As filed with the Securities and Exchange Commission on March 26, 1999
Securities Act File No. 33-56094
Investment Company Act File No. 811-7428
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act Of 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 68 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 70 [X]
(Check appropriate box or boxes)
PILGRIM MUTUAL FUNDS
(FORMERLY NICHOLAS-APPLEGATE MUTUAL FUNDS)
(Exact Name of Registrant Specified in Charter)
600 West Broadway, 30th Floor
San Diego, California 92101
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 551-8643
Arthur E. Nicholas
c/o Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
(Name and Address of Agent for Service)
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WITH COPIES TO:
<S> <C> <C>
Robert E. Carlson James M. Hennessy, Esq. Jeffrey S. Puretz, Esq.
Paul, Hastings, Janofsky & Walker LLP Pilgrim Investments, Inc. Dechert Price & Rhoads
555 S. Flower Street, Twentieth Floor 40 North Central Avenue, Suite 1200 1775 Eye Street, N.W.
Los Angeles, California 90071 Phoenix, AZ 85004 Washington, D.C. 20006
</TABLE>
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It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date
for a previously filed post-effective amendment.
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EXPLANATORY NOTE
The attached filing pertains to the Prospectus of the Pilgrim Money Market Fund,
a series of Pilgrim Mutual Funds and contains no information regarding any other
series of Pilgrim Mutual Funds. Information concerning the other funds of
Pilgrim Mutual Funds can be found in Post-Effective Amendment No. 67 filed on
March 25, 1999.
<PAGE>
PILGRIM
THE VALUE OF INVESTING
PILGRIM MONEY MARKET FUND
CLASSES A, B, C AND M
This prospectus contains important information about the Pilgrim Money Market
Fund. You should read it carefully before you invest, and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is true or complete. Any
representation to the contrary is a criminal offense.
Prospectus
<PAGE>
MONEY MARKET FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current income as is consistent
with the preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests all of its assets in the [ ] Money Market Fund, a series of [ ]
Trust, Inc., a registered open-end management investment company, rather than
directly in a portfolio of securities. In turn, the [ ] Money Market Fund seeks
to provide as high a level of current income as is consistent with the
preservation of capital and liquidity by investing in high quality debt
obligations with relatively short maturities. This "master-feeder" structure is
different from that of other Pilgrim Funds and many other investment companies,
which directly acquire and manage their own portfolio of securities.
The [ ] Money Market Fund seeks to achieve its investment objective by investing
at least 80% of its assets in U.S. Government obligations, investing in a
portfolio of securities and instruments issued or guaranteed by the United
States Government, its agencies or instrumentalities, bank instruments, trust
instruments, corporate commercial instruments and other corporate instruments
maturing in thirteen months or less. Corporate obligations and instruments
include but are not limited to, corporate commercial paper, notes, bonds and
debentures.
The [ ] Money Market Fund may invest up to 100% of its assets in obligations
issued by banks, and up to 10% of its assets in obligations issued by any one
bank. The [ ] Money Market Fund may invest up to 25% of its assets, at the time
of purchase, in foreign bank obligations, including Eurodollar obligations and
Yankee dollar obligations. The [ ] Money Market Fund may also purchase variable
amount master demand notes and fixed or variable rate debt units representing an
undivided interest in a trust's distributions of principal and interest that the
trust receives from an underlying portfolio of bonds. Other investment
strategies which the [ ] Money Market Fund may use are repurchase agreements,
reverse repurchase agreements, and delayed delivery agreements and when-issued
securities.
The [ ] Money Market Fund uses the amortized cost method of valuation to enable
the Fund to maintain a stable $1.00 share price. Of course, there is no
guarantee that the Fund will be able to maintain a $1.00 share price.
PRINCIPAL RISKS
The Fund is subject to the risks associated with investing in debt securities.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund. Because the Fund invests all of its assets
in another registered management investment company, the Fund and its
shareholders will bear the investment advisory fees and expenses of the Fund and
the other registered management investment company in which it invests with the
result that the Fund's expenses may be higher than those of other money market
funds which invest directly in debt securities. The Fund is also designed for
investors who desire a short-term investment and may not be appropriate for
those investors desiring a long-term investment.
2
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The Fund may be affected by these other risks by virtue of its investment in the
[ ] Money Market Fund:
+ CHANGES IN INTEREST RATES - the value of the Fund's investment may fall
when interest rates rise. Money market funds like the Fund are subject to
less interest rate risk than other income funds because they invest in debt
securities with a remaining maturity not greater than 397 days. The dollar
weighted average portfolio maturity of the Fund will not exceed ninety
days.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. Money market
funds like the Fund are subject to less credit risk than other income funds
because they invest in short-term debt securities of the highest quality.
OTHER RISKS AND TECHNIQUES
To the extent that the Fund invests in the [ ] Money Market Fund, it will be
indirectly exposed to the following techniques and risks based on the [ ] Money
Market Fund's investments:
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Fund's
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for the Fund depends upon the costs
of the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase the Fund's yield; however,
such transactions also increase the Fund's risk to capital and may result in a
shareholder's loss of principal.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
PERFORMANCE. Since this is a new fund, there are no investment returns to report
at this time.
3
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FEES AND EXPENSES
The following tables(1) show what it will cost you directly or indirectly to
invest in the Fund.
SHAREHOLDER TRANSACTION FEES (fees paid directly from your investment)
CLASS A CLASS B CLASS C CLASS M
------- ------- ------- -------
Maximum sales charge (load) imposed
on purchases (as a percentage of
offering price) None None None None
Maximum deferred sales charge (load)
(as a percentage of the lower of
original purchase price or
redemption proceeds) None(2) 5.00%(3) 1.00%(4) None
Exchange Fee None None None None
- ----------
1 The tables reflect the expenses of both the Fund and the [ ] Money Market
Fund in which it invests.
2 A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See Shareholder
Guide.
3 Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
4 Imposed upon redemption within 1 year from purchase.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)(1)
<TABLE>
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TOTAL ANNUAL
DISTRIBUTION FUND
MONEY MARKET MANAGEMENT AND SERVICE OPERATING
FUND(2) FEES(3) (12B-1) FEES(4) OTHER EXPENSES EXPENSES
- ------------ ---------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Class A 0.00 0.25 1.43 1.68
Class B 0.00 1.00 1.43 2.43
Class C 0.00 1.00 1.43 2.43
Class M 0.00 0.75 1.43 2.18
</TABLE>
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1 Shown as a ratio of expenses to average daily net assets.
2 The Fund is new, and therefore, has no historical expense data. Thus, the
numbers are estimates.
3 The Money Market Fund's shareholders indirectly bear the fees and expenses
associated with the investment of its assets in the [ ] Money Market Fund.
The [ ] Money Market Fund's investment adviser is [ ]. The total indirect
expenses borne by the Fund are estimated to be at an annual rate of 1.03%
of the Fund's average daily net assets.
4 To the extent the Distributor receives fees from other sources, such as the
[ ] Money Market Fund or that fund's distributor or other service provider,
it will offset its fees against the amounts received.
4
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EXAMPLES
The hypothetical examples below show what your expenses would be if you invested
$10,000 over the time frames indicated, assuming a 5% return each year, that you
reinvest all distributions, and that operating expenses for the Fund remains the
same. The example is for comparison only, and does not represent the Fund's
actual expenses and returns, either past or future.
ASSUMING YOU REDEEM
AT THE END OF EACH ASSUMING YOU DO
TIME PERIOD. NOT REDEEM.
MONEY MARKET FUND 1 YEAR 3 YEARS 1 YEAR 3 YEARS
----------------- ------ ------- ------ -------
Class A 171 530 171 530
Class B 746 1058 246 758
Class C 346 758 246 758
Class M 221 682 221 682
SHAREHOLDER GUIDE
CHOOSING A SHARE CLASS - PILGRIM PURCHASE OPTIONS(TM)
You may select from four separate classes of shares: Class A, Class B, Class C
and Class M of the Fund.
CLASS A
+ No front-end sales charge, however assets invested directly will be
assessed a sales charge upon exchange to another Class A Pilgrim Fund.
+ Distribution and service (12b-1) fees of 0.25%.
CLASS B
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00%.
+ A contingent deferred sales charge, as described below.
+ Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
CLASS C
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00%.
+ A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
+ No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
CLASS M
+ No front-end sales charge, however assets invested directly will be
assessed a sales charge upon exchange to another Class M Pilgrim Fund.
+ Distribution and service (12b-1) fees of 0.75%.
5
<PAGE>
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the potential initial sales charge upon exchange in the case
of A or M shares or the contingent deferred sales charge. The relative impact of
the ongoing annual expenses will depend on the length of time a share is held.
Higher distribution fees mean a higher expense ratio, so Class B and Class C
shares pay correspondingly lower dividends than Class A or Class M shares.
Orders for Class B shares and Class M shares in excess of $250,000 and
$1,000,000, respectively, will be accepted as orders for Class A shares or
declined. You should discuss which Class of shares is right for you with your
investment professional.
SALES CHARGE CALCULATION
CLASS B AND CLASS C
Class B and Class C shares are offered at their net asset value per share
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares that you sell within a certain period of
time after you bought them. The amount of the CDSC is based on the lesser of the
net asset value of the shares at the time of purchase or redemption. There is no
CDSC on shares acquired through the reinvestment of dividends. The CDSCs are as
follows:
CLASS B DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
-------------------- ----------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6th year none
CLASS C DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
-------------------- ----------
1st year 1%
After 1st year none
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Funds will first redeem shares in your account that are not subject
to a CDSC, and then will sell shares that have the lowest CDSC.
CDSC WAIVERS. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
+ redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of
death or initial determination of permanent disability.
6
<PAGE>
+ for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan,
up to a maximum of 12% per year of a shareholder's account value based on
the value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
+ mandatory distributions from a tax-deferred retirement plan or an IRA.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC.
7
<PAGE>
PURCHASING SHARES
You may purchase shares by the following methods. The minimum initial investment
in the Fund is $1,000 ($250 for IRAs), and the minimum for additional investment
in the Fund is $100.
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METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
------ ------------------ ---------------------
<S> <C> <C>
By contacting + An investment professional with an authorized firm can help you establish and
your investment maintain your account.
professional
By mail + Visit or consult an investment + Visit or consult an investment
professional. professional.
+ Make your check payable to the + Fill out the Account Additions form
Pilgrim Funds and mail it, along included on the bottom of your
with a completed Application. Please account statement along with your
indicate your investment check payable to the Fund and mail
professional on the New Account them to the address on the account
Application. statement.
+ Remember to write your account
number on the check.
By wire + Call the Pilgrim Operations + Wire the funds in the same manner
Department at (800) 336-3436 to described under "Initial
obtain an account number and Investment."
indicate your investment
professional on the account.
+ Instruct your bank to wire funds to
the Fund in the care of: Investors
Fiduciary Trust Co. ABA #101003621
Kansas City, MO credit to:
_______________ (the Fund)
A/C #751-8315; for further credit to:
Shareholder A/C
#__________________
(A/C # you received over the telephone)
Shareholder Name:
________________ (Your Name Here)
+ After wiring funds you must complete
the Account Application and send it
to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>
The Fund and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Fund reserves the right to liquidate sufficient shares to recover
annual transfer agent fees should you fail to maintain your account value at a
minimum of $1,000.00 ($250.00 for IRA's).
RETIREMENT PLANS. The Fund has available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
8
<PAGE>
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company ('IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
HOW TO REDEEM SHARES
You may redeem shares by the following methods:
<TABLE>
<CAPTION>
METHOD PROCEDURES
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<S> <C>
By contacting your + You may redeem by contacting your investment professional. Investment
investment professionals may charge for their services in connection with your
professional redemption request, but neither the Fund nor the Distributor imposes any
such charge.
By Mail + Send a written request specifying the Fund name and share class, your
account number, the name(s) in which the account is registered, and the
dollar value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
+ Corporate investors and other associations must have an appropriate
certification on file authorizing redemptions. A suggested form of such
certification is provided on the Account Application.
+ A signature guarantee may be required.
By Telephone -- + You may redeem shares by telephone on all accounts other than retirement
Expedited Redemption accounts, unless you check the box on the Account Application which
signifies that you do not wish to use telephone redemptions. To redeem by
telephone, call the Shareholder Servicing Agent at (800) 992-0180.
+ RECEIVING PROCEEDS BY CHECK:
+ You may have redemption proceeds (up to a maximum of $100,000) mailed to
an address which has been on record with Pilgrim Funds for at least 30
days.
+ RECEIVING PROCEEDS BY WIRE:
+ You may have redemption proceeds (subject to a minimum of $5,000) wired
to your pre-designated bank account.
+ You will NOT be able to receive redemption proceeds by wire unless you
check the box on the Account Application which signifies that you wish
to receive redemption proceeds by wire and attach a voided check.
+ Under normal circumstances, proceeds will be transmitted to your bank on
the business day following receipt of your instructions, provided
redemptions may be made.
</TABLE>
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $100 to yourself, or to anyone else you
properly designate, as long as the account has a current value of at least
$10,000. To establish a systematic cash withdrawal, complete the Systematic
9
<PAGE>
Withdrawal Plan section of the Account Application. To have funds deposited to
your bank account, follow the instructions on the Account Application. You may
elect to have monthly, quarterly, semi-annual or annual payments. Redemptions
are normally processed on the fifth day prior to the end of the month, quarter
or year. Checks are then mailed or proceeds are forwarded to your bank account
on or about the first of the following month. You may change the amount,
frequency and payee, or terminate the plan by giving written notice to the
Transfer Agent. A Systematic Withdrawal Plan may be modified at any time by the
Fund or terminated upon written notice by the Fund.
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
B or C shares. Shareholders who elect to have a systematic cash withdrawal must
have all dividends and capital gains reinvested. As shares of the Fund are
redeemed under the Plan, you may realize a capital gain or loss for income tax
purposes.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed in a timely fashion, but the Fund will
not release the proceeds until your purchase payment clears. This may take up to
15 days or more. To reduce such delay, purchases should be made by bank wire or
federal funds.
TRANSACTION POLICIES
NET ASSET VALUE. The net asset value (NAV) per share for the Fund and each class
is determined each business day as of the close of regular trading on the New
York Stock Exchange (usually at 4:00 p.m. New York City time).
The NAV for an investment company generally is calculated by subtracting
liabilities from total assets. With respect to the Fund, NAV is calculated by
subtracting liabilities from the Fund's percentage interest in the [ ] Money
Market Fund, multiplied by the [ ] Money Market Fund's NAV, plus any other
assets. The Fund's per share NAV is calculated by dividing its NAV by the number
of shares outstanding and rounding the result to the nearest whole cent.
The Fund tries to maintain a stable NAV of $1.00 per share. Because [ ] Money
Market Fund uses the amortized cost method of valuing the securities held by it
and rounds its per share net asset value to the nearest whole cent, it is
anticipated that the net asset value of [ ] Money Market Fund will remain
constant at $1.00 per share. However, the Fund makes no assurance that either it
or [ ] Money Market Fund can maintain a $1.00 net asset value per share.
Net asset value is normally determined at [ ] time each business day of the
Fund.
PRICE OF SHARES. When you buy or sell shares, you pay or receive the NAV. When
you sell shares, you receive the NAV minus any applicable deferred sales charge.
Exchange orders are effected at NAV, however shares purchased directly into
Class A or M may be subject to front-end sales charges upon exchange.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
10
<PAGE>
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations as evidence of your ownership. Certificates
representing shares of the Fund will not be issued.
EXCHANGES. You may exchange shares of the Fund for shares of the same class of
any other Pilgrim Fund. Shares purchased directly in Class A or M will be
subject to the appropriate front-end sales charge upon exchange into a
corresponding Class A or M Pilgrim Fund. Shares subject to a CDSC will continue
to age from the date that the original shares were purchased.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Pilgrim Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Pilgrim Funds (except for the Fund) are not intended as a
short-term trading vehicle. The adviser may prohibit excessive exchanges (more
than four per year). The adviser also may, on 60 days' prior notice, restrict
the frequency of, otherwise modify, or impose charges of up to $5.00 upon
exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Servicing Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
TELEPHONE ORDERS. The Fund and its 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 Fund and its transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Fund and its transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the Fund reserves 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.
11
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICE FEES
To pay for the cost of promoting the Fund and servicing your shareholder
account, each class of the Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
increase your cost of investing and may exceed the cost of paying other types of
sales charges. The following table shows the distribution and service fees
associated with investing in each class of shares.
DISTRIBUTION FEE(1) SERVICE FEE
------------------- -----------
CLASS A 0.00% 0.25%
CLASS B 0.75% 0.25%
CLASS C 0.75% 0.25%
CLASS M 0.75% 0.25%
- --------
1 To the extent the Distributor receives fees from other sources such as the
[ ] Money Market Fund or that fund's distributor or other service
providers, it will offset its fees against the amounts received.
MANAGEMENT OF THE FUND
ADVISER
Pilgrim Investments, Inc. has overall responsibility for the management of the
Fund. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for the Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Fund, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of ________, 1999,
Pilgrim Investments managed over $__ billion in assets. Pilgrim Investments is
an indirect, wholly owned subsidiary of Pilgrim America Capital Corporation
(NYSE: PFX). 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.
The Fund invests all of its assets in another registered management investment
company, [ ] Money Market Fund. The Investment Adviser for the [ ] Money Market
Fund is [ ], a Delaware limited partnership, located at [ ]. [ ] receives an
advisory fee for managing the [ ] Money Market Fund of 0.80% of the first $500
million of the [ ] Money Market Fund's average daily net assets, plus 0.775% of
the next $500 million of the [ ] Money Market Fund's average daily net assets,
plus 0.75% of the next $500 million of the [ ] Money Market Fund's average daily
net assets, plus 0.725% of the [ ] Money Market Fund's average daily net assets
in excess of $1.5 billion.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Fund generally distributes most or all of its net earnings in the form of
dividends. The Fund pays dividends monthly and distributes capital gains
annually.
12
<PAGE>
DIVIDEND REINVESTMENT
Unless you instruct the Fund to pay you dividends in cash, dividends and
distributions paid by the Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C or M shares of the Fund invested in another Pilgrim Fund
which offers the same class shares.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund will distribute most of its net investment income and net capital gains
to its shareholders each year. Although the Fund will not be taxed on amounts
it distributes, most shareholders will be taxed on amounts they receive. A
particular distribution generally will be taxable as either ordinary income or
long-term capital gains. It does not matter how long you have held your Fund
shares or whether you elect to receive your distributions in cash or reinvest
them in additional Fund shares. For example, if the Fund designates a particular
distribution as a long-term capital gains distribution, it will be taxable to
you at your long-term capital gains rate.
Dividends declared by the Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
13
<PAGE>
YEAR 2000 COMPLIANCE
Like other financial organizations, the Fund could be adversely affected if the
computer systems used by the Investment Adviser, the Administrator, the Fund's
other service providers, the [ ] Money Market Fund and its service providers do
not properly process and calculate date-related information after January 1,
2000. This is commonly known as the "Year 2000 Problem." The Year 2000 Problem
could have a negative impact on handling securities trades, payment of interest
and dividends, pricing, and account services. Pilgrim Investments 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 Fund's other major
service providers and [ ] Money Market Fund and its service providers. It is not
anticipated that the Fund will directly bear any material costs associated with
Pilgrim Investments', the Fund's other service providers', [ ] Money Market
Fund's or its 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 Fund 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 Fund or on global markets or economies, generally.
14
<PAGE>
[BACK COVER]
You can find additional information about the Fund in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Fund's annual and semi-annual reports list the holdings of the Fund's
portfolios, describe the Fund's performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about the Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by:
CALLING OR WRITING THE FUND'S SHAREHOLDER SERVICING AGENT AT:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
CONTACTING THE SECURITIES AND EXCHANGE COMMISSION:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
The SEC may charge you a fee for this information.
SEC file number: 811-7428
<PAGE>
PILGRIM MUTUAL FUNDS
40 North Central Avenue
Phoenix, Arizona 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
May 24, 1999
Pilgrim Mutual Funds (the "Trust") is an open-end management investment company
currently offering a number of separate diversified portfolios. This Statement
of Additional Information contains information regarding the following
portfolios (each a "Fund" and collectively the "Funds"):
Pilgrim International Core Growth Fund (the "International Core Growth Fund");
Pilgrim Worldwide Growth Fund (the "Worldwide Growth Fund"); Pilgrim
International Small Cap Growth Fund (the "International Small Cap Growth Fund");
Pilgrim Emerging Countries Fund (the "Emerging Countries Fund"); Pilgrim Large
Cap Growth Fund (the "Large Cap Growth Fund"); Pilgrim Mid Cap Growth Fund (the
"Mid Cap Growth Fund"); Pilgrim Small Cap Growth Fund (the "Small Cap Growth
Fund"); Pilgrim Convertible Fund (the "Convertible Fund"); Pilgrim Balanced Fund
(the "Balanced Fund"); Pilgrim High Yield Fund II ("High Yield Fund II"),
Pilgrim Strategic Income Fund (the "Strategic Income Fund") and Pilgrim Money
Market Fund (the "Money Market Fund").
