1.50% 1.60%
Net investment income 1.16% 1.09% 1.20% 2.00% 1.40% 1.80%
Portfolio turnover rate 7% 36% 49% 182% 12% 1.29%
Average commission rate paid(e) -- -- -- -- -- --
</TABLE>
- ------------
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) 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.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
39
<PAGE>
PILGRIM MAGNACAP FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b)TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.81 $ 16.59 $ 14.22
--------- --------- -------------
Income from investment operations:
Net investment income (loss) (0.04) -- 0.06
Net realized and unrealized gain on investments 2.97 4.13 2.61
--------- --------- -------------
Total from investment operations 2.93 4.13 2.67
--------- --------- -------------
Less distributions from:
Net investment income -- -- 0.06
Distributions in excess of net investment income 0.03 -- --
Realized gains on investment 1.85 4.91 0.24
--------- --------- -------------
Total distributions 1.88 4.91 0.30
--------- --------- -------------
Net asset value, end of period $ 16.86 $ 15.81 $ 16.59
========= ========= =============
TOTAL RETURN(c) 19.76% 29.92% 18.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 77,787 $ 37,427 $ 10,509
Ratios to average net assets:
Expenses 2.07% 2.16% 2.38%(d)
Net investment income (0.41)% (0.04)% 0.07%(d)
Portfolio turnover rate 53% 77% 15%
Average commission rate paid(e) $ 0.0422 $ 0.0686 --
<CAPTION>
CLASS M
-----------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.87 $ 16.63 $ 14.22
--------- ------- ------------
Income from investment operations:
Net investment income (loss) -- 0.02 0.08
Net realized and unrealized gain on investments 2.98 4.16 2.63
--------- ------- ------------
Total from investment operations 2.98 4.18 2.71
--------- ------- ------------
Less distributions from:
Net investment income -- 0.02 0.06
Distributions in excess of net investment income 0.05 0.01 --
Realized gains on investment 1.85 4.91 0.24
--------- ------- ------------
Total distributions 1.90 4.94 0.30
--------- ------- ------------
Net asset value, end of period $ 16.95 $ 15.87 $ 16.63
========= ======= ============
TOTAL RETURN(C) 20.00% 30.26% 19.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 14,675 $ 6,748 $ 1,961
Ratios to average net assets:
Expenses 1.82% 1.91% 2.13%(d)
Net investment income (0.16)% 0.22% 0.32%(d)
Portfolio turnover rate 53% 77% 15%
Average commission rate paid(e) $ 0.0422 $0.0686 --
</TABLE>
- ------------
(a) 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.
(b) Commencement of offering of shares.
(c) 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.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
40
<PAGE>
PILGRIM MIDCAP VALUE FUND
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a)
------------- ------------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.64 $ 11.99 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.07) (0.02) 0.13
Net realized and unrealized gain on investments 2.71 2.85 1.91
--------- --------- ----------
Total from investment operations 2.64 2.83 2.04
--------- --------- ----------
Less distributions:
Net investment income -- -- 0.05
In excess of net investment income -- 0.07 --
Realized gains on investments 0.49 0.11 --
--------- --------- ----------
Total distributions 0.49 0.18 0.05
--------- --------- ----------
Net asset value, end of period $ 16.79 $ 14.64 $ 11.99
========= ========= ==========
TOTAL RETURN (b) 18.40% 23.89% 20.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 27,485 $ 16,985 $ 2,389
Ratios to average net assets:
Expenses (c)(d)(e) 1.75% 1.75% 1.75%(f)
Net investment income (loss) (c)(d)(e) (0.53)% (0.13)% 2.00%(f)
Portfolio turnover rate 85% 86% 60%(f)
Average commission rate paid (g) $ 0.0421 $ 0.0592 --
<CAPTION>
CLASS B CLASS M
------------------------------------------ -----------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR TEN MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a) 1998 1997 1996 (a)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.49 $ 11.94 $ 10.00 $ 14.49 $ 11.93 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.18) (0.05) 0.07 (0.15) (0.03) 0.06
Net realized and unrealized gain on investments 2.65 2.76 1.90 2.67 2.76 1.91
-------- -------- ---------- --------- --------- ----------
Total from investment operations 2.47 2.71 1.97 2.52 2.73 1.97
-------- -------- ---------- --------- --------- ----------
Less distributions:
Net investment income -- -- 0.03 -- -- 0.04
In excess of net investment income -- 0.05 -- -- 0.06 --
Realized gains on investments 0.49 0.11 -- 0.49 0.11 --
-------- -------- ---------- --------- --------- ----------
Total distributions 0.49 0.16 0.03 0.49 0.17 0.04
-------- -------- ---------- --------- --------- ----------
Net asset value, end of period $ 16.47 $ 14.49 $ 11.94 $ 16.52 $ 14.49 $ 11.93
======== ======== ========== ========= ========= ==========
TOTAL RETURN (b) 17.40% 22.95% 19.80% 17.76% 23.21% 19.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 40,575 $ 23,258 $ 2,123 $ 13,232 $ 8,378 $ 1,731
Ratios to average net assets:
Expenses (c)(d)(e) 2.50% 2.50% 2.50%(f) 2.25% 2.25% 2.25%(f)
Net investment income (loss) (c)(d)(e) (1.28)% (0.90)% 1.27%(f) (1.03)% (0.63)% 1.16%(f)
Portfolio turnover rate 85% 86% 60%(f) 85% 86% 60%(f)
Average commission rate paid (g) $ 0.0421 $ 0.0592 -- $ 0.0421 $ 0.0592 --
</TABLE>
- ------------
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1998, the ratios of expenses to average net assets were 1.78%,
2.53% and 2.28% and the ratios of net investment income (loss) to
average net assets were (0.57)%, (1.32)% and (1.07)% for Class A, B and
M shares, respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1997, the ratios of expenses to average net assets were 1.94%,
2.69% and 2.44% and the ratios of net investment income (loss) to
average net assets were (0.32)%, (1.11)% and (0.81)% for Class A, B and
M shares, respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1996, the annualized ratios of expenses to average net assets
were 4.91%, 5.32% and 4.72% and the annualized ratios of net investment
income (loss) to average net assets were (1.17)%, (1.56)% and (1.32)%
for Class A, B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
41
<PAGE>
PILGRIM LARGECAP LEADERS FUND*
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.17 $ 11.77 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.01 0.06 0.07
Net realized and unrealized gain on investments 2.30 2.63 1.87
------- ------- -------------
Total from investment operations 2.31 2.69 1.94
------- ------- -------------
Less distributions:
Net investment income -- -- 0.07
In excess of net investment income -- 0.05 0.01
Realized gains on investments 1.59 0.24 0.09
In excess of realized gains 0.19 -- --
------- ------- -------------
Total distributions 1.78 0.29 0.17
------- ------- -------------
Net asset value, end of period $ 14.70 $ 14.17 $ 11.77
======= ======= =============
TOTAL RETURN (b) 17.71% 23.24% 19.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 7,606 $ 8,961 $ 2,530
Ratios to average net assets:
Expenses (c)(d)(e) 1.75% 1.75% 1.75%(f)
Net investment income (loss) (c)(d)(e) 0.03% 0.41% 0.65%(f)
Portfolio turnover rate 78% 86% 59%(f)
Average commission rate paid (g) $0.0518 $0.0586 --
<CAPTION>
CLASS B CLASS M
--------------------------------------- --------------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR TEN MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a) 1998 1997 1996 (a)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.04 $ 11.71 $ 10.00 $ 14.10 $ 11.73 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.10) (0.02) 0.06 (0.07) -- 0.06
Net realized and unrealized gain on investments 2.28 2.59 1.81 2.30 2.62 1.83
--------- --------- ------------ --------- --------- -----------
Total from investment operations 2.18 2.57 1.87 2.23 2.62 1.89
--------- --------- ------------ --------- --------- -----------
Less distributions:
Net investment income -- -- 0.06 -- -- 0.06
In excess of net investment income -- -- 0.01 -- 0.01 0.01
Realized gains on investments 1.59 0.24 0.09 1.59 0.24 0.09
In excess of realized gains 0.19 -- -- 0.19 -- --
--------- --------- ------------ --------- --------- -----------
Total distributions 1.78 0.24 0.16 1.78 0.25 0.16
--------- --------- ------------ --------- --------- -----------
Net asset value, end of period $ 14.44 $ 14.04 $ 11.71 $ 14.55 $ 14.10 $ 11.73
========= ========= ============ ========= ========= ===========
TOTAL RETURN (b) 16.91% 22.23% 18.85% 17.20% 22.58% 19.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 15,605 $ 13,611 $ 1,424 $ 5,533 $ 4,719 $ 1,240
Ratios to average net assets:
Expenses (c)(d)(e) 2.50% 2.50% 2.50%(f) 2.25% 2.25% 2.25%(f)
Net investment income (loss) (c)(d)(e) (0.72)% (0.35)% (0.25)%(f) (0.47)% (0.10)% 0.06%(f)
Portfolio turnover rate 78% 86% 59%(f) 78% 86% 59%(f)
Average commission rate paid (g) $ 0.0518 $ 0.0586 -- $ 0.0518 $ 0.0586 --
</TABLE>
- ------------
* Effective November 1, 1997, Pilgrim Investments, Inc. assumed the
portfolio investment responsibilities of the Fund from ARK Asset
Management Company, Inc.
