As filed with the Securities and Exchange Commission on September 2, 1999
Securities Act File No. 33-56094
Investment Company Act File No. 811-7428
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-1A
Registration Statement Under The Securities Act Of 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 72 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 74 [X]
(Check appropriate box or boxes)
PILGRIM MUTUAL FUNDS
(FORMERLY NICHOLAS-APPLEGATE MUTUAL FUNDS)
(Exact Name of Registrant Specified in Charter)
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 551-8643
James M. Hennessy, Esq. With Copies To:
Pilgrim Investments, Inc. Jeffrey S. Puretz, Esq.
40 North Central Avenue, Suite 1200 Dechert Price & Rhoads
Phoenix, AZ 85004 1775 Eye Street, N.W.
(Name and Address of Agent for Service) Washington, D.C. 20006
----------
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)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date for a
previously filed post-effective amendment.
================================================================================
<PAGE>
Prospectus
Classes: A, B, C and M
November 1, 1999
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund
Pilgrim LargeCap Leaders Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Value Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth
Fund Pilgrim Bank and Thrift Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim Asia-Pacific Equity Fund
INCOME FUNDS
Pilgrim Government Securities Income Fund
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund
Pilgrim High Yield Fund II
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
This prospectus contains important information about these funds. 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 truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUNDS AT A GLANCE ............................................. 2
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund ...................................... 4
Pilgrim LargeCap Leaders Fund .............................. 6
Pilgrim LargeCap Growth Fund ............................... 8
Pilgrim MidCap Value Fund .................................. 10
Pilgrim MidCap Growth Fund ................................. 12
Pilgrim SmallCap Growth Fund ............................... 14
Pilgrim Bank and Thrift Fund ............................... 16
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund .............................. 18
Pilgrim International Core Growth Fund ..................... 20
Pilgrim International SmallCap Growth Fund ................. 22
Pilgrim Emerging Countries Fund ............................ 24
Pilgrim Asia-Pacific Equity Fund ........................... 26
INCOME FUNDS
Pilgrim Government Securities Income Fund .................. 28
Pilgrim Strategic Income Fund .............................. 30
Pilgrim High Yield Fund .................................... 32
Pilgrim High Yield Fund II ................................. 34
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund ...................................... 36
Pilgrim Convertible Fund ................................... 38
FEES AND EXPENSES ............................................. 41
SHAREHOLDER GUIDE
Choosing a Share Class -- Pilgrim Purchase Options(TM) ..... 46
How to Purchase Shares ..................................... 49
How to Redeem Shares ....................................... 50
Transaction Policies ....................................... 51
Distribution and Shareholder Service Fees .................. 52
MANAGEMENT OF THE FUNDS
Adviser .................................................... 53
Sub-Advisers ............................................... 55
DIVIDENDS, DISTRIBUTIONS AND TAXES ............................ 56
MORE INFORMATION ABOUT RISKS .................................. 57
FINANCIAL HIGHLIGHTS .......................................... 61
</TABLE>
1
<PAGE>
FUNDS
AT A
GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. EQUITY FUNDS MagnaCap Fund Growth of capital, with dividend
Adviser: Pilgrim Investments, Inc. income as a secondary consideration
LargeCap Leaders Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
LargeCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
MidCap Value Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
MidCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Bank and Thrift Fund Long-term capital appreciation, with
Adviser: Pilgrim Investments, Inc. income as a secondary objective
INTERNATIONAL Worldwide Growth Fund Long-term capital appreciation
EQUITY FUNDS Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Core Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Emerging Countries Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Asia-Pacific Equity Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: HSBC Asset Management
INCOME FUNDS Government Securities Income Fund High current income, consistent with
Adviser: Pilgrim Investments, Inc. liquidity and preservation of capital
Strategic Income Fund Maximum Total Return
Adviser: Pilgrim Investments, Inc.
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
High Yield Fund II High level of current income and
Adviser: Pilgrim Investments, Inc. capital growth
EQUITY & INCOME Balanced Fund Long-term capital appreciation and
FUNDS Adviser: Pilgrim Investments, Inc. current income
Convertible Fund Total return, consisting of capital
Adviser: Pilgrim Investments, Inc. appreciation and current income
Sub-Adviser: Nicholas-Applegate Capital Mgt.
</TABLE>
2
<PAGE>
MAIN INVESTMENTS MAIN RISKS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Equity securities that meet Price volatility and other risks that accompany
disciplined selection criteria an investment in equity securities.
Equity securities of large Price volatility and other risks that accompany
U.S. companies believed to be an investment in equity securities.
leaders in their industry
Equity securities of large Price volatility and other risks that accompany an
U.S. companies investment in growth-oriented equity securities.
Equity securities of medium- Price volatility and other risks that accompany an
sized U.S. companies that meet investment in equity securities of medium-sized
disciplined selection criteria companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities of medium- Price volatility and other risks that accompany an
sized U.S. companies investment in equity securities of growth-oriented
and medium-sized companies. Particularly sensitive
to price swings during periods of economic uncertainty.
Equity securities of Price volatility and other risks that accompany an
small-sized U.S. companies investment in equity securities of growth-oriented and
small-sized companies. Particularly sensitive to price
swings during periods of economic uncertainty.
Equity securities of banks and Price volatility and other risks that accompany an
thrifts or their holding or investment in equity securities. Susceptible to risks
parent companies, and savings of decline in the price of securities concentrated
accounts of mutual thrifts in the banking and thrift industries.
Equity securities of issuers Price volatility and other risks that accompany an
located in at least three investment in growth-oriented foreign equities.
different countries, one of Sensitive to currency exchange rates, international
which may be the U.S. political and economic conditions and other risks
that affect foreign securities.
Equity securities of issuers Price volatility and other risks that accompany an
located in countries outside investment in growth-oriented foreign equities.
the U.S. Sensitive to currency exchange rates, internationa
political and economic conditions and other risks
that affect foreign securities.
Equity securities of small-sized Price volatility, liquidity and other risks that
companies located outside the U.S. accompany an investment in equity securities of
foreign, small-sized companies. Sensitive to currency
exchange rates, international political and economic
conditions and other risks that affect foreign
securities.
Equity securities of issuers Price volatility, liquidity and other risks that
located in countries with accompany an investment in equities from emerging
emerging securities markets countries. Sensitive to currency exchange rates,
international political and economic conditions and
other risks that affect foreign securities.
Equity securities of companies Price volatility and other risks that accompany an
based in the Asia-Pacific region, investment in foreign equities and in securities of
excluding Australia and Japan issuers in a single region. Sensitive to currency
exchange rates, international political and economic
conditions and other risks that affect foreign
securities.
Securities issued or guaranteed Credit, interest rate, prepayment and other risks
by the U.S. Government and certain that accompany an investment in government bonds
of its agencies or instrumentalities and mortgage related investments. Generally has less
credit risk than the other income funds.
Investment grade and high yield Credit, interest rate, prepayment and other risks
debt securities that accompany an investment in debt securities,
including high yield debt securities. May be sensitive
to credit risk during economic downturns.
High yield debt securities Credit, interest rate and other risks that accompany
an investment in lower-quality debt securities.
Particularly sensitive to credit risk during
economic downturns.
High yield debt securities Credit, interest rate and other risks that accompany
an investment in lower-quality debt securities.
Particularly sensitive to credit risk during
economic downturns.
A mix of equity and debt securities Price volatility and other risks that accompany
an investment in equity securities. Credit, interest
rate and other risks that accompany an investment
in debt securities.
Convertible securities of companies Price volatility and other risks that accompany an
of various sizes investment in equity securities. Credit, interest
rate, liquidity and other risks that accompany an
investment in debt securities
</TABLE>
3
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MAGNACAP
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS GROWTH OF CAPITAL, WITH DIVIDEND INCOME AS A SECONDARY
CONSIDERATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund is managed with the philosophy that companies that can best meet the
Fund's objectives have paid increasing dividends or have had the capability to
pay rising dividends from their operations. The Fund normally invests at least
65% of its assets in equity securities of companies that meet the following
disciplined criteria:
CONSISTENT DIVIDENDS -- A company must have paid or had the financial capability
from its operations to pay a dividend in 8 out of the last 10 years.
SUBSTANTIAL DIVIDEND INCREASES -- A company must have increased its dividend or
had the financial capability from its operations to have increased its dividend
at least 100% over the past 10 years.
REINVESTED EARNINGS -- Dividend payout must be less than 65% of current
earnings.
STRONG BALANCE SHEET -- Long term debt should be no more than 25% of the
company's total capitalization or a company's bonds must be rated at least A- or
A-3.
ATTRACTIVE PRICE -- A company's current share price should be in the lower half
of the stock's price/earnings ratio range for the past ten years, or the ratio
of the share price to its anticipated future earnings must be an attractive
value in relation to the average for its industry peer group or that of the
Standard & Poor's 500 Composite Stock Price Index.
The equity securities in which the Fund may invest include common stocks,
convertible securities, and rights or warrants. The remainder of the Fund's
assets may be invested in equity securities that the adviser believes have
growth potential because they represent an attractive value. In selecting
securities for the Fund, preservation of capital is also an important
consideration. Although the Fund normally will be invested as fully as
practicable in equity securities, assets that are not invested in equity
securities may be invested in high quality debt securities. The Fund may invest
up to 5% of its assets, measured at the time of investment, in foreign
securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies.
4
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities that meet the Fund's disciplined investment criteria. Rather, the
market could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
22.46% -3.11% 25.28% 8.02% 9.25% 4.15% 35.22% 18.51% 27.73% 16.09%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Class B and M
1 Year 5 Years 10 Years (7/17/95)
------ ------- -------- ---------
Class A(1) 9.40% 18.46% 15.13% --
Class B(2) 10.26% -- -- 20.73%
Class M(3) 1.56% -- -- 20.31%
S&P 500 Index 28.58% 23.81% 18.95% 27.75%
- ----------
* Class C shares of MagnaCap Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 18.93% (Q4 1998)
Worst quarter for period in bar chart: -15.99% (Q3 1990)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
5
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
LEADERS FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to be a large
company, although the Fund may also invest to a limited degree in companies that
have a market capitalization between $1 billion and $5 billion.
The equity securities in which the Fund may invest include common stock,
convertible securities, preferred stock, American Depositary Receipts, and
warrants. The Fund normally invests as fully as practicable (at least 80%) in
equity securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies.
6
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.07% 20.15% 20.08%
* Prior to November 1, 1998, the Fund's investment policies were different in
that they emphasized large company value stocks without necessarily
emphasizing industry leaders. Pilgrim Investments has been the Fund's
investment adviser since the Fund commenced operations; however, prior to
November 1, 1997, the Fund was managed by a sub-adviser.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception
1 Year (9/1/95)
------ ---------
Class A(1) 13.16% 18.67%
Class B(2) 14.33% 19.28%
Class C(3) 15.43% 18.93%
S&P 500 Index 28.58% 28.73%
- ----------
* Class C shares of LargeCap Leaders Fund were not offered during the period
ended December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 24.58% (Q4 1998)
Worst quarter for period in bar chart: -12.86% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
7
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in: corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated; U.S. Government securities; and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover signs of "change at the margin" -- positive business
developments which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests primarily in equity securities
of larger companies, which sometimes have more stable prices than smaller
companies.
8
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the U.S., and
foreign controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
59.45%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (7/21/97)
------ ---------
Class A(1) 50.26% 39.24%
Class B(2) 53.68% 40.46%
Class C(3) 57.34% 44.12%
Russell 1000 Growth Index 38.71% 44.57%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 37.87% (Q4 1998)
Worst quarter for period in bar chart: -8.50% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
9
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
VALUE FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests as fully as practicable (at least 80% of its assets)
in equity securities of medium-sized U.S. companies. The Fund will normally
invest at least 65% of its assets in equity securities of companies that meet
the following disciplined criteria:
CONSISTENT DIVIDENDS -- The company must have paid or had the financial
capability from its operations to pay a dividend in its last five fiscal years.
STRONG BALANCE SHEET -- If the company has debt that is rated, that debt is
rated investment grade by a nationally recognized rating agency. If the company
does not have debt that is rated, the company's long term debt to capitalization
ratio is below 25%.
REINVESTED EARNINGS -- The company currently pays out in dividends less than 65%
of current earnings, or less than the dividend payout as a percentage of current
earnings of at least half of the medium-sized companies in similar industries.
ATTRACTIVE PRICE -- The ratio of the stock's price to the next fiscal year's
anticipated earnings is less that the corresponding ratio for at least half of
the medium sized companies in similar industries.
The Fund considers a company to be medium-sized if it has a market
capitalization between $1 billion and $8 billion. The equity securities in which
the Fund may invest include common stock, convertible securities, preferred
stock and warrants.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests in medium-sized
companies, which are more susceptible to price swings than larger companies, but
usually tend to have less volatile price swings than smaller companies. To the
extent the Fund invests in small-cap companies, such securities are more
susceptible to price swings than larger companies because they have fewer
financial resources, limited product and market diversification and many are
dependent on a few key managers.
10
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
value securities that meet the Fund's disciplined investment criteria. Rather,
the market could favor growth-oriented stocks or large company stocks, or may
not favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
29.56% 21.87% 4.89%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception
1 Year (9/1/95)
------ ---------
Class A(1) -1.15% 15.53%
Class B(2) -0.75% 16.07%
Class M(3) 0.63% 15.70%
Russell Midcap Index 10.10% 18.85%
Russell Midcap Value Index 5.08% 19.43%
- ----------
* Class C shares of MidCap Value Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 13.87% (Q1 1998)
Worst quarter for period in bar chart: -13.94% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of two broad measures
of market performance -- the Russell Midcap Index, an unmanaged index consisting
of the 800 smallest companies in the Russell 1000 Index, and the Russell MidCap
Value Index, an unmanaged index consisting of companies in the Russell Midcap
Index with lower book-to-price ratios and lower forecasted growth values. Unlike
the bar chart, the table reflects the impact of sales charges. The Indices have
an inherent performance advantage over the Fund since each has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
11
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of medium-sized U.S. companies, and at least 75% of its total
assets in common stocks. It may invest the remainder of its assets in preferred
and convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in medium-sized companies,
which are more susceptible to price swings than larger companies, but usually
tend to have less volatile price swings than smaller companies.
12
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-11.00% 37.64% 15.84% 15.88% 14.14%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 7.60% 12.09% 13.18% --
Class B(2) 8.29% -- -- 18.26%
Class C(3) 12.44% 12.75 13.66 --
Russell Midcap
Growth Index 17.86% 17.34% 17.99% 21.07%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
4. Since inception performance for index is shown from 4/30/93.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 25.23% (Q4 1998)
Worst quarter for period in bar chart: -17.73% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. Unlike the bar chart,
the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
13
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of small U.S. companies, and at least 75% of its total assets
in common stocks. It may invest the remainder in preferred and convertible
securities, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, and securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in foreign
equity or debt securities. The Fund may also use options and futures contracts
involving securities, securities indices, interest rates and foreign currencies
as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small-cap companies, which
are more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and many
are dependent on a few key managers.
14
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-4.03% 34.87% 18.27% 11.24% 3.68%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (12/27/93) (5/31/95)
------ ------- -------- ---------
Class A(1) -2.26% 10.71% 11.38% --
Class B(2) -1.96% -- -- 14.46%
Class C(3) 2.12% 11.37% 12.03% --
Russell 2000
Growth Index 1.23% 10.22% 10.87% 12.72%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 26.90% (Q4 1998)
Worst quarter for period in bar chart: -23.64% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth
orientation. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
15
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
BANK AND
THRIFT FUND
INVESTMENT OBJECTIVE:
THE FUND PRIMARILY SEEKS LONG-TERM CAPITAL APPRECIATION; A SECONDARY OBJECTIVE
IS INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of national and state-chartered banks (other than
money center banks), thrifts, and the holding or parent companies of such
depository institutions, and in savings accounts of mutual thrifts that may
allow the Fund to participate in stock conversions of the mutual thrift. This
policy may only be changed with approval of the shareholders of the Fund. The
equity securities described above include common stocks, convertible securities
(including convertible preferred stock) and warrants, but do not include
non-convertible preferred stocks or adjustable rate preferred stocks.