This Statement of Additional Information is not a prospectus, but contains
information in addition to and more detailed than that set forth in the Funds'
Prospectus and should be read in conjunction with the Prospectus. In addition,
the financial statements from the Funds' March 31, 1999 Annual Reports are
incorporated herein by reference. Copies of the Funds' Prospectus and Annual
Reports may be obtained without charge by contacting Pilgrim Funds at the
address and phone number written above.
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION.........................................................B-2
MANAGEMENT OF THE FUNDS.....................................................B-2
INVESTMENT OBJECTIVES, POLICIES AND RISKS..................................B-14
INVESTMENT RESTRICTIONS....................................................B-44
PORTFOLIO TRANSACTIONS.....................................................B-47
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................B-50
DETERMINATION OF SHARE PRICE...............................................B-55
SHAREHOLDER INFORMATION....................................................B-57
SHAREHOLDER SERVICES AND PRIVILEGES........................................B-57
DISTRIBUTIONS..............................................................B-59
TAX CONSIDERATIONS.........................................................B-60
CALCULATION OF PERFORMANCE DATA............................................B-65
GENERAL INFORMATION........................................................B-73
FINANCIAL STATEMENTS.......................................................B-74
<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the laws of
Delaware. Information regarding each Fund of the Trust is included in this
Statement of Additional Information. The Money Market Fund is newly organized.
All of the Funds except the Money Market Fund consists of four classes of
shares, Class A, B, C and Q. The Money Market Fund consists of Class A, B and C
Shares.
Prior to a reorganization of the Trust which became effective on July 24, 1998
(the "Reorganization"), the Trust offered shares in a number of separate
diversified portfolios each of which invested all of its assets in a
corresponding master fund of Nicholas-Applegate Investment Trust (the "Master
Trust"). The Reorganization eliminated this two-tiered "master-feeder"
structure.
On March 15, 1999, the name of the Trust was changed from "Nicholas-Applegate
Mutual Funds," and the name of each Fund (except the Money Market Fund which is
a new fund) was changed as follows:
<TABLE>
<CAPTION>
OLD NAME NEW NAME
- -------- --------
<S> <C>
Nicholas-Applegate International Core Growth Fund Pilgrim International Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund Pilgrim Worldwide Growth Fund
Nicholas-Applegate International Small Cap Growth Fund Pilgrim International Small Cap Growth Fund
Nicholas-Applegate Emerging Countries Fund Pilgrim Emerging Countries Fund
Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund
Nicholas-Applegate Mid Cap Growth Fund Pilgrim Mid Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund Pilgrim Small Cap Growth Fund
Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund
Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund
Nicholas-Applegate High Yield Bond Fund Pilgrim High Yield Fund II
Nicholas-Applegate High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund II that, if approved by shareholders of High Yield Fund II, will
result in the reorganization of High Yield Fund II into the Pilgrim High Yield
Fund series of Pilgrim Investment Funds, Inc. If the Agreement and Plan of
Reorganization is approved by shareholders, the Reorganization is expected to
occur in or about June, 1999.
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES. The Trust is managed by its Board of Trustees. The Trustees
and Officers of the Trust are listed below. An asterisk (*) has been placed next
to the name of each Trustee who is an "interested person," as that term is
defined in the 1940 Act, by virtue of that person's affiliation with the Trust
or Pilgrim Investments, Inc., the Trust's investment manager ("Pilgrim
Investments" or the "Investment Manager").
Walter E. Auch, 6001 North 62nd Place, Paradise Valley, Arizona. (Age 76).
Trustee. Trustee, Pilgrim Prime Rate Trust; Director, Pilgrim Bank and Thrift
Fund, Inc.; Advisory Officer, Pilgrim Advisory Funds, Inc., Pilgrim Investment
Funds, Inc. and Pilgrim Government Securities Income Fund, Inc. Director,
Geotech Communications, Inc., a mobile radio communications company (since
1987); Fort Dearborn Fund (since 1987); Brinson Funds (since 1994), Smith Barney
Trak Fund (since 1992), registered investment companies; Pimco Advisors L.P., an
investment manager (since 1994); and Banyan Realty Fund (since 1987), Banyan
Strategic Land Fund (since 1987), Banyan Strategic Land Fund II (since 1988),
and Banyan Mortgage Fund (since 1988), real estate investment trusts. Formerly
Chairman and Chief Executive Officer, Chicago Board Options Exchange (1979 to
B-2
<PAGE>
1986); Senior Executive Vice President, Director and Member of the Executive
Committee, PaineWebber, Inc. (until 1979). Formerly Trustee, Nicholas-Applegate
Investment Trust (until 1998). [Although Mr. Auch is on the board of a company a
subsidiary of which is a broker-dealer, the Board has determined pursuant to
Rule 2a19-1 that Mr. Auch shall not be considered to be an "interested person."]
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 59) Trustee. Realtor, Coldwell Banker Success Realty (formerly, The
Prudential Arizona Realty) for more than the last five years. Ms. Baldwin is
also Vice President, United States Olympic Committee (November 1996 - Present),
and formerly Treasurer, United States Olympic Committee (November 1992 -
November 1996). Ms. Baldwin is also a director and/or trustee of each of the
funds managed by the Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130. (Age 66)
Trustee. 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)
Trustee. President of Al Burton Productions for more than the last five years;
formerly Vice President, First Run Syndication, Castle Rock Entertainment (July
1992 - November 1994). Mr. Burton is also a director and/or trustee of each of
the funds managed by the Investment Manager.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 52)
Trustee. Private Investor. Director of Artisoft, Inc. Mr. Patton was formerly
President and Co-owner, StockVal, Inc. (April 1993 - June 1997) and a partner
and director of the law firm of Streich, Lang, P.A. (1972 - 1993). Mr. Patton is
also a director and/or trustee of each of the funds managed by the Investment
Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
(Age 49) Chairman, Chief Executive Officer, and President. Chairman, Chief
Executive Officer and President of Pilgrim Group, Inc. ("Pilgrim Group") (since
December 1994); Chairman, Pilgrim Investments, Inc. (since December 1994);
Director, Pilgrim Securities, Inc. ("Pilgrim Securities") (since December 1994);
Chairman, Chief Executive Officer and President of Pilgrim Bank and Thrift Fund,
Inc., Pilgrim Government Securities Income Fund, Inc. and Pilgrim Investment
Funds, Inc. (since April 1995). Chairman and Chief Executive Officer of Pilgrim
Prime Rate Trust (since April 1995). Chairman and Chief Executive Officer of
Pilgrim America Capital Corporation (formerly, Express America Holdings
Corporation) ("Pilgrim Capital") (since August 1990).
Each Fund pays each Trustee who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $25,000; (ii) $2,500 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 each Fund is based on the Funds' average net assets as a percentage of
the average net assets of all the funds managed by the Investment Manager for
which the Trustees serve in common as directors/trustees.
CHANGE IN TRUSTEES. Except for Mr. Auch, each Trustee became a Trustee of the
Trust on May __, 1999. Prior to that date, the Trustees of the Trust were: Fred
C. Applegate, Dann V. Angeloff, Walter E. Auch, Theodore J. Coburn, Darlene
Deremer, George F. Keane, Arthur B. Laffer and Charles E. Young. Also, prior to
B-3
<PAGE>
that date, each Trustee who was not an interested person was paid an aggregate
annual fee of $14,000 for services rendered as a Trustee of the Trust, and
$1,000 for each meeting attended ($2,000 per Committee meeting for Committee
chairmen). Each Trustee was also reimbursed for out-of-pocket expenses incurred
as a Trustee.
COMPENSATION OF TRUSTEES. The following table sets forth information regarding
compensation of Trustees by the Trust and other funds managed by the Fund's
investment adviser for the year ended March 31, 1999. Officers of the Trust and
Trustees who are interested persons of the Trust do not receive any compensation
from the Funds. In the column headed "Total Compensation From Registrant and
Fund Complex Paid to Trustee," the number in parentheses indicates the total
number of boards in the fund complex on which the Trustee served during that
fiscal year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement Estimated Annual from Registrant and
Compensation Benefits Accrued as Benefits Upon Fund Complex Paid to
Name from Trust Part of Trust Expenses Retirement Trustee
- ---- ---------- ---------------------- ---------- --------------------
<S> <C> <C> <C> <C>
Fred C. Applegate* $____ None N/A $____ (__)
Arthur B. Laffer* $____ None N/A $____ (__)
Charles E. Young* $____ None N/A $____ (__)
Dann V. Angeloff* $____ None N/A $____ (__)
Walter E. Auch $____ None N/A $____ (__)
Theodore J. Coburn* $____ None N/A $____ (__)
Darlene Deremer* $____ None N/A $____ (__)
George F. Keane* $____ None N/A $____ (__)
</TABLE>
- ----------
* Resigned as Trustee effective May 21, 1999.
OFFICERS
The following individuals serve as officers for the Trust:
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 Pilgrim Prime Rate Trust; Chief
Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December
1993), Pilgrim Capital (formerly Express America Holdings Corporation).
Presently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
B-4
<PAGE>
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48)
Executive Vice President (since August 1996), Pilgrim Group; President and
Chief Executive Officer (since August 1996), Pilgrim Investments; Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of Pilgrim Prime Rate Trust. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer, Pilgrim Group, Pilgrim
Investments, Pilgrim Securities (since June 1998) and Pilgrim Financial
(since August 1998). He served in the 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 (since April 1997) and Pilgrim Group, Inc.
(since February 1997). Vice President and Assistant Secretary of Pilgrim
Prime Rate Trust. 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 PaineWebber (June,
1993 - April, 1995).
PRINCIPAL SHAREHOLDERS. As of _________, 1999, the Trustees and Officers of the
Trust as a group owned less than 1% of any class of the Fund's outstanding
shares. As of _________, 1999, to the knowledge of management, no person owned
beneficially or of record more than 5% of the outstanding shares of any class of
the Funds, except as follows:
[TO BE PROVIDED BY AMENDMENT]
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Funds and has overall responsibility for the management of the Funds. The
Investment Manager serves pursuant to an Investment Management Agreement between
the Investment Manager and the Trust. The Investment Management Agreement
requires the Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Funds.
B-5
<PAGE>
The Investment Manager, which was organized in December 1994, is registered as
an investment adviser with the SEC and serves as investment adviser to
registered investment companies (or series thereof) as well as privately managed
accounts. As of _________, 1999, the Investment Manager had assets under
management of approximately $___ billion. The Investment Manager is a
wholly-owned subsidiary of Pilgrim Group, Inc., which is itself a wholly-owned
subsidiary of Pilgrim America Capital Corporation, a Delaware corporation, the
shares of which are traded on the New York Stock Exchange (NYSE:PFX) and which
is a holding company that through its subsidiaries engages in the financial
services business.
The Investment Management Agreement provides that the Investment Manager, with
the approval of the Trust's Board of Trustees, may select and employ investment
advisers to serve as portfolio manager for any Fund ("Portfolio Manager"), and
shall monitor the Portfolio Manager's investment programs and results, and
coordinate the investment activities of the Portfolio Manager to ensure
compliance with regulatory restrictions.
The Investment Manager employs a Portfolio Manager to provide investment
advisory services to certain Funds. More information regarding the Portfolio
Manager is provided below.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all fees
payable to the Portfolio Managers, executive salaries and expenses of the
Trustees and Officers of the Trust who are employees of the Investment Manager
or its affiliates and office rent of the Trust. The Portfolio Manager pays all
of its expenses arising from the performance of its obligations under the
Portfolio Management Agreement. Subject to the expense reimbursement provisions
described in this Statement of Additional Information, other expenses incurred
in the operation of the Trust are borne by the Funds, including, without
limitation, investment advisory fees; brokerage commissions; interest; legal
fees and expenses of attorneys; fees of independent auditors, transfer agents
and dividend disbursing agents, accounting agents, and custodians; the expense
of obtaining quotations for calculating each Fund's net asset value; taxes, if
any, and the preparation of each Fund's tax returns; cost of stock certificates
and any other expenses (including clerical expenses) of issue, sale, repurchase
or redemption of shares; fees and expenses of registering and maintaining the
registration of shares of the Funds under federal and state laws and
regulations; salaries of personnel involved in placing orders for the execution
of the Fund's portfolio transactions; 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 Trustees of the Trust who are not
employees of the Investment Manager or any Portfolio Manager, or their
affiliates; membership dues in the Investment Company Institute; insurance
premiums; and extraordinary expenses such as litigation expenses. Expenses
directly attributable to a Fund are charged to that Fund and other expenses are
allocated proportionately among all the Funds in relation to the net assets of
each Fund.
The Investment Management Agreement will continue in effect for two years from
the date it became effective, and from year to year thereafter so long as such
continuance is specifically approved at least annually by (a) the Board of
Trustees or (b) the vote of a "majority" (as defined in the 1940 Act) of the
Fund's outstanding shares voting as a single class; provided, that in either
event the continuance is also approved by at least a majority of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Investment Manager by vote cast in person at a meeting called for the purpose of
voting on such approval.
The Investment Management Agreement is terminable without penalty with not less
than 60 days' notice by the Board of Trustees or by a vote of the holders of a
majority of the Fund's outstanding shares voting as a single class, or upon not
B-6
<PAGE>
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).
The Investment Manager bears the expense of providing its services, and pays the
fees of the Portfolio Manager. For its services, each Fund pays the Investment
Manager a monthly fee in arrears equal to the following as a percentage of the
Fund's average daily net assets during the month:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE*
- ------ ---------------------------------
Small Cap Growth Fund 1.00% of the Fund's average net assets
Mid Cap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500 million
of average net assets, and 0.65% of the average net
assets in excess of $1 billion
Large Cap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500 million
of average net assets, and 0.65% of the average net
assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500 million
of average net assets, and 0.65% of the average net
assets in excess of $1 billion
Balanced Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250
million of average net assets, and 0.35% of the
average net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the Fund's
average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
International Small Cap 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average net
assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500 million
of average net assets, and 0.85% of the average net
assets in excess of $1 billion
*The Money Market Fund does not pay a fee to the Investment Manager but
shareholders of the Money Market Fund will pay advisory fees to [_______], the
investment adviser of [_______] Money Market Fund, the investment company in
which the Money Market Fund invests all of its assets.
B-7
<PAGE>
Prior to the Reorganization, the Trust had not engaged the services of an
investment adviser for the Trust's A, B, C and Institutional Portfolios because
these portfolios invested all their assets in master funds of the Master Trust.
Consequently, the amounts of the advisory fees reported below were for services
provided to the master funds of the Master Trust. The amounts of the advisory
fees paid by each Fund for the fiscal years ended March 31, 1999, 1998 and 1997
were:
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $_______ $ 308,562 $_______
Worldwide Growth Fund _______ 1,251,181 _______
International Small Cap Growth Fund _______ 658,893 _______
Emerging Countries Fund _______ 2,790,216 _______
Large Cap Growth Fund _______ 32,530 _______
Mid Cap Growth Fund _______ 3,422,148 _______
Small Cap Growth Fund _______ 6,613,874 _______
Convertible Fund _______ 1,427,198 _______
Balanced Fund _______ 220,025 _______
Strategic Income Fund(1) _______ 94,359 _______
High Yield Fund II _______ 36,505 _______
- ----------
(1) Includes the advisory fees, fee reductions and expense reimbursements of the
Government Income Fund, the assets and liabilities of which were assigned to
and assumed by the Strategic Income Fund pursuant to the Reorganization.
The Investment Manager has entered into an expense limitation agreement with
the Trust, 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 certain of the Funds (which excludes interest, taxes,
brokerage commissions, extraordinary expenses such as litigation, other expenses
not incurred in the ordinary course of each Fund's business, and expenses of any
counsel or other persons or services retained by the Trust's trustees who are
not "interested persons," as defined in the 1940 Act, of the Investment Manager)
do not exceed the following for each Class:
FUND CLASS A CLASS B CLASS C CLASS Q
- ----- ------- ------- ------- -------
Small Cap Growth Fund 1.95% 2.60% 2.60% 1.50%
Mid Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Large Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Convertible Fund 1.60% 2.25% 2.25% 1.25%
Balanced Fund 1.60% 2.25% 2.25% 1.25%
Strategic Income Fund 0.95% 1.35% 1.35% 0.85%
High Yield Fund II 1.10% 1.75% 1.75% 1.00%
Emerging Countries Fund 2.25% 2.90% 2.90% 1.90%
Worldwide Growth Fund 1.85% 2.50% 2.50% 1.60%
International Small Cap Growth Fund 1.95% 2.60% 2.60% 1.65%
International Core Growth Fund 1.95% 2.60% 2.60% 1.65%
The expense limitation agreement provides that these expense limitations shall
continue until [June 30,] 2001. The Investment Manager may extend, but may not
shorten, the period of these limitations without the consent of the above Funds,
so long as the extension is at the same expense limitation amount discussed
above. Each Fund will at a later date reimburse the Investment Manager for
management fees waived and other expenses assumed by the Investment Manager
during the previous 36 months, but only if, after such reimbursement, the Fund's
expense ratio does not exceed the percentage described above. The Investment
Manager will only be reimbursed for fees waived or expenses assumed after the
B-8
<PAGE>
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.
Prior to the expense limitation agreement described above, the Funds (other than
the Money Market Fund which is a new fund) had an expense limitation agreement
with the predecessor adviser which provided for expense limits at the same
levels as the current agreement. For the fiscal years ended March 31, 1999, 1998
and 1997, the voluntary fee reduction resulted in a waiver of the following
expenses for each Fund (or predecessor portfolios thereof):
FUND 1999 1998 1997
- ----- ---- ---- ----
Small Cap Growth Fund $_______ $ 0 $_______
Mid Cap Growth Fund _______ 9,400 _______
Large Cap Growth Fund _______ 53,872 _______
Convertible Fund _______ 0 _______
Balanced Fund _______ 48,936 _______
Strategic Income Fund _______ -- _______
High Yield Fund II _______ 111,479 _______
Emerging Countries Fund _______ 84,868 _______
Worldwide Growth Fund _______ 111,071 _______
International Small Cap Growth Fund _______ 79,886 _______
International Core Growth Fund _______ 30,669 _______
PORTFOLIO MANAGER. The Investment Manager has entered into a Portfolio
Management Agreement with Nicholas-Applegate Capital Management ("NACM" or the
"Portfolio Manager"), 600 West Broadway, 30th Floor, San Diego, California
92101, to provide investment advisory services to the following Funds:
International Core Growth Fund; Worldwide Growth Fund; International Small Cap
Growth Fund; Emerging Countries Fund; Large Cap Growth Fund; Mid Cap Growth
Fund; Small Cap Growth Fund; and Convertible Fund. NACM, a California limited
partnership, was organized in 1984 to manage discretionary accounts investing
primarily in publicly traded equity securities and securities convertible into
or exercisable for publicly traded equity securities, with the goal of capital
appreciation. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership the general partner of which is
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
owned by Arthur Nicholas.
NACM has discretion to purchase and sell securities for the Funds that it
manages in accordance with each Fund's investment objective, policies and
restrictions. Although NACM is subject to general supervision by the Investment
Manager, the Investment Manager does not evaluate the investment merits of
specific securities transactions.
As compensation for its services to the Funds, the Investment Manager pays NACM
a monthly fee in arrears equal to the following as a percentage of the Fund's
average daily net assets managed during the month:
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Small Cap Growth Fund 0.50% of the Fund's average net assets
Mid Cap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500 million
of average net assets, and 0.325% of the average net
assets in excess of $1 billion
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SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Large Cap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500 million
of average net assets, and 0.325% of the average net
assets in excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500 million
of average net assets, and 0.325% of the average net
assets in excess of $1 billion
Emerging Countries Fund 0.625% of the Fund's average net assets
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International Small Cap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average net
assets in excess of $1 billion
International Core 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500 million
of average net assets, and 0.425% of the average net
assets in excess of $1 billion
The Portfolio Management Agreement will remain in effect for two years after it
becomes effective, 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 Trustees or (b) the vote of a "majority" (as
defined in the 1940 Act) of a 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 Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Investment Manager or the Portfolio Manager by
vote cast in person at a meeting called for the purpose of voting on such
approval.
The Portfolio Management Agreement is terminable without penalty with not less
than 60 days notice by the Board of Trustees or by a vote of the holders of a
majority of the relevant Fund's outstanding shares voting as a single class, or
upon not less than 60 days notice by the Investment Manager. The Portfolio
Management Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
INVESTMENT ADVISER OF THE [_______] MONEY MARKET FUND. The Money Market Fund
invests substantially all of its assets in the [_______] Money Market Fund. The
[_______] Money Market Fund is managed by [_______]. [Describe adviser &
advisory fee, contract.]
ADMINISTRATION. Prior to May __, 1999, the Trust had an Administration Agreement
with Investment Company Administration Corporation ("ICAC"), 4455 East Camelback
Road, Suite 261-E, Phoenix, Arizona 85018. Pursuant to an Administration
Agreement with the Trust, ICAC was responsible for performing all administrative
services required for the daily business operations of the Trust, subject to the
supervision of the Board of Trustees of the Trust. For the fiscal years ended
March 31, 1999 and 1998, ICAC received aggregate compensation of $_________ and
$848,799, respectively, for all of the series of the Trust.