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1998, the ratios of expenses to average net assets were 2.28%,
3.03% and 2.78% and the ratios of net investment income (loss) to
average net assets were (0.50)%, (1.25)% and (1.00)% for Class A, B and
M shares, respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1997, the ratios of expenses to average net assets were 2.33%,
3.08% and 2.83% and the ratios of net investment income (loss) to
average net assets were (0.18)%, (0.91)% and (0.68)% for Class A, B and
M shares, respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1996, the annualized ratios of expenses to average net assets
were 5.44%, 5.79% and 5.90% and the annualized ratios of net investment
income (loss) to average net assets were (3.04)%, (3.53)% and (3.59)%
for Class A, B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
42
<PAGE>
PILGRIM ASIA-PACIFIC EQUITY FUND
The information in the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (a)
------------- ------------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.93 $ 10.35 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.03 0.02 0.03
Net realized and unrealized gain (loss) on invest-
ments and foreign currency transactions (6.50) 0.58 0.34
---------- ------- -----------
Total from investment operations (6.47) 0.60 0.37
---------- ------- -----------
Less distributions:
Net investment income -- -- --
In excess of net investment income -- -- 0.02
Realized gains on investments -- -- --
Tax return of capital -- 0.02 --
---------- ------- -----------
Total distributions -- 0.02 0.02
---------- ------- -----------
Net asset value, end of period $ 4.46 $ 10.93 $ 10.35
========== ======= ===========
TOTAL RETURN (b) (59.29)% 5.78% 3.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 11,796 $32,485 $ 18,371
Ratios to average net assets:
Expenses (c)(d)(e) 2.00% 2.00% 2.00%(f)
Net investment income (loss) (c)(d)(e) 0.38% 0.00% 0.33%(f)
Portfolio turnover rate 81% 38% 15%
Average commission rate paid (g) $ 0.0081 $0.0096 --
<CAPTION>
CLASS B CLASS M
-------------------------------------- ----------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR TEN MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996 (A) 1998 1997 1996 (a)
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.83 $ 10.31 $ 10.00 $ 10.86 $ 10.32 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.03) (0.07) (0.01) -- (0.05) --
Net realized and unrealized gain (loss) on invest-
ments and foreign currency transactions (6.43) 0.59 0.32 (6.46) 0.59 0.33
-------- --------- ---------- -------- -------- --------
Total from investment operations (6.46) 0.52 0.31 (6.46) 0.54 0.33
-------- --------- ---------- -------- -------- --------
Less distributions:
Net investment income -- -- -- -- -- --
In excess of net investment income -- -- -- -- -- 0.01
Realized gains on investments -- -- -- -- -- --
Tax return of capital -- -- -- -- -- --
-------- --------- ---------- -------- -------- --------
Total distributions -- -- -- -- -- 0.01
-------- --------- ---------- -------- -------- --------
Net asset value, end of period $ 4.37 $ 10.83 $ 10.31 $ 4.40 $ 10.86 $ 10.32
======== ========= ========== ======== ======== ========
TOTAL RETURN (b) (59.65)% 5.04% 3.19% (59.48)% 5.26% 3.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 9,084 $ 30,169 $ 17,789 $ 4,265 $ 11,155 $ 6,476
Ratios to average net assets:
Expenses (c)(d)(e) 2.75% 2.75% 2.75%(f) 2.50% 2.50% 2.50%(f)
Net investment income (loss) (c)(d)(e) (0.39)% (0.79)% (0.38)%(f) (0.07)% (0.55)% (0.16)%(f)
Portfolio turnover rate 81% 38% 15% 81% 38% 15%
Average commission rate paid (g) $ 0.0081 $ 0.0096 -- $ 0.0081 $ 0.0096 --
</TABLE>
- ------------
(a) The Fund commenced operations on September 1, 1995.
(b) 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.
(c) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1998, the ratios of expenses to average net assets were 2.80%,
3.55% and 3.30% and the ratios of net investment income (loss) to
average net assets were (0.42)%, (1.19)% and (0.88)% for Class A, B and
M shares, respectively.
(d) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1997, the ratios of expenses to average net assets were 2.54%,
3.29% and 3.04% and the ratios of net investment income (loss) to
average net assets were (0.53)%, (1.33)% and (1.09)% for Class A, B and
M shares, respectively.
(e) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1996, the annualized ratios of expenses to average net assets
were 3.47%, 4.10% and 3.88% and the annualized ratios of net investment
income (loss) to average net assets were (1.14)%, (1.73)% and (1.53)%
for Class A, B and M shares, respectively.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades
on which commissions are charged.
43
<PAGE>
PILGRIM HIGH YIELD FUND
For the fiscal years ended June 30, 1998, 1997 and 1996 and the eight-month
period ended June 30, 1995, the information in the table below has been audited
by KPMG Peat Marwick LLP, independent auditors. For all periods ending prior to
November 1, 1994, the financial information was audited by another independent
auditor. Information for High Yield Fund for the fiscal years ended October 31,
1986 through October 31, 1989 was not included in such Fund's 1994 financial
statements.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
EIGHT
MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------------ JUNE 30,
1998 1997 1996 1995(a)(b)
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.80 $ 6.36 $ 6.15 $ 5.95
Income (loss) from
investment operations:
Net investment income 0.61 0.61 0.59 0.35
Net realized and unrealized
gain (loss) on investments 0.16 0.43 0.16 0.21
-------- ------- ------- -----------
Total from investment operation 0.77 1.04 0.75 0.56
-------- ------- ------- -----------
Less distributions from:
Net investment income 0.63 0.60 0.54 0.36
Distributions in excess of net
investment income -- -- -- --
-------- ------- ------- -----------
Total distributions 0.63 0.60 0.54 0.36
-------- ------- ------- -----------
Net asset value, end of period $ 6.94 $ 6.80 $ 6.36 $ 6.15
======== ======= ======= ===========
TOTAL RETURN(d) 11.71% 17.14% 12.72% 9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $102,424 $35,940 $18,691 $ 15,950
Ratios to average net assets:
Expenses(e)(f)(g) 1.00% 1.00% 1.00% 2.25%(i)
Net investment income(e)(f)(g)(h) 9.05% 9.54% 9.46% 8.84%(i)
Portfolio turnover rate 209% 394% 399% 166%
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
----------- ------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.47 $ 5.77 $ 5.70 $ 5.03 $ 6.46 $ 7.29
Income (loss) from
investment operations:
Net investment income 0.54 0.53 0.63 0.66 0.82 0.88
Net realized and unrealized
gain (loss) on investments (0.51) 0.70 0.07 0.74 (1.40) (0.80)
------- -------- -------- -------- ---------- -------
Total from investment operation 0.03 1.23 0.70 1.40 (0.58) 0.08
------- -------- -------- -------- ---------- -------
Less distributions from:
Net investment income 0.55 0.53 0.63 0.68 0.85 0.91
Distributions in excess of net
investment income -- -- -- 0.05 -- --
------- -------- -------- -------- ---------- -------
Total distributions 0.55 0.53 0.63 0.73 0.85 0.91
------- -------- -------- -------- ---------- -------
Net asset value, end of period $ 5.95 $ 6.47 $ 5.77 $ 5.70 $ 5.03 $ 6.46
======= ======== ======== ======== ============ =======
TOTAL RETURN(d) 0.47% 22.12% 12.65% 30.00% (10.08)% 0.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $16,046 $ 18,797 $ 17,034 $ 23,820 $ 21,598 $31,356
Ratios to average net assets:
Expenses(e)(f)(g) 2.00% 2.02% 2.03% 1.89% 1.75% 1.79%
Net investment income(e)(f)(g)(h) 8.73% 8.36% 10.93% 12.40% 14.11% 12.61%
Portfolio turnover rate 192% 116% 193% 173% 183% 210%
</TABLE>
Footnotes on next page
44
<PAGE>
PILGRIM HIGH YIELD FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------
JULY 17,
YEAR ENDED JUNE 30, 1995(c) TO
------------------------ JUNE 30,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 6.78 $ 6.36 $ 6.20
Income (loss) from investment operations:
Net investment income 0.58 0.57 0.48
Net realized and unrealized gain (loss) on investments 0.14 0.41 0.14
-------- ------- -----------
Total from investment operation 0.72 0.98 0.62
-------- ------- -----------
Less distributions from:
Net investment income 0.58 0.56 0.46
Distributions in excess of net investment income -- -- --
-------- ------- -----------
Total distributions 0.58 0.56 0.46
-------- ------- -----------
Net asset value, end of period $ 6.92 $ 6.78 $ 6.36
======== ======= ===========
TOTAL RETURN(d) 10.90% 16.04% 10.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $154,303 $40,225 $ 2,374
Ratios to average net assets:
Expenses(e)(f)(g) 1.75% 1.75% 1.75%(i)
Net investment income(e)(f)(g)(h) 8.30% 8.64% 9.02%(i)
Portfolio turnover rate 209% 394% 339%
<CAPTION>
CLASS M
-------------------------------------
JULY 17,
YEAR ENDED JUNE 30, 1995(c)
----------------------- JUNE 30,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 6.78 $ 6.36 $ 6.20
Income (loss) from investment operations:
Net investment income 0.59 0.58 0.50
Net realized and unrealized gain (loss) on investments 0.14 0.41 0.14
------- --------- ----------
Total from investment operation 0.73 0.99 0.64
------- --------- ----------
Less distributions from:
Net investment income 0.59 0.57 0.48
Distributions in excess of net investment income -- -- --
------- --------- ----------
Total distributions 0.59 0.57 0.48
------- --------- ----------
Net asset value, end of period $ 6.92 $ 6.78 $ 6.36
======= ========= ==========
TOTAL RETURN(d) 11.16% 16.29% 10.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $19,785 $ 8,848 $ 1,243
Ratios to average net assets:
Expenses(e)(f)(g) 1.50% 1.50% 1.50%(i)
Net investment income(e)(f)(g)(h) 8.55% 8.93% 9.41%(i)
Portfolio turnover rate 209% 394% 339%
</TABLE>
- ------------
(a) 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.