The Fund may invest up to 35% of its total assets in equity securities,
including preferred stocks or adjustable rate preferred stocks, of other types
of issuers, including money center banks, other financial services companies,
and companies that are not in financial services industries, and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) that are either issued or guaranteed by the
United States Government or an agency thereof or issued by a corporation or
other issuer and rated investment grade or comparable quality by at least one
nationally recognized rating organization. The Fund may invest up to 10% of its
assets in securities of other investment companies.
The adviser emphasizes a value approach, and selects securities that are
undervalued relative to the market and have potential for future growth,
including securities of institutions that the adviser believes are well
positioned to take advantage of investment opportunities in the banking and
thrift industries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- The value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in small- to
medium-sized companies, which are more susceptible to price swings than larger
companies.
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks or large company stocks, or may not favor equities at
all.
16
<PAGE>
RISKS OF CONCENTRATION -- because the Fund's investments are concentrated in the
banking and thrift industries, the value of the Fund may be subject to greater
volatility than a Fund with a portfolio that is less concentrated. If securities
of banks and thrifts as a group falls out of favor, the Fund could underperform
funds that focus on other types of companies.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.79% -18.14% 49.49% 32.36% 7.79% -1.89% 49.69% 41.10% 64.86% -1.83%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Class B
1 Year 5 Years 10 Years (10/17/97)
------ ------- -------- ----------
Class A(1) -7.48% 25.89% 20.90% --
Class B(2) -7.27% -- -- 4.29%
S&P 500 Index 28.58% 23.81% 18.95% 26.13%
S & P Major Regional
Banks Index 10.42% 23.77% 21.41% 15.84%
NASDAQ 100
Financial Index -1.09% 21.98% N/A 7.92%
- ----------
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 16.43% (Q3 1997)
Worst quarter for period in bar chart: -20.36% (Q3 1990)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of three broad
measures of market performance -- the Standard & Poor's 500 Composite Stock
Price Index, an unmanaged index of the stocks of approximately 500
large-capitalization U.S. companies, the S&P Major Regional Banks Index, an
unmanaged index comprised of major regional banks in the S&P 500 Index, and the
NASDAQ 100 Financial Index, an index of the 100 largest financial companies
traded on NASDAQ. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
17
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries, one of
which may be the U.S.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities, which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may also invest in small and
medium-sized companies, which may be more susceptible to greater price swings
than larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
18
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks,
or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2.45% 14.74% 17.92% 17.28% 37.34%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 29.43% 16.04% 16.61% --
Class B(2) 31.68% -- -- 21.12%
Class C(3) 35.39% 16.70% 17.09% --
MSCI World Index 22.78% 13.94% 13.62% 16.21%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 26.87% (Q4 1998)
Worst quarter for period in bar chart: -13.43% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. Unlike the
bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
19
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in large companies, which
sometimes have more stable prices than smaller companies.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities at
all.
20
<PAGE>
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.92%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (2/28/97)
------ ---------
Class A(1) 13.93% 16.44%
Class B(2) 15.31% 18.85%
Class C(3) 19.20% 20.47%
MSCI EAFE Index 20.33% 12.97%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 17.16% (Q1 1998)
Worst quarter for period in bar chart: -14.91% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
21
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund considers a company to be
small if it has a market capitalization below $1.5 billion. The Fund emphasizes
companies in the bottom 75% of publicly traded companies as measured by stock
market capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small companies, which may
be more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market diversification
and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could
22
<PAGE>
favor value-oriented stocks or large company stocks, or may not favor equities
at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.51% 17.58% 13.46% 35.57%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year (8/31/94) (5/31/95)
------ -------- ---------
Class A(1) 27.79% 13.00% --
Class B(2) 29.83% -- 18.31%
Class C(3) 33.89% 13.71% --
Salomon EPAC EM Index 14.14% 3.71% 1.67%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 24.53% (Q1 1998)
Worst quarter for period in bar chart: -15.35% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Salomon EPAC Extended Market Index, an unmanaged index
comprised of smaller-capitalization companies in 22 countries excluding Canada
and the United States. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
23
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets -- that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach, and seeks issuers in the
early stages of development, growth companies, cyclical companies, or companies
believed to be undergoing a basic change in operations. It uses a blend of
traditional fundamental research of individual securities, calling on the
expertise of many external analysts in different countries throughout the world,
and a computer intensive ranking system that analyzes and ranks securities. The
Investment Adviser currently selects portfolio securities from an investment
universe of approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than larger
companies because they may have fewer financial resources, limited product and
market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not
24
<PAGE>
favor the growth securities in company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. Investments in emerging markets countries are generally
riskier than other kinds of foreign investments, partly because emerging market
countries may be less politically and economically stable than other countries.
It may also be more difficult to buy and sell securities in emerging market
countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.34% 27.50% 9.44% -22.19%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year (11/28/94) (5/31/95)
------ -------- ---------
Class A(1) -26.67% 0.96% --
Class B(2) -26.05% -- 1.48%
Class C(3) -22.98% 1.45% --
MSCI Emerging Markets
Free Index -27.52% -13.31% -11.89%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 15.01% (Q2 1995)
Worst quarter for period in bar chart: -26.06% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Emerging Markets
Free Index, an unmanaged index comprised of companies representative of the
market structure of 22 emerging market countries in Europe, Latin America and
the Pacific Basin. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
25
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
ASIA-PACIFIC
EQUITY FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
HSBC ASSET MANAGEMENT AMERICAS, INC. AND HSBC ASSET MANAGEMENT HONG KONG
LIMITED
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
listed on stock exchanges in countries in the Asia-Pacific region or issued by
companies based in this region. Asia-Pacific countries in which the Fund invests
include, but are not limited to, China, Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand, but do not include Japan and
Australia. The equity securities in which the Fund may invest include common
stock, convertible securities, preferred stock, warrants, American Depositary
Receipts, European Depositary Receipts and other depositary receipts.
The Fund is managed using the investment philosophy that the sub-adviser, HSBC
Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Limited
(HSBC), uses in managing private Asia-Pacific portfolios. HSBC bases investment
decisions on a disciplined approach that takes into consideration the following
factors: a macroeconomic overview of the region, specific country analysis,
setting target country weightings, evaluation of industry sectors within each
country, and selection of specific stocks. In selecting specific securities, the
sub-adviser emphasize a value approach that seeks growth at a reasonable price.
This approach involves include analysis of such fundamental factors as absolute
rates of change of earnings growth, earnings growth relative to the market and
industry, quality of earnings and stability of earnings growth, quality of
management and product line, interest rate sensitivity and liquidity of the
stock.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: the country in which the issuer was organized; the
country in which the principal securities market for that issuer is located; the
country in which the issuer derives at least 50% of its revenues or profits from
goods produced or sold, investments made, or services performed; or the country
in which at least 50% of the issuer's assets are located.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on
26
<PAGE>
investment. To the extent the Fund invests in emerging markets countries, the
risks may be greater, partly because emerging market countries may be less
politically and economically stable than other countries. It may also be more
difficult to buy and sell securities in emerging market countries.
RISKS OF THE ASIA-PACIFIC REGION -- the Asia-Pacific region includes countries
in various stages of economic development, including emerging market countries.
In 1997 and 1998, securities markets in Asian countries suffered significant
downturns and volatility, and currencies lost value in relation to the U.S.
dollar. Currency devaluation in any one country may have a significant effect on
the entire region. Increased political or social unrest in some or all Asian
countries could cause further economic and market uncertainty.
RISKS OF CONCENTRATION -- because the Fund concentrates on a single region of
the world, the Fund's performance may be more volatile than that of a Fund that
invests globally. If Asia-Pacific securities fall out of favor, it may cause the
Fund to underperform funds that focus on other types of stocks.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.46% -43.73% -15.51%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (9/1/95)
------ --------
Class A(1) -20.37% -19.55%
Class B(2) -20.57% -19.51%
Class M(3) -19.26% -19.47%
MSCI Far East ex-Japan Index -4.82% 7.80%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 23.32% (Q4 1998)
Worst quarter for period in bar chart: -33.22% (Q4 1997)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Far East Free
ex-Japan Index, an unmanaged index of Far East markets excluding Japan. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
27
<PAGE>
INCOME
FUNDS
PILGRIM
GOVERNMENT
SECURITIES
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS HIGH CURRENT INCOME, CONSISTENT WITH LIQUIDITY AND PRESERVATION
OF CAPITAL.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 70% of its total assets in securities issued
or guaranteed by the U.S. Government and the following agencies or
instrumentalities of the U.S. Government: the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct
obligations of the U.S. Treasury and mortgage-backed securities. The Fund may
fall below the 70% threshold due to changes in the value of the Fund's holdings
or the sale of securities to meet redemptions, in which case the Fund will
purchase only U.S. Government securities until the 70% level is restored. The
remainder of the Fund's assets may be invested in securities issued by other
agencies and instrumentalities of the U.S. Government and in instruments
collateralized by securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The foregoing policies are fundamental and may
not be changed without shareholder approval.
The Fund may invest in securities of any maturity; however, the Fund is expected
to have a dollar-weighted average duration within a range of 20% above or below
that of the Lehman Intermediate Treasury Index. As of March 31, 1999, the
dollar-weighted average duration of the Lehman Intermediate Treasury Index was
3.08 years. The adviser determines the composition of the Fund's portfolio on
the basis of its judgment of existing market conditions, such as the general
direction of interest rates, trends in creditworthiness, expected inflation,
supply and demand of fixed income securities, and other factors. The Fund may
enter into reverse repurchase agreements, dollar roll transactions or pairing
off transactions. The Fund does not invest in highly leveraged derivatives, such
as swaps, interest-only or principal-only stripped mortgage-backed securities,
or interest rate futures contracts.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities. You
could lose money on an investment in the Fund. The Fund may be affected by the
following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. This Fund may be particularly sensitive to interest rates
because it primarily invests in U.S. government securities and may invest in
securities with long terms to maturity. Debt securities with longer durations
tend to be more sensitive to changes in interest rates, usually making them more
volatile than debt securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is subject
to less credit risk than the other income funds because it principally invests
in debt securities issued or guaranteed by the U.S. government, its agencies and
government sponsored enterprises.
28
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.92% 8.03% 11.90% 7.46%(1) 4.71% -3.61% 14.51% 2.56% 7.85% 5.61%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Classes B and M
1 Year 5 Years 10 Years(4) (7/17/95)
------ ------- -------- ----------
Class A(1) 0.63% 4.20% 6.56% --
Class B(2) -0.15% -- -- 4.42%
Class M(3) 1.66% -- -- 4.50%
Lehman Gov't/Mortgage 8.62% 6.45% 8.34% 7.20%
Lehman Interm.
Treasury** 6.98% 5.98% 7.38% 7.24%
- ----------
* Class C shares of Government Securities Income Fund were not offered during
the period ended December 31, 1998.
** Information on the Lehman Intermediate Treasury Index is presented because
effective May 24, 1999, the Fund seeks an average portfolio duration within
+/- 20% of the duration of that Index. Previously, the Fund's average
portfolio maturity was generally longer.
1. Reflects deduction of sales charge of 4.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a sales charge of 3.25%.
4. The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would have
been had the Fund adhered to its borrowing restriction.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 7.76% (Q2 1989)
Worst quarter for period in bar chart: -2.66% (Q1 1994)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of two broad measures
of market performance -- the Lehman Brothers/Mortgage Government Index and the
Lehman Brothers Intermediate Treasury Index. Unlike the bar chart, the table
reflects the impact of sales charges. The Index has an inherent performance
advantage over the Fund since it has no cash in its portfolio, imposes no sales
charges and incurs no operating expenses. An investor cannot invest directly in
an index.
29
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. There is no minimum credit rating for high yield
debt securities in which the Fund may invest.
The Fund may invest in debt securities of any maturity; however, the average
portfolio duration of the Fund will generally range from two to eight years. The
Fund may invest up to 30% of its total assets in securities payable in foreign
currencies. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The Fund does not invest in interest-only or principal-only
stripped mortgage-backed securities.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund may
be subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the
30
<PAGE>
Fund will be forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.77% 9.04% 7.94%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Insitutional Class
shares of the Fund, which is no longer offered, for prior periods, restated
to reflect Class A operating expenses, Class A, Class B and Class C shares
after adjustment for class expenses, would have had substantially similar
returns because institutional Class shares were invested in the same
portfolio of securities. Also, prior to May 24, 1999 a different adviser
managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (8/31/95)
------ --------
Class A* 2.78% 6.61%
Lehman Aggregate Bond Index 8.67% 8.20%
- ----------
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class A expenses, including
deduction of a sales charge of 4.75%, because Classes A, B and C of the Fund
did not have a full year's performance as of December 31, 1998. See the
footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
Best quarter for period in bar chart: 3.84% (Q4 1996)
Worst quarter for period in bar chart: -0.72% (Q1 1996)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
31
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME, WITH CAPITAL APPRECIATION AS A
SECONDARY OBJECTIVE.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. There is no minimum credit rating for high yield securities in which the
Fund may invest. The Fund may invest in debt securities of any maturity. In
selecting securities for the Fund, preservation of capital is a consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage-related securities and
participation interests and assignments in floating rate loans and notes. The
Fund may also invest up to 10% of its assets in foreign debt securities of any
rating. The Fund reserves the right to also invest in financial futures and
related options to attempt to hedge risk, although the Fund has not invested in
such instruments since Pilgrim Investments, Inc. became the adviser in 1995
through the date of this prospectus.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
32
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Classes B and M
1 Year 5 Years 10 Years (7/17/95)
------ ------- -------- ----------
Class A(1) -7.60% 7.36% 8.88% --
Class B(2) -8.02% -- -- 7.75%
Class M(3) -6.58% -- -- 7.69%
Lehman High Yield Index 1.87% 8.57% 10.55% 8.91%(4)
- ----------
* Class C shares of High Yield Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 4.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a sales charge of 3.25%.
4. Since inception performances for index is shown from 7/31/95.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
33
<PAGE>
INCOME
FUNDS
HIGH
YIELD
FUND II
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME AND CAPITAL GROWTH.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies.
The Fund is not restricted to investments in companies of any particular size,
but currently intends to invest principally in companies with market
capitalization above $100 million at the time of purchase. The Fund may also use
options, futures contracts and interest rate and currency swaps as hedging
techniques.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long term
maturities. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the owners of the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
34
<PAGE>
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
Security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign banks or
securities depositories than those in the U.S., and foreign controls on
investment.
RISK OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.05% 4.69%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Insitutional Class
shares of the Fund, which is no longer offered, for prior periods, restated
to reflect Class A operating expenses, Class A, Class B and Class C shares
after adjustment for class expenses, would have had substantially similar
returns because institutional Class shares were invested in the same
portfolio of securities. Also, prior to May 24, 1999 a different adviser
managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (7/31/96)
------ --------
Class A* -0.32% 12.92%
First Boston High Yield Index .58% 8.43%
- ----------
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class A expenses, including
deduction of a sales charge of 4.75%, because Classes A, B and C of the Fund
did not have a full year's performance as of December 31, 1998. See the
footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
Best quarter for period in bar chart: 8.30% (Q3 1997)
Worst quarter for period in bar chart: -7.14% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
35
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
BALANCED
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A BALANCE OF LONG-TERM CAPITAL APPRECIATION AND CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions.
The remainder of the Fund's assets will be invested in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization of over $5 billion is
considered to be a large company, although the Fund may also invest to a limited
degree in companies that have a market capitalization between $1 billion and $5
billion.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit quality for the high yield debt securities in which the Fund may
invest. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
CHANGES IN INTEREST RATES -- the value of the debt securities held by the Fund
may fall when interest rates rise. The Fund may be sensitive to changes in
interest rates because it may invest in debt securities with intermediate and
long terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
debt securities with shorter durations. Zero coupon securities are particularly
sensitive to changes in interest rates.