Also, prior to May __, 1999, the Trust had an Administrative Services Agreement
with NACM under which NACM was responsible for providing all administrative
services which are not provided by ICAC or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. For the
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fiscal years ended March 31, 1999 and 1998, NACM received aggregate compensation
of $_________ and $_______, respectively, for all of the series of the Trust
pursuant to the Administrative Services Agreement.
[Administrator and other service providers for [ ]Money Market Fund.]
DISTRIBUTOR. Shares of each Fund are distributed by Pilgrim Securities, Inc.
("Pilgrim Securities" or the "Distributor") pursuant to a Distribution Agreement
between the Trust and the Distributor. The Distribution Agreement requires the
Distributor to use its best efforts on a continuing basis to solicit purchases
of shares of the Funds. The Trust and the Distributor have agreed to indemnify
each other against certain liabilities. At the discretion of the Distributor,
all sales charges may at times be reallowed to an authorized dealer ("Authorized
Dealer"). If 90% or more of the sales commission is reallowed, such Authorized
Dealer may be deemed to be an "underwriter" as that term is defined under the
Securities Act of 1933, as amended. Each Distribution Agreement will remain in
effect for two years and from year to year thereafter only if its continuance is
approved annually by a majority of the Board of Trustees who are not parties to
such agreement or "interested persons" of any such party and must be approved
either by votes of a majority of the Trustees or a majority of the outstanding
voting securities of the Trust. See the Prospectus for information on how to
purchase and sell shares of the Funds, and the charges and expenses associated
with an investment. The sales charge retained by the Distributor and the
commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc., which
is a wholly-owned subsidiary of Pilgrim America Capital Corporation.
Prior to May __, 1999, the distributor of the Funds was Nicholas-Applegate
Securities ("NAS"). The aggregate commissions received by NAS in connection with
sales of shares in the Funds (other than the Money Market Fund which is a new
fund) for the fiscal years ended March 31,1999, 1998 and 1997 were $_________,
$6,778,277 and $5,766,080, respectively.
RULE 12B-1 PLANS. The Trust has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares offered by each Fund ("Rule
12b-1 Plans"). The Funds intend to operate the Rule 12b-1 Plans in accordance
with their terms and the National Association of Securities Dealers, Inc. rules
concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be
entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C and Class Q 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 a 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 a Fund; with respect to Class C shares
at an annual rate of up to 1.00% of the average daily net assets of the Class C
shares of a Fund; and with respect to Class Q shares at an annual rate of up to
0.25% of the average daily net assets of the Class Q shares of a Fund. The Board
of Trustees 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 each Class of 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 a Fund; (ii) with respect to Class B shares at an
annual rate equal to 1.00% of the average daily net assets of the class B shares
of a Fund; (iii) with respect to Class C shares at an annual rate of up to 1.00%
of the average daily net assets of the Class shares of a Fund; (iv) with respect
to Class M shares at an annual rate equal to 0.75% of the average daily net
assets of the Class M shares of a Fund; and (v) with respect to Class Q shares
at an annual rate equal to 0.25% of the average daily net assets of the Class Q
shares of a Fund.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C and Class Q shares
of the Funds, including payments to dealers for selling shares of the Funds and
for servicing shareholders of these classes of the Funds. Activities for which
these fees may be used include: promotional activities; preparation and
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<PAGE>
distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; interest on
accrued distribution expenses; and costs of administering the Rule 12b-1 Plans.
No more than 0.75% per annum of a Fund's average net assets may be used to
finance distribution expenses, exclusive of shareholder servicing payments, and
no Authorized Dealer may receive shareholder servicing payments in excess of
0.25% per annum of a Fund's average net assets held by the Authorized Dealer's
clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis
to Authorized Dealers for both distribution and shareholder servicing at the
annual rate of 0.25%, 0.25%, 1.00%, and 0.25% of a Fund's average daily net
assets of Class A, Class B, Class C, and Class Q shares, respectively, that are
registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. Rights to these ongoing payments begin to accrue in the 13th month
following a purchase of Class A, B or C shares [and in the 1st month following a
purchase of Class Q shares].
The Distributor will receive payment under a Rule 12b-1 Plan without regard to
actual distribution expenses it incurs. In the event a Rule 12b-1 Plan is
terminated in accordance with its terms, the obligations of a Fund to make
payments to the Distributor pursuant to the Rule 12b-1 Plan will cease and the
Fund will not be required to make any payments for expenses incurred after the
date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plans
also recognize that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers 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 one or more of the
Funds or other funds managed by the Investment Manager and/or other events
sponsored by dealers. In addition, the Distributor may, at its own expense, pay
concessions in addition to those described above to dealers that satisfy certain
criteria established from time to time by the Distributor. These conditions
relate to increasing sales of shares of the Funds over specified periods and to
certain other factors. These payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to (1) 0.30%
of the value of the Funds' shares sold by the dealer during a particular period,
and (2) 0.10% of the value of the Funds' shares held by the dealer's customers
for more than one year, calculated on an annual basis.
The Rule 12b-1 Plans have been approved by the Board of Trustees of each Fund,
including all of the Trustees who are not interested persons of the Trust as
defined in the 1940 Act, and by each Fund's shareholders. Each Rule 12b-1 Plan
must be renewed annually by the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Trust 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 Trustees be committed to the Trustees who are
not interested persons. Each Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Trustees or by a vote of a majority of the Fund's outstanding shares on 60
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<PAGE>
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 Trustees has determined that
differing distribution arrangements in connection with the sale of new shares of
a Fund is necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Trustees, including those Trustees
who are not interested persons of the Trust, concluded that, in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Rule 12b-1 Plans as tailored to each class
of each Fund, will benefit such Funds and their respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement shall be
approved by the Trustees who are not interested persons of the Trust, cast in
person at a meeting called for the purpose of voting on any such amendment.
The Distributor is required to report in writing to the Board of Trustees at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably be
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
Prior to May 24, 1999, the Trust has a Distribution Plan with respect to each
Class of each Fund (other than the Money Market Fund) and a separate Shareholder
Service Plan with respect to each Class of each Fund (other than the Money
Market Fund). Under the Distribution Plan, NAS (the Distributor's predecessor)
was entitled to payment each month in the following amounts: with respect to
Class A shares at an annual rate of up to 0.10% of the average daily net assets
of the Class A shares of a Fund; with respect to Class B shares at an annual
rate of up to 0.75% of the average daily net assets of the Class B shares of a
Fund; and with respect to Class C shares at an annual rate of up to 0.75% of the
average daily net assets of the Class C shares of a Fund. The Distribution Plan
did not apply to Class Q shares. Under the Distribution Plan, NAS was paid
without regard to actual distribution expenses it incurred. The aggregate
amounts earned by NAS pursuant to that Distribution Plan for the fiscal year
ended March 31, 1999, were as follows:
[TO BE PROVIDED BY AMENDMENT]
Under the Shareholder Service Plan, NAS was entitled to payment each month in
the following amounts: with respect to Class A shares at an annual rate of up to
0.25% of the average daily net assets of the Class A shares of a Fund; with
respect to Class B shares at an annual rate of up to 0.25% of the average daily
net assets of the Class B shares of a Fund; with respect to Class C shares at an
annual rate of up to 0.25% of the average daily net assets of the Class C shares
of a Fund; and with respect to Class Q shares at an annual rate of up to 0.25%
of the average daily net assets of the Class Q shares of a Fund. Under the
Shareholder Service Plan, NAS was paid only with respect to expenses actually
incurred. If expenses incurred by NAS exceeded the amount of the shareholder
service fee in a particular month, the excess amount would be carried forward
and recovered in a future period of NAS's actual expenses were less than the
shareholder service fee. However, effective May 24, 1999, the Funds were no
longer responsible for those excess amounts.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
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<PAGE>
shareholders might no longer be able to avail themselves of any automatic
investment or other service then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder Servicing
Agent for the Funds. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. Each Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian out-of-pocket fees, proxy solicitation costs, and the compensation
of Trustees who are not affiliated with the Investment Manager. Most Fund
expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, the Rule 12b-1 Plan fees for each class of shares are
charged proportionately only to the outstanding shares of that class.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion describes the various investment policies and
techniques employed by the Funds, except as otherwise noted. There can be no
assurance that any of the Funds will achieve their investment objectives.
TEMPORARY INVESTMENTS
Each Fund (other than the Money Market Fund whose investments are typically
short-term) may, from time to time on a temporary basis, invest all of its
assets in short-term instruments to maintain liquidity or when the Investment
Adviser determines that the market conditions call for a temporary defensive
posture. These temporary investments include: notes issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; commercial paper rated in
the highest two rating categories; certificates of deposit; repurchase
agreements and other high grade corporate debt securities.
EQUITY SECURITIES OF GROWTH COMPANIES
Each Fund (other than the Money Market Fund) may invest in equity securities of
domestic and foreign companies, the earnings and stock prices of which are
expected by the Investment Manager or Portfolio Manager to grow at an
above-average rate. Such investments will be diversified over a cross-section of
industries and individual companies. For Funds other than the Large Cap Growth
Fund, some of these companies will be organizations with market capitalizations
of $500 million or less or companies that have limited product lines, markets
and financial resources and are dependent upon a limited management group.
Examples of possible investments include emerging growth companies employing new
technology, cyclical companies, initial public offerings of companies offering
high growth potential, or other corporations offering good potential for high
growth in market value. The securities of such companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
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PREFERRED STOCK
Each Fund may invest in preferred stock. Preferred stock, unlike common stock,
offers a stated dividend rate payable from a corporation's earnings. Such
preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. If interest rates rise, the fixed dividend on preferred stocks may
be less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid before dividends are paid on the
issuer's common stock. Preferred stock also generally has a preference over
common stock on the distribution of a corporation's assets in the event of
liquidation of the corporation, and may be "participating," which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stocks on the distribution of a corporation's assets in
the event of a liquidation are generally subordinate to the rights associated
with a corporation's debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund (other than the Money Market Fund) may invest in convertible
securities and warrants. The value of a convertible security is a function of
its "investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The credit
standing of the issuer and other factors may also affect the investment value of
a convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the conversion
value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value.
The market value of convertible debt securities tends to vary inversely with the
level of interest rates. The value of the security declines as interest rates
increase and increases as interest rates decline. Although under normal market
conditions longer term debt securities have greater yields than do shorter term
debt securities of similar quality, they are subject to greater price
fluctuations. A convertible security may be subject to redemption at the option
of the issuer at a price established in the instrument governing the convertible
security. If a convertible security held by a Fund is called for redemption, the
Fund must permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Rating requirements do not
apply to convertible debt securities purchased by the Funds because the Funds
purchase such securities for their equity characteristics.
As a matter of operating policy, no Fund will invest more than 5% of its net
assets in warrants. A warrant gives the holder a right to purchase at any time
during a specified period a predetermined number of shares of common stock at a
fixed price. Unlike convertible debt securities or preferred stock, warrants do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for resale of the warrants,
potential price fluctuations as a result of speculation or other factors, and
failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised
(in which event the warrant may expire without being exercised, resulting in a
loss of the Fund's entire investment therein).
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SYNTHETIC CONVERTIBLE SECURITIES
Each Fund (other than the Money Market Fund) may invest in "synthetic"
convertible securities, which are derivative positions composed of two or more
different securities whose investment characteristics, taken together, resemble
those of convertible securities. For example, a Fund may purchase a
non-convertible debt security and a warrant or option, which enables the Fund to
have a convertible-like position with respect to a company, group of companies
or stock index. Synthetic convertible securities are typically offered by
financial institutions and investment banks in private placement transactions.
Upon conversion, the Fund generally receives an amount in cash equal to the
difference between the conversion price and the then current value of the
underlying security. Unlike a true convertible security, a synthetic convertible
comprises two or more separate securities, each with its own market value.
Therefore, the market value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertible component. For this reason,
the values of a synthetic convertible and a true convertible security may
respond differently to market fluctuations. A Fund only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
"A" or higher by Moody's or "A" or higher by S&P and will not invest more than
15% of its net assets in such synthetic securities and other illiquid
securities.
EURODOLLAR CONVERTIBLE SECURITIES
Each Fund (other than the Money Market Fund) may invest in Eurodollar
convertible securities, which are fixed-income securities of a U.S. issuer or a
foreign issuer that are issued outside the United States and are convertible
into equity securities of the same or a different issuer. Interest and dividends
on Eurodollar securities are payable in U.S. dollars outside of the United
States. The Funds may invest without limitation in Eurodollar convertible
securities that are convertible into foreign equity securities listed, or
represented by ADRs listed, on the New York Stock Exchange or the American Stock
Exchange or convertible into publicly traded common stock of U.S. companies. The
Funds may also invest up to 15% of its total assets invested in convertible
securities, taken at market value, in Eurodollar convertible securities that are
convertible into foreign equity securities which are not listed, or represented
by ADRs listed, on such exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee Dollar instruments are U.S. dollar denominated bonds issued in
the U.S. by foreign banks and corporations. These investments involve risks that
are different from investments in securities issued by U.S. issuers. See
"Foreign Investment Considerations."
CORPORATE DEBT SECURITIES
Corporate debt securities are subject to the risk of the issuer's inability to
meet principal and interest payments on the obligation (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity (market risk). When interest rates decline, the value
of the Funds' debt securities can be expected to rise, and when interest rates
rise, the value of those securities can be expected to decline. Debt securities
with longer maturities tend to be more sensitive to interest rate movements than
those with shorter maturities.
Debt obligations that are deemed investment grade carry a rating of at least Baa
from Moody's or BBB from Standard and Poor's, or a comparable rating from
another rating agency or, if not rated by an agency, are determined by the
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Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have
speculative characteristics and changes in economic circumstances are more
likely to lead to a weakened capacity to make interest and principal payments
than higher rated bonds.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred to as
"junk bonds." These bonds are subject to greater market fluctuations and risk of
loss of income and principal than higher rated bonds for a variety of reasons,
including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates affect high yield securities differently from other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, a Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Funds'
asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact the Investment Manager's or Portfolio Manager's ability to accurately
value high yield bonds and the Funds' assets and hinder the Funds' ability to
dispose of the bonds. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. The rating of an issuer
is also heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. Also, since credit rating agencies may
fail to timely change the credit ratings to reflect subsequent events, the
Investment Manager or Portfolio Manager must monitor the issuers of high yield
bonds in the Funds' portfolios to determine if the issuers will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the bonds' liquidity so the Funds can meet redemption requests.
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SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Funds
may acquire certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
A Fund holding instruments of foreign banks or financial institutions may be
subject to additional investment risks that are different in some respects from
those incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. See "Foreign Investments" below. Domestic banks and foreign banks are
subject to different governmental regulations with respect to the amount and
types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry depends largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
Federal and state laws and regulations require domestic banks to maintain
specified levels of reserves, limited in the amount which they can loan to a
single borrower, and subject to other regulations designed to promote financial
soundness. However, such laws and regulations do not necessarily apply to
foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances, to
the extent permitted under their respective investment objectives and policies
stated above and in their Prospectuses, the Funds may make interest-bearing time
or other interest-bearing deposits in commercial or savings banks. Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates of deposit
(interest-bearing time deposits) issued by savings banks or savings and loan
associations that have capital, surplus and undivided profits in excess of $100
million, based on latest published reports, or less than $100 million if the
principal amount of such obligations is fully insured by the U.S. Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The Funds
may invest a portion of their assets in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper and short-term notes will normally have maturities of
less than nine months and fixed rates of return, although such instruments may
have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the time
of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Investment Manager or Portfolio
Manager to be of comparable quality. These rating symbols are described in
Appendix A.
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Corporate obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government obligations. Such
obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law.
Each Fund may invest in sovereign debt obligations of foreign countries. A
number of factors affect a sovereign debtor's willingness or ability to repay
principal and interest in a timely manner, including its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which it may be subject.
Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
MUNICIPAL SECURITIES
Each Fund (other than the Money Market Fund) may invest in debt obligations
issued by state and local governments, territories and possessions of the U.S.,
regional government authorities, and their agencies and instrumentalities
("municipal securities"). Municipal securities include both notes (which have
maturities of less than one year) and bonds (which have maturities of one year
or more) that bear fixed or variable rates of interest.
In general, "municipal securities" debt obligations are issued to obtain funds
for a variety of public purposes, such as the construction, repair, or
improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
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a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assistance (although without obligation) to make up deficiencies in the
debt service reserve fund.
The Funds may purchase insured municipal debt in which scheduled payments of
interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
MORAL OBLIGATION SECURITIES. Municipal securities may include "moral obligation"
securities which are usually issued by special purpose public authorities. If
the issuer of moral obligation bonds cannot fulfill its financial
responsibilities from current revenues, it may draw upon a reserve fund, the
restoration of which is moral commitment but not a legal obligation of the state
or municipality which created the issuer.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Funds may invest in
tax-exempt industrial development bonds and pollution control bonds which, in
most cases, are revenue bonds and generally are not payable from the
unrestricted revenues of an issuer. They are issued by or on behalf of public
authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS. The Funds may invest in lease obligations or
installment purchase contract obligations of municipal authorities or entities
("municipal lease obligations"). Although lease obligations do not constitute
general obligations of the municipality for which its taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payment due under the lease obligation. A Fund may
also purchase "certificates of participation," which are securities issued by a
particular municipality or municipal authority to evidence a proportionate
interest in base rental or lease payments relating to a specific project to be
made by the municipality, agency or authority. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
any year unless money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
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The Funds will attempt to minimize the special risks inherent in municipal lease
obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at least
one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Manager or Portfolio Manager to be critical to
the lessee's ability to deliver essential services; and (4) contain legal
features which the Investment Manager or Portfolio Manager deems appropriate,
such as covenants to make lease payments without the right of offset or
counterclaim, requirements for insurance policies, and adequate debt service
reserve funds.
SHORT-TERM OBLIGATIONS. The Funds (other than the Money Market Fund) may invest
in short-term municipal obligations These securities include the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They also are usually general obligations of the issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the money
for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal National Mortgage Association or the
Government National Mortgage Association.
SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term (365 days
or less) promissory notes issued by municipalities to supplement their cash
flow.
ZERO COUPON SECURITIES
The Convertible, Balanced and High Yield II Funds may each invest up to 35% of
its net assets in zero coupon securities issued or guaranteed by the U.S.
Government and its agencies and instrumentalities. Zero coupon securities may be
issued by the U.S. Treasury or by a U.S. Government agency, authority or
instrumentality (such as the Student Loan Marketing Association or the
Resolution Funding Corporation). Zero coupon securities are sold at a
substantial discount from face value and redeemed at face value at their
maturity date without interim cash payments of interest and principal. This
discount is amortized over the life of the security and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, such securities may be subject to greater
volatility as a result of changes in prevailing interest rates than interest
paying investments in which the Funds may invest. Because income on such
securities is accrued on a current basis, even though the Funds do not receive
the income currently in cash, the Funds may have to sell other portfolio
investments to obtain cash needed by the Funds to make income distributions.
PARTICIPATION INTERESTS
Each Fund may invest in participation interests, subject to the limitation on
investments by the Funds in illiquid investments. Except for the Strategic
Income, Balanced and Money Market Funds, no Fund currently intends to invest
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more than 5% of its net assets in such interests. Participation interests
represent an undivided interest in or assignment of a loan made by an issuing
financial institution. No more than 5% of a Fund's net assets can be invested in
participation interests of the same issuing borrower. Participation interests
are primarily dependent upon the financial strength of the borrowing
corporation, which is obligated to make payments of principal and interest on
the loan, and there is a risk that such borrowers may have difficulty making
payments. In the event the borrower fails to pay scheduled interest or principal
payments, a Fund could experience a reduction in its income and might experience
a decline in the net asset value of its shares. In the event of a failure by the
financial institution to perform its obligation in connection with the
participation, a Fund might incur certain costs and delays in realizing payment
or may suffer a loss of principal and/or interest.
SENIOR LOANS
The Strategic Income Fund may invest in interests in variable or floating rate
secured loans or notes ("Senior Loans"), which, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. Strategic Income Fund
invests in Senior Loans that have interest rates that float periodically based
upon a benchmark indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S. dollar-denominated.
Generally, the Senior Loans in which Strategic Income Fund invests are fully
collateralized with assets and/or cash flow that Pilgrim Investments believes
have a market value at the time of acquisition that equals or exceeds the
principal amount of the Senior Loan.
Senior Loans vary from other types of debt in that they generally hold the most
senior position in the capital structure of a borrower. Thus, Senior Loans are
generally repaid before unsecured bank loans, corporate bonds, subordinated
debt, trade creditors, and preferred or common stockholders. Senior Loans that
Strategic Income Fund may acquire include participation interests in lease
financings ("Lease Participations").