(b) Effective November 1, 1994, High Yield Fund changed its year end to
June 30.
(c) Commencement of offering of shares.
(d) 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.
(e) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1998, the ratios of expenses to average net assets were 1.17%,
1.92% and 1.67% and the ratios of net investment income to average net
assets were 8.88%, 8.13% and 8.38% for Class A, B and M shares,
respectively.
(f) Prior to the waiver and reimbursement of expenses for the year ended
June 30, 1997, the ratios of expenses to average net assets were 1.42%,
2.17% and 1.92% and the ratios of net investment income to average net
assets were 9.09%, 8.18% and 8.47% for Class A, B and M shares,
respectively.
(g) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1996, the ratios of expenses to average net assets were 2.19%,
2.94% (i) and 2.69% (i), and the ratios of net investment income to
average net assets were 8.27%, 8.05% (i) and 8.51% (i), for Class A, B
and M shares, respectively.
(h) Prior to the waiver of expenses, the ratio of expenses to average net
assets was 2.35% (i) in 1995 and 2.07% in 1994 for Class A shares.
Prior to the waiver of expenses, the ratio of net investment income to
average net assets was 8.74% (i) in 1995 and 8.66% in 1994 for Class A
shares.
(i) Annualized.
45
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG Peat Marwick LLP, independent
auditors. For all periods ending prior to July 1, 1994, the financial
information was audited by another independent auditor.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1998 1997 1996 1995(a) 1994
------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 12.71 $ 12.59 $ 12.97 $ 12.73 $ 13.96
Income (loss) from
investment operations:
Net investment income 0.64 0.69 0.75 0.84 0.84
Net realized and unrealized
gain (loss) on investments 0.30 0.20 (0.32) 0.24 (1.17)
---------- ---------- -------- ---------- -----------
Total from investment operations 0.94 0.89 0.43 1.08 (0.33)
---------- ---------- -------- ---------- -----------
Less distributions from:
Net investment income 0.64 0.69 0.75 0.84 0.90
Distributions in excess of net
investment income 0.13 0.04 -- -- --
Tax return of capital -- 0.04 0.06 -- --
---------- ---------- -------- ---------- -----------
Total distributions 0.77 0.77 0.81 0.84 0.90
---------- ---------- -------- ---------- -----------
Net asset value, end of period $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73
========== ========== ======== ========== ===========
TOTAL RETURN(d) 7.63% 7.33% 3.34% 8.96% (2.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 23,682 $ 29,900 $ 38,753 $ 43,631 $ 61,100
Ratios to average net assets:
Expenses(e)(f)(g) 1.50% 1.42% 1.51% 1.40% 1.21%
Net investment income(e)(f)(g) 5.13% 5.78% 5.64% 6.37% 6.44%
Portfolio turnover rate 134% 172% 170% 299% 402%
<CAPTION>
1993(c) 1992 1991 1990 1989
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $ 13.76 $ 13.76 $ 13.79 $ 14.23 $ 14.23
Income (loss) from
investment operations:
Net investment income 1.13 1.19 1.25 1.25 1.31
Net realized and unrealized
gain (loss) on investments 0.18 -- (0.03) (0.38) 0.02
---------- ---------- -------- -------- ---------
Total from investment operations 1.31 1.19 1.22 0.87 1.33
---------- ---------- -------- -------- ---------
Less distributions from:
Net investment income 1.11 1.19 1.25 1.31 1.33
Distributions in excess of net
investment income -- -- -- -- --
Tax return of capital -- -- -- -- --
---------- ---------- -------- -------- ---------
Total distributions 1.11 1.19 1.25 1.31 1.33
---------- ---------- -------- -------- ---------
Net asset value, end of period $ 13.96 $ 13.76 $ 13.76 $ 13.79 $ 14.23
========== ========== ======== ======== =========
TOTAL RETURN(d) 9.82% 8.98% 9.27% 6.51% 10.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 87,301 $ 96,390 $110,674 $122,212 $ 144,769
Ratios to average net assets:
Expenses(e)(f)(g) 1.12% 1.10% 1.14% 1.14% 1.06%
Net investment income(e)(f)(g) 8.06% 8.59% 9.09% 9.02% 9.45%
Portfolio turnover rate 466% 823% 429% 448% 537%
</TABLE>
Footnotes on next page
46
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(Continued)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.68 $ 12.59 $ 12.95
Income (loss) from investment operations:
Net investment income 0.60 0.67 0.66
Net realized and unrealized gain (loss) on investments 0.24 0.11 (0.37)
---------- ---------- -------------
Total from investment operations 0.84 0.78 0.29
---------- ---------- -------------
Less distributions from:
Net investment income 0.60 0.67 0.65
Distributions in excess of net investment income 0.08 0.02 --
Tax return of capital -- -- --
---------- ---------- -------------
Total distributions 0.68 0.69 0.65
---------- ---------- -------------
Net asset value, end of period $ 12.84 $ 12.68 $ 12.59
========== ========== =============
TOTAL RETURN(d) 6.78% 6.38% 2.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 3,220 $ 1,534 $ 73
Ratios to average net assets:
Expenses(e)(f)(g) 2.25% 2.17% 2.26%(h)
Net investment income(e)(f)(g) 4.24% 4.92% 4.98%(h)
Portfolio turnover rate 134% 172% 170%
<CAPTION>
CLASS M
---------------------------------------
YEAR YEAR JULY 17,
ENDED ENDED 1995(b) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.72 $ 12.59 $ 12.95
Income (loss) from investment operations:
Net investment income 0.64 0.70 0.68
Net realized and unrealized gain (loss) on investments 0.23 0.14 (0.36)
---------- --------- ----------
Total from investment operations 0.87 0.84 0.32
---------- --------- ----------
Less distributions from:
Net investment income 0.63 0.70 0.68
Distributions in excess of net investment income 0.08 -- --
Tax return of capital -- 0.01 --
---------- --------- ----------
Total distributions 0.71 0.71 0.68
---------- --------- ----------
Net asset value, end of period $ 12.88 $ 12.72 $ 12.59
========== ========= ==========
TOTAL RETURN(d) 7.02% 6.88% 2.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 224 $ 61 $ 24
Ratios to average net assets:
Expenses(e)(f)(g) 2.00% 1.92% 2.01%(h)
Net investment income(e)(f)(g) 4.29% 5.25% 5.73%(h)
Portfolio turnover rate 134% 172% 170%
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) During this period, average daily borrowing were $11,038,044, average
monthly shares outstanding were 6,429,755 and average daily borrowings
per share were $1.72. The Fund earned income and realized capital gains
as a result of entering into reverse repurchase agreements during the
six months from July to December 1992. Such transactions constituted
borrowing transactions and, as a result, the Fund exceeded its 10%
borrowing limitations during that period. Therefore, the Fund's
performance was higher than it would have been had the Fund adhered to
its investment restrictions. This borrowing technique was discontinued
subsequent to December 1992, until April 4, 1995, when shareholders
approved a change in the Fund's investment policies.
(d) 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.
(e) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1998, the ratios of expenses to average net assets were 1.58%,
2.33% and 2.08% (g), and the ratios of net investment income to average
net assets were 5.06%, 4.20% and 4.24% for Class A, B and M shares,
respectively.
(f) Prior to the waiver and reimbursement of expenses for the period ended
June 30, 1996, the ratios of expenses to average net assets were 1.57%,
2.41%(g) and 2.16%(g), and the ratios of net investment income to
average net assets were 5.74%, 4.83%(g) and 5.58%(g) for Class A, B and
M shares, respectively.
(g) Prior to the waiver expenses for the period ended June 30, 1995, the
ratio of expenses to average net assets was 1.54%, and the ratio of net
investment income to average net assets was 6.23% for Class A shares.
(h) Annualized.