36
<PAGE>
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may invest
in high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-6.29% 23.44% 16.39% 20.50% 23.34%
* Prior to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 16.26% 13.52% 14.25% --
Class B(2) 17.80% -- -- 26.42%
Class C(3) 21.52% 14.14% 14.75% --
Composite Index 20.93% 17.34% 15.27% 20.48%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 14.44% (Q3 1997)
Worst quarter for period in bar chart: -5.88% (Q2 1994)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- a composite index consisting of 60% Standard & Poor's 500
Composite Stock Price Index and 40% Lehman Brothers Government/Corporate Bond
Index. Unlike the bar chart, the table reflects the impact of sales charges. The
Indices have an inherent performance advantage over the Fund since each has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
37
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
CONVERTIBLE
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN, CONSISTING OF CAPITAL APPRECIATION AND
CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. Convertible securities are generally preferred stock or
other securities, including debt securities, that are convertible into common
stock. The Fund emphasizes companies with market capitalizations above $500
million. Through investments in convertible securities, the Fund seeks to
capture the upside performance of the underlying equities with less downside
exposure. The Fund may invest the remainder of its assets in common and
preferred stocks, debt securities of any maturity, and securities issued by the
U.S. Government and its agencies and instrumentalities. The Fund may also use
options and futures contracts involving securities, securities indices, interest
rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit rating for high yield securities in which the Fund may invest.
The Fund also may invest up to 35% of its net assets in zero coupon securities.
PRINCIPAL RISKS
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" -- positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, issuer and other risks, and their values may go up or down, sometimes
rapidly and unpredictably. Market risk is the risk that securities may decline
in value due to factors affecting securities markets generally or particular
industries. Issuer risk is the risk that the value of a security may decline for
reasons relating to the issuer, such as changes in the financial condition of
the issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility. The Fund may
invest in small and medium-sized companies, which may be more susceptible to
greater price swings than larger companies because they may have fewer financial
resources, limited product and market diversification and many are dependent on
a few key managers.
CHANGES IN INTEREST RATES -- the value of the convertible and debt securities
held by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in securities with intermediate
and long terms to maturity. Securities with longer
38
<PAGE>
durations tend to be more sensitive to changes in interest rates, usually making
them more volatile than securities with shorter durations. Zero coupon
securities are particularly sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a convertible or debt
security is unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic downturns.
This Fund may be subject to more credit risk than the other bond funds, because
the convertible securities and debt securities in which it invests may be
lower-rated securities.
Inability to sell securities -- lower rated securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
Risks of using derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-8.23% 21.67% 20.29% 22.58% 20.86%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 13.93% 13.41% 15.74% --
Class B(2) 15.31% -- -- 20.61%
Class C(3) 19.12% 14.03% 16.19% --
First Boston Convertible Index 6.55% 10.82% 11.42%(4) 13.48%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
4. Since inception performance for the index is shown from 4/30/93.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 19.73% (Q4 1998)
Worst quarter for period in bar chart: -9.08% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was __.__%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
39
<PAGE>
- --------------------------------------------------------------------------------
THIS PAGE INTENTIONALLY LEFT BLANK
- --------------------------------------------------------------------------------
40
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Fees
(fees paid directly from your investment)
- -----------------------------------------------------------------------------------------------
Class A Class B Class C1 Class M2
------- ------- -------- --------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)
Equity Funds and Equity & Income Funds 5.75%(3) None None 3.50%(3)
Income Funds 4.75%(3) None None 3.25%(3)
- -----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or redemption proceeds)
Equity Funds and Equity & Income Funds None(4) 5.00%(5) 1.00%(6) None
Income Funds None(4) 5.00%(5) 1.00%(6) None
- -----------------------------------------------------------------------------------------------
</TABLE>
1 Bank and Thrift Fund and Asia-Pacific Equity Fund do not offer Class C
shares.
2 Class M shares are offered only by MagnaCap Fund, LargeCap Leaders Fund,
MidCap Value Fund, Asia-Pacific Equity Fund, Government Securities Income
Fund and High Yield Fund.
3 Reduced for purchases of $50,000 and over. See Shareholder Guide.
4 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.
5 Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
6 Imposed upon redemption within 1 year from purchase.
41
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)(1)
CLASS A
Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 0.30% 0.35% 1.37% -- 1.37%
LargeCap Leaders 1.00 0.25 1.03 2.28 (0.53)% 1.75
LargeCap Growth 0.75 0.35 0.88 1.98 (0.38) 1.60
MidCap Value 1.00 0.25 0.53 1.78 (0.03) 1.75
MidCap Growth 0.75 0.35 0.42 1.52 -- 1.52
SmallCap Growth 1.00 0.35 0.49 1.84 -- 1.84
Bank and Thrift 0.72 0.25 0.23 1.20 -- 1.20
Worldwide Growth 1.00 0.35 0.54 1.89 (0.04) 1.85
International Core Growth 1.00 0.35 0.64 1.99 (0.04) 1.95
International SmallCap Growth 1.00 0.35 0.59 1.94 -- 1.94
Emerging Countries 1.25 0.35 0.84 2.44 (0.19) 2.25
Asia-Pacific Equity 1.25 0.25 1.30 2.80 (0.80) 2.00
Government Securities Income 0.50 0.25 0.83 1.58 (0.08) 1.50
Strategic Income 0.45 0.35 0.98 1.78 (0.83) 0.95
High Yield 0.60 0.25 0.32 1.17 (0.17) 1.00
High Yield II 0.60 0.35 0.54 1.39 (0.39) 1.00
Balanced 0.75 0.35 0.65 1.75 (0.15) 1.60
Convertible 0.75 0.35 0.42 1.52 -- 1.52
CLASS B
Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- -------- ---------- --------
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
LargeCap Growth 0.75 1.00 0.88 2.63 (0.38) 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
MidCap Growth 0.75 1.00 0.42 2.17 -- 2.17
SmallCap Growth 1.00 1.00 0.55 2.55 -- 2.55
Bank and Thrift 0.72 1.00 0.23 1.95 -- 1.95
Worldwide Growth 1.00 1.00 0.54 2.54 (0.04) 2.50
International Core Growth 1.00 1.00 0.63 2.63 (0.03) 2.60
International SmallCap Growth 1.00 1.00 0.59 2.59 -- 2.59
Emerging Countries 1.25 1.00 0.83 3.08 (0.18) 2.90
Asia-Pacific Equity 1.25 1.00 1.30 3.55 (0.80) 2.75
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 0.75 1.02 2.22 (0.87) 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
High Yield II 0.60 1.00 0.44 2.04 (0.29) 1.75
Balanced 0.75 1.00 0.65 2.40 (0.15) 2.25
Convertible 0.75 1.00 0.42 2.17 -- 2.17
</TABLE>
42
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deduced from Fund asset)(1)
<TABLE>
<CAPTION>
CLASS C3 Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ----- ---------- -------------- ----------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
LargeCap Growth 0.75 1.00 0.89 2.64 (0.39) 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
MidCap Growth 0.75 1.00 0.43 2.18 -- 2.18
SmallCap Growth 1.00 1.00 0.49 2.49 -- 2.49
Worldwide Growth 1.00 1.00 0.54 2.54 (0.04) 2.50
International Core Growth 1.00 1.00 0.65 2.65 (0.05) 2.60
International SmallCap Growth 1.00 1.00 0.59 2.59 -- 2.59
Emerging Countries 1.25 1.00 0.82 3.07 (0.17) 2.90
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 0.75 1.01 2.21 (0.86) 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
High Yield II 0.60 1.00 0.44 2.04 (0.29) 1.75
Balanced 0.75 1.00 0.64 2.39 (0.14) 2.25
Convertible 0.75 1.00 0.42 2.17 -- 2.17
CLASS M Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses Expenses Adviser2 Expenses
- ---- ---------- ------------ -------- ------------ ----------- --------
MagnaCap 0.72% 0.75% 0.35% 1.82% -- 1.82%
LargeCap Leaders 1.00 0.75 1.03 2.78 (0.53)% 2.25
MidCap Value 1.00 0.75 0.53 2.28 (0.03) 2.25
Asia-Pacific Equity 1.25 0.75 1.30 3.30 (0.80) 2.50
Government Securities Income 0.50 0.75 0.83 2.08 (0.08) 2.00
High Yield 0.60 0.75 0.32 1.67 (0.17) 1.50
</TABLE>
1 These tables show the estimated operating expenses for each Fund by class
as a ratio of expenses to average daily net assets. These estimates are
based on each Fund's actual operating expenses for its most recent complete
fiscal year and fee waivers to which the Adviser has agreed.
2 Pilgrim Investments has entered into expense limitation agreements with
each Fund except MagnaCap Fund, Bank and Thrift Fund and Government
Securities Income Fund, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." For High Yield
Fund, the current limits will continue through December 31, 1999, at which
time they will change to 1.10% for Class A, 1.85% for Classes B and C and
1.60% for Class M through at least October 31, 2001. For each remaining
Fund except Government Securities Income Fund, the expense limit will
continue through at least October 31, 2001. Nicholas-Applegate Capital
Management bears 50% of the cost of maintaining the expense limit for Funds
for which it serves as sub-adviser. Pilgrim Investments has separately
agreed to reimburse Government Securities Income Fund to the extent that
total Fund operating expenses, excluding interest, taxes, brokerage
commissions, extraordinary expenses, and distribution fees in excess of
0.25%, exceed 1.50% of the Fund's average daily net asset on the first $40
million in net assets and 1.00% of average daily net assets in excess of
$40 million. The expense limit for Government Securities Income Fund will
terminate only with termination of the advisory contract with Pilgrim
Investments.
3 Because Class C shares are new for the MagnaCap, LargeCap Leaders, MidCap
Value, Government Securities Income and High Yield Funds, their expenses
are based on Class B expenses.
4 Except for the MagnaCap, LargeCap Leaders, MidCap Value, Bank and Thrift,
Asia-Pacific Equity, Government Securities Income and High Yield Funds,
other expenses have been restated to reflect the elimination of certain
administrative fees effective May 24, 1999.
43
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
EXAMPLES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. Each Example assumes
that you invest $10,000 in the Fund for the time period indicated. Each Example
also assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
CLASS A ------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $706 $ 984 $1,282 $2,127 $706 $ 984 $1,282 $2,127
LargeCap Leaders 743 1,199 1,680 3,001 743 1,199 1,680 3,001
LargeCap Growth 728 1,089 1,513 2,689 728 1,089 1,513 2,689
MidCap Value 743 1,100 1,481 2,547 743 1,100 1,481 2,547
MidCap Growth 721 1,028 1,356 2,283 721 1.028 1,356 2,283
SmallCap Growth 751 1,120 1,513 2,609 751 1,120 1,513 2,609
Bank and Thrift 690 934 1,197 1,946 690 934 1,197 1,946
Worldwide Growth 752 1,127 1,530 2,653 752 1,127 1,530 2,653
International Core Growth 762 1,156 1,579 2,752 762 1,156 1,579 2,752
International SmallCap Growth 761 1,149 1,562 2,709 761 1,149 1,562 2,709
Emerging Countries 790 1,257 1,768 3,164 790 1,257 1,768 3,164
Asia-Pacific Equity 766 1,322 1,902 3,469 766 1,322 1,902 3,469
Government Securities Income 620 927 1,255 2,180 620 927 1,255 2,180
Strategic Income 567 850 1,241 2,335 567 850 1,241 2,335
High Yield 582 815 1,075 1,815 582 815 1,075 1,815
High Yield II 572 819 1,127 1,998 572 819 1,127 1,998
Balanced 728 1,066 1,442 2,495 728 1,066 1,442 2,495
Convertible 721 1,028 1,356 2,283 721 1,028 1,356 2,283
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
CLASS B ------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $710 $ 949 $1,314 $2,221 $210 $ 649 $1,114 $2,221
LargeCap Leaders 753 1,187 1,745 3,133 253 887 1,545 3,133
LargeCap Growth 728 1,043 1,525 2,747 228 743 1,325 2,747
MidCap Value 753 1,085 1,543 2,680 253 785 1,343 2,680
MidCap Growth 720 979 1,364 2,339 220 679 1,164 2,339
SmallCap Growth 758 1,094 1,555 2,712 258 794 1,355 2,712
Bank and Thrift 698 912 1,252 2,080 198 612 1,052 2,080
Worldwide Growth 753 1,083 1,543 2,710 253 783 1,343 2,710
International Core Growth 763 1,112 1,590 2,804 263 812 1,390 2,804
International SmallCap Growth 762 1,105 1,575 2,767 262 805 1,375 2,767
Emerging Countries 793 1,216 1,784 3,218 293 916 1,584 3,218
Asia-Pacific Equity 778 1,315 1,973 3,599 278 1,015 1,773 3,599
Government Securities Income 728 1,003 1,405 2,396 228 703 1,205 2,396
Strategic Income 637 822 1,226 2,301 137 522 1,026 2,301
High Yield 688 889 1,223 2,035 188 589 1,023 2,035
High Yield II 678 882 1,243 2,153 178 582 1,043 2,153
Balanced 728 1,019 1,453 2,551 228 719 1,253 2,551
Convertible 720 979 1,364 2,339 220 679 1,164 2,339
</TABLE>
44
<PAGE>
EXAMPLES
<TABLE>
<CAPTION>
CLASS C
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $310 $649 $1,114 $2,400 $210 $649 $1,114 $2,400
LargeCap Leaders 353 887 1,545 3,309 253 887 1,545 3,309
LargeCap Growth 328 744 1,329 2,914 228 744 1,329 2,914
MidCap Value 353 785 1,343 2,863 253 785 1,343 2,863
MidCap Growth 321 682 1,169 2,513 221 682 1,169 2,513
SmallCap Growth 352 776 1,326 2,826 252 776 1,326 2,826
Worldwide Growth 353 783 1,343 2,869 253 783 1,343 2,869
International Core Growth 363 814 1,396 2,976 263 814 1,396 2,976
International SmallCap Growth 362 805 1,375 2,925 262 805 1,375 2,925
Emerging Countries 393 915 1,580 3,359 293 915 1,580 3,359
Government Securities Income 328 703 1,205 2,585 228 703 1,205 2,585
Strategic Income 237 521 1,023 2,405 137 521 1,023 2,405
High Yield 288 589 1,023 2,230 188 589 1,023 2,230
High Yield II 278 582 1,043 2,321 178 582 1,043 2,321
Balanced 328 718 1,250 2,704 228 718 1,250 2,704
Convertible 320 679 1,164 2,503 220 679 1,164 2,503
CLASS M
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $528 $ 902 $1,301 $2,412 $528 $ 902 $1,301 $2,412
LargeCap Leaders 570 1,134 1,723 3,313 570 1,134 1,723 3,313
MidCap Value 570 1,035 1,525 2,872 570 1,035 1,525 2,872
Asia-Pacific Equity 594 1,258 1,945 3,767 594 1,258 1,945 3,767
Government Securities Income 521 932 1,368 2,577 521 932 1,368 2,577
High Yield 482 821 1,189 2,224 482 821 1,189 2,224
</TABLE>
45
<PAGE>
SHAREHOLDER
GUIDE
CHOOSING A SHARE CLASS
- --------------------------------------------------------------------------------
PILGRIM PURCHASE OPTIONS (TM)
Depending upon the Fund, you may select from up to four separate classes of
shares: Class A, Class B, Class C and Class M.
CLASS A
* Front-end sales charge, as described on the next page.
* Distribution and service (12b-1) fees of 0.25% to 0.35%.
CLASS B
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1.00% (0.75% for Strategic Income
Fund)
* A contingent deferred sales charge, as described on the next page.
* Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses. Class B shares acquired initially through Funds that
were part of the Nicholas-Applegate Mutual Funds at the time of purchase will
convert after seven years from the date of original purchase.
CLASS C
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1.00% (0.75% for Strategic Income
Fund)
* 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.
* Not offered by Bank and Thrift Fund and Asia-Pacific Equity Fund.
CLASS M
* Lower front-end sales charge than Class A, as described on the next page.
* Distribution and service (12b-1) fees of 0.75%.
* No automatic conversion to Class A shares, so annual expenses continue at the
Class M level throughout the life of your investment.
* Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield
Fund.
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the initial sales charge or the contingent deferred sales
charge. The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Higher distribution
fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A or Class M shares.
Orders for Class B shares and Class M shares in excess of $250,000 and
$1,000,000, respectively, will be accepted as orders for Class A shares or
declined. You should discuss which Class of shares is right for you with your
investment professional.
46
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE CALCULATION
CLASS A
Class A shares of the funds are sold subject to the following sales charge.