Substantial increases in interest rates may cause an increase in loan defaults
as borrowers may lack resources to meet higher debt service requirements. The
value of Strategic Income Fund's assets may also be affected by other
uncertainties such as economic developments affecting the market for Senior
Loans or affecting borrowers generally. Also, a default on a Senior Loan in
which the Fund has invested or a sudden and extreme increase in prevailing
interest rates may cause a decline in the Fund's net asset value.
The maximum period of time of interest rate reset on any Senior Loans in which
Strategic Income Fund may invest is one year. In addition, the Strategic Income
Fund will ordinarily maintain a dollar-weighted average time to next interest
rate adjustment on its Senior Loans of 90 days or less.
Strategic Income Fund also may invest in assignments of or participations in
Senior Loans. With respect to any given Senior Loan, the rights of the Fund when
it acquires a participation may be more limited than the rights of original
lenders or of investors who acquire an assignment. The Fund may assume the
credit risk of both the borrower and the lender selling the participation.
Strategic Income Fund does not impose any minimum standard regarding the rating
of any outstanding debt securities of borrowers.
Senior Loans usually include restrictive covenants which must be maintained by
the borrower. Under certain interests in Senior Loans, Strategic Income Fund may
have an obligation to make additional loans upon demand by the borrower. The
Fund intends to reserve against such contingent obligations by segregating
sufficient assets in high quality short-term liquid investments or borrowing to
cover such obligations.
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Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Fund's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
CREDIT RISK. Pilgrim Investments performs its own independent credit analysis of
the borrower. Information about interests in Senior Loans generally will not be
in the public domain, and interests are generally not currently rated by any
nationally recognized rating service.
Senior Loans are subject to the risk of nonpayment of scheduled interest or
principal payments. Issuers of Senior Loans generally have either issued debt
securities that are rated lower than investment grade, or, if they had issued
debt securities, such debt securities would likely be rated lower than
investment grade. However, unlike other types of debt securities, the Senior
Loans in which the Fund invests are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments on
Senior Loans held by the Fund, the Fund could experience a reduction in its
income, and would experience a decline in the market value of the particular
Senior Loan so affected, and may experience a decline in the NAV of Fund Shares
or the amount of its dividends. In the event of a bankruptcy of the borrower,
the Fund could experience delays or limitations with respect to its ability to
realize the benefits of the collateral securing the Senior Loan.
COLLATERAL. Senior Loans typically will be secured by pledges of collateral from
the borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. Strategic Income Fund may also receive guarantees as
a form of collateral. In some instances, the Fund may invest in Senior Loans
that are secured only by stock of the borrower or its subsidiaries or
affiliates. The value of the collateral may decline below the principal amount
of the Senior Loan subsequent to the Fund's investment in such Senior Loan. In
addition, to the extent that collateral consists of stock of the borrower or its
subsidiaries or affiliates, the Fund will be subject to the risk that this stock
may decline in value, be relatively illiquid, or may lose all or substantially
all of its value, causing the Senior Loan to be undercollateralized.
LIMITED SECONDARY MARKET. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
some or many of the Senior Loans in which the Fund invests will be illiquid. In
addition, Senior Loans in which the Fund invests generally require the consent
of the borrower prior to sale or assignment. These consent requirements may
delay or impede the Fund's ability to sell Senior Loans.
In addition, because the secondary market for Senior Loans may be limited, it
may be difficult to value Senior Loans. Market quotations may not be available
and valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in the valuation, because there is
less reliable, objective data available.
HYBRID LOANS. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans").
Strategic Income Fund may invest in Hybrid Loans that are secured debt of the
borrower, although they may not in all instances be considered senior debt of
the borrower. With Hybrid Loans, the Fund may not possess a senior claim to all
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of the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although they may provide a relatively higher yield. Because the lenders in
Hybrid Loans waive or forego certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lenders' interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Fund's security interest in
some of the collateral may be subordinate to other creditors, the risk of
nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. Strategic Income Fund will invest only in
Hybrid Loans which meet credit standards established by Pilgrim Investments with
respect to Hybrid Loans and nonetheless provide certain protections to the
lender such as collateral maintenance or call protection.
SUBORDINATED AND UNSECURED LOANS. The Strategic Income Fund may invest up to 5%
of its assets in subordinated and unsecured loans. The primary risk arising from
a holder's subordination is the potential loss in the event of default by the
issuer of the loans. Subordinated loans in an insolvency bear an increased
share, relative to senior secured lenders, of the ultimate risk that the
borrower's assets are insufficient to meet its obligations to its creditors.
Unsecured loans are not secured by any specific collateral of the borrower. They
do not enjoy the security associated with collateralization and may pose a
greater risk of nonpayment of interest or loss of principal than do secured
loans. Strategic Income Fund will acquire unsecured loans only where the
Investment Manager believes, at the time of acquisition, that the Fund would
have the right to payment upon default that is not subordinate to any other
creditor.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Credit rating
agencies frequently do not rate such instruments; however, the Investment
Manager or Portfolio Manager will determine what unrated and variable and
floating rate instruments are of comparable quality at the time of the purchase
to rated instruments eligible for purchase by the Fund. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for the Fund to dispose of the variable or floating rate
instrument involved in the event of the issuer of the instrument defaulting on
its payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit. The Money Market Fund can
invest only in variable or fixed rate debt units representing an undivided
interest in a trust's distributions of principal and interest that a trust
receives from an underlying portfolio of bonds issued by a highly rated
corporate or U.S. Government agency issuer and/or payments from recharacterized
distributions made possible by the swap of certain payments due on the
underlying bonds. These units in which the Money Market Fund indirectly invests
must meet the credit quality standards of Rule 2a-7 of the 1940 Act.
INDEX AND CURRENCY-LINKED SECURITIES
Each Fund (other than the Money Market Fund) may invest in "index-linked" or
"commodity-linked" notes, which are debt securities of companies that call for
interest payments and/or payment at maturity in different terms than the typical
note where the borrower agrees to make fixed interest payments and to pay a
fixed sum at maturity. Principal and/or interest payments on an index-linked
note depend on the performance of one or more market indices, such as the S&P
500 Index or a weighted index of commodity futures such as crude oil, gasoline
and natural gas. The Funds may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the principal amount of an
equity-linked debt security is exchanged for common stock of the issuer or is
payable in an amount based on the issuer's common stock price at the time of
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maturity. Currency-linked debt securities are short-term or intermediate term
instruments having a value at maturity, and/or an interest rate, determined by
reference to one or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one currency against
another currency, or against an index.
Index and currency-linked securities are derivative instruments which may entail
substantial risks. Such instruments may be subject to significant price
volatility. The company issuing the instrument may fail to pay the amount due on
maturity. The underlying investment or security may not perform as expected by
the Investment Manager or Portfolio Manager. Markets, underlying securities and
indexes may move in a direction that was not anticipated by the Investment
Manager or Portfolio Manager. Performance of the derivatives may be influenced
by interest rate and other market changes in the U.S. and abroad. Certain
derivative instruments may be illiquid. See "Illiquid Securities" below.
MORTGAGE-RELATED SECURITIES
Each Fund (other than the Money Market Fund) may invest in mortgage-related
securities. Mortgage-related securities are derivative interests in pools of
mortgage loans made to U.S. residential home buyers, including mortgage loans
made by savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
The Funds may also invest in debt securities which are secured with collateral
consisting of U.S. mortgage-related securities, and in other types of U.S.
mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United
States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders and
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages not insured or guaranteed by
any government agency from a list of approved seller/services which include
state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. FHLMC is a
government-sponsored corporation created to increase availability of mortgage
credit for residential housing and owned entirely by private stockholders. FHLMC
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issues participation certificates which represent interests in conventional
mortgages from FHLMC's national portfolio. Pass-through securities issued by
FNMA and participation certificates issued by FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC, respectively, but are not
backed by the full faith and credit of the United States Government.
Although the underlying mortgage loans in a pool may have maturities of up to 30
years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO in which
the Funds may invest is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment experience
of the collateral. CMOs provide for a modified form of call protection through a
de facto breakdown of the underlying pool of mortgages according to how quickly
the loans are repaid. Monthly payment of principal and interest received from
the pool of underlying mortgages, including prepayments, is first returned to
the class having the earliest maturity date or highest seniority. Classes that
have longer maturity dates and lower seniority will receive principal only after
the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (E.G., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans.
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds invest
include, but are not limited to, interests in pools of receivables, such as
credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number of
respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities.
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"ROLL" TRANSACTIONS
Each Fund (other than the Money Market Fund) may enter into "roll" transactions,
which are the sale of GNMA certificates and other securities together with a
commitment to purchase similar, but not identical, securities at a later date
from the same party. During the roll period, a Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase,
as well as by the interest earned on the cash proceeds of the initial sale. Like
when-issued securities or firm commitment agreements, roll transactions involve
the risk that the market value of the securities sold by the Fund may decline
below the price at which the Fund is committed to purchase similar securities.
Additionally, in the event the buyer of securities under a roll transaction
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
transactions may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Fund's obligation to repurchase
the securities.
A Fund will engage in roll transactions for the purpose of acquiring securities
for its portfolio consistent with its investment objective and policies and not
for investment leverage. Nonetheless, roll transactions are speculative
techniques and are considered to be the economic equivalent of borrowings by the
Fund. To avoid leverage, the Fund will establish a segregated account with its
Custodian in which it will maintain liquid assets in an amount sufficient to
meet its payment obligations with respect to these transactions. A Fund will not
enter into roll transactions if, as a result, more than 15% of the Fund's net
assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers that are not publicly
traded in the United States. Each Fund may also invest in depository receipts.
The United States Government from time to time has imposed restrictions, through
taxation or otherwise, on foreign investments by U.S. entities such as the
Funds. If such restrictions should be reinstituted, it might become necessary
for such Funds to invest substantially all of their assets in United States
securities. In such event, the Board of Trustees of the Trust would consider
alternative arrangements, including reevaluation of the Funds' investment
objectives and policies, investment of all of the Funds' assets in another
investment company with different investment objectives and policies than the
Funds, or hiring an investment adviser to manage the Funds' assets. However, a
Fund would adopt any revised investment objective and fundamental policies only
after approval by the shareholders holding a majority (as defined in the
Investment Company Act) of the shares of the Fund.
DEPOSITORY RECEIPTS. Each of the Funds (other than the Money Market Fund) may
invest in American Depository Receipts ("ADRs"), which are receipts issued by an
American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuers. ADRs, in registered form, are designed for use in
U.S. securities markets. Such depository receipts may be sponsored by the
foreign issuer or may be unsponsored. The Funds (other than the Money Market
Fund) may also invest in European and Global Depository Receipts ("EDRs" and
"GDRs"), which, in bearer form, are designed for use in European securities
markets, and in other instruments representing securities of foreign companies.
Such depository receipts may be sponsored by the foreign issuer or may be
unsponsored. Unsponsored depository receipts are organized independently and
without the cooperation of the foreign issuer of the underlying securities; as a
result, available information regarding the issuer may not be as current as for
sponsored depository receipts, and the prices of unsponsored depository receipts
may be more volatile than if they were sponsored by the issuer of the underlying
securities. ADRs may be listed on a national securities exchange or may trade in
the over-the-counter market. ADR prices are denominated in United States
dollars; the underlying security may be denominated in a foreign currency,
although the underlying security may be subject to foreign government taxes
which would reduce the yield on such securities.
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SOVEREIGN DEBT SECURITIES. Certain Funds may invest in sovereign debt securities
issued by governments of foreign countries. The sovereign debt in which the
Funds may invest may be rated below investment grade. These securities usually
offer higher yields than higher rated securities but are also subject to greater
risk than higher rated securities.
BRADY BONDS. Brady bonds represent a type of sovereign debt. These obligations
were created under a debt restructuring plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady, in which foreign entities issued these
obligations in exchange for their existing commercial bank loans. Brady Bonds
have been issued by Argentina, Brazil, Costa Rica, the Dominican Republic,
Mexico, the Philippines, Uruguay and Venezuela, and may be issued by other
emerging countries.
FOREIGN CURRENCY TRANSACTIONS. Each Fund investing in foreign securities may
enter in to foreign currency transactions either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts in order
to have the necessary currencies to settle transactions. Each such Fund may also
enter into foreign currency transactions to protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to a Fund.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
MARKET CHARACTERISTICS. Settlement practices for transactions in foreign markets
may differ from those in United States markets, and may include delays beyond
periods customary in the United States. Foreign security trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
Transactions in options on securities, futures contracts, futures options and
currency contracts may not be regulated as effectively on foreign exchanges as
similar transactions in the United States, and may not involve clearing
mechanisms and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and procedures
and margin requirements than in the United States. The value of a Fund's
positions may also be adversely impacted by delays in its ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States.
LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
TAXES. The interest payable on certain of the Funds' foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
COSTS. The expense ratios of the Funds are likely to be higher than those of
investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign company, the
Investment Manager or Portfolio Manager considers such factors as the
characteristics of the particular company, differences between economic trends
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and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located. The
extent to which a Fund will be invested in foreign companies and countries and
depository receipts will fluctuate from time to time within the limitations
described in the Prospectus, depending on the Investment Manager's or Portfolio
Manager's assessment of prevailing market, economic and other conditions.
SECURITIES SWAPS
Each Fund (other than the Money Market Fund) may enter into securities swaps, a
technique primarily used to indirectly participate in the securities market of a
country from which a Fund would otherwise be precluded for lack of an
established securities custody and safekeeping system. The Fund deposits an
amount of cash with its custodian (or the broker, if legally permitted) in an
amount equal to the selling price of the underlying security. Thereafter, the
Fund pays or receives cash from the broker equal to the change in the value of
the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund (other than the Money Market Fund) is
authorized to purchase put and call options with respect to securities which are
otherwise eligible for purchase by the Fund and with respect to various stock
indices subject to certain restrictions. Put and call options are derivative
securities traded on United States and foreign exchanges, including the American
Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange,
Pacific Stock Exchange and New York Stock Exchange. Except as indicated in
"Non-Hedging Strategic Transactions," the Funds will engage in trading of such
derivative securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Manager or Portfolio Manager perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it protects
against significant downward price movement while it allows full participation
in any upward movement. If the Fund holds a stock which the Investment Manager
or Portfolio Manager believes has strong fundamentals, but for some reason may
be weak in the near term, the Fund may purchase a put option on such security,
thereby giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, is the
amount by which the Fund hedges against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the premium paid for
the put option less any amount for which the put may be sold reduces the profit
the Fund realizes on the sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
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<PAGE>
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has remaining
value by a purchaser through a "closing sale transaction," which is accomplished
by selling an option of the same series as the option previously purchased. The
Funds generally will purchase only those options for which the Investment
Manager or Portfolio Manager believes there is an active secondary market to
facilitate closing transactions.
WRITING CALL OPTIONS. Each Fund (other than the Money Market Fund) may write
covered call options. A call option is "covered" if a Fund owns the security
underlying the call or has an absolute right to acquire the security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
the Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after it has been notified
of the exercise of an option.
Effecting a closing transaction in the case of a written call option will permit
a Fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. Also, effecting a closing
transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the closing
transaction is less than the premium received from writing the option or if the
proceeds from the closing transaction are more than the premium paid to purchase
the option. A Fund realizes a loss from a closing transaction if the cost of the
closing transaction is more than the premium received from writing the option or
if the proceeds from the closing transaction are less than the premium paid to
purchase the option. However, because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, appreciation of the underlying security owned by the Fund generally
offsets, in whole or in part, any loss to the Fund resulting from the repurchase
of a call option.
STOCK INDEX OPTIONS. Each Fund (other than the Money Market Fund) may also
purchase put and call options with respect to the S&P 500 and other stock
indices. The Funds may purchase such options as a hedge against changes in the
values of portfolio securities or securities which it intends to purchase or
sell, or to reduce risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain risks
not found in stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Manager's or Portfolio Manager's ability to
predict correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
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Index prices may be distorted if circumstances disrupt trading of certain stocks
included in the index, such as if trading were halted in a substantial number of
stocks included in the index. If this happens, the Fund could not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, the Fund might be unable to exercise an option it holds, which could
result in substantial losses to the Fund. The Funds purchase put or call options
only with respect to an index which the Investment Manager or Portfolio Manager
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events. The extent to which
a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign option exchanges do not afford to participants many of the
protections available in United States option exchanges. For example, there may
be no daily price fluctuation limits in such exchanges or markets, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, a Fund as an option writer could lose amounts substantially in excess
of its initial investment, due to the margin and collateral requirements
typically associated with such option writing. See "Dealer Options" below.
LIMITS ON USE OF OPTIONS. A Fund may not purchase or sell options if more than
25% of its net assets would be hedged. The Funds may write covered call options
and secured put options to seek to generate income or lock in gains on up to 25%
of their net assets.
DEALER OPTIONS. Each Fund (other than the Money Market Fund) may engage in
transactions involving dealer options as well as exchange-traded options.
Certain risks are specific to dealer options. While the Funds might look to a
clearing corporation to exercise exchange-traded options, if a Fund purchases a
dealer option it must rely on the selling dealer to perform if the Fund
exercises the option. Failure by the dealer to do so would result in the loss of
the premium paid by the Fund as well as loss of the expected benefit of the
transaction.
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<PAGE>
Exchange-traded options generally have a continuous liquid market while dealer
options may not. Consequently, a Fund can realize the value of a dealer option
it has purchased only by exercising or reselling the option to the issuing
dealer. Similarly, when a Fund writes a dealer option, the Fund can close out
the option prior to its expiration only by entering into a closing purchase
transaction with the dealer. While the Fund seeks to enter into dealer options
only with dealers who will agree to and can enter into closing transactions with
the Fund, no assurance exists that the Fund will at any time be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
Unless the Fund, as a covered dealer call option writer, can effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the inability to enter into
a closing transaction may result in material losses to the Fund. For example,
because a Fund must maintain a secured position with respect to any call option
on a security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option. This
requirement may impair the Fund's ability to sell portfolio securities at a time
when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission") takes the
position that purchased dealer options are illiquid securities. A Fund may treat
the cover used for written dealer options as liquid if the dealer agrees that
the Fund may repurchase the dealer option it has written for a maximum price to
be calculated by a predetermined formula. In such cases, the dealer option would
be considered illiquid only to the extent the maximum purchase price under the
formula exceeds the intrinsic value of the option. With that exception, however,
the Fund will treat dealer options as subject to the Fund's limitation on
illiquid securities. If the Commission changes its position on the liquidity of
dealer options, the Fund will change its treatment of such instruments
accordingly.
FOREIGN CURRENCY OPTIONS
Each Fund (other than the Money Market Fund) may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency gives
the purchaser of the option the right to sell or purchase a foreign currency at
the exercise price until the option expires. The Funds use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Funds to reduce foreign currency risk using such options.
As with other kinds of option transactions, writing options on foreign currency
constitutes only a partial hedge, up to the amount of the premium received. The
Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
Each Fund (other than the Money Market Fund) may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fix number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
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currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds (other than the Money Market Fund) may invest in futures
contracts and in options on futures contracts as a hedge against changes in
market conditions or interest rates. As a general rule, no Fund will purchase or
sell futures if, immediately thereafter, more than 25% of its net assets would
be hedged.
The Funds trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). Each such Fund segregates liquid assets in a separate
account with its Custodian when required to do so by CFTC guidelines in order to
cover its obligation in connection with futures and options transactions.
A Fund does not pay or receive funds upon the purchase or sale of a futures
contract. When it enters into a domestic futures contract, the Fund deposits in
a segregated account with its Custodian liquid assets equal to approximately 5%
of the contract amount. This amount is known as initial margin. The margin
requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions differs from that of margin
in securities transactions. Futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfies all contractual obligations. Subsequent payments
(called variation margin) to and from the broker will be made on a daily basis
as the price of the underlying stock index fluctuates, to reflect movements in
the price of the contract making the long and short positions in the futures
contract more or less valuable. For example, when a Fund purchases a stock index
futures contract and the price of the underlying stock index rises, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment equal to that increase in value. Conversely, when a
Fund purchases a stock index futures contract and the price of the underlying
stock index declines, the position will be less valuable requiring the Fund to
make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, a Fund may elect to close
the position by taking an opposite position, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is made on closing the position. The Fund either pays or receives cash,
thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. Each Fund (other than the Money Market Fund) may
invest in futures contracts on stock indices. A stock index futures contracts is
a bilateral agreement pursuant to which the parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
contract and the price at which the contract is originally struck. No physical
delivery of the underlying stocks in the index is made. Currently, stock index
futures contracts can be purchased or sold with respect to the S&P 500 Stock
Price Index on the Chicago Mercantile Exchange, the Major Market Index on the
Chicago Board of Trade, the New York Stock Exchange Composite Index on the New
York Futures Exchange and the Value Line Stock Index on the Kansas City Board of
Trade. Foreign financial and stock index futures are traded on foreign exchanges
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including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. Each Fund (other than the Money
Market Fund) may invest in interest rate or financial futures contracts. Bond
prices are established in both the cash market and the futures market. In the
cash market, bonds are purchased and sold with payment for the full purchase
price of the bond being made in cash, generally within five business days after
the trade. In the futures market, a contract is made to purchase or sell a bond
in the future for a set price on a certain date. Historically, the prices for
bonds established in the futures markets have generally tended to move in the
aggregate in concert with cash market prices, and the prices have maintained
fairly predictable relationships.