47
<PAGE>
Investment Manager
PILGRIM INVESTMENTS, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Distributor
PILGRIM SECURITIES, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
Shareholder Servicing Agent
PILGRIM GROUP, INC.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4408
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
PROSPECTUS
November 1, 1998
<PAGE>
PILGRIM BANK AND THRIFT FUND, INC.
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
Pilgrim Bank and Thrift Fund, Inc. (the "Fund") is an open-end management
investment company commonly known as a mutual fund. The Fund's primary
investment objective is long-term capital appreciation. Income is the secondary
objective. The Fund seeks to achieve its objectives by investing primarily in
equity securities of national and state-chartered banks (other than money center
banks), thrifts, the holding or parent companies of such depository
institutions, and in savings accounts of mutual thrifts. These portfolio
securities are selected principally on the basis of fundamental investment value
and potential for future growth, including securities of institutions that the
Fund believes are well-positioned to take advantage of opportunities currently
developing in the banking and thrift industries. There is no assurance that the
Fund will achieve its objectives.
This Statement of Additional Information is not a prospectus and it should be
read in conjunction with the Fund's Prospectus, dated November 1, 1998
("Prospectus"), which has been filed with the Securities and Exchange Commission
("SEC"). Copies of the Prospectus may be obtained at no charge by calling (800)
992-0180.
TABLE OF CONTENTS
PAGE
----
General Information and History...............................................2
Management of the Fund........................................................2
Distribution Plan.............................................................7
Investment Restrictions......................................................10
Portfolio Transactions.......................................................11
Additional Purchase and Redemption Information...............................12
Determination of Share Price.................................................17
Shareholder Services and Privileges..........................................18
Distributions................................................................20
Tax Considerations...........................................................21
Shareholder Information......................................................23
Calculation of Performance Data..............................................24
General Information..........................................................26
Financial Statements.........................................................27
<PAGE>
GENERAL INFORMATION AND HISTORY
Pilgrim Bank and Thrift Fund, Inc. is an open-end management investment company
commonly known as a mutual fund. The Fund was incorporated in Maryland in
November, 1985 under the name "Pilgrim Regional BankShares, Inc." as a
closed-end, diversified management investment company. The Fund 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.
The Board of Directors of the Fund has approved a change in the name of the
Fund, to be effective on November 16, 1998. On November 16, 1998, the name of
the Fund will become "Pilgrim Bank and Thrift Fund." This Statement of
Additional Information reflects the names of the Company and the Fund as they
will be on November 16, 1998.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by its Board of Directors. The Directors
and Officers of the Fund 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 Investment Company Act of 1940 (the "1940 Act"), by virtue of
that person's affiliation with the Fund or Pilgrim Investments, Inc., the Fund's
investment manager (the "Investment Manager" or "Pilgrim Investments").
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix,
Arizona 85016. (Age 59.) 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 also is a director and/or trustee of each of the funds managed
by the Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06310.
(Age 66.) Director. Commissioner of Banking, State of Connecticut
(January 1995 - Present). Mr. Burke was formerly President of Bristol
Savings Bank (August 1992- January 1995) and President of Security
Savings and Loan (November 1989 - August 1992). Mr. Burke is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210.
(Age 70.) 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 also
is a director and/or trustee of each of the funds managed by the
Investment Manager.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. (Age 52.) Director. Private Investor. Director of Artisoft,
Inc. (August 1994-Present). Formerly President and Co-owner, StockVal,
Inc. (April 1993 - June 1997). Mr. Patton was also formerly a partner
and director of the law firm of Streich, Lang, P.A. (1972 - 1993). Mr.
Patton is also a director and/or trustee of each of the funds managed
by the Investment Manager.
-2-
<PAGE>
Robert W. Stallings*, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 49.) Chairman, Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim
Group, Inc. (since December 1994); Chairman, Pilgrim Investments
(since December 1994); Director, Pilgrim Securities, Inc. ("Pilgrim
Securities") (since December 1994); Chairman, Chief Executive Officer
and President of Pilgrim Government Securities Income Fund, Inc.,
Pilgrim Investment Funds, Inc. and Pilgrim Advisory Funds, Inc.
(formerly, Pilgrim America Masters Series, Inc.), (since April 1995).
Chairman, President and Chief Executive Officer of WESAV Investments,
Inc. 2 (May 1991 - Present), Express America T.C. Corp. and EAMC
Liquidation Corp. (December 1996 - Present); Chairman of WESAV
Investments Corp. (August 1992 - Present); Chairman and Chief
Executive Officer of Pilgrim America Capital Corporation (formerly,
Express America Holdings Corporation) ("Pilgrim Capital") (August 1990
- Present).
The Fund pays each Director who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $20,000; (ii) $1,500 per quarterly
and special Board meeting; (iii) $500 per committee meeting; (iv) $500 per
special telephonic meeting; and (v) out-of-pocket expenses. The pro rata share
paid by the Fund is based on the Fund's average net assets as a percentage of
the average net assets of all the funds managed by the Investment Manager for
which the Directors serve in common as directors/trustees.
COMPENSATION OF DIRECTORS.
The following table sets forth information regarding compensation of Directors
by the Fund and other funds managed by the Investment Manager for the six months
ended June 30, 1998. Officers of the Fund and Directors who are interested
persons of the Fund 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 serves.
-3-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM
AGGREGATE ACCRUED ANNUAL REGISTRANT
COMPENSATION AS PART OF BENEFITS AND FUND
FROM FUND UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
------------------------ ---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Mary A. Baldwin(1), Director.......................... $3,611 N/A N/A $18,057
(5 boards)
John P. Burke(1)(2), Director......................... $3,611 N/A N/A $18,057
(5 boards)
Al Burton(1), Director................................ $3,611 N/A N/A $18,057
(5 boards)
Bruce S. Foerster(1)(4), Director.................... $3,611 N/A N/A $18,057
(5 boards)
Jock Patton(1), Director ........................... $3,611 N/A N/A $18,057
(5 boards)
Robert W. Stallings(3), Director and Chairman......... $0 N/A N/A $0
(5 boards)
</TABLE>
- ---------------------------------------------
(1) Member of the Audit Committee.
(2) Mr. Burke was elected to the Board of Directors at the May 5, 1997 Board
meeting.
(3) "Interested person," as defined in the Investment Company Act of 1940, of
the Fund because of affiliation with the Investment Manager. (4) Mr.
Foerster resigned from the Board of the Fund effective September 30, 1998.
OFFICERS.
James R. Reis, EXECUTIVE VICE PRESIDENT, AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41.)
Director, Vice Chairman (since December 1994) and Executive Vice
President (since April 1995), Pilgrim Group, Inc. and Pilgrim
Investments; Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of Pilgrim
Securities; Executive Vice President and Assistant Secretary of each of
the other funds in the Pilgrim Group of 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).
-4-
<PAGE>
Stanley Vyner, EXECUTIVE VICE PRESIDENT.
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48.)
President and Chief Executive Officer (since August 1996), Pilgrim
Investments; Executive Vice President (since July 1996) of most of the
funds in the Pilgrim Group of Funds. 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.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY.
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.)
Executive Vice President (since April 1998) and Secretary (since April
1995), Pilgrim Capital (formerly, Express America Holdings
Corporation), Pilgrim Group, Inc., Pilgrim Investments, and Pilgrim
Securities; Executive Vice President and Secretary of each of the funds
in the Pilgrim Group of Funds. Presently serves or has served as an
officer or director of other affiliates of Pilgrim Capital. Formerly,
Senior Vice President, Pilgrim Capital, Pilgrim Group, Inc., Pilgrim
Investments and Pilgrim Securities (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).
Carl Dorf, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER.
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 57.)
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).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL
OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer, Pilgrim Group, Inc.,
Pilgrim Investments, Pilgrim Securities (since June 1998) and Pilgrim
Financial (since August, 1998). He served in same capacity from
January, 1995 - April, 1997. Chief Financial Officer of Endeaver Group
(April, 1997 to June, 1998).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY.
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.)
Vice President, Pilgrim Investments, Inc. (since April 1997) and
Pilgrim Group, Inc. (since February 1997). Vice President and Assistant
Secretary of each of the funds in the Pilgrim Group of Funds. 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
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30)
Vice President, Pilgrim Investments (since August 1997) and Pilgrim
Financial (since May 1998), Accounting Manager (since November 1995).
Formerly Assistant Vice President and Accounting Supervisor for Paine
Webber (June, 1993 - April, 1995).
PRINCIPAL SHAREHOLDERS. As of September 30, 1998, the Directors and Officers of
the Fund as a group owned less than 1% of the outstanding shares of the Fund. As
of September 30, 1998, to the knowledge of management, no person owned
beneficially or of record more than 5% of the outstanding shares of any class
-5-
<PAGE>
of the Fund except as follows: Merrill Lynch, Pierce Fenner & Smith, Inc.
("Merril Lynch"), 4800 Deer Lake Drive, Jacksonville, Florida 32246-6484, owned
13.58% of the Class A shares and 30.45% of the Class B shares.