Equity Funds,
Balanced Fund and
Convertible Fund Income Funds
-------------------------- --------------------------
As a % As a %
of the As a % of of the As a % of
offering net offering net
Your investment price asset value price asset value
- ---------------------- --------- ------------- ---------- -------------
Less than $50,000 5.75% 6.10% 4.75% 4.99%
$50,000 - $99,999 4.50% 4.71% 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63% 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56% 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04% 2.00% 2.04%
$1,000,000 and over See below See below
INVESTMENTS OF $1 MILLION OR MORE. There is no front-end sales charge if you
purchase Class A shares in an amount of $1 million or more. However, the shares
will be subject to a contingent deferred sales charge if they are redeemed
within one or two years of purchase, depending on the amount of the purchase, as
follows:
Period during which
Your investment CDSC CDSC applies
- -------------------------- ------- ---------------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares that were purchased in an amount of $1 million or more
through Funds that were part of the Nicholas-Applegate Mutual Funds at the time
of purchase will be subject to a contingent deferred sales charge of 1% within
one year from the date of purchase.
CLASS 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 and capital gains
distributions. 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.
CLASS M
Class M shares of the funds are sold subject to the following sales charge.
MagnaCap,
LargeCap Leaders, Government
MidCap Value, Securities
and Income and
Asia-Pacific High Yield
Equity Funds Funds
--------------------- ---------------------
As a % As a % As a % As a %
of the of net of the of net
offering asset offering asset
Your investment price value price value
- ------------------- -------- ------- -------- -------
Less than $50,000 3.50% 3.63% 3.25% 3.36%
$50,000 - $99,999 2.50% 2.56% 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52% 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01% 1.00% 1.01%
$500,000 and over none none none none
47
<PAGE>
SHAREHOLDER
GUIDE
CHOOSING A SHARE CLASS
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCED SALES CHARGES. You may reduce the initial sales charge on a purchase of
Class A or Class M shares of the funds by combining multiple purchases to take
advantage of the breakpoints in the sales charge schedules. You may do this by:
LETTER OF INTENT -- lets you purchase shares over a 13 month period and pay the
same sales charge as if the shares had all been purchased at once.
RIGHTS OF ACCUMULATION -- lets you add the value of shares of any open-end
Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of
your next purchase for purposes of calculating the sales charge.
COMBINATION PRIVILEGE -- shares held by investors in the Pilgrim Funds which
impose a CDSC may be combined with Class A or Class M shares for a reduced sales
charge.
See the Account Application or the Statement of Additional Information for
details, or contact your financial representative or the Shareholder Servicing
Agent for more information.
CDSC WAIVERS. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
* redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of death
or initial determination of permanent disability.
* for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan, up
to a maximum of 12% per year of a shareholder's account value based on the
value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
* mandatory distributions from a tax-deferred retirement plan or an IRA.
However, if you purchased shares that were part of the Nicholas-Applegate
Mutual Funds, you may be eligible for a CDSC waiver prior to the mandatory
distribution age.
* If you think you may be eligible for a CDSC waiver, contact your financial
representative or the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. If you sell Class B 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. This
privilege can be used only once per calendar year. If you want to use the
Reinstatement Privilege, contact your financial representative or the
Shareholder Servicing Agent. Consult the SAI for more information.
SALES CHARGE WAIVERS. Class A or Class M shares may be purchased without a sales
charge by certain individuals and institutions. For additional information,
contact the Shareholder Servicing Agent, or see the Statement of Additional
Information.
48
<PAGE>
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
The minimum initial investment amounts for the Pilgrim Funds are as follows:
* Non-retirement accounts: $1,000
* Retirement accounts: $250
* Pre-Authorized Investment Plan: $100 to open; you must invest at least $100 a
month
The minimum additional investment is $100
Make your investment using the table on the right.
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Funds reserve 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 Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (`IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment
Your Investment professional with an
Professional authorized firm
can help you establish
and maintain your
account.
By Mail Visit or consult an Visit or consult an
investment investment
professional. professional.
Make your check Fill out the Account
payable to the Pilgrim Additions form
Funds and mail it, included on the bottom
along with a completed of your account
Application. Please statement along with
indicate your your check payable to
investment professional the Fund and mail
on the New Account them to the address on
Application the account statement.
Remember to write your account
number on the check.
By Wire Call the Pilgrim Wire the funds in the
Operations Department same manner described
at (800) 336-3436 to under "Initial
obtain an account Investment."
number and indicate
your investment
professional on the
account.
Instruct your bank to
wire funds to the Fund
in the care of:
Investors Fiduciary
Trust Co. ABA
#101003621 Kansas
City, MO credit to:
------------------------
(the Fund) A/C #751-8315;
for further credit to:
Shareholder A/C
#________________ (A/C #
you received over the
telephone)
Shareholder Name:
------------------------
(Your Name Here)
After wiring funds you
must complete the
Account Application
and send it to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO
64141-6368
49
<PAGE>
SHAREHOLDER
GUIDE
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem shares using the table on the right:
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account on a regular basis.
* Your account must have a current value of at least $10,000.
* Minimum withdrawal amount is $100.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge
for their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in which
the account is registered, and the dollar value or
number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification is
provided on the Account Application. A signature
guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check the
box on the Account Application which signifies that
you do not wish to use telephone redemptions. To
redeem by telephone, call the Shareholder Servicing
Agent at (800) 992-0180.
Receiving Proceeds By Check:
You may have redemption proceeds (up to a maximum of
$100,000) mailed to an address which has been on
record with Pilgrim Funds for at least 30 days.
Receiving Proceeds By Wire: You may have redemption
proceeds (subject to a minimum of $5,000) wired to
your pre-designated bank account. You will not be
able to receive redemption proceeds by wire unless
you check the box on the Account Application which
signifies that you wish to receive redemption
proceeds by wire and attach a voided check. Under
normal circumstances, proceeds will be transmitted to
your bank on the business day following receipt of
your instructions, provided redemptions may be made.
In the event that share certificates have been
issued, you may not request a wire redemption by
telephone.
50
<PAGE>
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
NET ASSET VALUE. The net asset value (NAV) per share for each Fund and class is
determined each business day as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per share of
each class of each Fund is calculated by taking the value of the Fund's assets
attributable to that class, subtracting the Fund's liabilities attributable to
that class, and dividing by the number of shares of that class that are
outstanding. Because foreign securities may trade on days when the Funds do not
price shares, the net asset value of a Fund that invests in foreign securities
may change on days when shareholders will not be able to purchase or redeem the
Fund's shares.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith by the Board of Directors or Trustees, although the actual calculations
will be made by persons acting under the supervision of the Board. Valuing
securities at fair value involves greater reliance on judgment than securities
that have readily available market quotations.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable sales
charge. When you sell shares, you receive the NAV minus any applicable deferred
sales charge. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "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
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
EXCHANGES. You may exchange shares of a Fund for shares of the same class of any
other Pilgrim Fund, without paying any additional sales charge. Shares subject
to a CDSC will continue to age from the date that the original shares were
purchased. If you exchange shares of a Fund that at the time you acquired the
shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the
exchange will be subject to the current CDSC structure and conversion rights of
the Fund being acquired, although the shares will continue to age for CDSC and
conversion purposes from the date the original shares were acquired.
51
<PAGE>
SHAREHOLDER
GUIDE
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Funds are intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice, restrict the
frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege. A
Fund may change or cancel its exchange policies at any time, upon 60 days
written notice to shareholders.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the Funds reserve the right upon 30 days written notice to redeem, at NAV, the
shares of any shareholder whose account (except for IRAs) has a value of less
than $1,000, other than as a result of a decline in the NAV per share.
DISTRIBUTION AND
SHAREHOLDER SERVICE FEES
To pay for the cost of promoting the Funds and servicing your shareholder
account, each class of each Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
increase your cost of investing and may exceed the cost of paying other types of
sales charges. The following table shows the distribution and service fees
associated with investing in each class of shares.
Distribution Fee Service Fee
---------------- -----------
CLASS A
MagnaCap Fund .......... 0.05% 0.25%
LargeCap Leaders,
MidCap Value, Bank
and Thrift, Asia-Pacific
Equity, Government
Securities Income and
High Yield Funds ...... 0.00% 0.25%
LargeCap Growth,
MidCap Growth,
SmallCap Growth,
Convertible,
International
CoreGrowth,
Worldwide Growth,
International SmallCap
Growth, Emerging
Countries, Strategic
Income, High Yield II
and Balanced Funds .... 0.10% 0.25%
CLASS B .................... 0.75%* 0.25%
CLASS C .................... 0.75%* 0.25%
CLASS M .................... 0.50% 0.25%
* The Class B and Class C distribution fee for Strategic Income Fund is 0.50%.
52
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of September 30, 1999,
Pilgrim Investments managed over $ billion in assets. Pilgrim Investments
acquired certain assets of previous advisers to certain of the Funds in
separate transactions that closed on April 7, 1995 and May 21, 1999. Pilgrim
Investments is an indirect, wholly owned subsidiary of ReliaStar Financial
Corp. (NYSE: RLR). Through its subsidiaries, ReliaStar Financial Corp. offers
individuals and institutions life insurance and annuities, employee benefits
products and services, life and health reinsurance, retirement plans, mutual
funds, bank products and personal finance education.
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year as a percentage of that Fund's average daily net
assets:
Fund Advisory Fee
- ------------------------------- ------------
MagnaCap 0.72%
LargeCap Leaders 1.00
LargeCap Growth 0.75
MidCap Value 1.00
MidCap Growth 0.75
SmallCap Growth 1.00
Bank and Thrift 0.72
Worldwide Growth 1.00
International Core Growth 1.00
International SmallCap Growth 1.00
Emerging Countries 1.25
Asia-Pacific Equity 1.25
Government Securities Income 0.50
Strategic Income 0.45
High Yield 0.60
High Yield II 0.60
Balanced 0.75
Convertible 0.75
PILGRIM INVESTMENTS DIRECTLY MANAGES THE PORTFOLIOS OF THE FOLLOWING FUNDS:
MAGNACAP FUND
This Fund is managed by a team led by Howard N. Kornblue, Senior Vice President
and Senior Portfolio Manager for Pilgrim Investments. Mr. Kornblue has served as
a Portfolio Manager of MagnaCap Fund since 1989. The other individuals on the
team are G. David Underwood, Anuradha Sahai and Robert M. Kloss.
53
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
LARGECAP LEADERS FUND AND MIDCAP VALUE FUND
The LargeCap Leaders and MidCap Value Funds are managed by a team led by G.
David Underwood, Vice President and Senior Portfolio Manager for Pilgrim
Investments. Mr. Underwood is the Lead Portfolio Manager of LargeCap Leaders
Fund. Prior to joining Pilgrim Investments in December, 1996, Mr. Underwood
served as Director of Funds Management for First Interstate Capital Management.
Mr. Underwood's prior experience includes a 10 year association with Integra
Trust Company of Pittsburgh where he served as Director of Research and Senior
Portfolio Manager. The other individual on the team is Robert M. Kloss.
BANK AND THRIFT FUND
Carl Dorf, Senior Vice President and Senior Portfolio Manager of Bank and Thrift
Fund has been managing the Fund's portfolio since January 1991, when he joined
Pilgrim Investments' predecessor. Mr. Dorf is also a Senior Vice President of
Pilgrim Investments.
STRATEGIC INCOME FUND
The following individuals share responsibility for the day-to-day management of
the Strategic Income Fund.
Robert K. Kinsey, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey
manages Strategic Income Fund's assets that are invested in assets other than
high yield debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was
a Vice President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
GOVERNMENT SECURITIES INCOME FUND
Robert K. Kinsey, whose background is described above, has primary
responsibility for the day-to-day management of Government Securities Income
Fund, and has served as Senior Portfolio Manager of Government Securities Income
Fund since May 24, 1999.
Charles G. Ullerich, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Government Securities Income Fund since September 1996 and
served as Assistant Portfolio Manager of that Fund from August 1995 to September
1996. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President of
Treasury Services for First Liberty Bank of Macon, GA since 1991, where he was
Portfolio Manager for a mortgage and treasury securities portfolio.
HIGH YIELD FUND AND HIGH YIELD FUND II
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund and High Yield Fund II since June 1995 and May, 1999,
respectively.
BALANCED FUND
The following individuals share responsibility for the day-to-day management of
the Balanced Fund:
G. David Underwood, whose background is described above, has served as Senior
Portfolio Manager of the equity portion of the Balanced Fund's assets since May
24, 1999.
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
Robert K. Kinsey, whose background is described above, has also served as a
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
54
<PAGE>
SUB-ADVISERS
- --------------------------------------------------------------------
For the following Funds, Pilgrim Investments has engaged Sub-Advisers to
provide the day-to-day management of the Fund's portfolio. The Sub-Advisers are
among the most respected institutional investment advisers in the world, and
have been selected primarily on the basis of their successful application of a
consistent, well-defined, long-term investment approach over a period of
several market cycles.
LARGECAP GROWTH FUND, MIDCAP GROWTH FUND, SMALLCAP GROWTH FUND, WORLDWIDE GROWTH
FUND, INTERNATIONAL CORE GROWTH FUND, INTERNATIONAL SMALLCAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
Nicholas-Applegate Capital Management (NACM). Founded in 1984, NACM manages
over $ billion [update #s] of discretionary assets for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations, and other institutional investors
and individuals. Each of the Funds listed above is managed by a team of
portfolio managers and analysts employed by NACM.
In connection with the acquisition of certain assets relating to certain of the
Funds in 1999, Pilgrim Investments and certain of its affiliates entered into
an agreement with Nicholas-Applegate Capital Management and its affiliates
which provides that Pilgrim Investments (not the Funds) will be obligated to
pay to Nicholas-Applegate Capital Management a specified amount upon
termination of the sub-advisory agreement with Nicholas-Applegate Capital
Management.
ASIA-PACIFIC EQUITY FUND
HSBC Asset Management Americas Inc. and HSBC Asset Management Hong Kong Limited
(collectively, HSBC) serve jointly as Sub-Adviser to Asia-Pacific Equity Fund.
The firms are part of HSBC Asset Management, the global investment advisory and
fund management business unit of HSBC Holdings plc (founded as the Hong Kong
and Shanghai Banking Corporation in 1865) which, with headquarters in London,
is one of the world's largest banking and financial organizations. HSBC Asset
Management manages over approximately $49 billion [update #s] of assets
worldwide for a wide variety of institutional, retail and private clients. HSBC
Asset Management has advisory operations in Hong Kong and Singapore, among
other locations. Its parent company has over a century of operations in local
economies throughout the Asia-Pacific region.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
Ian Burden, Chief Investment Officer, HSBC Hong Kong, and Man Wing Chung,
Director, HSBC Hong Kong, are primarily responsible for portfolio management of
Asia-Pacific Equity Fund. Mr. Lutcher joined HSBC in 1997, and has over 20
years of investment experience. Prior to joining HSBC, Mr. Lutcher was with
Merrill Lynch Asset Management. Mr. Burden has been with HSBC for 17 years, and
has 24 years investment experience. Mr. Chung has been with HSBC for 5 years,
and has 10 years investment experience.
55
<PAGE>
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
Annually Semi-Annually Quarterly Monthly
- -------- ------------- --------- -------
LargeCap Leaders(1) MagnaCap(1) Balanced(3) Strategic
LargeCap Growth(1) Convertible(3) Income
MidCap Value(1) Fund(2)
MidCap Growth(1) Government
SmallCap Growth(1) Securities
Bank and Thrift(1) Income(2)
International Core High Yield(2)
Growth(3) High
Worldwide Growth(1) Yield II(2)
Asia-Pacific Equity(1)
International
SmallCap Growth(1)
Emerging Countries(1)
(1) Distributions normally expected to consist primarily of capital gains.
(2) Distributions normally expected to consist primarily of ordinary income.
(3) Distributions normally expected to consist on an annual basis of a variable
combination of capital gains and ordinary income.