The sale of an interest rate or financial futures sale by a Fund obligates the
Fund, as seller, to deliver the specific type of financial instrument called for
in the contract at a specific future time for a specified price. A futures
contract purchased by a Fund obligates the Fund, as purchaser, to take delivery
of the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without delivery of securities. A Fund
closes out a futures contract sale by entering into a futures contract purchase
for the same aggregate amount of the specific type of financial instrument and
the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund receives the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the Fund closes out a futures
contract purchase by entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
Domestic interest rate futures contracts are traded in an auction environment on
the floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. A public market now exists in domestic futures
contracts covering various financial instruments including long-term United
States Treasury bonds and notes; Government National Mortgage Association (GNMA)
modified pass-through mortgage-backed securities; three-month United States
Treasury bills; and 90-day commercial paper. A Fund may trade in any futures
contract for which there exists a public market, including, without limitation,
the foregoing instruments. International interest rate futures contracts are
traded on the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. Each Fund (other than the Money Market Fund)
may use foreign currency future contracts for hedging purposes. A foreign
currency futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a foreign currency at a specified
price and time. A public market exists in futures contracts covering several
foreign currencies, including the Australian dollar, the Canadian dollar, the
British pound, the German mark, the Japanese yen, the Swiss franc, and certain
multinational currencies such as the European Currency Unit ("ECU"). Other
foreign currency futures contracts are likely to be developed and traded in the
future. The Funds will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks related to
the use of futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures contract and movements
in the price of the securities which are the subject of the hedge. The price of
the future may move more or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an unfavorable direction, a
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund will
experience either a loss or a gain on the future which will not be completely
offset by movements in the price of the securities which are subject to the
hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Manager or Portfolio Manager
believes that over time the value of a diversified portfolio will tend to move
in the same direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the price of
securities before a Fund is able to invest its cash (or cash equivalents) in
securities (or options) in an orderly fashion, it is possible that the market
may decline instead. If the Fund then decides not to invest in securities or
options at that time because of concern as to possible further market decline or
for other reasons, it will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the futures and the securities being
hedged, the price of futures may not correlate perfectly with movement in the
stock index or cash market due to certain market distortions. All participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the index or cash market and
futures markets. In addition, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. As a result of price distortions in the futures
market and the imperfect correlation between movements in the cash market and
the price of securities and movements in the price of futures, a correct
forecast of general trends by the Investment Manager or Portfolio Manager may
still not result in a successful hedging transaction over a very short time
frame.
Positions in futures may be closed out only on an exchange or board of trade
which provides a secondary market for such futures. Although the Funds intend to
purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures position, and in the event of adverse price movements, the Funds
would continue to be required to make daily cash payments of variation margin.
When futures contracts have been used to hedge portfolio securities, such
securities will not be sold until the futures contract can be terminated. In
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such circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus provide
an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment Manager's or
Portfolio Manager's ability to predict correctly movements in the direction of
the market. For example, if the Fund hedges against the possibility of a decline
in the market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds (other than the Money Market Fund) may
purchase options on the futures contracts they can purchase or sell, as
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder or writer of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. There is no guarantee that such closing transactions can be
effected.
Investments in futures options involve some of the same considerations as
investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Funds because the maximum amount
at risk is limited to the premium paid for the options (plus transaction costs).
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RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. Except as
described below under "Non-Hedging Strategic Transactions," a Fund will not
engage in transactions in futures contracts or related options for speculation,
but only as a hedge against changes resulting from market conditions in the
values of securities held in the Fund's portfolio or which it intends to
purchase and where the transactions are economically appropriate to the
reduction of risks inherent in the ongoing management of the Fund. A Fund may
not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. A Fund also may not
purchase or sell futures or purchase related options if, immediately thereafter,
the sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for such options would exceed 5% of the market value
of the Fund's net assets.
Upon the purchase of futures contracts, a Fund will deposit an amount of cash or
cash equivalents, equal to the market value of the futures contracts, in a
segregated account with the Custodian or in a margin account with a broker to
collateralize the position and thereby insure that the use of such futures is
unleveraged.
These restrictions, which are derived from current federal and state regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and the Trustees of the Trust may change them if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of a Fund.
The extent to which a Fund may enter into futures and options transactions may
be limited by the Internal Revenue Code requirements for qualification of the
Fund as a regulated investment company. See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
Each Fund (other than the Money Market Fund) may enter into interest rate and
currency swap transactions and purchase or sell interest rate and currency caps
and floors, and may enter into currency swap cap transactions. An interest rate
or currency swap involves an agreement between a Fund and another party to
exchange payments calculated as if they were interest on a specified
("notional") principal amount (e.g., an exchange of floating rate payments by
one party for fixed rate payments by the other). An interest rate cap or floor
entitles the purchaser, in exchange for a premium, to receive payments of
interest on a notional principal amount from the seller of the cap or floor, to
the extent that a specified reference rate exceeds or falls below a
predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
streams. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each swap is accrued on a daily basis, and an
amount of cash or high-quality liquid securities having an aggregate net asset
value at least equal to the accrued excess is maintained in a segregated account
by the Trust's custodian. If a Fund enters into a swap on other than a net
basis, or sells caps or floors, the Fund maintains a segregated account in the
full amount accrued on a daily basis of the Fund's obligations with respect to
the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap market
has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
swap documentation, and the Investment Manager or Portfolio Manager has
determined that the swap market has become relatively liquid. Swap transactions
do not involve the delivery of securities or other underlying assets or
principal, and the risk of loss with respect to such transactions is limited to
the net amount of payments that the Fund is contractually obligated to make or
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receive. Caps and floors are more recent innovations for which standardized
documentation has not yet been developed; accordingly, they are less liquid than
swaps, and caps and floors purchased by a Fund are considered to be illiquid
assets.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is a contract
between two entities ("counterparties") to exchange interest payments (of the
same currency) between the parties. In the most common interest rate swap
structure, one counterparty agrees to make floating rate payments to the other
counterparty, which in turn makes fixed rate payments to the first counterparty.
Interest payments are determined by applying the respective interest rates to an
agreed upon amount, referred to as the "notional principal amount." In most such
transactions, the floating rate payments are tied to the London Interbank
Offered Rate, which is the offered rate for short-term Eurodollar deposits
between major international banks. As there is no exchange of principal amounts,
an interest rate swap is not an investment or a borrowing.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the coupon
exchanges over the life of the swap. In contrast to single currency interest
rate swaps, cross-currency swaps involve both interest rate risk and foreign
exchange risk.
SWAP OPTIONS. Each Fund (other than the Money Market Fund) may invest in swap
options. A swap option is a contract that gives a counterparty the right (but
not the obligation) to enter into a new swap agreement or to shorten, extend,
cancel or otherwise change an existing swap agreement, at some designated future
time on specified terms. It is different from a forward swap, which is a
commitment to enter into a swap that starts at some future date with specified
rates. A swap option may be structured European-style (exercisable on the
pre-specified date) or American-style (exercisable during a designated period).
The right pursuant to a swap option must be exercised by the right holder. The
buyer of the right to receive fixed pursuant to a swap option is said to own a
call.
CAPS AND FLOORS. Each Fund (other than the Money Market Fund) may invest in
interest rate caps and floors and currency swap cap transactions. An interest
rate cap is a right to receive periodic cash payments over the life of the cap
equal to the difference between any higher actual level of interest rates in the
future and a specified strike (or "cap") level. The cap buyer purchases
protection for a floating rate move above the strike. An interest rate floor is
the right to receive periodic cash payments over the life of the floor equal to
the difference between any lower actual level of interest rates in the future
and a specified strike (or "floor") level. The floor buyer purchases protection
for a floating rate move below the strike. The strikes are typically based on
the three-month LIBOR (although other indices are available) and are measured
quarterly. Rights arising pursuant to both caps and floors are exercised
automatically if the strike is in the money. Caps and floors eliminate the risk
that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate and
currency swaps and interest rate caps and floors are similar to those described
above with respect to dealer options. In connection with such transactions, a
Fund relies on the other party to the transaction to perform its obligations
pursuant to the underlying agreement. If there were a default by the other party
to the transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
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transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be unable to obtain its expected benefit. In addition,
while each Fund will seek to enter into such transactions only with parties
which are capable of entering into closing transactions with the Fund, there can
be no assurance that a Fund will be able to close out such a transaction with
the other party, or obtain an offsetting position with any other party, at any
time prior to the end of the term of the underlying agreement. This may impair a
Fund's ability to enter into other transactions at a time when doing so might be
advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS
Each Fund's options, futures and swap transactions will generally be entered
into for hedging purposes -- to protect against possible changes in the market
values of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchase or
sale of particular securities. However, in addition to the hedging transactions
referred to above, the Strategic Income Fund may enter into options, futures and
swap transactions to enhance potential gain in circumstances where hedging is
not involved. Each Fund's net loss exposure resulting from transactions entered
into for each purposes will not exceed 5% of the Fund's net assets at any one
time and, to the extent necessary, the Fund will close out transactions in order
to comply with this limitation. Such transactions are subject to the limitations
described above under "Options," "Futures Contracts," and "Interest Rate and
Currency Swaps."
INVESTMENT COMPANY SECURITIES
Each Fund (other than the Money Market Fund) may invest up to 10% of its total
assets in the shares of other investment companies. The Funds may invest in
money market mutual Funds in connection with the management of their daily cash
positions. The Funds may also make indirect foreign investments through other
investment companies that have comparable investment objectives and policies as
the Funds. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Manager or Portfolio Manager, subject to the
seller's agreement to repurchase and the Fund's agreement to resell such
securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry
System or an equivalent foreign system. The seller under a repurchase agreement
will be required to maintain the value of the underlying securities at not less
than 102% of the repurchase price under the agreement. If the seller defaults on
its repurchase obligation, the Fund holding the repurchase agreement will suffer
a loss to the extent that the proceeds from a sale of the underlying securities
is less than the repurchase price under the agreement. Bankruptcy or insolvency
of such a defaulting seller may cause the Fund's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to be
loans under the Investment Company Act.
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REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the sale
of a security by a Fund and its agreement to repurchase the security (or, in the
case of mortgage-backed securities, substantially similar but not identical
securities) at a specified time and price. A Fund will maintain in a segregated
account with the Custodian cash, U.S. Government securities or other appropriate
liquid securities in an amount sufficient to cover its obligations under these
agreements with broker-dealers (no such collateral is required on such
agreements with banks). Under the 1940 Act, these agreements are considered
borrowings by the Funds, and are subject to the percentage limitations on
borrowings described below. The agreements are subject to the same types of
risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, a Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash.
The Funds do not intend to engage in these transactions for speculative purposes
but only in furtherance of their investment objectives. Because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described, the Fund's liquidity and the ability of the Investment
Manager or Portfolio Manager to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases the Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. A Fund does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
BORROWING
Each Fund (other than the Money Market Fund) may borrow up to 20% of its total
assets for temporary, extraordinary or emergency purposes. Each Fund may also
borrow money through reverse repurchase agreements, uncovered short sales, and
other techniques. All borrowings by a Fund cannot exceed one-third of a Fund's
total assets. Short sales "not against the box" and roll transactions are
considered borrowings for purposes of the percentage limitations applicable to
borrowings.
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The use of borrowing by a Fund involves special risk considerations that may not
be associated with other funds having similar objectives and policies. Since
substantially all of a Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing remain fixed by the terms of the Fund's
agreement with its lender, the asset value per share of the Fund tends to
increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, the
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when fundamental investment considerations would not favor
such sales.
LENDING FUND SECURITIES
The Funds (other than the Money Market Fund) may lend securities only to
financial institutions such as banks, broker/ dealers and other recognized
institutional investors in amounts up to 30% of the Fund's total assets. These
loans earn income for the Fund and are collateralized by cash, securities or
letters of credit. The Fund might experience a loss if the financial institution
defaults on the loan.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank must satisfy the Fund. Any
loan might be secured by any one or more of the three types of collateral. The
terms of the Fund's loans must permit the Fund to reacquire loaned securities on
five days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code.
SHORT SALES
Certain Funds may make short sales of securities they own or have the right to
acquire at no added cost through conversion or exchange of other securities they
own (referred to as short sales "against the box") and short sales of securities
which they do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security which it
does not own, in anticipation of a decline in the market value of the security.
To complete the sale, the Fund must borrow the security generally from the
broker through which the short sale is made) in order to make delivery to the
buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with the
broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by a Fund that are not made "against the box" create opportunities
to increase the Fund's return but, at the same time, involve specific risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share tends to increase more when the
securities it has sold short decrease in value, and to decrease more when the
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securities it has sold short increase in value, than would otherwise be the case
if it had not engaged in such short sales. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Fund may be required to pay in connection with the
short sale. Short sales theoretically involve unlimited loss potential, as the
market price of securities sold short may continually increase, although a Fund
may mitigate such losses by replacing the securities sold short before the
market price has increased significantly. Under adverse market conditions the
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. To secure its obligation to deliver securities sold short, a Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a technique to
hedge against market risks when the Investment Manager or Portfolio Manager
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund's
long position would be reduced by a gain in the short position. The extent to
which such gains or losses in the long position are reduced will depend upon the
amount of securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold short are placed in a segregated
account (not with the broker), or unless the Fund's obligation to deliver the
securities sold short is "covered" by placing in a segregated account (not with
the broker) cash, U.S. Government securities or other liquid debt or equity
securities in an amount equal to the difference between the market value of the
securities sold short at the time of the short sale and any such collateral
required to be deposited with a broker in connection with the sale (not
including the proceeds from the short sale), which difference is adjusted daily
for changes in the value of the securities sold short. The total value of the
cash, U.S. Government securities or other liquid debt or equity securities
deposited with the broker and otherwise segregated may not at any time be less
than the market value of the securities sold short at the time of the short
sale. Each Fund will comply with these requirements. In addition, as a matter of
policy, the Trust's Board of Trustees has determined that no Fund will make
short sales of securities or maintain a short position if to do so could create
liabilities or require collateral deposits and segregation of assets aggregating
more than 25% of the Fund's total assets, taken at market value.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
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ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and the Fund might
be unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemption
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested in purchasing such securities.
The Emerging Countries Fund may invest in foreign securities that are restricted
against transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly from
the issuer or its underwriter, the Fund treats foreign securities whose
principal market is abroad as not subject to the investment limitation on
securities subject to legal or contractual restrictions on resale.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase or sell securities for delivery at a future date,
generally 15 to 45 days after the commitment is made. The other party's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous. A Fund may not purchase when issued securities or
enter into firm commitments if, as a result, more than 15% of the Fund's net
assets would be segregated to cover such securities.
INVESTMENT TECHNIQUES AND PROCESSES
The Portfolio Manager's investment techniques and processes, which it has used
in managing institutional portfolios for many years, are described generally in
the Funds' prospectus of the Funds it manages. In making decisions with respect
to equity securities for the Funds, GROWTH OVER TIME(R) is the Portfolio
Manager's underlying goal. It's how the Portfolio Manager built its reputation.
Over the past ten years, the Portfolio Manager has built a record as one of the
finest performing investment managers in the United States. It has successfully
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delivered growth over time to many institutional investors, pension plans,
foundations, endowments and high net worth individuals. The Portfolio Manager's
methods have proven their ability to achieve growth over time through a variety
of investment vehicles.
The Portfolio Manager emphasizes growth over time through investment in
securities of companies with earnings growth potential. The Portfolio Manager's
style is a "bottom-up" growth approach that focuses on the growth prospects of
individual companies rather than on economic trends. It builds portfolios stock
by stock. The Portfolio Manager's decision-making is guided by three critical
questions: Is there a positive change? Is it sustainable? Is it timely? The
Portfolio Manager uses these three factors because it focuses on discovering
positive developments when they first show up in an issuer's earnings, but
before they are fully reflected in the price of the issuer's securities. The
Portfolio Manager is always looking for companies that are driving change and
surpassing analysts' expectations. It seeks to identify companies poised for
rapid growth. The Portfolio Manager focuses on recognizing successful companies,
regardless of their capitalization or whether they are domestic or foreign
companies.
The Portfolio Manager's techniques and processes include relationships with an
extensive network of brokerage research firms located throughout the world.
These analysts are often located in the same geographic regions as the companies
they follow, have followed those companies for a number of years, and have
developed excellent sources of information about them. The Portfolio Manager
does not employ in-house analysts other than the personnel actually engaged in
managing investments for the Funds and the Portfolio Manager's other clients.
However, information obtained from a brokerage research firm is confirmed with
other research sources or the Portfolio Manager's computer-assisted quantitative
analysis (including "real time" pricing data) of a substantial universe of
potential investments.
DIVERSIFICATION
Each Fund is "diversified" within the meaning of the Investment Company Act. In
order to qualify as diversified, a Fund must diversify its holdings so that at
all times at least 75% of the value of its total assets is represented by cash
and cash items (including receivables), securities issued or guaranteed as to
principal or interest by the United States or its agencies or instrumentalities,
securities of other investment companies, and other securities (for this purpose
other securities of any one issuer are limited to an amount not greater than 5%
of the value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of the issuer).
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Portfolio Manager
in approximately equal amounts, and the Investment Manager or Portfolio Manager
attempts to stay fully invested within the applicable percentage limitations set
forth in the Prospectus. In addition, for each issuer whose securities are added
to an investment portfolio, the Investment Manager or Portfolio Manager sells
the securities of one of the issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Fund (as defined in the Investment
Company Act).
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All percentage limitations set forth below apply immediately after a purchase or
initial investment, and any subsequent change in any applicable percentage
resulting from market fluctuations will not require elimination of any security
from the relevant portfolio.
The investment objective of each Fund, including the Money Market Fund, is a
fundamental policy. In addition, no Fund:
1. May invest in securities of any one issuer if more than 5% of the market
value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Fund's total assets may be invested
without regard to this restriction and a Fund will be permitted to invest
all or a portion of its assets in another diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund. This restriction also does not apply
to investments by a Fund in securities of the U.S. Government or any of its
agencies and instrumentalities.
2. May purchase more than 10% of the outstanding voting securities, or of any
class of securities, of any one issuer, or purchase the securities of any
issuer for the purpose of exercising control or management, except that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund.
3. May invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that a Fund
will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund. This
restriction does not apply to investments by a Fund in securities of the
U.S. Government or its agencies and instrumentalities or to investments by
the Money Market Fund in obligations of domestic branches of U.S. banks and
U.S. branches of foreign banks which are subject to the same regulation as
U.S. banks.
4. May purchase or sell real estate. However, a Fund may invest in securities
secured by, or issued by companies that invest in, real estate or interests
in real estate.
5. May make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. Each Fund reserves the authority to make loans of
its portfolio securities in an aggregate amount not exceeding 30% of the
value of its total assets. This restriction does not apply to the Money
Market Fund.
6. May borrow money on a secured or unsecured basis, except for temporary,
extraordinary or emergency purposes or for the clearance of transactions in
amounts not exceeding 20% of the value of its total assets at the time of
the borrowing, provided that, pursuant to the Investment Company Act, a
Fund may borrow money if the borrowing is made from a bank or banks and
only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all
borrowings (including proposed borrowings), and provided, further that the
borrowing may be made only for temporary, extraordinary or emergency
purposes or for the clearance of transactions in amounts not exceeding 20%
of the value of the Fund's total assets at the time of the borrowing. If
such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law.
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7. May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Funds from
engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it may be
deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% (10% in the case of the Money Market Fund) of the
value of its net assets in securities that at the time of purchase are
illiquid.
10. May purchase securities on margin, except for initial and variation margin
on options and futures contracts, and except that a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. May engage in short sales (other than the Mid Cap Growth, Small Cap Growth,
Worldwide Growth, International Core Growth, International Small Cap
Growth, Strategic Income and High Yield II Funds), except that a Fund may
use such short-term credits as are necessary for the clearance of
transactions.
12. May invest in securities of other investment companies, except (a) that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities
laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Fund.
13. May issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Funds from engaging in short sales, options, futures and
foreign currency transactions.
14. May enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest in
stock index, currency and financial futures contracts and related options
in accordance with any rules of the Commodity Futures Trading Commission.
15. May purchase or write options on securities, except for hedging purposes
(except in the case of the Strategic Income Fund, which may do so for
non-hedging purposes) and then only if (i) aggregate premiums on call
options purchased by a Fund do not exceed 5% of its net assets, (ii)
aggregate premiums on put options purchased by a Fund do not exceed 5% of
its net assets, (iii) not more than 25% of a Fund's net assets would be
hedged, and (iv) not more than 25% of a Fund's net assets are used as cover
for options written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board of
Trustees of the Trust, no Fund:
1. May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships,
although a Fund may invest in the securities of companies which invest in
or sponsor such programs.