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Fund and has overall responsibility for the management of the Fund. The
Investment Management Agreement between the Fund and the Investment Manager
requires the Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Fund. The Investment Manager,
which was organized in December 1994, is registered as an investment adviser
with the SEC and serves as investment adviser to four other registered
investment companies (or series thereof) as well as privately managed accounts.
As of October 15, 1998, the Investment Manager had assets under management of
approximately $5.3 billion.
The Investment Manager is a wholly-owned subsidiary of Pilgrim Group, Inc.,
which itself is a wholly-owned subsidiary of Pilgrim Capital, a Delaware
corporation, the shares of which are traded on the NASDAQ National Market System
and which is a holding company that through its subsidiaries engages in the
financial services business.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all
executive salaries and expenses of the Directors and Officers of the Fund who
are employees of the Investment Manager or its affiliates and office rent for
the Fund. Other expenses incurred in the operation of the Fund are borne by it,
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 the Fund's net
asset value; taxes, if any, and the preparation of the Fund's tax returns; cost
of stock certificates and any other expenses (including clerical expenses) of
issue, sale, repurchase or redemption of shares; expenses of registering and
qualifying shares of the Fund 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 Fund who are not employees of the Investment Manager or its
affiliates; membership dues in the Investment Company Institute; insurance
premiums; and extraordinary expenses such as litigation expenses.
The Fund pays the Investment Manager a fee of 1.00% of the first $30,000,000 of
average daily net assets, 0.75% of the next $95,000,000 of average daily net
assets and 0.70% of average daily net assets in excess of $125,000,000. The fees
are computed and accrued daily and paid monthly. For the fiscal years ended
December 31, 1995, 1996, 1997 and the six month period ended June 30, 1998, the
Fund paid management fees to the Investment Manager of $1,421,324, $1,746,917,
$2,361,103, and $2,446,063, respectively. Prior to October 17, 1997, the
Investment Manager was paid management fees based on average weekly net assets.
The Investment Management Agreement will remain in effect for two years
following its date of execution, and thereafter will automatically continue for
successive annual periods as long as such continuance is specifically approved
at least annually by (a) the Board of Directors 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 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.
-6-
<PAGE>
The Investment Management Agreement is terminable without penalty with not less
than 60 days' notice by the Board of Directors 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).
DISTRIBUTOR. Shares of the Fund are distributed by Pilgrim Securities, Inc.
("Pilgrim Securities" or the "Distributor") pursuant to an Underwriting
Agreement between the Fund and the Distributor. The Underwriting Agreement
requires the Distributor to use its best efforts on a continuing basis to
solicit purchases of shares of the Fund. The Fund and the Distributor have
agreed to indemnify each other against certain liabilities. At the discretion of
the Distributor, all sales charges may at times be reallowed to an authorized
dealer ("Authorized Dealer"). 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. The Underwriting
Agreement will remain in effect for two years and from year to year thereafter
only if its continuance is approved annually by a majority of the Board of
Directors who are not parties to such agreement or "interested persons" of any
such party and must be approved either by votes of a majority of the Directors
or a majority of the outstanding voting securities of the Fund. See the
Prospectus for information on how to purchase and sell shares of the Fund, and
the charges and expenses associated with an investment. The Distributor, like
the Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc.,
which is a wholly-owned subsidiary of Pilgrim America Capital Corporation.
DISTRIBUTION PLAN
The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). The Fund
intends to operate the Rule 12b-1 Plans in accordance with its terms and the
National Association of Securities Dealers, Inc.'s 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 and Class B shares in amounts not to exceed the following: with respect
to Class A shares at an annual rate of up to 0.35% of the average daily net
assets of the Class A shares of the Fund; with respect to Class B shares at an
annual rate of up to 1.00% of the average daily net assets of the Class B shares
of the Fund. The Board of Directors has approved under the Rule 12b-1 Plans
payments of the following amounts to the Distributor each month in connection
with the offering, sale, and shareholder servicing of Class A and Class B shares
as follows: (i) with respect to Class A shares at an annual rate equal to 0.25%
of the average daily net assets of the Class A shares of the Fund and (ii) with
respect to Class B shares at an annual rate equal to 1.00% of the average daily
net assets of the Class B shares of the Fund. Of these amounts, fees equal to an
annual rate of 0.25% of the average daily net assets of the Fund are for
shareholder servicing for each of the classes.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis
to Authorized Dealers for both distribution and shareholder servicing at the
annual rate of 0.25% of the Fund's average daily net assets of Class A and Class
B 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. Rights to these ongoing payments begin to accrue in the 13th
month following a purchase of Class A or B shares. These fees may be used to
cover the expenses of the Distributor primarily intended to result in the sale
of Class A and Class B shares of the Fund, including payments to Authorized
Dealers for selling shares of the Fund and for servicing shareholders of these
classes of the Fund. Activities for which these fees may be used include:
preparation and distribution of advertising materials and sales literature;
expenses of organizing and conducting sales seminars; overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; and costs of
administering the Rule 12b-1 Plan. The
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<PAGE>
fees for Class A shares acquired prior to the Fund's conversion to an open-end
investment company will be paid to the Distributor.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of the Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates. The Distributor will
receive payment under the Rule 12b-1 Plan without regard to actual distribution
expenses it incurs.
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 Fund's shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers that have sold or may sell
significant amounts of shares during specified periods of time. Such
compensation and incentives may include, but are not limited to, cash,
merchandise, trips and financial assistance to dealers in connection with
pre-approved conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and lodging)
incurred by sales personnel and members of their families, or other invited
guests, to various locations for such seminars or training programs, seminars
for the public, advertising and sales campaigns regarding the Fund or other
funds managed by the Investment Manager and/or other events sponsored by
dealers. 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 Fund 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
Fund's shares sold by the dealer during a particular period, and (2) 0.10% of
the value of the Fund's 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, including all
of the Directors who are not interested persons of the Fund 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 Fund and who have no direct or indirect financial interest in the
operation of the Rule 12b-1 Plan, cast in person at a meeting called for that
purpose. It is also required that the selection and nomination of such Directors
be committed to the Directors who are not interested persons. The Rule 12b-1
Plans and any distribution or service agreement may be terminated as to the 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
the Fund are necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Directors, including those
Directors who are not interested persons of the Fund, concluded that, in the
exercise of their reasonable business judgment and in light of their fiduciary
duties, there is a reasonable likelihood that the Rule 12b-1 Plans as tailored
to each class of the Fund, will benefit the Fund and its 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
the Fund without approval by a majority of the Fund's outstanding shares, and
all material amendments to a Plan or any distribution or service agreement shall
be approved by the Directors who are not interested persons of the Fund, cast in
person at a meeting called for the purpose of voting on any such amendment.
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<PAGE>
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 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.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of the Fund's Class A shares for the six month period
ended June 30, 1998 were $293,427, including expenses for: advertising -
$29,701; salaries and commissions - $238,896; printing, postage, and handling -
$6,425; brokers' servicing fees - $14,053; and miscellaneous and other
promotional activities - $4,352. Total distribution expenses incurred by the
Distributor for the costs of promotion and distribution of the Fund's Class B
shares for the six month period ended June 30, 1998 were $1,495,998, including
expenses for: advertising -- $29,363; salaries and commissions -- $1,050,227;
printing, postage, and handling -- $109,808; brokers' servicing fees --
$241,620; and miscellaneous and other promotional activities -- $64,980. Of the
total amount incurred by the Distributor for the six month period ended June 30,
1998, $1,723,039 was for the costs of personnel of the Distributor and its
affiliates involved in the promotion and distribution of the Fund's shares.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of the Fund's Class A shares for the fiscal year
ended December 31, 1997 were $495,472, including expenses for: advertising -
$18,519; salaries and commissions - $287,588; printing, postage, and handling -
$50,070; brokers' servicing fees - $110,264; and miscellaneous and other
promotional activities - $29,031. Total distribution expenses incurred by the
Distributor for the costs of promotion and distribution of the Fund's Class B
shares for the fiscal year ended December 31, 1997 were $74,483, including
expenses for: advertising -- $2,784; salaries and commissions -- $43,239;
printing, postage, and handling -- $7,528; brokers' servicing fees -- $16,578;
and miscellaneous and other promotional activities -- $4,354. Of the total
amount incurred by the Distributor during the last year, $301,898 was for the
costs of personnel of the Distributor and its affiliates involved in the
promotion and distribution of the Fund's shares.
The sales charge retained by the Distributor and the commissions reallowed to
selling dealers are not an expense of the Fund and have no effect on the net
asset value of the Fund. For the fiscal year ended December 31, 1997, and the
six-month period ended June 30, 1998, total commissions allowed to other dealers
were approximately $2,664,805 and $10,935,047, respectively. For the fiscal year
ended December 31, 1997, and the six-month period ended June 30, 1998, the
Distributor retained approximately $202,290 and $1,042,387 or approximately
7.59% and 9.53% of the total commissions assessed on shares of the Fund.
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 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.
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<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions listed below relating to the
investment of the Fund's assets and its activities. Restrictions 1 through 10
are fundamental policies that may not be changed without the approval of the
holders of a majority of the outstanding voting securities of the Fund (which
for this purpose and under the Investment Company Act of 1940 means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the 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.