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C or M shares of a Fund invested in another Pilgrim Fund
which offers the same class shares. If you are a shareholder of Pilgrim Prime
Rate Trust, whose shares are not held in a broker or nominee account, you may,
upon written request, elect to have all dividends invested into a pre-existing
Class A account of any open-end Pilgrim Fund.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
56
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques that may be used by the Funds, see the Statement of Additional
Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter into foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help 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 the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as zero-
coupon or pay-in-kind securities tend to be more volatile. The secondary market
in which high yield securities are traded is generally less liquid than the
57
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
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.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
OTHER INVESTMENT COMPANIES. Each Fund (except the MagnaCap, High Yield and
Government Securities Income Funds) may invest up to 10% of its assets in other
investment companies. When a Fund invests in other investment companies, you
indirectly pay a proportionate share of the expenses of that other investment
company (including management fees, administration fees, and custodial fees) in
addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities (except MagnaCap Fund may not invest in restricted
securities). If a security is illiquid, the Fund might be unable to sell the
security at a time when the adviser might wish to sell, and the security could
have the effect of decreasing the overall level of the Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less liquid
than registered securities traded on established secondary markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
58
<PAGE>
- --------------------------------------------------------------------------------
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk of
nonpayment of principal or interest. Substantial increases in interest rates may
cause an increase in loan defaults. Although the loans will generally be fully
collateralized at the time of acquisition, the collateral may decline in value,
be relatively illiquid, or lose all or substantially all of its value subsequent
to the Fund's investment. Many loans are relatively illiquid, and may be
difficult to value.
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund
(except Bank and Thrift Fund) may lend portfolio securities in an amount up to
331|M/3% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for a Fund depends upon the costs of
the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase a Fund's yield; however,
such transactions also increase a Fund's risk to capital and may result in a
shareholder's loss of principal.
SHORT SALES. Each Fund (except the MagnaCap, LargeCap Leaders, Bank and Thrift,
Asia-Pacific Equity, Government Securities Income and High Yield Funds) may make
short sales. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the
59
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
expectation that the market price will drop. If the price of the security rises,
the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss.
PAIRING OFF TRANSACTIONS. A pairing-off transaction occurs when a Fund commits
to purchase a security at a future date, and then the Fund -- pairs-off' the
purchase with a sale of the same security prior to or on the original settlement
date. Whether a pairing-off transaction on a debt security produces a gain
depends on the movement of interest rates. If interest rates increase, then the
money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure. When a Fund
takes a temporary defensive strategy, it may limit the Fund's ability to achieve
its investment objective.
PORTFOLIO TURNOVER. Each Fund (except the MagnaCap, LargeCap Leaders, MidCap
Value, Bank and Thrift and Asia-Pacific Equity Funds) is generally expected to
engage in frequent and active trading of portfolio securities to achieve its
investment objective. A high portfolio turnover rate involves greater expenses
to a Fund, including brokerage commissions and other transaction costs, and is
likely to generate more taxable short-term gains for shareholders, which may
have an adverse effect on the performance of the Fund.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. 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 Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally. Foreign issuers may be
more susceptible to risks associated with the Year 2000 Problem than domestic
issuers.
60
<PAGE>
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
61
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MAGNACAP
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------
Year Ended June 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995(a)
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.92 $ 16.69 $ 14.03 $ 12.36
- ------------------------------------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss) 0.04 0.10 0.09 0.12
- ------------------------------------- ---------- ---------- ---------- ----------
Net realized and unrealized
gains on investments 3.02 4.16 2.87 2.29
- ------------------------------------- ---------- ---------- ---------- ----------
Total from investment operations 3.06 4.26 2.96 2.41
- ------------------------------------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income 0.06 0.12 0.06 0.14
- ------------------------------------- ---------- ---------- ---------- ----------
Net realized gains on investments 1.85 4.91 0.24 0.60
- ------------------------------------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.07 $ 15.92 $ 16.69 $ 14.03
===================================== ========== ========== ========== ==========
TOTAL RETURN(c) 20.53% 30.82% 21.31% 20.61%
- ------------------------------------- ---------- ---------- ---------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 348,759 $ 290,355 $ 235,393 $ 211,330
- ------------------------------------- ---------- ---------- ---------- ----------
Ratios to average net assets:
Expenses(d) 1.37% 1.46% 1.68% 1.59%
- ------------------------------------ ---------- ---------- ---------- ----------
Net investment income(d) 0.29% 0.64% 0.54% 0.98%
- ------------------------------------- ---------- ---------- ---------- ----------
Portfolio turnover rate 53% 77% 15% 6%
- ------------------------------------- ---------- ---------- ---------- ----------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized.
62
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C Class M
---------------------------------------------------- ------------ ----------------------------------------------------
Year Year Year July 17, June 1, Year Year Year July 17,
Ended Ended Ended 1995(b) to 1999(b) to Ended Ended Ended 1995(b) to
June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1999 1999 1998 1997 1996
------------ ------------ ------------- ------------ ------------ ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.81 $ 16.59 $ 14.22 $ 15.87 $ 16.63 $ 14.22
------------ ------------ ---------- ------------ ---------- ----------
(0.04) -- 0.06 -- 0.02 0.08
------------ ------------ ---------- ------------ ---------- ----------
2.97 4.13 2.61 2.98 4.16 2.63
------------ ------------ ---------- ------------ ---------- ----------
2.93 4.13 2.67 2.98 4.18 2.71
------------ ------------ ---------- ------------ ---------- ----------
0.03 -- 0.06 0.05 0.03 0.06
------------ ------------ ---------- ------------ ---------- ----------
1.85 4.91 0.24 1.85 4.91 0.24
------------ ------------ ---------- ------------ ---------- ----------
$ 16.86 $ 15.81 $ 16.59 $ 16.95 $ 15.87 $ 16.63
============ ============ ========== ============ ========== ==========
19.76% 29.92% 18.98% 20.00% 30.26% 19.26%
------------ ------------ ---------- ------------ ---------- ----------
$ 77,787 $ 37,427 $ 10,509 $ 14,675 $ 6,748 $ 1,961
------------ ------------ ---------- ------------ ---------- ----------
2.07% 2.16% 2.38% 1.82% 1.91% 2.13%
------------ ------------ ---------- ------------ ---------- ----------
(0.41)% (0.04)% 0.07% (0.16)% 0.22% 0.32%
------------ ------------ ---------- ------------ ---------- ----------
53% 77% 15% 53% 77% 15%
------------ ------------ ---------- ------------ ---------- ----------
</TABLE>
63
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
LEADERS FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
Ten Months
Year Ended June 30, Ended
-------------------------------------------- June 30,
1999 1998 (b) 1997 1996 (a)
------------ ------------- ------------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.17 $ 11.77 $ 10.00
- ------------------------------------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss) 0.01 0.06 0.07
- ------------------------------------- ---------- ---------- ----------
Net realized and unrealized
gains on investments 2.30 2.63 1.87
- ------------------------------------- ---------- ---------- ----------
Total from investment operations 2.31 2.69 1.94
- ------------------------------------- ---------- ---------- ----------
Less distributions from:
Net investment income -- 0.05 0.08
- ------------------------------------- ---------- ---------- ----------
Net realized gains on investments 1.78 0.24 0.09
- ------------------------------------- ---------- ---------- ----------
Net asset value, end of period $ 14.70 $ 14.17 $ 11.77
===================================== ========== ========== ==========
TOTAL RETURN(D) 17.71% 23.24% 19.56%
- ------------------------------------- ---------- ---------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 7,606 $ 8,961 $ 2,530
- ------------------------------------- ---------- ---------- ----------
Ratios to average net assets:
Net expenses after expense
reimbursement(e) 1.75% 1.75% 1.75%
- ------------------------------------ ---------- ---------- ----------
Gross expenses prior to expense
reimbursement(e) 2.28% 2.33% 5.44%
- ------------------------------------ ---------- ---------- ----------
Net investment income (loss) after
expense reimbursement(e) 0.03% 0.41% 0.65%
- ------------------------------------- ---------- ---------- ----------
Portfolio turnover rate 78% 86% 59%
- ------------------------------------- ---------- ---------- ----------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Effective November 1, 1997, Pilgrim Investments, Inc. assumed the portfolio
investment responsibilities of the Fund from ARK Asset Management Company,
Inc.
(c) Commencement of offering shares.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(e) Annualized.
64
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------ -------------
Ten Months (June 17,
Year Ended June 30, Ended 1999(c) to
---------------------------------------- June 30, June 30,
1999 1998 (b) 1997 1996 (a) 1999
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 14.04 $ 11.71 $ 10.00
------------- ------------- -------------
(0.10) (0.02) 0.06
------------- ------------- -------------
2.28 2.59 1.81
------------- ------------- -------------
2.18 2.57 1.87
------------- ------------- -------------
-- -- 0.07
------------- ------------- -------------
1.78 0.24 0.09
------------- ------------- -------------
$ 14.44 $ 14.04 $ 11.71
============= ============= =============
16.91% 22.23% 18.85%
------------- ------------- -------------
$ 15,605 $ 13,611 $ 1,424
------------- ------------- -------------
2.50% 2.50% 2.50%
------------- ------------- -------------
3.03% 3.08% 5.79%
------------- ------------- -------------
(0.72)% (0.35)% (0.25)%
------------- ------------- -------------
78% 86% 59%
------------- ------------- -------------
<CAPTION>
Class M
---------------------------------------- Ten Months
Year Ended June 30, Ended
---------------------------------------- June 30,
1999 1998 (b) 1997 1996 (a)
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
$ 14.10 $ 11.73 $ 10.00
------------- ------------- -----------
(0.07) -- 0.06
------------- ------------- -----------
2.30 2.62 1.83
------------- ------------- -----------
2.23 2.62 1.89
------------- ------------- -----------
-- 0.01 0.07
------------- ------------- -----------
1.78 0.24 0.09
------------- ------------- -----------
$ 14.55 $ 14.10 $ 11.73
============= ============= ===========
17.20% 22.58% 19.06%
------------- ------------- -----------
$ 5,533 $ 4,719 $ 1,240
------------- ------------- -----------
2.25% 2.25% 2.25%
------------- ------------- -----------
2.78% 2.83% 5.90%
------------- ------------- -----------
(0.47)% (0.10)% 0.06%
------------- ------------- -----------
78% 86% 59%
------------- ------------- -----------
</TABLE>
65
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Three Months Year July 21, 1997(a)
Ended Ended to
June 30, March 31, March 31,
1999(b) 1999 1998
-------------- ----------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.73 $ 12.50
- ------------------------------------------------------------- ----------- -----------
Income from investment operations:
Net investment income (loss) (0.08) (0.03)
- ------------------------------------------------------------- ----------- -----------
Net realized and unrealized gains on investments 9.77 3.29
- ------------------------------------------------------------- ----------- -----------
Total from investment operations 9.69 3.26
- ------------------------------------------------------------- ----------- -----------
Less distributions from:
Net investment income -- --
- ------------------------------------------------------------- ----------- -----------
Net realized gains on investments 0.48 0.03
- ------------------------------------------------------------- ----------- -----------
Net asset value, end of period $ 24.94 $ 15.73
============================================================= =========== ===========
TOTAL RETURN(C): 63.06% 62.35%
- ------------------------------------------------------------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 12,445 $ 4,742
- ------------------------------------------------------------- ----------- -----------
Ratios to average net assets:
Net expenses after expense reimbursement(d) 1.59% 1.60%
- ------------------------------------------------------------- ----------- -----------
Gross expenses prior to expense reimbursement(d) 2.24% 4.70%
- ------------------------------------------------------------- ----------- -----------
Net investment income (loss) after expense reimbursement(d) (0.65)% (0.87)%
- ------------------------------------------------------------- ----------- -----------
Portfolio turnover 253% 306%
- ------------------------------------------------------------- ----------- -----------
</TABLE>
(a) The Fund commenced operations on July 21, 1997.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
66
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------- ------------------------------------------
Three Months Year July 21, Three Months Year July 21,
Ended Ended 1997(a) to Ended Ended 1997(a) to
June 30, March 31, March 31, June 30, March 31, March 31,
1999(b) 1999 1998 1999(b) 1999 1998
-------------- ----------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 15.64 $ 12.50 $ 15.63 $ 12.50
----------- ----------- ----------- -----------
(0.08) (0.07) (0.07) (0.05)
----------- ----------- ----------- -----------
9.71 3.24 9.65 3.24
----------- ----------- ----------- -----------
9.63 3.17 9.58 3.19
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
0.23 0.03 0.24 0.06
----------- ----------- ----------- -----------
$ 25.04 $ 15.64 $ 24.97 $ 15.63
=========== =========== =========== ===========
62.28% 61.08% 61.97% 61.38%
----------- ----------- ----------- -----------
$ 20,039 $ 3,187 $ 8,004 $ 960
----------- ----------- ----------- -----------
2.24% 2.25% 2.25% 2.25%
----------- ----------- ----------- -----------
2.89% 4.78% 2.90% 7.79%
----------- ----------- ----------- -----------
(1.28)% (1.36)% (1.26)% (1.49)%
----------- ----------- ----------- -----------
253% 306% 253% 306%
----------- ----------- ----------- -----------
</TABLE>
67
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
VALUE FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Ten Months
Year Ended June 30, Ended
----------------------------------------- June 30,
1999 1998 1997 1996 (a)
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.64 $ 11.99 $ 10.00
- ------------------------------------- ------------ ------------ ----------
Income from investment operations:
Net investment income (loss) (0.07) (0.02) 0.13
- ------------------------------------- ------------ ------------ ----------
Net realized and unrealized gains
(loss) on investments 2.71 2.85 1.91
- ------------------------------------- ------------ ------------ ----------
Total from investment operations 2.64 2.83 2.04
- ------------------------------------- ------------ ------------ ----------
Less distributions from:
Net investment income -- 0.07 0.05
- ------------------------------------- ------------ ------------ ----------
Net realized gains on investments 0.49 0.11 --
- ------------------------------------- ------------ ------------ ----------
Net asset value, end of period $ 16.79 $ 14.64 $ 11.99
===================================== ============ ============ ==========
TOTAL RETURN(C) 18.40% 23.89% 20.48%
- ------------------------------------- ------------ ------------ ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 27,485 $ 16,985 $ 2,389
- ------------------------------------- ------------ ------------ ----------
Ratios to average net assets:
Net expenses after expense
reimbursement(d) 1.75% 1.75% 1.75%
- ------------------------------------ ------------ ------------ ----------
Gross expenses prior to expense
reimbursement(d) 1.78% 1.94% 4.91%
- ------------------------------------ ------------ ------------ ----------
Net investment income (loss) after
expense reimbursement(d) (0.53)% (0.13)% 2.00%
- ------------------------------------- ------------ ------------ ----------
Portfolio turnover rate 85% 86% 60%
- ------------------------------------- ------------ ------------ ----------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(d) Annualized.
68
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS M
-------------------------------------------------- ------------- ------------------------------------------------
Ten Months (June 2, Ten Months
Year Ended June 30, Ended 1999 to Year Ended June 30, Ended
------------------------------------- June 30, June 30, ------------------------------------ June 30,
1999 1998 1997 1996 (a) 1999)(b) 1999 1998 1997 1996 (a)
----------- ------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 14.49 $ 11.94 $ 10.00 $ 14.49 $ 11.93 $ 10.00
------------ ------------ ---------- ------------ ----------- ---------
(0.18) (0.05) 0.07 (0.15) (0.03) 0.06
------------ ------------ ---------- ------------ ----------- ---------
2.65 2.76 1.90 2.67 2.76 1.91
------------ ------------ ---------- ------------ ----------- ---------
2.47 2.71 1.97 2.52 2.73 1.97
------------ ------------ ---------- ------------ ----------- ---------
-- 0.05 0.03 -- 0.06 0.04
------------ ------------ ---------- ------------ ----------- ---------
0.49 0.11 -- 0.49 0.11 --
------------ ------------ ---------- ------------ ----------- ---------
$ 16.47 $ 14.49 $ 11.94 $ 16.52 14.49 11.93
============ ============ ========== ============ =========== =========
17.40% 22.95% 19.80% 17.76% 23.21% 19.82%
------------ ------------ ---------- ------------ ----------- ---------
$ 40,575 $ 23,258 $ 2,123 $ 13,232 $ 8,378 $ 1,731
------------ ------------ ---------- ------------ ----------- ---------
2.50% 2.50% 2.50% 2.25% 2.25% 2.25%
------------ ------------ ---------- ------------ ----------- ---------
2.53% 2.69% 5.32% 2.28% 2.44% 4.72%
------------ ------------ ---------- ------------ ----------- ---------
(1.28)% (0.90)% 1.27% (1.03)% (0.63)% 1.16%
------------ ------------ ---------- ------------ ----------- ---------
85% 86% 60% 85% 86% 60%
------------ ------------ ---------- ------------ ----------- ---------
</TABLE>
69
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, -----------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.63 $ 16.80 $ 18.37 $ 13.61 $ 13.25
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) (0.50) (0.14) (0.17) (0.18) (0.10)
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gains
on investments 3.17 6.50 0.57 4.94 0.46
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Total from investment operations 2.67 6.36 0.40 4.76 0.36
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income -- -- -- -- --
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized gains on investments 1.37 4.53 1.97 -- --
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 19.93 $ 18.63 $ 16.80 $ 18.37 $ 13.61
===================================== =========== =========== =========== =========== ===========
TOTAL RETURN(C): 15.36% 41.81% 1.09% 35.07% 2.72%
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 67,550 $ 90,619 $ 76,108 $ 77,275 $ 65,292
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Ratios to average net assets:
Net expenses after
expense reimbursement(d) 1.56% 1.57% 1.60% 1.58% 1.59%
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Gross expenses prior to
expense reimbursement(d) 1.64% 1.66% 1.56% 1.56% 1.63%
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss) after
expense reimbursement(d) (1.04)% (1.33)% (1.05)% (0.91)% (0.66)%
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
Portfolio turnover 154% 200% 153% 114% 98%
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc. became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of dividends and capital
gain distributions at net asset value and excluding the deduction of sales
charges. Total return for less than one year is not annualized.