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2. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market
daily.
PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement
authorizes the Investment Manager or Portfolio Manager to select the brokers or
dealers that will execute the purchase and sale of investment securities for
each Fund. In all purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreements and Portfolio
Management Agreements, each Investment Manager or Portfolio Manager determines,
subject to the instructions of and review by the Board of Trustees of the Fund,
which securities are to be purchased and sold by the Funds and which brokers are
to be eligible to execute portfolio transactions of the Fund. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of an Investment Manager
or Portfolio Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, each Investment Manager or Portfolio Manager
will use its best efforts to choose a broker capable of providing the brokerage
services necessary to obtain the most favorable price and execution available.
The full range and quality of brokerage services available will be considered in
making these determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors. The Investment Managers or
Portfolio Manager will seek to obtain the best commission rate available from
brokers that are believed to be capable of providing efficient execution and
handling of the orders. In those instances where it is reasonably determined
that more than one broker can offer the brokerage services needed to obtain the
most favorable price and execution available, consideration may be given to
those brokers that supply research and statistical information to a Fund, the
Investment Manager, and/or the Portfolio Manager, and provide other services in
addition to execution services. Each Investment Manager or Portfolio Manager
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Investment Manager or Portfolio Manager
to be useful in varying degrees, but of indeterminable value. Consistent with
this policy, portfolio transactions may be executed by brokers affiliated with
the Pilgrim Group or any of the Investment Managers or Portfolio Managers, so
long as the commission paid to the affiliated broker is reasonable and fair
compared to the commission that would be charged by an unaffiliated broker in a
comparable transaction. The placement of portfolio brokerage with broker-dealers
who have sold shares of a Fund is subject to rules adopted by the National
Association of Securities Dealers, Inc. ("NASD") Provided the Fund's officers
are satisfied that the Fund is receiving the most favorable price and execution
available, the Fund may also consider the sale of the Fund's shares as a factor
in the selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Funds' general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for a Fund, the Fund may also give weight to the
ability of a broker to furnish brokerage and research services to the Fund, the
Investment Manager or the Portfolio Manager, even if the specific services were
not imputed to the Fund and were useful to the Investment Manager and/or
Portfolio Manager in advising other clients. In negotiating commissions with a
broker, the Fund may therefore pay a higher commission than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission has been determined in good faith by the
Investment Manager or Portfolio Manager to be reasonable in relation to the
value of the brokerage and research services provided by such broker.
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Purchases of securities for a Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers which specialize in the types of securities which the
Fund will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate for
other clients served by that Fund's Investment Manager or Portfolio Manager. If
the purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Investment
Manager or Portfolio Manager is considered at or about the same time,
transactions in such securities will be allocated among the Fund and the
Investment Manager's or Portfolio Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager or Portfolio Manager. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by a Investment Manager or Portfolio Manager, and the
results of such allocations, are subject to periodic review by the Board of
Trustees. To the extent any of Funds seek to acquire the same security at the
same time, one or more of the Funds may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price for
such security. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a specific
Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with the Investment
Manager, except for any sales of portfolio securities that may legally be made
pursuant to a tender offer, in which event the Investment Manager will offset
against its management fee a part of any tender fees that may be legally
received and retained by an affiliated broker-dealer.
Brokerage commissions paid by each Fund (or by the master fund predecessor of
the Fund) for each of the last three fiscal years are as follows:
Year Ended March 31,
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund 464,615 $ 24,643
Worldwide Growth Fund 1,065,153 970,564
International Small Cap Growth Fund 745,259 692,326
Emerging Countries Fund 3,634,338 1,427,861
Large Cap Growth Fund 30,907 4,620
Mid Cap Growth Fund 1,809,755 1,139,938
Small Cap Growth Fund 1,002,867 987,245
Convertible Fund 130,017 114,243
Balanced Fund 43,966 35,105
Strategic Income Fund(1) 100 0
- ----------
(1) The Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the Strategic Income Fund paid no brokerage fees
in the fiscal year ended March 31, 1998.
Of the total commissions paid during the fiscal year ended March 31, 1999,
$_________ (____%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
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separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
During the fiscal year ended March 31, 1999, the following Funds (or their
predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: [TO BE UPDATED:] Worldwide Growth Fund -- Merrill Lynch & Co.;
International Small Cap Growth Fund -- Merrill Lynch & Co.; Emerging Countries
Fund -- Merrill Lynch & Co.; Large Cap Growth Fund -- Merrill Lynch & Co., J. P.
Morgan & Co.; Mid Cap Growth Fund -- Merrill Lynch & Co., J. P. Morgan & Co.;
Small Cap Growth Fund -- Merrill Lynch & Co.; Convertible Fund -- Salomon Smith
Barney, Merrill Lynch & Co., J. P. Morgan & Co.; Balanced Fund -- Bear Stearns
Co., Morgan Stanley Dean Witter Discover & Co.; High Yield Fund II -- Merrill
Lynch & Co., J. P. Morgan & Co. The holdings of securities of such brokers and
dealers were as follows as of March 31, 1999: Worldwide Growth Fund -- Merrill
Lynch & Co. ($________); Large Cap Growth Fund -- Merrill Lynch & Co.
($________); Mid Cap Growth Fund -- Merrill Lynch & Co. ($________); Convertible
Fund -- Salomon Smith Barney ($________); Balanced Fund -- Bear Stearns Co.
($________), Morgan Stanley Dean Witter Discover & Co. ($________); Strategic
Income Fund -- J. P. Morgan & Co. ($________); High Yield Fund II-- Merrill
Lynch & Co. ($________).
ABOUT THE MONEY MARKET FUND. With respect to the [ ] Money Market Fund in which
the Fund invests its assets, [ ] is responsible for decisions to buy and sell
securities for the Company, broker-dealer selection and negotiation of
commission rates. Since purchases and sales of portfolio securities by [ ] are
usually principal transactions, the [ ] Money Market Fund incurs little or no
brokerage commissions. Portfolio securities are normally purchased directly from
the issuer or from a market maker for the securities. The purchase price paid to
dealers serving as market makers may include a spread between the bid and asked
prices. [ ] may also purchase securities from underwriters at prices which
include a commission paid by the issuer to the underwriters.
[_______] does not seek to profit from short-term trading, and will generally
(but not always) hold portfolio securities to maturity. However, [_______] may
seek to enhance the yield of the [_______] Money Market Fund by taking advantage
of yield disparities that occur in the money market. For example, market
conditions frequently result in similar securities trading at different prices.
[_______] may dispose of any portfolio security prior to its maturity if such
disposition and reinvestment of proceeds are expected to enhance yield
consistent with the [_______]'s judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. [_______] Money Market Fund is required to maintain
an average weighted portfolio maturity of 90 days or less and purchase only
instruments having remaining maturities of 13 months or less. Both may result in
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on U.S. Government Obligations, Agencies and Money Market
obligations, the high rate of portfolio turnover is not expected to have a
material effect on the [_______] Money Market Fund's net income or expenses.
Allocation of transactions, including their frequency, to various dealers is
determined by [_______] in its best judgment and in a manner deemed to be in the
best interest of shareholders of the Company rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price.
[_______] and its affiliates manage several other investment accounts, some of
which may have objectives similar to the [_______] Money Market Fund. It is
possible that at times, identical securities will be acceptable for one or more
of such investment accounts. However, the position of each account in the
securities of the same issuer may vary and the length of time that each account
may choose to hold its investment in the securities of the same issuer may
likewise vary. The timing and amount of purchase by each account will also be
determined by its
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cash position. If the purchase or sale of securities consistent with the
investment policies of the [_______] Money Market Fund and one or more of these
accounts is considered at or about the same time, transactions in such
securities will be allocated in good faith among the [_______] Money Market Fund
and such accounts in a manner deemed equitable by [_______]. [_______] may
combine such transactions, in accordance with applicable laws and regulations,
in order to obtain the best net price and most favorable execution. The
allocation and combination of simultaneous securities purchases on behalf of the
[_______] Money Market Fund and other funds will be made in the same way that
such purchases are allocated among or combined with those of other [_______]
accounts. Simultaneous transactions could adversely affect the ability of a Fund
to obtain or dispose of the full amount of a security which it seeks to purchase
or sell.
Provisions of the 1940 Act and rules and regulations thereunder have also been
construed to prohibit the [_______] Money Market Fund's purchasing securities or
instruments from or selling securities or instruments to, any holder of 5% or
more of the voting securities of any investment company managed by the
[_______]. [_______] Money Market Fund has obtained an order of exemption from
the SEC which would permit [_______] Money Market Fund to engage in transactions
with such a 5% holder, if the 5% holder is one of the 50 largest U.S. banks
measured by deposits. Purchases from these 5% holders will be subject to
quarterly review by the Board of Directors including those directors who are not
"interested persons" of the Company. Additionally, such purchases and sales will
be subject to the following conditions: (1) [_______] will maintain and preserve
a written copy of the internal control procedures for the monitoring of such
transactions, together with a written record of any such transactions setting
forth a description of the security purchased or sold, the identity of the
purchaser or seller, the terms of the purchase or sale transaction and the
information or materials upon which the determinations to purchase or sell each
security were made; (2) each security to be purchased or sold by [_______] Money
Market Fund will be: (i) consistent with such Fund's investment policies and
objectives; (ii) consistent with the interests of shareholders of such Fund; and
(iii) comparable in terms of quality, yield, and maturity to similar securities
purchased or sold during a comparable period of time; (3) the terms of each
transaction will be reasonable and fair to shareholders of the [_______] Money
Market Fund and will not involve overreaching on the part of any person; and (4)
each commission, fee, spread or other remuneration received by a 5% holder will
be reasonable and fair compared to the commission, fee, spread or other
remuneration received by other brokers or dealers in connection with comparable
transactions involving similar securities purchased or sold during a comparable
period of time and will not exceed the limitations set forth in Section 17(e)(2)
of the 1940 Act.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased, redeemed
or exchanged appears in the Prospectus under "Shareholder Guide." Shares of the
Funds are offered at the net asset value next computed following receipt of the
order by the dealer (and/or the Distributor) or by the Trust's transfer agent,
DST Systems, Inc. ("Transfer Agent"), plus, for Class A shares (of all Funds
except the Money Market Fund), a varying sales charge depending upon the class
of shares purchased and the amount of money invested, as set forth in the
Prospectus. Authorized dealers will be paid commissions on shares sold in
Classes A, B and C, at net asset value, which at the time of investment would
have been subject to the imposition of a contingent deferred sales charge if
liquidated. The Distributor may, from time to time, at its discretion, allow the
selling dealer to retain 100% of such sales charge, and such dealer may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended. The Distributor, at its expense, may also provide additional
promotional incentives to dealers in connection with sales of shares of the
Funds 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
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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 Funds with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Portfolio Manager intends to retain the security in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
Trust reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE. Class A shares of the Funds (other than
the Money Market Fund which does not have a sales charge) may be purchased at
net asset value, without a sales charge, by persons who have redeemed their
Class A shares of a Fund (or shares of other funds managed by the Investment
Manager in accordance with the terms of such privileges established for such
funds) within the previous 90 days. The amount that may be so reinvested in the
Fund is limited to an amount up to, but not exceeding, the redemption proceeds
(or to the nearest full share if fractional shares are not purchased). In order
to exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent, or be postmarked, within 90 days after the date
of redemption. This privilege may only be used once per calendar year. Payment
must accompany the request and the purchase will be made at the then current net
asset value of the Fund. Such purchases may also be handled by a securities
dealer who may charge a shareholder for this service. If the shareholder has
realized a gain on the redemption, the transaction is taxable and any
reinvestment will not alter any applicable Federal capital gains tax. If there
has been a loss on the redemption and a subsequent reinvestment pursuant to this
privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
Any person who can document that Fund shares were purchased with proceeds from
the redemption (within the previous 90 days) of shares from any unaffiliated
mutual fund on which a sales charge was paid or which were subject at any time
to a CDSC, and the Distributor has determined in its discretion that the
unaffiliated fund invests primarily in the same types of securities as the
Pilgrim Fund purchased.
Class A Shares of the Funds may also be purchased at net asset value by any
charitable organization or any state, county, or city, or any instrumentality,
department, authority or agency thereof that has determined that a Fund is a
legally permissible investment and that is prohibited by applicable investment
law from paying a sales charge or commission in connection with the purchase of
shares of any registered management investment company ("an eligible
governmental authority"). If an investment by an eligible governmental authority
at net asset value is made though a dealer who has executed a selling group
agreement with respect to the Trust (or the other open-end Pilgrim Funds) the
Distributor may pay the selling firm 0.25% of the Offering Price.
Officers, trustees and bona fide full-time employees of the Trust and officers,
trustees and full-time employees of the Investment Manager, any Portfolio
Manager, the Distributor, the Trust's service providers or affiliated
corporations thereof or any trust, pension, profit-sharing or other benefit plan
for such persons, broker-dealers, for their own accounts or for members of their
families (defined as current spouse, children, parents, grandparents, uncles,
aunts, siblings, nephews, nieces, step-relations, relations at-law, and cousins)
employees of such broker-dealers (including their immediate families) and
discretionary advisory accounts of the Investment Manager or any Portfolio
Manager, may purchase Class A shares of a Fund at net asset value without a
sales charge. Such purchaser may be required to sign a letter stating that the
purchase is for his own investment purposes only and that the securities will
not be resold except to the Fund. The Trust may, under certain circumstances,
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allow registered investment adviser's 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.
Class A or Class M shares of all Funds with a sales charge may also be purchased
without a sales charge by (i) shareholders who have authorized the automatic
transfer of dividends from the same class of another Pilgrim Fund distributed by
the Distributor or from Pilgrim Prime Rate Trust; (ii) registered investment
advisors, trust companies and bank trust departments investing in Class A shares
on their own behalf or on behalf of their clients, provided that the aggregate
amount invested in any one or more Funds, during the 13 month period starting
with the first investment, equals at least $1 million; (iii) broker-dealers, who
have signed selling group agreements with the Distributor, and registered
representatives and employees of such broker-dealers, for their own accounts or
for members of their families (defined as current spouse, children, parents,
grandparents, uncles, aunts, siblings, nephews, nieces, step relations,
relations-at-law and cousins); (iv) broker-dealers using third party
administrators for qualified retirement plans who have entered into an agreement
with the Pilgrim Funds or an affiliate, subject to certain operational and
minimum size requirements specified from time-to-time by the Pilgrim Funds; (v)
accounts as to which a banker or broker-dealer charges an account management fee
(`wrap accounts'); and (vi) any registered investment company for which Pilgrim
Investments, Inc. serves as adviser.
The Funds may terminate or amend the terms of these sales charge waivers at any
time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION. An investor may immediately
qualify for a reduced sales charge on a purchase of Class A or Class M shares of
any of the Funds which offers Class A shares or shares with front-end sales
charges, by completing the Letter of Intent section of the Shareholder
Application in the Prospectus (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for
the reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one investment in the Pilgrim Funds
will be effective only after notification to the Distributor that the investment
qualifies for a discount. The shareholder's holdings in the Investment Manager's
funds acquired within 90 days before the Letter of Intent is filed will be
counted towards completion of the Letter of Intent but will not be entitled to a
retroactive downward adjustment of sales charge until the Letter of Intent is
fulfilled. Any redemptions made by the shareholder during the 13-month period
will be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemption) during the period.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application in the Prospectus. A
minimum initial investment equal to 25% of the intended total investment is
required. An amount equal to the maximum sales charge or 5.75% of the total
intended purchase will be held in escrow at Pilgrim Funds, in the form of
shares, in the investor's name to assure that the full applicable sales charge
will be paid if the intended purchase is not completed. The shares in escrow
will be included in the total shares owned as reflected on the monthly
statement; income and capital gain distributions on the escrow shares will be
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paid directly by the investor. The escrow shares will not be available for
redemption by the investor until the Letter of Intent has been completed, or the
higher sales charge paid. If the total purchases, less redemptions, equal the
amount specified under the Letter, the shares in escrow will be released. If the
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by the Distributor and the dealer with
whom purchases were made pursuant to the Letter of Intent (to reflect such
further quantity discount) on purchases made within 90 days before, and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the applicable offering price.
If the total purchases, less redemptions, are less than the amount specified
under the Letter, the investor will remit to the Distributor an amount equal to
the difference in dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the redemption of an appropriate number of shares
in escrow to realize such difference will be made. If the proceeds from a total
redemption are inadequate, the investor will be liable to the Distributor for
the difference. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the Investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the Distributor as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the purpose of paying any additional sales charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the proceeds as directed by the Distributor. The investor or the
securities dealer must inform the Transfer Agent or the Distributor that this
Letter is in effect each time a purchase is made.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other open-end funds
distributed by the Distributor (excluding the Money Market Fund) can be combined
with a current purchase to determine the reduced sales charge and applicable
offering price of the current purchase. The reduced sales charge apply to
quantity purchases made at one time or on a cumulative basis over any period of
time by (i) an investor, (ii) the investor's spouse and children under the age
of majority, (iii) the investor's custodian accounts for the benefit of a child
under the Uniform gift to Minors Act, (iv) a trustee or other fiduciary of a
single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies' registered investment advisors, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
The reduced sales charge also apply on a non-cumulative basis, to purchases made
at one time by the customers of a single dealer, in excess of $1 million. The
Letter of Intent option may be modified or discontinued at any time.
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Shares of the Fund and other open-end Pilgrim Funds (excluding the Money Market
Fund) purchased and owned of record or beneficially by a corporation, including
employees of a single employer (or affiliates thereof) including shares held by
its employees, under one or more retirement plans, can be combined with a
current purchase to determine the reduced sales charge and applicable offering
price of the current purchase, provided such transactions are not prohibited by
one or more provisions of the Employee Retirement Income Security Act or the
Internal Revenue Code. Individuals and employees should consult with their tax
advisors concerning the tax rules applicable to retirement plans before
investing.
REDEMPTIONS. Payment to shareholders for shares redeemed will be made within
seven days after receipt by the Fund's Transfer Agent of the written request in
proper form, except that a Fund may suspend the right of redemption or postpone
the date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, each Trust has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event a Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Trust
reserves the right, upon 30 days written notice, to redeem, at net asset value
(less any applicable deferred sales charge), the shares of any shareholder whose
account has a value of less than $1,000 in the Fund, other than as a result of a
decline in the net asset value per share. Before the Fund redeems such shares
and sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares in the account is less than the minimum amount and will
allow the shareholder 30 days to make an additional investment in an amount that
will increase the value of the account to at least $1,000 before the redemption
is processed. This policy will not be implemented where a Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may be
subject to a CDSC. 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, 4% of the amount invested for
Class B shares and ___% of the amount invested for Class C shares.
Shareholders will be charged a CDSC if certain of those shares are redeemed
within the applicable time period as stated in the prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares or (iii) were exchanged for
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shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services. The shareholder must notify the Fund either directly or through
the Distributor at the time of redemption that the shareholder is entitled to a
waiver of CDSC or redemption fee. The waiver will then be granted subject to
confirmation of the shareholder's entitlement.
The CDSC or redemption fee, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered investment advisors,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. The
amount of any CDSC also will be reinstated. To exercise this privilege, the
written order for the purchase of shares must be received by the Transfer Agent
or be postmarked within 90 days after the date of redemption. This privilege can
be used only once per calendar year. If a loss is incurred on the redemption and
the reinstatement privilege is used, some or all of the loss may not be allowed
as a tax deduction.
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. However, Class B
shares of the Funds that were acquired before May __, 1999, and which have not
been exchanged into any other Fund since that date, will convert seven years
after purchase. The conversion of Class B shares into Class A shares is subject
to the continuing availability of an opinion of counsel or an Internal Revenue
Service ("IRS") ruling, if the Investment Manager deems it advisable to obtain
such advice, to the effect that (1) such conversion will not constitute taxable
events for federal tax purposes; and (2) the payment of different dividends on
Class A and Class B shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986. The Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. The conversion will be effected at the
relative net asset values per share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each class
of each Fund's shares will be determined once daily as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during
each day on which that Exchange is open for trading. As of the date of this
Statement of Additional Information, the New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
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Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. Portfolio securities underlying traded call options will be
valued at their market price as determined above; however, the current market
value of the option written will be subtracted from net asset value. In cases in
which securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Board of Trustees as
the primary market. Short-term obligations maturing in less than 60 days will
generally be valued at amortized cost. The mortgage securities held in a Fund's
portfolio will be valued at the mean between the most recent bid and asked
prices as obtained from one or more dealers that make markets in the securities
when over-the counter market quotations are readily available. Securities for
which quotations are not readily available and all other assets will be valued
at their respective fair values as determined in good faith by or under the
direction of the Board of Trustees of the Trust. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of a
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of a Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to a Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Trustees.