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The following investment restrictions may be changed by the Board of Directors
without shareholder approval. Appropriate notice will be given of any changes in
these restrictions made by the Board of Directors. The Fund may not:
(11) Participate on a joint or joint and several basis in any
trading account in securities.
(12) Purchase securities of any issuer for the purposes of
exercising control or management, except in connection with a
merger, consolidation, acquisition or reorganization.
(13) Invest more than 5% of the Fund's total assets in securities
of any issuer which, together with its predecessors, has been
in continuous operation less than three years.
(14) Purchase or retain the securities of any issuer if those
officers or Directors of the Fund or officers or Directors of
the Investment Manager who each own beneficially more than 1/2
of 1% of the securities of that issuer together own more than
5% of the securities of such issuer.
(15) Invest in illiquid securities if, as a result, more than 15%
of the Fund's net assets would be invested in such securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in a percentage from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing restrictions.
PORTFOLIO TRANSACTIONS
The Investment Management Agreement authorizes the Investment Manager to select
the brokers or dealers that will execute the purchase and sale of investment
securities for the Fund. In all purchases and sales of securities for the Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreement, the Investment
Manager determines, subject to the instructions of and review by the Board of
Directors of the Fund, which brokers are to be eligible to execute portfolio
transactions for the Fund. Purchases and sales of securities in the
over-the-counter market will generally be executed directly with a
"market-maker," unless in the opinion of the Investment Manager, a better price
and execution can otherwise be obtained by using a broker for the transaction.
In placing portfolio transactions, the Investment 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 such as the firm's ability to engage in
transactions in shares of banks and thrifts that are not listed on an organized
stock exchange. The Investment Manager will seek to obtain the best commission
rate available from brokers that are believed to be capable of providing
efficient execution and handling of the orders. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the most favorable price and execution available, consideration
may be given to those brokers that supply research and statistical information
to the Fund and/or the Investment Manager, and provide other services in
addition to execution services. Consistent with this policy, portfolio
transactions may be executed by brokers affiliated with the Pilgrim Funds, 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
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<PAGE>
the 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 Fund's general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for the Fund, the Fund may also give weight to
the ability of a broker to furnish brokerage and research services to the Fund
or the Investment Manager, even if the specific services were not imputed to the
Fund and were useful to the Investment 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 to be reasonable in
relation to the value of the brokerage and research services provided by such
broker.
Purchases of Fund securities 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 the Fund may also be appropriate
for other clients served by the Fund's Investment Manager. If the purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other clients serviced by the Investment Manager is considered
at or about the same time, transactions in such securities will be allocated
among the Fund and the Investment Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods used by
the Investment Manager, and the results of such allocations, are subject to
periodic review by the Board of Directors.
For the years ended December 31, 1995, 1996, 1997, and the six month period
ended June 30, 1998, the total brokerage commissions paid by the Fund amounted
to approximately $49,000, $85,000, $90,000, and $316,000, respectively.
The Fund places no restrictions on portfolio turnover. While the Fund may from
time to time sell a security it has held for a short period of time, the Fund
has no policy of engaging in short-term trading or generating short-term gains.
The annual rate of the Fund's portfolio turnover during the fiscal years ended
December 31, 1996 and 1997, and the six month period ended June 30, 1998, was
21%, 22%, and 2%, respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Fund's
transfer agent, DST Systems, Inc. ("Transfer Agent"), plus, for Class A shares,
a varying sales charge depending upon the amount of money invested, as set forth
in the Prospectus. Authorized dealers will be paid commissions on shares sold in
Classes A and B, at net asset value, which at the time of investment would have
been subject to the imposition of a contingent deferred sales charge if
liquidated. The Distributor may, from time to time, at its discretion, allow the
selling dealer
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<PAGE>
to retain 100% of such sales charge, and such dealer may therefore be deemed an
"underwriter" under the Securities Act of 1933, as amended. The Distributor, at
its expense, may also provide additional promotional incentives to dealers in
connection with sales of shares of the Fund and other funds managed by the
Investment Manager. In some instances, such incentives may be made available
only to dealers whose representatives have sold or are expected to sell
significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families to locations
within or outside of the United States, merchandise or other items. Dealers may
not use sales of the Fund's shares to qualify for the incentives to the extent
such may be prohibited by the laws of any state.
Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE. Class A shares of the Fund may be
purchased at net asset value, without a sales charge, by persons who have
redeemed their Class A shares of the Fund or shares of other funds managed by
the Investment Manager in accordance with the terms of such privileges
established for such funds within the previous 90 days. The amount that may be
so reinvested in the Fund is limited to an amount up to, but not exceeding, the
redemption proceeds (or to the nearest full share if fractional shares are not
purchased). In order to exercise this privilege, a written order for the
purchase of shares must be received by the Transfer Agent, or be postmarked,
within 90 days after the date of redemption. This privilege may only be 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 Fund may also be purchased at net asset value by any
state, county, or city, or any instrumentality, department, authority or agency
thereof that has determined that the Fund is a legally permissible investment
and that is prohibited by applicable investment law from paying a sales charge
or commission in connection with the purchase of shares of any registered
management investment company ("an eligible 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
Fund (or the other 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 shares of
other Pilgrim Funds distributed by the Distributor may reinvest such amount plus
any shares acquired through dividend reinvestment in Class A shares of the Fund
at its current net asset value, without a sales charge.
Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers or affiliated
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<PAGE>
corporations thereof or any trust, pension, profit-sharing or other benefit plan
for such persons, broker-dealers, for their own accounts or for members of their
families (defined as current spouse, children, parents, grandparents, uncles,
aunts, siblings, nephews, nieces, step-relations, relations at-law, and
cousins), employees of such broker-dealers (including their immediate families)
and discretionary advisory accounts of the Investment Manager, may purchase
Class A shares of the Fund at net asset value without a sales charge. Such
purchaser may be required to sign a letter stating that the purchase is for his
own investment purposes only and that the securities will not be resold except
to the Fund. The Fund may, under certain circumstances, allow registered
investment advisers to make investments on behalf of their clients at net asset
value without any commission or concession.
Class A 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.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION. An investor may immediately
qualify for a reduced sales charge on a purchase of Class A shares of the Fund
or any open-end fund in the Pilgrim Funds which offers Class A shares or shares
with front-end sales charges, by completing the Letter of Intent section of the
Shareholder Application in the Prospectus (the "Letter of Intent" or "Letter").
By completing the Letter, the investor expresses an intention to invest during
the next 13 months a specified amount which if made at one time would qualify
for the reduced sales charge. At any time within 90 days after the first
investment which the investor wants to qualify for the reduced sales charge, a
signed Shareholder Application, with the Letter of Intent section completed, may
be filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one investment in the Pilgrim Funds
will be effective only after notification to the Distributor that the investment
qualifies for a discount. The shareholder's holdings in the Investment Manager's
open-end 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, 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
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<PAGE>
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 the 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 net asset value to remit
to the Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other open-end funds
distributed by the Distributor (excluding Pilgrim General Money Market Shares)
can be combined with a current purchase to determine the reduced sales charge
and applicable offering price of the current purchase. The reduced sales charge
applies to quantity purchases made at one time or on a cumulative basis over any
period of time by (i) an investor, (ii) the investor's spouse and children under
the age of majority, (iii) the investor's custodian accounts for the benefit of
a child under the Uniform 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 applies on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.
Shares of the Fund and other 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.
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<PAGE>
REDEMPTIONS. Payment to shareholders for shares redeemed will be made within
three days after receipt by the Fund's Transfer Agent of the written request in
proper form, except that the Fund may suspend the right of redemption or
postpone the date of payment as to the Fund during any period when (a) trading
on the New York Stock Exchange is restricted as determined by the 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 the Fund not reasonably practicable; or (c) for such other period as
the SEC may permit for the protection of the Fund's shareholders. At various
times, the Fund may be requested to redeem shares for which it has not yet
received good payment. Accordingly, the Fund may delay the mailing of a
redemption check until such time as it has assured itself that good payment has
been collected for the purchase of such shares, which may take up to 15 days or
longer.
The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Fund liquidates portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Fund reserves
the right, upon 30 days' written notice, to redeem, at net asset value (less any
applicable deferred sales charge), the shares of any shareholder whose account
has a value of less than $1,000 in the Fund, other than as a result of a decline
in the net asset value per share. Before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount that will
increase the value of the account to at least $1,000 before the redemption is
processed. This policy will not be implemented where the Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B shares may be subject to a
CDSC or redemption fee. For purchase payments subject to such CDSC, the
Distributor may pay out of its own assets a commission from 0.25% to 1.00% of
the amount invested for Class A purchases over $1 million and 4% of the amount
invested for Class B shares.
Shareholders will be charged a CDSC or redemption fee if certain of those shares
are redeemed within the applicable time periods as stated in the Prospectus.
No CDSC or redemption fee is imposed on any shares subject to a CDSC or
redemption fee to the extent that those shares (i) are no longer subject to the
applicable holding period, (ii) resulted from reinvestment of distributions on
CDSC or redemption fee 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
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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. 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 advisers,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients.