(d) Annualized
70
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, -------------------------------------- March 31,
1999(a) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 21.55 $ 16.33 $ 16.25 $ 12.50
------------ ------------ ------------ ------------
(0.42) (0.25) (0.17) (0.09)
------------ ------------ ------------ ------------
3.42 6.74 0.25 3.84
------------ ------------ ------------ ------------
3.00 6.49 0.08 3.75
------------ ------------ ------------ ------------
-- -- -- --
------------ ------------ ------------ ------------
1.01 1.27 -- --
------------ ------------ ------------ ------------
$ 23.54 $ 21.55 $ 16.33 $ 16.25
============ ============ ============ ============
14.59% 40.84% (0.49)% 30.00%
------------ ------------ ------------ ------------
$ 45,876 $ 46,806 $ 29,002 $ 11,186
------------ ------------ ------------ ------------
2.22% 2.22% 2.25% 2.22%
------------ ------------ ------------ ------------
2.29% 2.21% 2.66% 3.39%
------------ ------------ ------------ ------------
(1.69)% (1.99)% (1.69)% (1.61)%
------------ ------------ ------------ ------------
154% 200% 153% 114%
------------ ------------ ------------ ------------
<CAPTION>
Class C
--------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ----------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 17.15 $ 16.48 $ 18.06 $ 13.45 $ 13.18
------------ ------------ ------------ ------------ ------------
(0.61) (0.28) (0.32) (0.27) (0.17)
------------ ------------ ------------ ------------ ------------
2.97 6.26 0.62 4.88 0.44
------------ ------------ ------------ ------------ ------------
2.36 5.98 0.30 4.61 0.27
------------ ------------ ------------ ------------ ------------
-- -- -- -- --
------------ ------------ ------------ ------------ ------------
1.02 5.31 1.88 -- --
------------ ------------ ------------ ------------ ------------
$ 18.49 $ 17.15 $ 16.48 $ 18.06 $ 13.45
============ ============ ============ ============ ============
14.60% 40.95% 0.56% 34.28% 2.05%
------------ ------------ ------------ ------------ ------------
$ 141,685 $ 166,849 $ 157,501 $ 177,461 $ 143,390
------------ ------------ ------------ ------------ ------------
2.23% 2.27% 2.14% 2.14% 2.24%
------------ ------------ ------------ ------------ ------------
2.30% 2.33% 2.17% 2.14% 2.24%
------------ ------------ ------------ ------------ ------------
(1.70)% (2.01)% (1.59)% (1.47)% (1.30)%
------------ ------------ ------------ ------------ ------------
154% 200% 153% 114% 98%
------------ ------------ ------------ ------------ ------------
</TABLE>
71
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ----------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.75 $ 15.15 $ 17.93 $ 13.06 $ 12.10
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income (loss) (0.85) (0.08) (0.22) (0.20) (0.16)
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net realized and unrealized gains (loss)
on investments 0.69 6.91 (0.66) 5.09 1.12
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total from investment operations (0.16) 6.83 (0.88) 4.89 0.96
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Less distributions from:
Net investment income -- -- -- -- --
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net realized gains on investments 2.87 2.23 1.90 0.02 --
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 16.72 $ 19.75 $ 15.15 $ 17.93 $ 13.06
=========================================== ============ ============ ============ ============ ============
TOTAL RETURN(C): 0.37% 46.32% (6.26)% 37.48% 7.93%
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 94,428 $ 201,943 $ 121,742 $ 138,155 $ 106,725
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Ratio to average net assets:
Net expenses after expense reimbursement(d) 1.85% 1.89% 1.72% 1.74% 1.86%
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Gross expenses prior to expense
reimbursement(d) 1.95% 1.90% 1.72% 1.74% 1.84%
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net investment income (loss) after expense
reimbursement(d) (1.32)% (1.85)% (1.26)% (1.20)% (1.27)%
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Portfolio turnover 90% 92% 113% 130% 100%
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) The total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized Annualized
72
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, ------------------------------------- March 31,
1999(a) 1999 1998 1997 1996
------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 22.53 $ 15.51 $ 16.69 $ 12.50
------------ ----------- ----------- ------------
(0.53) (0.27) (0.21) (0.14)
------------ ----------- ----------- ------------
0.33 7.29 (0.97) 4.33
------------ ----------- ----------- ------------
(0.20) 7.02 (1.18) 4.19
------------ ----------- ----------- ------------
-- -- -- --
------------ ----------- ----------- ------------
1.21 -- -- --
------------ ----------- ----------- ------------
$ 21.12 $ 22.53 $ 15.51 $ 16.69
============ =========== =========== ============
(0.29)% 45.26% (7.07)% 33.52%
------------ ----------- ----------- ------------
$ 45,140 $ 55,215 $ 28,030 $ 13,626
------------ ----------- ----------- ------------
2.57% 2.62% 2.61% 2.58%
------------ ----------- ----------- ------------
2.66% 2.63% 2.73% 3.26%
------------ ----------- ----------- ------------
(2.03)% (2.59)% (2.13)% (2.09)%
------------ ----------- ----------- ------------
90% 92% 113% 130%
------------ ----------- ----------- ------------
<CAPTION>
Class C
--------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, -----------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 18.62 $ 14.69 $ 17.62 $ 12.96 $ 12.07
------------ ------------ ------------ ------------ ------------
(0.84) (0.38) (0.31) (0.29) (0.22)
------------ ------------ ------------ ------------ ------------
0.61 6.84 (0.63) 5.03 1.11
------------ ------------ ------------ ------------ ------------
(0.23) 6.46 (0.94) 4.74 0.89
------------ ------------ ------------ ------------ ------------
-- -- -- -- --
------------ ------------ ------------ ------------ ------------
1.88 2.53 1.99 0.08 --
------------ ------------ ------------ ------------ ------------
$ 16.51 $ 18.62 $ 14.69 $ 17.62 $ 12.96
============ ============ ============ ============ ============
(0.24)% 45.40% (6.81)% 37.18% 7.37%
------------ ------------ ------------ ------------ ------------
$ 144,597 $ 225,025 $ 182,907 $ 207,332 $ 157,292
------------ ------------ ------------ ------------ ------------
2.51% 2.57% 2.35% 2.35% 2.44%
------------ ------------ ------------ ------------ ------------
2.60% 2.59% 2.35% 2.35% 2.44%
------------ ------------ ------------ ------------ ------------
(1.97)% (2.53)% (1.89)% (1.81)% (1.85)%
------------ ------------ ------------ ------------ ------------
90% 92% 113% 130% 100%
------------ ------------ ------------ ------------ ------------
</TABLE>
73
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
BANK AND
THRIFT FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the year ended June 30, 1999, the six-month period ended June 30, 1998 and
the years ended December 31, 1997, 1996, and 1995, the information in the table
below, with the exception of the information in the row labeled "Total
Investment Return at Net Asset Value" for periods prior to January 1, 1997, have
been audited by KPMG LLP, independent auditors. For all periods ending prior to
December 31, 1995, the financial information, with the exception of the
information in the row labeled "Total Investment Return at Net Asset Value", was
audited by another independent auditor. The information in the row labeled
"Total Investment Return at Net Asset Value" has not been audited for periods
prior to January 1, 1997. Prior to October 17, 1997, the Class A shares were
designated as Common Stock and the Fund operated as a closed-end investment
company.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------
Year Six Months
Ended Ended Year Ended December 31,
June 30, June 30, ---------------------------------------------------
1999 1998(c) 1997 1996 1995(a) 1994
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 25.87 $ 17.84 $ 14.83 $ 10.73 $ 11.87
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Income (loss) from investment operations:
Net investment income 0.11 0.34 0.32 0.31 0.26
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net realized and unrealized gains
(loss) on investments 1.54 10.83 5.18 4.78 (0.53)
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Total from investment operations 1.65 11.17 5.50 5.09 (0.27)
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Less distributions from:
Net investment income -- 0.31 0.35 0.34 0.22
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net realized gains on investments -- 2.65 2.14 0.65 0.65
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Tax return of capital -- 0.18 -- -- --
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net asset value, end of year $ 27.52 $ 25.87 $ 17.84 $ 14.83 $ 10.73
============================================== ========== ========== ========== ========== ============
Closing market price, end of year -- -- $ 15.75 $ 12.88 $ 9.13
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
TOTAL INVESTMENT RETURN AT MARKET VALUE(d) -- -- 43.48% 52.81% (8.85)%
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(e) 6.38% 64.86% 41.10% 49.69% (1.89)%
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year ($millions) $ 549 $ 383 $ 252 $ 210 $ 152
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Ratio to average net assets:
Expenses(f) 1.20% 1.10% 1.01% 1.05% 1.28%
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net investment income(f) 0.94% 1.39% 1.94% 2.37% 2.13%
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
Portfolio turnover rate 2% 22% 21% 13% 14%
- ---------------------------------------------- ---------- ---------- ---------- ---------- ------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering shares.
(c) Effective June 30, 1998, Bank and Thrift Fund changed its year end to June
30.
(d) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
74
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------
Year Six Months October 20,
Ended Ended 1997(b) to
June 30, June 30, December 31,
1999 1998(c) 1997
------------- ------------ -------------
<S> <C> <C> <C>
$ 25.85 $ 25.25
--------- ---------
0.01 0.04
--------- ---------
1.54 2.92
--------- ---------
1.55 2.96
--------- ---------
-- 0.04
--------- ---------
-- 2.04
--------- ---------
-- 0.28
--------- ---------
$ 27.40 $ 25.85
========= =========
-- --
--------- ---------
-- --
--------- ---------
6.00% 11.88%
--------- ---------
$ 360 $ 76
--------- ---------
1.95% 1.89%
--------- ---------
0.19% 0.99%
--------- ---------
2% 22%
--------- ---------
</TABLE>
(e) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(f) Annualized.
75
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.33 $ 16.88 $ 16.57 $ 14.29 $ 14.94
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) (0.02) 0.04 (0.16) (0.07) (0.05)
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gains (loss)
on investments 5.78 5.33 2.20 2.86 (0.09)
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total from investment operations 5.76 5.37 2.04 2.79 (0.14)
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income 0.06 -- -- 0.12 0.02
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized gains on investments 3.64 2.92 1.73 0.39 0.49
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 21.39 $ 19.33 $ 16.88 $ 16.57 $ 14.29
============================================= =========== =========== =========== =========== ===========
TOTAL RETURN(C): 33.56% 34.55% 12.51% 19.79% (0.90)%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 49,134 $ 38,647 $ 24,022 $ 23,481 $ 22,208
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Ratios to average net assets:
Net expenses after expense reimbursement(d) 1.86% 1.86% 1.85% 1.85% 1.85%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Gross expenses prior to expense
reimbursement(d) 2.02% 2.21% 2.17% 2.17% 2.18%
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss) after expense
reimbursement(d) (0.62)% (0.69)% (0.93)% (0.35)% (0.42)%
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Portfolio turnover 247% 202% 182% 132% 99%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
76
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, -------------------------------------- March 31,
1999(a) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 20.10 $ 16.02 $ 14.34 $ 12.50
------------ ------------ ------------ ------------
(0.08) (0.17) (0.14) (0.05)
------------ ------------ ------------ ------------
6.25 5.44 1.82 1.89
------------ ------------ ------------ ------------
6.17 5.27 1.68 1.84
------------ ------------ ------------ ------------
0.01 -- -- --
------------ ------------ ------------ ------------
2.05 1.19 -- --
------------ ------------ ------------ ------------
$ 24.21 $ 20.10 $ 16.02 $ 14.34
============ ============ ============ ============
32.74% 34.03% 11.72% 14.72%
------------ ------------ ------------ ------------
$ 18,556 $ 10,083 $ 5,942 $ 1,972
------------ ------------ ------------ ------------
2.51% 2.51% 2.50% 2.50%
------------ ------------ ------------ ------------
2.67% 2.70% 4.81% 9.50%
------------ ------------ ------------ ------------
(1.31)% (1.37)% (1.62)% (1.28)%
------------ ------------ ------------ ------------
247% 202% 182% 132%
------------ ------------ ------------ ------------
<CAPTION>
Class C
------------------------------------------------------------------------------
Three Month
Ended Year Ended March 31,
June 30, ---------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$ 19.05 $ 16.92 $ 16.76 $ 14.44 $ 14.86
------------ ------------ ------------ ------------ -----------
(0.20) (0.19) (0.28) (0.21) (0.15)
------------ ------------ ------------ ------------ -----------
5.83 5.41 2.23 2.92 (0.08)
------------ ------------ ------------ ------------ -----------
5.63 5.22 1.95 2.71 (0.23)
------------ ------------ ------------ ------------ -----------
0.01 -- -- 0.01 --
------------ ------------ ------------ ------------ -----------
3.15 3.09 1.79 0.38 0.19
------------ ------------ ------------ ------------ -----------
$ 21.52 $ 19.05 $ 16.92 $ 16.76 $ 14.44
============ ============ ============ ============ ===========
32.73% 33.72% 11.81% 18.95% (1.49)%
------------ ------------ ------------ ------------ -----------
$ 98,470 $ 84,292 $ 70,345 $ 71,155 $ 71,201
------------ ------------ ------------ ------------ -----------
2.51% 2.51% 2.50% 2.50% 2.50%
------------ ------------ ------------ ------------ -----------
2.67% 2.77% 2.61% 2.57% 2.57%
------------ ------------ ------------ ------------ -----------
(1.28)% (1.34)% (1.57)% (0.99)% (1.06)%
------------ ------------ ------------ ------------ -----------
247% 202% 182% 132% 99%
------------ ------------ ------------ ------------ -----------
</TABLE>
77
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL CORE
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Three Months February 28,
Ended Year Ended March 31, 1997(a) to
June 30, ------------------------- March 31,
1999(b) 1999 1998 1997
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.01 $ 12.73 $ 12.50
- ------------------------------------- ----------- ----------- ----------
Income from investment operations:
Net investment income (loss) (0.01) (0.02) --
- ------------------------------------- ----------- ----------- ----------
Net realized and unrealized gains
on investments 1.02 4.56 0.23
- ------------------------------------- ----------- ----------- ----------
Total from investment operations 1.01 4.54 0.23
- ------------------------------------- ----------- ----------- ----------
Less distributions from:
Net investment income 0.18 -- --
- ------------------------------------- ----------- ----------- ----------
Net realized gains on investments 0.13 0.26 --
- ------------------------------------- ----------- ----------- ----------
Net assest value, end of period $ 17.71 $ 17.01 $ 12.73
===================================== =========== =========== ==========
TOTAL RETURN(C): 5.90% 36.10% 1.76%
- ------------------------------------- ----------- ----------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 21,627 $ 12,664 $ 2
- ------------------------------------- ----------- ----------- ----------
Ratios to average net assets:
Net expenses after expenses
reimbursement(d) 1.89% 1.96% 1.95%
- ------------------------------------ ----------- ----------- ----------
Gross expenses prior to expense
reimbursement(d) 2.13% 3.02% 4,579.78%
- ------------------------------------ ----------- ----------- ----------
Net investment income (loss)
after expense reimbursement(d) (0.51)% (0.45)% 0.00%
- ------------------------------------- ----------- ----------- ----------
Portfolio turnover 214% 274% 76%
- ------------------------------------- ----------- ----------- ----------
</TABLE>
(a) The fund commenced operations on February 28, 1997.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
78
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------- ----------------------------------------------------
Three Months February 28, Three Months February 28,
Ended Year Ended March 31, 1997(a) to Ended Year Ended March 31, 1997(a) to
June 30, ----------------------- March 31, June 30, ----------------------- March 31,
1999(b) 1999 1998 1997 1999(b) 1999 1998 1997
-------------- ----------- ----------- -------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 17.10 $ 12.68 $ 12.50 $ 17.16 $ 12.68 $ 12.50
----------- ----------- ----------- ----------- ----------- -----------
(0.16) (0.11) -- (0.05) (0.07) --
----------- ----------- ----------- ----------- ----------- -----------
1.05 4.66 0.18 0.94 4.55 0.18
----------- ----------- ----------- ----------- ----------- -----------
0.89 4.55 0.18 0.89 4.48 0.18
----------- ----------- ----------- ----------- ----------- -----------
0.03 -- -- 0.11 -- --
----------- ----------- ----------- ----------- ----------- -----------
0.07 0.13 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 17.89 $ 17.10 $ 12.68 $ 17.94 $ 17.16 $ 12.68
=========== =========== =========== =========== =========== ===========
5.24% 35.31% 1.44% 5.22% 35.25% 1.44%
----------- ----------- ----------- ----------- ----------- -----------
$ 11,033 $ 7,942 $ 1 $ 10,400 $ 3,517 $ 43
----------- ----------- ----------- ----------- ----------- -----------
2.53% 2.61% 2.59% 2.55% 2.61% 2.41%
----------- ----------- ----------- ----------- ----------- -----------
2.77% 3.04% 16,000.25% 2.79% 5.10% 25.55%
----------- ----------- ----------- ----------- ----------- -----------
(1.13)% (1.32)% 0.00% (1.19)% (1.27)% (0.07)%
----------- ----------- ----------- ----------- ----------- -----------
214% 274% 76% 214% 274% 76%
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
79
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------
Three Months August 31,
Ended Year Ended March 31, 1994(a) to
June 30, ------------------------------------------------- March 31,
1999(c) 1999 1998 1997 1996 1995
-------------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.29 $ 14.92 $ 13.15 $ 11.51 $ 12.50
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) 0.02 (0.15) 0.04 (0.02) --
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gains (loss)
on investments 3.21 5.36 1.88 1.79 (0.98)
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total from investment operations 3.23 5.21 1.92 1.77 (0.98)
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income -- -- 0.01 0.13 0.01
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net realized gains on investments 1.49 0.84 0.14 -- --
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 21.03 $ 19.29 $ 14.92 $ 13.15 $ 11.51
============================================= =========== =========== =========== =========== ===========
TOTAL RETURN(D): 17.26% 36.31% 14.67% 15.46% (7.85)%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 25,336 $ 11,183 $ 5,569 $ 1,056 $ 610
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Ratio to average net assets:
Net expenses after expense reimbursement(e) 1.94% 1.96% 1.95% 1.95% 1.95%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Gross expenses prior to expense
reimbursement(e) 2.08% 2.75% 3.76% 10.06% 9.77%
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss) after expense
reimbursement(e) (0.82)% (1.56)% (1.05)% (0.27)% (0.07)%
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Portfolio turnover 146% 198% 206% 141% 75%
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(a) The Fund commenced operations on August 31, 1994.