In computing a class of a Fund's net asset value, all class-specific liabilities
incurred or accrued are deducted from the class' net assets. The resulting net
assets are divided by the number of shares of the class outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting daily
expense accruals of the higher distribution fees applicable to Class B and Class
C 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
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of regular trading on the New York Stock Exchange will be confirmed at the next
computed offering price as described in the Prospectus.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Fund will not normally be
issued to shareholders (and not at all for shares of the Money Market Fund). 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 Trust reserves the right, if conditions exist that make cash payments
undesirable, to honor any request for redemption or repurchase order with
respect to shares of a Fund by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (redemption-in-kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting theses
securities to cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act as a result of which a Fund is obligated to redeem shares
with respect to any one shareholder during any 90-day period solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds (other than the Money Market Fund)
provide a Pre-Authorized Investment Program for the convenience of investors who
wish to purchase shares of a Fund on a regular basis. Such a Program may be
started with an initial investment ($1,000 minimum) and subsequent voluntary
purchases ($100 minimum) with no obligation to continue. The Program may be
terminated without penalty at any time by the investor or the Funds. The minimum
investment requirements may be waived by the Fund for purchases made pursuant to
(i) employer-administered payroll deduction plans, (ii) profit-sharing, pension,
or individual or any employee retirement plans, or (iii) purchases made in
connection with plans providing for periodic investments in Fund shares.
For investors purchasing shares of a Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of a Fund on a
periodic basis, the Fund may, in lieu of furnishing confirmations following each
purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of a fund will not be issued
unless the shareholder requests them in writing.
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SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS. For self-employed individuals and
corporate investors that wish to purchase shares of a Fund, there is available
through the Fund a Prototype Plan and Custody Agreement. The Custody Agreement
provides that Investors Fiduciary Trust Company, Kansas City, Missouri, will act
as Custodian under the Plan, and will furnish custodial services for an annual
maintenance fee of $12.00 for each participant, with no other charges. (This fee
is in addition to the normal Custodian charges paid by the Funds.) The annual
contract maintenance fee may be waived from time to time. For further details,
including the right to appoint a successor Custodian, see the Plan and Custody
Agreements as provided by the Trust. Employers who wish to use shares of a Fund
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors having earned income are eligible to
purchase shares of a Fund under an IRA pursuant to Section 408(a) of the
Internal Revenue Code. An individual who creates an IRA may contribute annually
certain dollar amounts of earned income, and an additional amount if there is a
non-working spouse. Simple IRA plans that employers may establish on behalf of
their employees are also available. Roth IRA plans that enable employed and
self-employed individuals to make non-deductible contributions, and, under
certain circumstances, effect tax-free withdrawals, are also available. Copies
of a model Custodial Account Agreement are available from the Distributor.
Investors Fiduciary Trust Company, Kansas City, Missouri, will act as the
Custodian under this model Agreement, for which it will charge the investor an
annual fee of $12.00 for maintaining the Account (such fee is in addition to the
normal custodial charges paid by the Funds). Full details on the IRA are
contained in an IRS required disclosure statement, and the Custodian will not
open an IRA until seven (7) days after the investor has received such statement
from the Trust. An IRA using shares of a Fund may also be used by employers who
have adopted a Simplified Employee Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are also
available. Section 403(b) plans are arrangements by a public school organization
or a charitable, educational, or scientific organization that is described in
Section 501(c)(3) of the Internal Revenue Code under which employees are
permitted to take advantage of the federal income tax deferral benefits provided
for in Section 403(b) of the Code. It is advisable for an investor considering
the funding of any retirement plan to consult with an attorney or to obtain
advice from a competent retirement plan consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES. As discussed in the Prospectus,
the telephone redemption and exchange privileges are available for all
shareholder accounts; however, retirement accounts may not utilize the telephone
redemption privilege. The telephone privileges may be modified or terminated at
any time. The privileges are subject to the conditions and provisions set forth
below and in the Prospectus.
1. Telephone redemption and/or exchange instructions received in good
order before the pricing of a Fund on any day on which the New York
Stock Exchange is open for business (a "Business Day"), but not later
than 4:00 p.m. eastern time, will be processed at that day's closing
net asset value. For each exchange, the shareholder's account may be
charged an exchange fee. There is no fee for telephone redemption;
however, redemptions of Class A and Class B shares may be subject to a
contingent deferred sales charge (See "Redemption of Shares" in the
Prospectus).
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
3. Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
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4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on
the registration. This address cannot reflect any change within
the previous sixty (60) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $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 on the exchange having the same
aggregate net asset value as the shares being exchanged shall be
substituted in the escrow account. Shares held in escrow may not be
redeemed until the Letter of Intent has expired and/or the appropriate
adjustments have been made to the account.
9. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Funds' then-current
prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by
the bank upon which it was drawn.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting both
income dividends and capital gains distributions, if any, in additional shares
of a respective class of a Fund at the then current net asset value, with no
sales charge. The Funds' management believes that most investors desire to take
advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
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shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and its shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and shareholders are
advised to consult their own tax advisers with respect to the particular
federal, state, local and foreign tax consequences to them of an investment in
the Funds. This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations issued thereunder, and judicial and
administrative authorities as in effect on the date of this Statement of
Additional Information, all of which are subject to change, which change may be
retroactive.
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each Fund
must, among other things: (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund intends to make
distributions in accordance with the calendar year distribution requirement.
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<PAGE>
DISTRIBUTIONS. Dividends of investment company taxable income (including net
short-term capital gains) are taxable to shareholders as ordinary income.
Distributions of investment company taxable income may be eligible for the
corporate dividends-received deduction to the extent attributable to a Fund's
dividend income from U.S. corporations, and if other applicable requirements are
met. However, the alternative minimum tax applicable to corporations may reduce
the benefit of the dividends-received deduction. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) designated by a Fund as capital gain dividends are not eligible for the
dividends-received deduction and will generally be taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been held by a shareholder, and are not eligible for the dividends-received
deduction. Net capital gains from assets held for one year 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 a Fund. Any
distributions that are not from a Fund's investment company taxable income or
net capital gain may be characterized as a return of capital to shareholders or,
in some cases, as capital gain. Shareholders will be notified annually as to the
federal tax status of dividends and distributions they receive and any tax
withheld thereon.
Dividends, including capital gain dividends, declared in October, November, or
December with a record date in such month and paid during the following January
will be treated as having been paid by a Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by a Fund reduce the net asset value of the Fund shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by a Fund. The price of shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will generally be
taxable to them.
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by a Fund may be
treated as debt securities that were originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount that accrues on a debt security in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code. If the High Yield Fund II
invests in certain high yield original issue discount securities issued by
corporations, a portion of the original issue discount accruing on the
securities may be eligible for the deduction for dividends received by
corporations. In such event, properly designated dividends of investment company
taxable income received from the High Yield Fund II by its corporate
shareholders, to the extent attributable to such portion of accrued original
issue discount, may be eligible for this deduction for dividends received by
corporations.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to
fluctuations in foreign currency exchange rates which occur between the time a
Fund accrues income or other receivable or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
B-61
<PAGE>
receivable or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain financial contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains and losses, may increase or
decrease the amount of a Fund's net investment income to be distributed to its
shareholders as ordinary income.
PASSIVE FOREIGN INVESTMENT COMPANIES. A Fund may invest in stocks of foreign
companies that are classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign company is classified as a PFIC if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which a Fund held the PFIC stock. A Fund
itself will be subject to tax on the portion, if any, of the excess distribution
that is allocated to that Fund's holding period in prior taxable years (and an
interest factor will be added to the tax, as if the tax had actually been
payable in such prior taxable years) even though the Fund distributes the
corresponding income to shareholders. Excess distributions include any gain from
the sale of PFIC stock as well as certain distributions from a PFIC. All excess
distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. Alternatively, another
election is available that involves marking to market the Funds' PFIC stock at
the end of each taxable year with the result that unrealized gains are treated
as though they were realized and are reported as ordinary income; any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are reported as ordinary loss to the extent of any net mark-to-market gains
included in income in prior years.
FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign
countries may be subject to withholding and other income or similar taxes
imposed by such countries. If more than 50% of the value of a Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, that Fund will be eligible and intends to elect to "pass through"
to the Fund's shareholders the amount of foreign income and similar taxes paid
by that Fund. Pursuant to this election, a shareholder will be required to
include in gross income (in addition to taxable dividends actually received) his
pro rata share of the foreign taxes paid by a Fund, and will be entitled either
to deduct (as an itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions, but such a shareholder may be eligible to claim the foreign tax
credit (see below). Each shareholder will be notified within 60 days after the
close of the relevant Fund's taxable year whether the foreign taxes paid by the
Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of a
Fund's income flows through to its shareholders. With respect to a Fund, gains
from the sale of securities will be treated as derived from U.S. sources and
certain currency fluctuation gains, including fluctuation gains from foreign
currency denominated debt securities, receivable and payable, will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as
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<PAGE>
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by a Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund. The foreign tax credit limitation rules do not apply to certain
electing individual taxpayers who have limited creditable foreign taxes and no
foreign source income other than passive investment-type income. The foreign tax
credit is eliminated with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Fund are held by the Fund or the
shareholders, as the case may be, for less than 16 days (46 days in the case of
preferred shares) during the 30-day period (90-day period for preferred shares)
beginning 15 days (45 days for preferred shares) before the shares become
ex-dividend. Foreign taxes may not be deducted in computing alternative minimum
taxable income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by a Fund will be treated as United States
source income.
OPTIONS AND HEDGING TRANSACTIONS. The taxation of equity options (including
options on narrow-based stock indices) and over-the-counter options on debt
securities is governed by Code Section 1234. Pursuant to Code Section 1234, with
respect to a put or call option that is purchased by a Fund, if the option is
sold, any resulting gain or loss will be a capital gain or loss, and will be
short-term or long term, depending upon the holding period of the option. If the
option expires, the resulting loss is a capital loss and is short-term or
long-term, depending upon the holding period of the option. If the option is
exercised, the cost of the option, in the case of a call option, is added to the
basis of the purchased security and, in the case of a put option, reduces the
amount realized on the underlying security in determining gain or loss.
Certain options and financial contracts in which a Fund may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by a Fund at the end of each taxable
year (and on certain other dates as prescribed under the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
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<PAGE>
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, notional principal contract, futures or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options, futures and forward contracts
and short sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-day period ending with the 30th
day after the close of the Fund's taxable year, if certain conditions are met.
Requirements relating to a Fund's tax status as a regulated investment company
may limit the extent to which the Fund will be able to engage in transactions in
options and foreign currency forward contracts.
SHORT SALES AGAINST THE BOX. If a Fund sells short "against the box," unless
certain constructive sale rules (discussed above) apply, it may realize a
capital gain or loss upon the closing of the sale. Such gain or loss generally
will be long- or short-term depending upon the length of time the Fund held the
security which it sold short. In some circumstances, short sales may have the
effect of reducing an otherwise applicable holding period of a security in the
portfolio. Were that to occur, the affected security would again have to be held
for the requisite period before its disposition to avoid treating that security
as having been sold within the first three months of its holding period. The
constructive sale rule, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully under "Options and Hedging Transactions" above.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future Treasury regulations may apply similar
treatment to other transactions with respect to property that becomes
substantially worthless.
OTHER INVESTMENT COMPANIES. It is possible that by investing in other investment
companies, a Fund may not be able to meet the calendar year distribution
requirement and may be subject to federal income and excise tax. The
diversification and distribution requirements applicable to each Fund may limit
the extent to which each Fund will be able to invest in other investment
companies.
SALE OR OTHER DISPOSITION OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, which generally may be eligible
for reduced Federal tax rates, depending on the shareholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in a Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
B-64
<PAGE>
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING. Each Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish a Fund with the shareholder's correct taxpayer
identification number or social security number and to make such certifications
as a Fund may require, (2) the IRS notifies the shareholder or a Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United States, is
a nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder. If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends 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.
OTHER TAXES. Distributions also may be subject to state, local and foreign
taxes. U.S. tax rules applicable to foreign investors may differ significantly
from those outlined above. This discussion does not purport to deal with all of
the tax consequences applicable to shareholders. Shareholders are advised to
consult their own tax advisers for details with respect to the particular tax
consequences to them of an investment in a Fund.
CALCULATION OF PERFORMANCE DATA
Each Fund (other than the Money Market Fund) may, from time to time, include
"total return" in advertisements or reports to shareholders or prospective
investors. Quotations of average annual total return will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
a Fund over periods of 1, 5 and 10 years (up to the life of the Fund),
calculated pursuant to the following formula which is prescribed by the SEC:
n
P(1 + T) = ERV
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<PAGE>
Where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, a Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Quotations of yield for a Fund will be based on all investment income per share
earned during a particular 30-day period (including dividends and interest),
less expenses accrued during the period ("net investment income") and are
computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
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.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
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<PAGE>
Certain Funds may also from time to time advertise its yield based on a 30-day
or 90-day period ended on a date other than the most recent balance sheet
included in the Fund's Registration Statement, computed in accordance with the
yield formula described above, as adjusted to conform with the differing period
for which the yield computation is based. Any quotation of performance stated in
terms of yield (whether based on a 30-day or 90-day period) will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
A Fund may also publish a distribution rate in sales literature and in investor
communications preceded or accompanied by a copy of the current Prospectus. The
current distribution rate for a Fund is the annualization of the Fund's
distribution per share divided by the maximum offering price per share of a Fund
at the respective month-end. The current distribution rate may differ from
current yield because the distribution rate may contain items of capital gain
and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures
will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load.
For purposes of calculating the historical performance of a Fund, the Trust will
take into account the historical performance of the series of the Trust
corresponding to the Fund prior to the Reorganization of the Trust as well as
the historical performance of that series' corresponding master fund for
periods, if any, prior to the date of inception of the series.
YIELD INFORMATION FOR THE MONEY MARKET FUND. The yield for the Money Market Fund
will be based on yield information from the [_______] Money Market Fund.
The current yields for the [_______] Money Market Fund quoted will be the net
average annualized yield for an identified period, usually seven consecutive
calendar days. Yield for the [_______] Money Market Fund will be computed by
assuming that an account was established with a single share of the [_______]
Money Market Fund (the "Single Share Account") on the first day of the period.
To arrive at the quoted yield, the net change in the value of that Single Share
Account for the period (which would include dividends accrued with respect to
the share, and dividends declared on shares purchased with dividends accrued and
paid, if any, but would not include realized gains and losses or unrealized
appreciation or depreciation) will be multiplied by 365 and then divided by the
number of days in the period, with the resulting figure carried to the nearest
hundredth of 1%. The [_______] Money Market Fund may also furnish a quotation of
effective yield for the [_______] Money Market Fund that assumes the
reinvestment of dividends for a 365 day year and a return for the entire year
equal to the average annualized yield for the period, which will be computed by
compounding the unannualized current yield for the period by adding 1 to the
number of days in the period, and then subtracting 1 from the result. Historical
yields are not necessarily indicative of future yields. Rates of return will
vary as interest rates and other conditions affecting money market instruments
change. Yields also depend on the quality, length of maturity and type of
instruments in the [_______] Money Market Fund's portfolio and the [_______]
Money Market Fund's operating expenses. Quotations of yields will be accompanied
by information concerning the average weighted maturity of the [_______] Money
Market Fund. Comparison of the quoted yields of various investments is valid
only if yields are calculated in the same manner and for identical limited
periods. When comparing the yield for the Money Market Fund with yields quoted
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with respect to other investments, shareholders should consider (a) possible
differences in time periods, (b) the effect of the methods used to calculate
quoted yields, (c) the quality and average-weighted maturity of portfolio
investments, expenses, convenience, liquidity and other important factors, and
(d) the taxable or tax-exempt character of all or part of dividends received.
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return and yields
will always show a calculation that includes the effect of the maximum sales
charge but may also show total return without giving effect to that charge.
Because these additional quotations will not reflect the maximum sales charge
payable, these performance quotations will be higher than the performance
quotations that reflect the maximum sales charge.
Total returns and yields are based on past results and are not necessarily a
prediction of future performance.
PERFORMANCE COMPARISONS. In reports or other communications to shareholders or
in advertising material, a Fund may compare the performance of its Class A,
Class B, Class C and Class Q shares with that of other mutual funds as listed in
the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY and THE WALL
STREET JOURNAL. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results.
Yields for the following Classes of the following Funds for the
thirty-day period ended March 31, 1999 were as follows:
FUND AND CLASS
Convertible Fund
Class A __%
Class B __%
Class C __%
Class Q __%
Strategic Income Fund
Class A __%
Class B __%
Class C __%
Class Q __%
Balanced Growth
Class A __%
Class B __%
Class C __%
Class Q __%
High Yield Fund II
Class A __%
Class B __%
Class C __%
Class Q __%
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<PAGE>
The average annual total returns, including sales charges, for each class of
shares of each Fund for the one-five-and ten-year periods ended March 31, 1999,
if applicable, and for classes that have not been in operation for ten years,
the average annual total return for the period from commencement of operations
to March 31, 1999, is as follows:
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION INCEPTION DATE
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
International Core Growth
Class A ___% N/A N/A ___% 2/28/97
Class B ___% N/A N/A ___% 2/28/97
Class C ___% N/A N/A ___% 2/28/97
Class Q ___% N/A N/A ___% 2/28/97
Worldwide Growth
Class A ___% ___% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% ___% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
International Small Cap Growth
Class A ___% ___% N/A ___% 12/27/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% ___% N/A ___% 12/27/93
Class Q ___% ___% N/A ___% 8/31/95
Emerging Countries
Class A ___% __% N/A ___% 11/28/94
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 11/28/94
Class Q ___% __% N/A ___% 8/31/95
Large Cap Growth
Class A ___% N/A N/A ___% 7/21/97
Class B ___% N/A N/A ___% 7/21/97
Class C ___% N/A N/A ___% 7/21/97
Class Q ___% N/A N/A ___% 8/31/95
Mid Cap Growth
Class A ___% __% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
Small Cap Growth
Class A ___% __% N/A ___% 12/27/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 12/27/93
Class Q ___% ___% N/A ___% 8/31/95
</TABLE>
B-69
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Convertible
Class A ___% __% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
Balanced
Class A ___% N/A N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% N/A N/A ___% 4/19/93
Class Q ___% N/A N/A ___% 8/31/95
High Yield II
Class A ___% N/A N/A ___% 3/27/98
Class B ___% N/A N/A ___% 3/27/98
Class C ___% N/A N/A ___% 3/27/98
Class Q ___% N/A N/A ___% 3/27/98
Strategic Income
Class A N/A N/A N/A ___% 8/31/95
Class B N/A N/A N/A ___% 8/31/95
Class C N/A N/A N/A ___% 8/31/95
Class Q N/A N/A N/A ___% 8/31/95
</TABLE>
There are no figures for the Money Market Fund since it has not yet commenced
operations.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to age characteristics, of various countries and
regions in which a Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of a Fund's portfolio; (v) the major industries located in various
jurisdictions; (vi) the number of shareholders in the Funds or other Pilgrim
Funds and the dollar amount of the assets under management; (vii) descriptions
of investing methods such as dollar-cost averaging, best day/worst day
scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Funds and individual stocks in a Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of a
Fund or other industry specialists, (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Portfolio Manager, Pilgrim Capital,
Pilgrim Group, Inc. or affiliates of the Trust, the Investment Manager, the
Portfolio Manager, Pilgrim Capital or Pilgrim Group, Inc. including (i)
performance rankings of other funds managed by the Investment Manager or a
Portfolio Manager, or the individuals employed by the Investment Manager or a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Fund, including rankings of mutual funds published by Lipper Analytical
Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating
services, companies, publications or other persons who rank mutual funds or
B-70
<PAGE>
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 Pilgrim Mutual Funds or other 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
or the Portfolio Manager; and (vi) information regarding rights offerings
conducted by closed-end funds managed by the Investment Manager.
PRIOR PERFORMANCE OF LARGE CAP FUND AND ITS PREDECESSORS
The following table sets forth historical performance information for the Class
I shares of the Large Cap Growth Fund. It includes historical performance
information for the Institutional Portfolios which preceded the Fund prior to
the reorganization of the Trust in July 1998 and the Portfolio Manager's
composite performance data relating to the historical performance of
institutional private accounts managed by the Portfolio Manager, since the dates
indicated, that have investment objectives, policies, strategies and risks
substantially similar to those of such Funds. The composite data is provided to
illustrate the past performance of the Portfolio Manager in managing
substantially similar accounts as measured against specified market indices and
does not represent the performance of the Fund. Investors should not consider
this performance data as an indication of future performance of the Fund or of
the Portfolio Manager.
The Portfolio Manager has advised the Trust that the net performance results for
the Fund are calculated as set forth above under "Performance Data" All
information set forth in the tables below relies on data supplied by the
Portfolio Manager or from statistical services, reports or other sources
believed by the Portfolio Manager to be reliable. However, except as otherwise
indicated, such information has not been verified and is unaudited.