A redemption fee of 2% will be imposed for a one-year period following
conversion of the Fund from a closed-end investment company to an open-end
investment company on Fund shares acquired prior to the conversion. This fee
shall also apply if converted shares are exchanged for shares of another
open-end Pilgrim Fund. The Fund reserves the right to waive or reduce the
redemption fee in whole or in part.
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 a taxable event for federal income tax
purposes; and (2) the payment of different dividends on Class A and Class B
shares does not result in the Fund dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended.
The Class B shares so converted will no longer be subject to the higher expenses
borne by Class B shares. The conversion will be effected at the relative net
asset values per share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each class
of the 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 average of the last reported
bid and ask price on the valuation day. In cases in which securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market.
Securities for which quotations are not readily available and all other assets
will be valued at their respective fair values as determined in good faith by or
under the direction of the Board of Directors of the Fund.
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<PAGE>
In computing a class of the 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 Class B shares, reflecting daily expense
accruals of the higher distribution fees applicable to Class B shares. It is
expected, however, that the per share net asset value of the classes will tend
to converge immediately after the payment of dividends or distributions that
will differ by approximately the amount of the expense accrual differentials
between the classes.
Orders received by dealers prior to the close of regular trading on the New York
Stock Exchange will be confirmed at the offering price computed as of the close
of regular trading on the Exchange provided the order is received by the
Distributor prior to its close of business that same day (normally 4:00 P.M.
Pacific time). It is the responsibility of the dealer to insure that all orders
are transmitted timely to the Fund. Orders received by dealers after the close
of trading on the New York Stock Exchange will be confirmed at the next computed
offering price as described in the Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Fund provides a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of the Fund
on a regular basis. Such a Program may be started with an initial investment
($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no
obligation to continue. The Program may be terminated without penalty at any
time by the investor or the Fund. The minimum investment requirements may be
waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
For investors purchasing shares of the Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of the Fund on
a periodic basis, the Fund may, in lieu of furnishing confirmations following
each purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. SHAREHOLDERS MAY RELY ON THESE STATEMENTS IN LIEU
OF CERTIFICATES. CERTIFICATES REPRESENTING SHARES OF THE FUND WILL NOT BE ISSUED
UNLESS THE SHAREHOLDER REQUESTS THEM IN WRITING.
SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS. For self-employed individuals and
corporate investors that wish to purchase shares of the Fund, there is available
through the Fund a Prototype Plan and Custody Agreement. The Custody Agreement
provides that Investors Fiduciary Trust Company, Kansas City, Missouri, will act
as Custodian under the Plan, and will furnish custodial services for an annual
maintenance fee of $12.00 for each participant, with no other charges. (This fee
is in addition to the normal Custodian
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charges paid by the Fund.) 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
Fund. Employers who wish to use shares of the Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors having earned income are eligible to
purchase shares of the Fund under an 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 which employers may establish on behalf of
their employees are also available. Roth IRA plans which enable employed and
self-employed individuals to make non-deductible contributions, and, under
certain circumstances, effect tax-free withdrawals, are also available. Copies
of model Custodial Account Agreements are available from the Distributor.
Investors Fiduciary Trust Company, Kansas City, Missouri, will act as the
Custodian under these model Agreements, for which it will charge the investor an
annual fee of $12.00 for maintaining the Account (such fee is in addition to the
normal custodial charges paid by the Fund). Full details on the IRA and Simple
IRA are contained in IRS required disclosure statements, and the Custodian will
not open an IRA until seven (7) days after the investor has received such
statement from the Fund. An IRA using shares of the Fund may also be used by
employers who have adopted a Simplified Employee Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are also
available. Section 403(b) plans are arrangements by a public school organization
or a charitable, educational, or scientific organization that is described in
Section 501(c)(3) of the Internal Revenue Code under which employees are
permitted to take advantage of the federal income tax deferral benefits provided
for in Section 403(b) of the Code.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES. As discussed in the Prospectus,
the telephone redemption and exchange privileges are available for all
shareholder accounts; however, retirement accounts may not utilize the telephone
redemption privilege. The telephone privileges may be modified or terminated at
any time. The privileges are subject to the conditions and provisions set forth
below and in the Prospectus.
1. Telephone redemption and/or exchange instructions received in good
order before the pricing of the 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 or redemption fee (See "Redemption of
Shares" in the Prospectus).
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180.
3. Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
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(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 thirty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed
to the address of record) can be processed with in a 30 day
period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
5. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have
the same account information and options except as stated in the
Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141
and deposited into your account before any transaction may be
processed.
8. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares
of the Pilgrim Fund to be purchased in the exchange having the same
aggregate net asset value as the shares being exchanged shall be
substituted in the escrow account. Shares held in escrow may not be
redeemed until the Letter of Intent has expired and/or the appropriate
adjustments have been made to the account.
9. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Fund's then-current
prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by
the bank upon which it was drawn.
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 the respective class of the Fund at the then current net asset value, with no
sales charge. Alternatively, a shareholder can elect at any time to receive
dividends and/or capital gains distributions in cash. In the absence of such an
election, each purchase of shares of a class of the 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 at any time
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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 Fund 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 Fund. 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.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. The Fund intends to qualify as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). To so qualify, the Fund must, with respect to each taxable
year, among other things: (a) derive at least 90% of its gross income 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, (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).
The status of the Fund as a regulated investment company does not involve
government supervision of management or of its investment practices or policies.
As a regulated investment company, the Fund generally will be relieved of
liability for U.S. federal income tax on that portion of its investment company
taxable income and net realized capital gains which it distributes to its
shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, the Fund intends to make
distributions in accordance with the calendar year distribution requirement.
DISTRIBUTIONS. Dividends of investment company taxable income (including net
short-term capital gains) are taxable to shareholders as ordinary income.
Distributions of investment company taxable income may be eligible for the
corporate dividends-received deduction to the extent attributable to the Fund's
dividend income from U.S. corporations, and if other applicable requirements are
met. However, the alternative minimum tax applicable to corporations may reduce
the benefit of the dividends-received deduction. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) designated by the Fund as capital gain dividends are not eligible for
the dividends-received deduction and will generally be taxable to shareholders
as long-term capital gains, regardless of how long a shareholder has held Fund
shares. Net capital gains from assets held for one year of less will be taxed as
ordinary income. Generally, dividends and distributions are taxable to
shareholders, whether received in cash or reinvested in shares of the Fund. Any
distributions that are not from the Fund's investment
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company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Shareholders will be
notified annually as to the federal tax status of dividends and distributions
they receive and any tax withheld thereon.
Dividends, including capital gain dividends, declared in October, November, or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by the Fund reduce the net asset value of the Fund's 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 the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
ORIGINAL ISSUE DISCOUNT. Certain of the debt securities acquired by the Fund may
be treated as debt securities that were originally issued at a discount.
Original issue discount can generally be defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income is actually received by the Fund, original
issue discount that accrues on a debt security in a given year generally is
treated for federal income tax purposes as interest and, therefore, such income
would be subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
SALE 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, and the rate of tax will depend
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 the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of the Fund's shares held
by the shareholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the
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shareholder subsequently acquires shares of the same or another regulated
investment company and the otherwise applicable sales charge is reduced or
eliminated under a "reinvestment right" received upon the initial purchase of
shares of stock. In that case, the gain or loss recognized will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. Sales charges affected by this rule are treated as if they were
incurred with respect to the stock acquired under the reinvestment right. This
provision may be applied to successive acquisitions of stock.
BACKUP WITHHOLDING. The Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number and to make such certifications
as the Fund may require, (2) the IRS notifies the shareholder or the Fund that
the shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when required
to do so, the shareholder fails to certify that he 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 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, capital gain dividends and amounts retained by the
Fund that are designated as undistributed capital gains. 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.
SHAREHOLDER INFORMATION
Certificates representing shares of the 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.).
The Fund 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 the 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
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transaction expenses in converting theses securities to cash. The Fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which the 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.
CALCULATION OF PERFORMANCE DATA
The 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 the Fund over periods of 1, 5 and 10
years (up to the life of the Fund), calculated pursuant to the following formula
which is prescribed by the 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, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Prior to October 17, 1997, the 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.
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
-24-
<PAGE>
a-b 6
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.
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 are based on past results and are not a prediction of future
performance.