(b) Commencement of share offerings.
(c) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(e) Annualized
80
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, -------------------------------------- March 31,
1999(c) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 20.16 $ 15.89 $ 13.96 $ 12.50
------------ ------------ ------------ ------------
(0.20) (0.15) (0.15) (0.02)
------------ ------------ ------------ ------------
3.46 5.56 2.09 1.48
------------ ------------ ------------ ------------
3.26 5.41 1.94 1.46
------------ ------------ ------------ ------------
-- -- 0.01 --
------------ ------------ ------------ ------------
0.99 1.14 -- --
------------ ------------ ------------ ------------
$ 22.43 $ 20.16 $ 15.89 $ 13.96
============ ============ ============ ============
16.55% 35.73% 13.96% 11.68%
------------ ------------ ------------ ------------
$ 16,158 $ 12,033 $ 5,080 $ 1,487
------------ ------------ ------------ ------------
2.59% 2.61% 2.60% 2.60%
------------ ------------ ------------ ------------
2.73% 2.98% 4.89% 16.15%
------------ ------------ ------------ ------------
(1.45)% (2.20)% (1.66)% (0.64)%
------------ ------------ ------------ ------------
146% 198% 206% 141%
------------ ------------ ------------ ------------
<CAPTION>
Class C
--------------------------------------------------------------------------------
Three Months August 31,
Ended Year Ended March 31, 1994(a) to
June 30, --------------------------------------------------- March 31,
1999(c) 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 18.53 $ 14.87 $ 13.05 $ 11.32 $ 12.50
------------ ------------ ------------ ------------ ------------
(0.10) (0.11) (0.16) 0.01 (0.04)
------------ ------------ ------------ ------------ ------------
3.09 5.09 1.98 1.72 (1.12)
------------ ------------ ------------ ------------ ------------
2.99 4.98 1.82 1.73 (1.16)
------------ ------------ ------------ ------------ ------------
-- -- -- -- 0.02
------------ ------------ ------------ ------------ ------------
0.92 1.32 -- -- --
------------ ------------ ------------ ------------ ------------
$ 20.60 $ 18.53 $ 14.87 $ 13.05 $ 11.32
============ ============ ============ ============ ============
16.55% 35.63% 13.98% 15.30% (9.25)%
------------ ------------ ------------ ------------ ------------
$ 13,226 $ 8,014 $ 3,592 $ 933 $ 24
------------ ------------ ------------ ------------ ------------
2.59% 2.61% 2.60% 2.60% 2.61%
------------ ------------ ------------ ------------ ------------
2.73% 3.38% 3.95% 16.15% 75.37%
------------ ------------ ------------ ------------ ------------
(1.45)% (2.18)% (1.67)% (1.02)% (0.76)%
------------ ------------ ------------ ------------ ------------
146% 198% 206% 141% 75%
------------ ------------ ------------ ------------ ------------
</TABLE>
81
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------
Three Months November 28
Ended Year Ended March 31, 1994(a) to
June 30, ---------------------------------------------------- March 31,
1999(c) 1999 1998 1997 1996 1995
-------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period 17.39 $ 17.20 $ 14.03 $ 11.00 $ 12.50
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Income from investment operations:
Net investment income (loss) (0.06) 0.03 (0.06) (0.04) 0.04
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Net realized and unrealized gains (loss)
on investments (3.81) 1.22 3.51 3.15 (1.54)
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Total from investment operations (3.87) 1.25 3.45 3.11 (1.50)
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Less distributions from:
Net investment income 0.02 -- -- 0.02 --
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Net realized gains on investments 0.07 1.06 0.28 0.06 --
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Net asset value, end of period $ 13.43 $ 17.39 $ 17.20 $ 14.03 $ 11.00
=========================================== ============ ========== ============ ============ ============
TOTAL RETURN(D): (22.23)% 8.06% 24.79% 28.43% (11.98)%
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 47,180 $ 71,014 $ 38,688 $ 4,718 $ 1,197
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Ratio to average net assets:
Net expenses after expense reimbursement(e) 2.27% 2.26% 2.25% 2.25% 2.25%
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Gross expenses prior to expense
reimbursement(e) 2.56% 2.48% 3.08% 6.72% 6.15%
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Net investment income (loss) after expense
reimbursement(e) (0.25)% 0.55% (1.14)% (0.35)% 1.09%
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
Portfolio turnover 213% 243% 176% 118% 61%
- ------------------------------------------- ------------ ---------- ------------ ------------ ------------
</TABLE>
(a) The Fund commenced operations on November 28, 1994.
(b) Commencement of offering shares.
(c) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(e) Annualized
82
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, -------------------------------------- March 31,
1999(c) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 17.64 $ 17.29 $ 14.02 $ 12.50
------------ ------------ ------------ ------------
(0.22) (0.07) (0.11) (0.04)
------------ ------------ ------------ ------------
(3.70) 1.26 3.47 1.56
------------ ------------ ------------ ------------
(3.92) 1.19 3.36 1.52
------------ ------------ ------------ ------------
-- -- -- --
------------ ------------ ------------ ------------
0.08 0.84 0.09 --
------------ ------------ ------------ ------------
$ 13.64 $ 17.64 $ 17.29 $ 14.02
============ ============ ============ ============
(22.23)% 7.47% 24.00% 12.16%
------------ ------------ ------------ ------------
$ 22,338 $ 38,796 $ 24,558 $ 3,557
------------ ------------ ------------ ------------
2.91% 2.91% 2.90% 2.90%
------------ ------------ ------------ ------------
3.20% 3.06% 3.66% 7.58%
------------ ------------ ------------ ------------
(0.80)% (0.20)% (1.77)% (1.05)%
------------ ------------ ------------ ------------
213% 243% 176% 118%
------------ ------------ ------------ ------------
<CAPTION>
Class C
--------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31, November 28,
June 30, -------------------------------------------------- 1994(a) to
1999(c) 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 16.98 $ 16.81 $ 13.71 $ 10.79 $ 12.50
------------ ------------ ------------ ----------- ------------
(0.27) (0.12) (0.10) (0.05) --
------------ ------------ ------------ ----------- ------------
(3.49) 1.26 3.37 2.97 (1.70)
------------ ------------ ------------ ----------- ------------
(3.76) 1.14 3.27 2.92 (1.70)
------------ ------------ ------------ ----------- ------------
-- -- -- -- 0.01
------------ ------------ ------------ ----------- ------------
0.08 0.97 0.17 -- --
------------ ------------ ------------ ----------- ------------
$ 13.14 $ 16.98 $ 16.81 $ 13.71 $ 10.79
============ ============ ============ =========== ============
(22.21)% 7.47% 23.94% 27.30% (13.64)%
------------ ------------ ------------ ----------- ------------
$ 19,246 $ 36,986 $ 29,376 $ 4,345 $ 59
------------ ------------ ------------ ----------- ------------
2.90% 2.91% 2.90% 2.90% 2.90%
------------ ------------ ------------ ----------- ------------
3.19% 3.09% 3.12% 6.23% 242.59%
------------ ------------ ------------ ----------- ------------
(0.77)% (0.26)% (1.75)% (1.06)% (0.04)%
------------ ------------ ------------ ----------- ------------
213% 243% 176% 118% 61%
------------ ------------ ------------ ----------- ------------
</TABLE>
83
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
ASIA-PACIFIC
EQUITY FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Ten Months
Year Ended June 30, Ended
----------------------------------------- June 30,
1999 1998 1997 1996 (a)
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.93 $ 10.35 $ 10.00
- ------------------------------------- ----------- ---------- ----------
Income from investment operations:
Net investment income (loss) 0.03 0.02 0.03
- ------------------------------------- ----------- ---------- ----------
Net realized and unrealized gain
(loss) on investments (6.50) 0.58 0.34
- ------------------------------------- ----------- ---------- ----------
Total from investment operations (6.47) 0.60 0.37
- ------------------------------------- ----------- ---------- ----------
Less distributions from:
Net investment income -- -- --
- ------------------------------------- ----------- ---------- ----------
In excess of net investment income -- -- 0.02
- ------------------------------------- ----------- ---------- ----------
Tax return of capital -- 0.02 --
- ------------------------------------- ----------- ---------- ----------
Net asset value, end of period $ 4.46 $ 10.93 $ 10.35
===================================== =========== ========== ==========
TOTAL RETURN (B) (59.29)% 5.78% 3.76%
- ------------------------------------- ----------- ---------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 11,796 $ 32,485 $ 18,371
- ------------------------------------- ----------- ---------- ----------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 2.00% 2.00% 2.00
- ------------------------------------- ----------- ---------- ----------
Gross expenses prior to expense
reimbursement (c) 2.80% 2.54% 3.47
- ------------------------------------- ----------- ---------- ----------
Net investment income (loss) after
expense reimbursement (c) 0.38% 0.00% 0.33
- ------------------------------------- ----------- ---------- ----------
Portfolio turnover rate 81% 38% 15%
- ------------------------------------- ----------- ---------- ----------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) Annualized.
84
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class M
-------------------------------------------------------- ---------------------------------------------------
Ten Months Ten Months
Year Ended June 30, Ended Year Ended June 30, Ended
-------------------------------------- June 30, ------------------------------------- June 30,
1999 1998 1997 1996 (a) 1999 1998 1997 1996 (a)
----------- ------------- ------------ ----------------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.83 $ 10.31 $ 10.00 $ 10.86 $ 10.32 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
(0.03) (0.07) (0.01) -- (0.05) --
------------ ------------ ------------ ------------ ------------ ------------
(6.43) 0.59 0.32 (6.46) 0.59 0.33
------------ ------------ ------------ ------------ ------------ ------------
(6.46) 0.52 0.31 (6.46) 0.54 0.33
------------ ------------ ------------ ------------ ------------ ------------
-- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
-- -- -- -- -- 0.01
------------ ------------ ------------ ------------ ------------ ------------
-- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
$ 4.37 $ 10.83 $ 10.31 $ 4.40 $ 10.86 $ 10.32
============ ============ ============ ============ ============ ============
(59.65)% 5.04% 3.19% (59.48)% 5.26% 3.32%
------------ ------------ ------------ ------------ ------------ ------------
$ 9,084 $ 30,169 $ 17,789 $ 4,265 $ 11,155 $ 6,476
------------ ------------ ------------ ------------ ------------ ------------
2.75% 2.75% 2.75% 2.50% 2.50% 2.50%
------------ ------------ ------------ ------------ ------------ ------------
3.55% 3.29% 4.10% 3.30% 3.04% 3.88%
------------ ------------ ------------ ------------ ------------ ------------
(0.39)% (0.79)% (0.38)% (0.07)% (0.55)% (0.16)%
------------ ------------ ------------ ------------ ------------ ------------
81% 38% 15% 81% 38% 15%
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
85
<PAGE>
INCOME
FUNDS
PILGRIM GOVERNMENT
SECURITIES
INCOME FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughtout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.71 $ 12.59 $ 12.97 $ 12.73
- ------------------------------------------- ---------- ---------- -------- ----------
Income (loss) from investment operations:
Net investment income 0.64 0.69 0.75 0.84
- ------------------------------------------- ---------- ---------- -------- ----------
Net realized and unrealized gain (loss) on
investments 0.30 0.20 (0.32) 0.24
- ------------------------------------------- ---------- ---------- -------- ----------
Total from investment operations 0.94 0.89 0.43 1.08
- ------------------------------------------- ---------- ---------- -------- ----------
Less distributions from:
Net investment income 0.77 0.73 0.75 0.84
- ------------------------------------------- ---------- ---------- -------- ----------
Tax return of capital -- 0.04 0.06 --
- ------------------------------------------- ---------- ---------- -------- ----------
Total distributions 0.77 0.77 0.81 0.84
- ------------------------------------------- ---------- ---------- -------- ----------
Net asset value, end of period $ 12.88 $ 12.71 $ 12.59 $ 12.97
=========================================== ========== ========== ======== ==========
TOTAL RETURN(C) 7.63% 7.33% 3.34% 8.96%
- ------------------------------------------- ---------- ---------- -------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 23,682 $ 29,900 $ 38,753 $ 43,631
- ------------------------------------------- ---------- ---------- -------- ----------
Ratios to average net assets:
Net expenses after expense
reimbursement (d) 1.50% 1.42% 1.51% 1.40%
- ------------------------------------------- ---------- ---------- -------- ----------
Gross expenses prior to expense
reimbursement (d) 1.58% 1.42% 1.57% 1.54%
- ------------------------------------------- ---------- ---------- -------- ----------
Net investment income after
expense reimbursement (d) 5.13% 5.78% 5.64% 6.37%
- ------------------------------------------- ---------- ---------- -------- ----------
Portfolio turnover rate 134% 172% 170% 299%
- ------------------------------------------- ---------- ---------- -------- ----------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(d) Annualized.