The Portfolio Manager's composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"(1)), retroactively applied to all time periods.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
loses. All returns reflect the deduction of investment advisory fees, brokerage
commissions and execution costs paid by the Portfolio Manager's institutional
private accounts, without provision for federal or state income taxes. Custodial
fees, if any, were not included in the calculation. The Portfolio Manager's
composites include all actual, fee-paying, discretionary institutional private
accounts managed by the Portfolio Manager that have investment objectives,
policies, strategies and risks substantially similar to those of the Large Cap
Growth Fund. Securities transactions are accounted for on the trade date and
accrual accounting is utilized. Cash and equivalents are included in performance
returns. The monthly returns of the Portfolio Manager's composites combine the
individual accounts' returns (calculated on a time-weighted rate of return that
is revalued whenever cash flows exceed $500) by asset-weighing each individual
account's asset value as of the beginning of the month. Quarterly and yearly
returns are calculated by geometrically linking the monthly and quarterly
returns, respectively. The yearly returns are computed by geometrically linking
the returns of each quarter within the calendar year.
- ----------
1 AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and
fair presentations by investment advisers of their performance results, and
(ii) ensure uniformity in reporting so that performance results of
investment advisers are directly comparable.
B-71
<PAGE>
The institutional private accounts that are included in the Portfolio Manager's
composites are not subject to the same types of expenses to which the Class A,
B, C and Q shares of the Large Cap Growth Fund are subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Funds by the Investment Company Act or Subchapter M
of the Internal Revenue Code. Consequently, the performance results for the
Portfolio Manager's composites could have been adversely affected if the
institutional private accounts included in the composites had been regulated as
investment companies under the federal securities laws.
The results presented below may not necessarily equate with the return
experienced by any particular investor as a result of the timing of investments
and redemptions. In addition, the effect of taxes on any investor will depend on
such person's tax status, and the results have not been reduced to reflect any
income tax which may have been payable.
The investment results presented below are not intended to predict or suggest
the returns that might be experienced by the Large Cap Growth Fund or an
individual investor investing in such Fund. Investors should also be aware that
the uses of a methodology different form that used below to calculated
performance could result in different performance data.
<TABLE>
<CAPTION>
PORTFOLIO
MANAGER'S
LARGE CAP RUSSELL 1000
GROWTH GROWTH
YEAR COMPOSITE(1) INDEX(1,2) S&P 500(1,3) A B C Q
- ---- ------------ ---------- ------------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1995 35.38% 25.26% 25.37%
1996(4) 26.63 23.12 22.96 (6.28%)(5) (6.11%)(5) (2.16%)(5) (1.18%)(5)
1997 33.06 30.48 33.31 37.66 39.16 44.52 ____
1998 ____ ____ ____ ____ ____ ____ ____
1999 ____ ____ ____ ____ ____ ____ ____
Last Year(6) ____ ____ ____ ____ ____ ____ ____
Since Inception(6) ____ ____ ____ ____ ____ ____ ____
</TABLE>
- ----------
1 Annualized.
2 The Russell 1000 Growth Index contains those companies among the Russell
1000 Securities with higher than average price-to-book ratios and
forecasted growth. The Russell 1000 Index contains the top 1,000 securities
of the Russell 3000 Index, which comprises the 3,000 largest U.S.
securities as determined by total market capitalization. The Russell 1000
Growth Index is considered generally representative of the U.S. market for
large cap stocks. The Index reflects the reinvestment of income dividends
and capital gains distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
3 The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarding as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
4 Commencement of investment operations was April 1, 1995.
5 Inception dates are as follows: Large Cap Growth Composite - April 1, 1995;
Large Cap Growth Portfolios A, B, C and Q (predecessor to the Class A, B, C
and Q shares of the Large Cap Growth Fund) -- December 27, 1996.
6 Through March 31, 1999.
B-72
<PAGE>
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. The authorized shares of the Trust consists of
an unlimited number of shares of beneficial interest. Holders of shares of the
Funds have one vote for each share held, and a proportionate fraction of a vote
for each fraction of a share held. All shares when issued are fully paid and
non-assessable by the Trust. Shares have no preemptive rights. All shares have
equal voting, dividend and liquidation rights. Shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do so,
and in such event the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Generally, there will not be annual meetings of shareholders.
The Board of Trustees may classify or reclassify any unissued shares into shares
of any series by setting or changing in any one or more respects, from time to
time, prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or
qualifications of such shares. Any such classification or reclassification will
comply with the provisions of the 1940 Act. The Board of Trustees may create
additional series (or classes of series) of shares without shareholder approval.
Any series or class of shares may be terminated by a vote of the shareholders of
such series or class entitled to vote or by the Trustees of the Trust by written
notice to shareholders of such series or class. Shareholders may remove Trustees
from office by votes cast at a meeting of shareholders or by written consent.
CUSTODIAN. The cash and securities owned by each Fund are held by Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Trust are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS. [_______________] serves as the independent auditor for
the Trust, and in that capacity examines the annual financial statements of the
Trust.
OTHER INFORMATION. The Trust 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 Trust by any governmental agency. The
Prospectus and this Statement of Additional Information omit certain of the
information contained in each Trust's Registration Statement filed with the SEC
and copies of this information may be obtained from the SEC upon payment of the
prescribed fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statement audited by independent
certified public accountants.
DECLARATION OF TRUST. The Declaration of Trust of the Trust provides that
obligations of the Trust are not binding upon its Trustees, officers, employees
and agents individually and that the Trustees, officers, employees and agents
will not be liable to the trust or its investors for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee, officer,
B-73
<PAGE>
employee or agent against any liability to the trust or its investors to which
the Trustee, officer, employee or agent would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
or her duties. The Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to a designated Fund shall be enforceable against the assets and
property of such Fund only, and not against the assets or property of any other
Fund or the investors therein.
FINANCIAL STATEMENTS
The financial statements from the Funds' March 31, 1999 Annual Reports are
incorporated herein by reference. Copies of the Funds' Annual Reports may be
obtained without charge by contacting Pilgrim Funds at Suite 1200, 40 North
Central Avenue, Phoenix, Arizona 85004, (800) 992-0180. There are no financial
statements for the Money Market Fund at this time.
B-74
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Form of Certificate of Trust of Registrant (b)
(2) Form of Certificate of Amendment of Certificate of Trust (b)
(3) Form of Amended and Restated Declaration of Trust (b)
(4) Form of Establishment of Additional Series (b)
(5) Form of Establishment of Additional Series(b)
(6) Form of Amendment No. 2 to Amended and Restated Declaration
of Trust (b)
(7) Form of Amendment No. 3 to Amended and Restated Declaration
of Trust (b)
(8) Form of Amendment No. 4 to Amended and Restated Declaration
of Trust (b)
(9) Form of Amendment No. 5 to Amended and Restated Declaration
of Trust (b)
(10) Form of Amendment No. 6 to Amended and Restated Declaration
of Trust (b)
(11) Form of Amendment No. 7 to Amended and Restated Declaration
of Trust (b)
(12) Form of Amendment No. 8 to Amended and Restated Declaration
of Trust (b)
(13) Form of Amendment No. 9 to Amended and Restated Declaration
of Trust (b)
(14) Form of Amendment No. 10 to Amended and Restated Declaration
of Trust (a)
(15) Form of Amendment No. 11 to Amended and Restated Declaration
of Trust (c)
(16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust (c)
(17) Form of Amendment No. 13 to Amended and Restated Declaration
of Trust (b)
(18) Form of Amendment No. 14 to Amended and Restated Declaration
of Trust (d)
(19) Form of Amendment No. 15 to Amended and Restated Declaration
of Trust (e)
(20) Form of Amendment No. 16 to Amended and Restated Declaration
of Trust (h)
(21) Form of Amendment No. 17 to Amended and Restated Declaration
of Trust (h)
(22) Form of Amendment No. 18 to Amended and Restated Declaration
of Trust (h)
(23) Form of Amendment No. 19 to Amended and Restated Declaration
of Trust (j)
(24) Form of Amendment No. 20 to Amended and Restated Declaration
of Trust (j)
(25) Form of Amendment No. 21 to Amended and Restated Declaration
of Trust (k)
(26) Form of Certificate of Amendment to Certificate of Trust (m)
(27) Form of Amendment No. 22 to Amended and Restated Declaration
of Trust (m)
(b) (1) Form of Amended Bylaws of Registrant (b)
(2) Form of Amendment to Section 2.5 of Bylaws of Registrant (b)
C-1
<PAGE>
(c) Not Applicable
(d) (1) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management, with respect to Global Blue
Chip Fund, Emerging Markets Bond Funds, Pacific Rim Fund, Greater
China Fund/Latin American Fund (g)
(2) Form of Subadvisory Agreement between Registrant and
Nicholas-Applegate Capital Management Hong Kong, with Respect to the
Pacific Rim Fund and Greater China Fund (g)
(3) Form of Subadvisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Asia, with Respect to the
Pacific Rim Fund and Greater Chine Fund (g)
(4) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding additional funds to the Investment Advisory
Agreement (i)
(5) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding Global Technology Fund to the Investment
Advisory Agreement (j)
(6) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding Large Cap Value Fund to the Investment
Advisory Agreement (k)
(7) Form of Investment Management Agreement between the Trust and Pilgrim
Investments, Inc.(m)
(8) Form of Portfolio Management Agreement between Pilgrim Investments,
Inc. and Nicholas-Applegate Capital Management.(m)
(e) (1) Form of Distribution Agreement between Registrant and
Nicholas-Applegate Securities dated as of April 19, 1993 (b)
(2) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Global Blue Chip Fund, Emerging Market Bond Fund,
Pacific Rim Fund, Greater China Fund and Latin American Fund to
Distribution Agreement (g)
(3) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Classes of Shares to the Distribution Agreement (j)
(4) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Global Tecnology Fund to the Distribution Agreement
(j)
(5) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Large Cap Value Fund to the Distribution Agreement
(k)
(6) Form of Underwriting Agreement between the Trust and Pilgrim
Securities, Inc. (m)
(f) None.
(g) (1) Form of Custodian Service Agreement between Registrant and PNC bank
Dated as of April 1, 1993 (b)
C-2
<PAGE>
(2) Form of Letter Agreement between Registrant and PNC Bank with Respect
to Custodian Services Fees related to the Global Blue Chip Fund and
the Emerging Markets Bond Fund (e)
(3) Form of Letter Agreement between Registrant and PNC Bank, adding
Pacific Rim Fund, Greater China Fund and Latin America Fund to
Custodian Services Agreement (g)
(4) Form of Letter Agreement between Registrant and PNC Bank, adding
Classes of Shares and Global Technology Fund to Custodian Services
Agreement (j)
(5) Form of Letter Agreement between Registrant and PNC Bank, adding
shares of Large Cap Value Fund to Custodian Services Agreement (k)
(6) Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co. dated as of June 1, 1998. (k)
(7) Form of Amendment to Custodian Agreement between Registrant and Brown
Brothers Harriman & Co. (k)
(8) Form of Foreign Custody Manager Delegation Agreement between
Registrant and Brown Brothers Harriman & Co. dated as of June 1, 1998
(k)
(h) (1) Form of Amended Administration Agreement between Registrant and
Investment Company Administration Corporation (b)
(2) Form of Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management dated as of November 18, 1996
(b)
(3) Form of Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1, 1993 (b)
(4) Form of Letter Agreement between Registrant and State Street Bank and
Trust Company, adding Global blue Chip Fund and Emerging Markets Bond
Fund to Transfer Agency and Service Agreement (e)
(5) Form of Letter Agreement between Registrant and Stated Street Bank and
Trust Company, adding Pacific Rim Fund, Greater China Fund and Latin
America Fund to Transfer Agency and Service Agreement (g)
(6) Form of Letter Agreement between Registrant and Stated Street
Bank/Trust Company, adding Classes of Shares and Global Technology
Fund to Transfer Agency and Service Agreement (j)
(7) Form of Letter Agreement between Registrant and Stated Street
Bank/Trust Company, adding Large Cap Value Fund to Transfer Agency and
Service Agreement (k)
(8) Form of Amended Shareholder Service Plan between Registrant and
Nicholas-Applegate Securities (l)
(9) Form of License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (b)
C-3
<PAGE>
(10) Form of Accounting Services Agreement between Registrant and PFPC Inc.
dated as of April 1, 1993 (b)
(11) Form of Letter Agreement between Registrant and PFPC Inc., adding
Global Blue Chip Fund and Emerging Markets Bond Fund to Accounting
Services Agreement (e)
(12) Form of Letter Agreement between Registrant and PFPC Inc. with respect
to Accounting services Fees related to the Global blue Chip Fund and
the Emerging Markets Bond Fund (f)
(13) Form of Letter Agreement between Registrant and PFPC Inc. adding the
Pacific Rim Fund, Greater China Fund and Latin America Fund (g)
(14) Form of Letter Agreement between Registrant and PFPC Inc. regarding
fees for additional funds under Accounting Services Agreement (l)
(15) Form of Letter Agreement between Registrant and PFPC Inc. adding
Classes of Shares and Global Technology Fund to Accounting Services
Agreement (j)
(16) Form of Letter Agreement between Registrant and PFPC Inc. adding Large
Cap Value Fund to Accounting Services Agreement (k)
(17) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management regarding expenses reimbursements (j)
(18) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management adding Large Cap Value Fund to Agreement regarding
expense reimbursements (k)
(19) Form of Credit Agreement among Registrant, Chemical Bank and Certain
other Banks dated April 10,1996 (b)
(20) Form of First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, the Chase Manhattan Bank and Certain
Other Banks (e)
(21) Form of Second Amendment Agreement to Credit Agreement among
Registrant, the Chase Manhattan Bank and certain other Banks (g)
(22) Form of Third Amendment Agreement to Credit Agreement among
Registrant, the Chase Manhattan Bank and certain other Banks (k)
(23) Form of Expense Limitation Agreement (m)
(i) Opinion of Counsel (k)
(j) None.
(k) None.
(l) Form of Investment Letter of Initial Investors in Registrant dated April 1,
1993 (b)
(m) (1) Form of Distribution Plan of Registrant (l)
(2) Form of Amended and Restated Service and Distribution Plan for Class A
(m)
(3) Form of Amended and Restated Service and Distribution Plan for Class B
(m)
C-4
<PAGE>
(4) Form of Amended and Restated Service and Distribution Plan for Class C
(m)
(5) Form of Amended and Restated Service Plan for Class Q (m)
(n) Financial Data Schedule*
(o) (1) Form of Multi-Class Plan (k)
(2) Form of Amended and Restated Multi-Class Plan (m)
- ----------
* To be filed by amendment.
(a) Filed as an exhibit to Post-Effective Amendment No. 29 to Registrant's Form
N-1A Registration Statement on May 3, 1996 and incorporated herein by
reference.
(b) Filed as an exhibit to Post-Effective Amendment No. 30 to the Registrant's
Form N-1A Registration Statement on June 4, 1996 and incorporated herein by
reference.
(c) Filed as an exhibit to Post-Effective Amendment No. 38 to Registrants Form
N-1A Registration Statement of January 3, 1997 and incorporated herein by
reference.
(d) Filed as an exhibit to Post-Effective Amendment No. 40 to Registrants form
N-1A Registration Statement on May 2, 1997 and incorporated herein by
reference.
(e) Filed as an exhibit to Post-Effective Amendment No. 43 to Registrant's Form
N-1A Registration Statement on July 14, 1997 and incorporated herein by
reference.
(f) Filed as an exhibit to Post-Effective Amendment No. 45 to Registrant's Form
N-1A Registration Statement on July 28, 1997 and incorporated herein by
reference.
(g) Filed as an exhibit to Post-Effective Amendment No. 47 to Registrant's Form
N-1A Registration Statement on September 2, 1997 and incorporated herein by
reference.
(h) Filed as an exhibit to Post-Effective Amendment No. 48 to Registrant's Form
N-1A Registration Statement on December 15, 1997 and incorporated herein by
reference.
(i) Filed as an exhibit to Post-Effective Amendment No. 60 to Registrant's Form
N-1A Registration Statement on June 15, 1998 and incorporated herein by
reference.
(j) Filed as an exhibit to Post-Effective Amendment No. 63 to Registrant's Form
N-1A Registration Statement on July 21, 1998 and incorporated herein by
reference.
(k) Filed as an exhibit to Post-Effective Amendment No. 66 to Registrant's Form
N-1A Registration Statement on August 14, 1998 and incorporated herein by
reference.
(l) Filed as an exhibit to Registrant's Form N-14 Registration Statement on
December 15, 1997 and incorporated herein by reference.
C-5
<PAGE>
(m) Filed as an exhibit to Post-Effective Amendment No. 67 to the Registrant's
Form N-A Registration Statement of March 25, 1999 and incorporated herein
by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Article 5.2 of the Amended and Restated Declaration of Trust provides
for the indemnification of Registrant's trustees, officers, employees and agents
against liabilities incurred by them in connection with the defense or
disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("disabling conduct").
Section 8 of Registrant's Administration Agreement provides for the
indemnification of Registrant's Administrator against all liabilities incurred
by it in performing its obligations under the agreement, except with respect to
matters involving its disabling conduct. Section 9 of Registrant's Distribution
Agreement provides for the indemnification of Registrant's Distributor against
all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its disabling conduct.
Section 4 of the Shareholder Service Agreement provides for the indemnification
of Registrant's Distributor against all liabilities incurred by it in performing
its obligations under the Agreement, except with respect to matters involving
its disabling conduct.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, 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 whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS
Nicholas-Applegate Capital Management is a California limited
partnership, the general partner of which is Nicholas-Applegate Capital
Management, Inc. (The "General Partner"). During the two fiscal years ended
December 31, 1997, Nicholas-Applegate Capital Management has engaged principally
C-6
<PAGE>
in the business of providing investment services to institutional and other
clients. All of the additional information required by this Item 26 with respect
to Nicholas-Applegate Capital Management is set forth in the Form ADV, as
amended, of Nicholas-Applegate Capital Management (File No. 801-21442), which is
incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Nicholas-Applegate Securities does not act as a principal underwriter,
depositor or investment adviser to any investment company other than Registrant.
(b) Nicholas-Applegate Securities, the distributor of the shares of
Registrant's series, is a California limited partnership and its general partner
is Nicholas-Applegate Capital Management Holdings, L.P. (the "General Partner").
Information is furnished below with respect to the officers, partners and
directors of the general partner and Nicholas-Applegate Securities. The
principal business address of such persons is 600 West Broadway, 30th Floor, San
Diego, California 92101, except as otherwise indicated below.
Positions And Positions And
Name And Principal Offices With Principal Offices With
Business Address Underwriter Registrant
---------------- ----------- ----------
Arthur E. Nicholas President President
Peter J. Johnson Vice President Vice President
E. Blake Moore, Jr. Chief Financial Officer Chief Financial Officer
and Secretary and Secretary
Todd Spillane Director Of Compliance None
(c) Not applicable.
ITEM 28. 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
will be maintained either at the offices of the Registrant (600 West Broadway,
30th Floor, San Diego, California 92101); the Investment Adviser to the Trust
and Master Trust, Nicholas-Applegate Capital Management (600 West Broadway, 30th
Floor, San Diego, California 92101); the primary Administrator for the Trust and
Master Trust, Investment Company Administration Corporation (4455 East Camelback
Road, Suite 261-E, Phoenix, Arizona 85018); the Custodian, PNC Bank (Airport
Business Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania
19113); or the Transfer and Dividend Disbursing Agent, State Street Bank & Trust
Company (2 Heritage Drive, 7th Floor, North Quincy, Massachusetts 02171).
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ITEM 29. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes that if it is requested by the holders of at least
10% of its outstanding shares to call a meeting of shareholders for the purpose
of voting upon the question of removal of a trustee, it will do so and will
assist in communications with other shareholders as required by Section 16(c) of
the Investment Company Act of 1940.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego and State of
California on the 24th day of March, 1999.
PILGRIM MUTUAL FUNDS
By:
--------------------------------
Arthur E. Nicholas*
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
- -------------------------- Principal Executive Officer March 24, 1999
Arthur E. Nicholas *
- -------------------------- Principal Financial and March 24, 1999
Charles William Maher Accounting Officer
- -------------------------- Trustee March 24, 1999
Fred C. Applegate *
- -------------------------- Trustee March 24, 1999
Dann V. Angeloff *
- -------------------------- Trustee March 24, 1999
Walter E. Auch *
- -------------------------- Trustee March 24, 1999
Theodore J. Coburn *
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- -------------------------- Trustee March 24, 1999
Darlene Deremer *
- -------------------------- Trustee March 24, 1999
George F. Keane *
- -------------------------- Trustee March 24, 1999
Arthur B. Laffer *
- -------------------------- Trustee March 24, 1999
Charles E. Young *
/s/ E. Blake Moore, Jr.
- --------------------------
* By: E. Blake Moore, Jr.
Attorney-in-Fact**
** Powers of Attorney for the Trustees are incorporated by reference to
Post-Effective Amendment No. 60 to the Registration Statement on Form N-1A
as filed on June 15, 1998, Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A as filed on August 1, 1994 and
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A
as filed on September 26, 1994.
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