PERFORMANCE COMPARISONS. In reports or other communications to shareholders or
in advertising material, the Fund may compare the performance of its Class A and
Class B 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 Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY and THE WALL
STREET JOURNAL. If the Fund compares its performance to other funds or to
relevant indexes, the Fund's performance will be stated in the same terms in
which such comparative data and indexes are stated, which is normally total
return rather than yield. For these purposes the performance of the Fund, as
well as the performance of such investment companies or indexes, may not reflect
sales charges, which, if reflected, would reduce performance results. Prior to
October 17, 1997, the 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 Fund's average annual total returns for Class A shares based on net asset
value per share including the maximum Class A sales charge for the one-, five-
and ten-year periods ended June 30, 1998 and for the period from inception of
the Fund on January 24, 1986 to June 30, 1998, were 34.22%, 28.54%, 22.05% and
18.27%, respectively. The average annual total return for the Class B shares
based on net asset value per share including the maximum contingent deferred
sales charge for the period October 20, 1997 (commencement of sale of Class B
shares) to June 30, 1998 was 13.59%.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including age characteristics, of various regions in which the Fund may invest,
as compiled by various organizations, and projections of such information; (ii)
the performance of U.S. equity and debt markets; (iii) the geographic
distribution of the Fund's portfolio; (iv) the number of shareholders in the
Fund or other Pilgrim Funds and the dollar amount of the assets under
management; (v) descriptions of the trend in consolidation of commercial banks
in the United States, including forecasts of the decline in the number of such
banks, and discussions of the impact of such trends; (vi) descriptions of the
trends in technology utilized by financial institutions, and discussions of the
-25-
<PAGE>
impact of such trends; (vii) comparisons of the average price to earnings ratio,
price to book ratio, and price to cash flow of the Fund, individual stocks in
the Fund's portfolio, the Standard & Poor's 500 Index, or comparable bank
indices, and descriptions of such comparisons; (viii) quotes from the portfolio
manager of the Fund or other industry specialists; (ix) lists or statistics of
certain of the 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; (x)
NASDAQ symbols for each class of shares of the Fund; and (xi) 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, Pilgrim Capital, Pilgrim Group, Inc. or
affiliates of the Fund, the Investment Manager, Pilgrim Capital or Pilgrim
Group, Inc. including (i) performance rankings of other funds managed by the
Investment Manager, or the individuals employed by the Investment Manager who
exercise responsibility for the day-to-day management of the 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 Fund
consists of 100,000,000 shares of common stock having a par value of $.001 per
share. Holders of shares of the Fund have one vote for each share held, and a
proportionate fraction of a vote for each fraction of a share held. All shares
issued and outstanding are fully paid and non-assessable, transferable, and
redeemable at the option of the shareholder. Shares have no preemptive 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.
The Board of Directors may classify or reclassify any unissued shares of the
Fund into shares of another class or 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.
CUSTODIAN. The cash and securities owned by the 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 the Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Fund are passed upon by 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, acts as independent auditors for the Fund.
-26-
<PAGE>
OTHER INFORMATION. The Fund 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 Fund by any governmental agency. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in the 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 Fund will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statements audited by the
independent certified public accountants.
FINANCIAL STATEMENTS
The financial statements for the short fiscal year ended June 30, 1998 are
incorporated herein by reference from the Fund's Annual Report to Shareholders.
Copies of the Fund's Annual Report and any subsequent Semi-Annual Report may be
obtained without charge by contacting the Fund at 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004, (800) 992-0180.
-27-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
-- Financial Highlights
Contained in Part B:
Financial Statements are incorporated by reference from the
Registrant's Annual Report to Shareholders for the fiscal year
ended June 30, 1998 (audited).
(B) EXHIBITS
(1)(A) Amended and Restated Articles of Incorporation(1)
(1)(B) Form of Articles of Amendment to Articles of
Incorporation
(2) Amended and Restated Bylaws(1)
(3) Not Applicable
(4) Not Applicable
(5) Form of Amended and Restated Investment Management
Agreement(1)
(6)(A) Form of Underwriting Agreement(1)
(6)(B) Form of Selling Group Agreement(2)
(7) Not Applicable
(8) Form of Custodian Agreement(2)
(9) Form of Recordkeeping Agreement(2)
(10) Opinion and Consent of Dechert Price & Rhoads(2)
(11) Consent of Independent Auditors
(12) Not Applicable
<PAGE>
(13) Not Applicable
(14) Incorporated by reference from the Registrant's
previous filing on Form N-2, Investment Company Act
File No. 811-4504
(15) (A) Service and Distribution Plan for Class A
Shares(1)
(B) Service and Distribution Plan for Class B
Shares(1)
(16) Schedule of Computation of Performance Quotations(1)
(17) Financial Data Schedule
(18) Form of Plan Adopted Pursuant to Rule 18f-3(1)
- --------------
(1) Incorporated by reference from Registrant's initial Registration
Statement on Form N-1A, as filed with the Securities and Exchange
Commission on August 12, 1997.
(2) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, as filed with the Securities and
Exchange Commission on October 15, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
N/A
ITEM 27. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article Seventh of the Company's Articles of Incorporation, Article VII of the
Company's Bylaws, the Investment Management Agreement filed as Exhibit 5, and
the Underwriting Agreement filed as Exhibit 6(A) provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the
C-2
<PAGE>
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 director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such a
director, officer or controlling person in connection with the securities 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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT MANAGER
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. 801-48282) filed
under the Investment Advisers Act of 1940 and is incorporated herein by
reference thereto.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Pilgrim America Investment Funds, Inc., Pilgrim America Masters
Series, Inc., Pilgrim Government Securities Income Fund, Inc.
(b) The following are directors and officers of Pilgrim America
Securities, Inc. The principal address of these persons is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004.
Positions and Offices Positions and Offices
Name with the Distributor with the Registrant
---- -------------------- -------------------
Robert W. Stallings Director. Chairman, Director.
James R. Reis Vice Chairman, Director, Executive Vice President,
Assistant Secretary Assistant Secretary.
James M. Hennessy Executive Vice President, Executive Vice President,
Secretary. Secretary.
(c) Not applicable.
C-3
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of the Registrant or Pilgrim America
Group, Inc., the Shareholder Servicing Agent, at 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Phoenix, and the State of Arizona, on
the 26th day of October, 1998.
PILGRIM AMERICA BANK AND THRIFT FUND, INC.
By: /s/ ROBERT W. STALLINGS
---------------------------------------
Robert W. Stallings
Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert W. Stallings Director and President October 26, 1998
- ------------------------- (Principal Executive Officer)
Robert W. Stallings*
__________________ Senior Vice President and Principal October 26, 1998
Michael J. Roland* Financial Officer
(Principal Financial Officer)
__________________ Director October 26, 1998
Mary A. Baldwin*
__________________ Director October 26, 1998
John P. Burke*
__________________ Director October 26, 1998
Al Burton*
__________________ Director October 26, 1998
Bruce S. Foerster*
__________________ Director October 26, 1998
Jock Patton*
</TABLE>
*By: /s/ Robert W. Stallings
--------------------------------------------
Robert W. Stallings, Attorney-in-fact**
** Powers of attorney for Directors were previously filed with the Fund's
initial Registration Statement on Form N-1A (File No. 333-3345) on
August 12, 1997, and are incorporated by reference herein. The Power of
Attorney for Michael J. Roland was previously filed with post-effective
amendment no. 2 to the Registration Statement on August 28, 1998, and
is incorporated by reference herein.
<PAGE>
EXHIBIT INDEX
Exhibit 1(B) Form of Articles of Amendment
to Articles of Incorporation
Exhibit 11 Consent of Independent Auditors
Exhibit 17 (EDGAR Exhibit 27) Financial Data Schedules
PILGRIM AMERICA BANK AND THRIFT FUND, INC.
ARTICLES OF AMENDMENT
PILGRIM AMERICA BANK AND THRIFT FUND, INC., a Maryland corporation
having its principal office in the State of Maryland in Baltimore City
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by
striking out Article FIRST of the Articles of Incorporation and inserting in
lieu thereof the following:
FIRST: The name of the corporation is Pilgrim Bank and Thrift
Fund, Inc. (the "Corporation").
SECOND: The Amendment to the Articles of Incorporation of the
Corporation as hereinabove set forth shall be effective on November 16, 1998.
THIRD: The foregoing amendment to such Articles of
Incorporation of the Corporation was approved by a majority of the entire Board
of Directors of the Corporation; the charter amendment is limited to changes
expressly permitted by Section 2-605 of Subtitle 6 of Title 2 of the Maryland
General Corporation Law to be made without action by the stockholders, and the
Corporation is registered as an open-end investment company under the Investment
Company Act of 1940.
FOURTH: The undersigned President of the Corporation
acknowledges these Articles of Amendment to be the corporate act of the
Corporation and states to the best of his knowledge, information and belief that
the matters and facts set forth in these Articles with respect to authorization
and approval are true in all material respects and that this statement is made
under the penalties of perjury.
<PAGE>
IN WITNESS WHEREOF, Pilgrim America Bank and Thrift Fund, Inc. has
caused this instrument to be signed in its name and on its behalf by its
President, Robert W. Stallings, and attested by its Secretary, James M.
Hennessy, on the ___ day of October, 1998.
ATTEST: PILGRIM AMERICA BANK AND THRIFT
FUND, INC.
_______________________________ By:________________________________(SEAL)
James M. Hennessy Robert W. Stallings
Secretary President
-2-
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pilgrim America Bank and Thrift Fund, Inc.
Pilgrim America Investment Funds, Inc.
Pilgrim Government Securities Income Fund, Inc.
Pilgrim America Masters Series, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Financial Highlights" in the
Prospectus and "Independent Auditors" in the Statements of Additional
Information.
/s/ KPMG Peat Marwick
Los Angeles, California
October 26, 1998
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