(e) Commencement of offering shares
86
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C Class M
--------------------------------------------------- ---------- -------------------------------------------------
July 17, June 11, July 17,
Year Ended June 30, 1995(b) to 1999(b) to Year Ended June 30, 1995(b) to
--------------------------------------- June 30, June 30, -------------------------------------- June 30,
1999 1998 1997 1996 1999 1999 1998 1997 1996
----------- ------------- ------------- ----------- ---------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.68 $ 12.59 $ 12.95 $ 12.72 $ 12.59 $ 12.95
---------- ---------- --------- ---------- --------- --------
0.60 0.67 0.66 0.64 0.70 0.68
---------- ---------- --------- ---------- --------- --------
0.24 0.11 (0.37) 0.23 0.14 (0.36)
---------- ---------- --------- ---------- --------- --------
0.84 0.78 0.29 0.87 0.84 0.32
---------- ---------- --------- ---------- --------- --------
0.68 0.69 0.65 0.70 0.70 0.68
---------- ---------- --------- ---------- --------- --------
-- -- -- -- 0.01 --
---------- ---------- --------- ---------- --------- --------
$ 12.84 $ 12.68 $ 12.59 $ 12.88 $ 12.72 $ 12.59
========== ========== ========= ========== ========= ========
6.78% 6.38% 2.25% 7.02% 6.88% 2.52%
---------- ---------- --------- ---------- --------- --------
$ 3,220 $ 1,534 $ 73 $ 224 $ 61 $ 24
---------- ---------- --------- ---------- --------- --------
2.25% 2.17% 2.26% 2.00% 1.92% 2.01%
---------- ---------- --------- ---------- --------- --------
2.29% -- 2.41% 2.05% -- 2.16%
---------- ---------- --------- ---------- --------- --------
4.24% 4.92% 4.98% 4.29% 5.25% 5.73%
---------- ---------- --------- ---------- --------- --------
134% 172% 170% 134% 172% 170%
---------- ---------- --------- ---------- --------- --------
</TABLE>
87
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A
--------------------------
July 27,
Three Months 1998(a)
Ended to
June 30, March 31,
1999(b) 1999
-------------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.08
- ------------------------------------------------------------- --------
Income from investment operations:
Net investment income 0.53
- ------------------------------------------------------------- --------
Net realized and unrealized gains (loss) on investments (0.08)
- ------------------------------------------------------------- --------
Total from investment operations 0.45
- ------------------------------------------------------------- --------
Less distributions from:
Net investment income 0.53
- ------------------------------------------------------------- --------
Net realized gains on investments 0.11
- ------------------------------------------------------------- --------
Net asset value, end of period $ 12.89
============================================================= ========
TOTAL RETURN(C): 5.60%
- ------------------------------------------------------------- --------
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period, ($000) $ 5,751
- ------------------------------------------------------------- --------
Ratio to average net assets:
Net expenses, after expense reimbursement(d) 0.96%
- ------------------------------------------------------------- --------
Gross expenses prior to expense reimbursement(d) 1.98%
- ------------------------------------------------------------- --------
Net investment income (loss) after expense reimbursement(d) 5.81%
- ------------------------------------------------------------- --------
Portfolio turnover 274%
- ------------------------------------------------------------- --------
</TABLE>
(a) The Fund commenced operations on July 27, 1998.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund.
(c) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(d) Annualized
88
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------------- --------------------------
July 27, July 27,
Three Months 1998(a) Three Months 1998(a)
Ended to Ended to
June 30, March 31, June 30, March 31,
1999(b) 1999 1999(b) 1999
-------------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
$ 12.78 $ 13.27
-------- --------
0.45 0.48
-------- --------
(0.05) (0.06)
-------- --------
0.40 0.42
-------- --------
0.46 0.48
-------- --------
0.11 0.11
-------- --------
$ 12.61 $ 13.10
======== ========
5.17% 5.19%
-------- --------
$ 6,637 $ 8,128
-------- --------
1.37% 1.36%
-------- --------
2.42% 2.41%
-------- --------
5.35% 5.36%
-------- --------
274% 274%
-------- --------
</TABLE>
89
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH
YIELD FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------
Eight
Months Year
Year Ended June 30, Ended Ended
-------------------------------------------------- June 30, October 31,
1999 1998 1997 1996 1995(a)(c) 1994
------------- ------------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.80 $ 6.36 $ 6.15 $ 5.95 $ 6.47
- -------------------------------------------------- --------- -------- -------- -------- -------
Income (loss) from investment operations:
Net investment income 0.61 0.61 0.59 0.35 0.54
- -------------------------------------------------- --------- -------- -------- -------- -------
Net realized and unrealized gain (loss) on
investments 0.16 0.43 0.16 0.21 (0.51)
- -------------------------------------------------- --------- -------- -------- -------- -------
Total from investment operation 0.77 1.04 0.75 0.56 0.03
- -------------------------------------------------- --------- -------- -------- -------- -------
Less distributions from:
Net investment income 0.63 0.60 0.54 0.36 0.55
- -------------------------------------------------- --------- -------- -------- -------- -------
In excess of net
investment income -- -- -- -- --
- -------------------------------------------------- --------- -------- -------- -------- -------
Total distributions 0.63 0.60 0.54 0.36 0.55
- -------------------------------------------------- --------- -------- -------- -------- -------
Net asset value, end of period $ 6.94 $ 6.80 $ 6.36 $ 6.15 $ 5.95
================================================== ========= ======== ======== ======== =======
TOTAL RETURN(D) 11.71% 17.14% 12.72% 9.77% 0.47%
- -------------------------------------------------- --------- -------- -------- -------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 102,424 $ 35,940 $ 18,691 $ 15,950 $16,046
- -------------------------------------------------- --------- -------- -------- -------- -------
Ratios to average net assets:
Gross expenses prior to expense reimbursement (e) 1.17% 1.42% 2.19% 2.35% 2.07%
- -------------------------------------------------- --------- -------- -------- -------- -------
Net expenses after expense reimbursement (e) 1.00% 1.00% 1.00% 2.25% 2.00%
- -------------------------------------------------- --------- -------- -------- -------- -------
Net investment income after
expense reimbursement (e) 9.05% 9.54% 9.46% 8.84% 8.73%
- -------------------------------------------------- --------- -------- -------- -------- -------
Portfolio turnover rate 209% 394% 399% 166% 192%
- -------------------------------------------------- --------- -------- -------- -------- -------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering shares.
(c) Effective November 1, 1994, High Yield Fund changed its year end to June
30.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(e) Annualized.
90
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C Class M
----------------------------------------------------- ------------ ---------------------------------------------
July 17, May 27, July 17,
Year Ended June 30, 1995(b) to 1999(b) to Year Ended June 30, 1995(b)
---------------------------------------- June 30, June 30, ----------------------------------- June 30,
1999 1998 1997 1996 1999 1999 1998 1997 1996
------------- ------------- ------------ ------------ ------------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.78 $ 6.36 $ 6.20 $ 6.78 $ 6.36 $ 6.20
--------- -------- -------- -------- -------- --------
0.58 0.57 0.48 0.59 0.58 0.50
--------- -------- -------- -------- -------- --------
0.14 0.41 0.14 0.14 0.41 0.14
--------- -------- -------- -------- -------- --------
0.72 0.98 0.62 0.73 0.99 0.64
--------- -------- -------- -------- -------- --------
0.58 0.56 0.46 0.59 0.57 0.48
--------- -------- -------- -------- -------- --------
$ 6.92 $ 6.78 $ 6.36 $ 6.92 $ 6.78 $ 6.36
========= ======== ======== ======== ======== ========
10.90% 16.04% 10.37% 11.16% 16.29% 10.69%
--------- -------- -------- -------- -------- --------
$ 154,303 $ 40,225 $ 2,374 $ 19,785 $ 8,848 $ 1,243
--------- -------- -------- -------- -------- --------
1.75% 1.75% 1.75% 1.50% 1.50% 1.50%
--------- -------- -------- -------- -------- --------
1.92% 2.17% 2.94% 1.67% 1.92% 2.69%
--------- -------- -------- -------- -------- --------
8.30% 8.64% 9.02% 8.55% 8.93% 9.41%
--------- -------- -------- -------- -------- --------
209% 394% 339% 209% 394% 339%
--------- -------- -------- -------- -------- --------
</TABLE>
91
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH
YIELD FUND II
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A
------------------------------------------
Three Months Year March 27,
Ended Ended 1998 to
June 30, March 31, March 31,
1999(b) 1999 1998(a)
-------------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.72 $ 12.70
- --------------------------------------------- -------- ---------
Income from investment operations:
Net investment income (loss) 1.12 0.01
- --------------------------------------------- -------- ---------
Net realized and unrealized gains (loss) on
investments (1.00) 0.01
- --------------------------------------------- -------- ---------
Total from investment operations 0.12 0.02
- --------------------------------------------- -------- ---------
Less distributions from:
Net investment income 1.18 --
- --------------------------------------------- -------- ---------
Net asset value, end of period $ 11.66 $ 12.72
============================================= ======== =========
TOTAL RETURN(C): 1.13% 0.16%
- --------------------------------------------- -------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 17,327 $ 4,690
- --------------------------------------------- -------- ---------
Ratios to average net assets:
Net expenses after expense reimbursement(d) 1.12% 1.06%
- --------------------------------------------- -------- ---------
Gross expenses prior to expense
reimbursement(d) 1.53% 1.06%
- -------------------------------------------- -------- ---------
Net investment income (loss) after
expense reimbursement(d) 9.44% 7.22%
- --------------------------------------------- -------- ---------
Portfolio turnover 242% 484%
- --------------------------------------------- -------- ---------
</TABLE>
(a) The Fund commenced operations on March 27, 1998.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
92
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------ ------------------------------------------
Three Months Year March 27, Three Months Year March 27,
Ended Ended 1998 to Ended Ended 1998 to
June 30, March 31, March 31, June 30, March 31, March 31,
1999(b) 1999 1998(a) 1999(b) 1999 1998(a)
-------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 12.71 $ 12.69 $ 12.71 $ 12.69
-------- --------- -------- ---------
1.04 0.01 1.04 0.01
-------- --------- -------- ---------
(0.99) 0.01 (0.99) 0.01
-------- --------- -------- ---------
0.05 0.02 0.05 0.02
-------- --------- -------- ---------
1.10 -- 1.10 --
-------- --------- -------- ---------
$ 11.66 $ 12.71 $ 11.66 $ 12.71
======== ========= ======== =========
0.55% 0.16% 0.55% 0.16%
-------- --------- -------- ---------
$ 42,960 $ 8,892 $ 21,290 $ 4,815
-------- --------- -------- ---------
1.77% 1.69% 1.77% 1.66%
-------- --------- -------- ---------
2.18% 1.69% 2.18% 1.66%
-------- --------- -------- ---------
8.84% 6.61% 8.79% 6.91%
-------- --------- -------- ---------
242% 484% 242% 484%
-------- --------- -------- ---------
</TABLE>
93
<PAGE>
EQUITY &
INCOME FUNDS
PILGRIM
BALANCED
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ----------------------------------------------------------------
1999(b) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.53 $ 15.54 $ 16.16 $ 13.74 $ 13.52
- ----------------------------------------- --------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.36 0.26 0.32 0.34 0.21
- ----------------------------------------- --------- --------- --------- --------- ---------
Net realized and unrealized gains
on investments 2.58 5.70 0.84 2.42 0.22
- ----------------------------------------- --------- --------- --------- --------- ---------
Total from investment operations 2.94 5.96 1.16 2.76 0.43
- ----------------------------------------- --------- --------- --------- --------- ---------
Less distributions from:
Net investment income 0.43 0.27 0.32 0.34 0.21
- ----------------------------------------- --------- --------- --------- --------- ---------
Net realized gains on investments 3.01 1.70 1.46 -- --
- ----------------------------------------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 19.03 $ 19.53 $ 15.54 $ 16.16 $ 13.74
========================================= ========= ========= ========= ========= =========
TOTAL RETURN(C): 17.10% 39.34% 6.74% 20.16% 3.22%
- ----------------------------------------- --------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 9,519 $ 6,675 $ 4,898 $ 5,902 $ 4,980
- ----------------------------------------- --------- --------- --------- --------- ---------
Ratio to average net assets:
Net expenses after expense
reimbursement(d) 1.59% 1.61% 1.60% 1.60% 1.60%
- ---------------------------------------- --------- --------- --------- --------- ---------
Gross expenses prior to expense
reimbursement(d) 1.97% 2.56% 3.00% 3.30% 2.78%
- ---------------------------------------- --------- --------- --------- --------- ---------
Net investment income (loss) after
expense reimbursement(d) 2.08% 3.58% 1.87% 2.16% 1.44%
- ----------------------------------------- --------- --------- --------- --------- ---------
Portfolio turnover 165% 260% 213% 197% 110%
- ----------------------------------------- --------- --------- --------- --------- ---------
</TABLE>
(a) Commencement of offering of shares.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
94
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(a) to
June 30, -------------------------------------- March 31,
1999(b) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 20.07 $ 14.88 $ 14.18 $ 12.50
---------- ---------- ---------- ----------
0.28 0.15 0.17 0.12
---------- ---------- ---------- ----------
2.74 5.58 0.70 1.68
---------- ---------- ---------- ----------
3.02 5.73 0.87 1.80
---------- ---------- ---------- ----------
0.31 0.15 0.17 0.12
---------- ---------- ---------- ----------
2.40 0.39 -- --
---------- ---------- ---------- ----------
$ 20.38 $ 20.07 $ 14.88 $ 14.18
========== ========== ========== ==========
16.49% 38.79% 6.10% 14.45%
---------- ---------- ---------- ----------
$ 6,048 $ 4,254 $ 2,133 $ 673
---------- ---------- ---------- ----------
2.24% 2.26% 2.25% 2.25%
---------- ---------- ---------- ----------
2.62% 2.71% 6.44% 13.05%
---------- ---------- ---------- ----------
1.43% 2.99% 1.25% 1.38%
---------- ---------- ---------- ----------
165% 260% 213% 197%
---------- ---------- ---------- ----------
<CAPTION>
Class C
-----------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, --------------------------------------------------------------
1999(b) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
$ 19.90 $ 15.59 $ 16.20 $ 13.76 $ 13.54
---------- ---------- ---------- ---------- ----------
0.26 0.15 0.21 0.24 0.11
---------- ---------- ---------- ---------- ----------
2.52 5.71 0.85 2.44 0.22
---------- ---------- ---------- ---------- ----------
2.78 5.86 1.06 2.68 0.33
---------- ---------- ---------- ---------- ----------
0.28 0.15 0.21 0.24 0.11
---------- ---------- ---------- ---------- ----------
4.05 1.40 1.46 -- --
---------- ---------- ---------- ---------- ----------
$ 18.35 $ 19.90 $ 15.59 $ 16.20 $ 13.76
========== ========== ========== ========== ==========
16.34% 38.35% 6.05% 19.58% 2.47%
---------- ---------- ---------- ---------- ----------
$ 21,655 $ 20,784 $ 16,990 $ 16,586 $ 16,470
---------- ---------- ---------- ---------- ----------
2.23% 2.26% 2.25% 2.25% 2.25%
---------- ---------- ---------- ---------- ----------
2.61% 2.68% 2.83% 3.01% 2.60%
---------- ---------- ---------- ---------- ----------
1.43% 2.93% 1.23% 1.53% 0.83%
---------- ---------- ---------- ---------- ----------
165% 260% 213% 197% 110%
---------- ---------- ---------- ---------- ----------
</TABLE>
95
<PAGE>
EQUITY &
INCOME FUNDS
PILGRIM
CONVERTIBLE
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by other independent
auditors.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ----------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.12 $ 16.59 $ 15.68 $ 12.86 $ 14.16
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Income from investment operations:
Net investment income (loss) 0.40 0.44 0.47 0.48 0.49
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net realized and unrealized gains (loss)
on investments 3.17 4.49 1.64 2.82 (0.89)
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Total from investment operations 3.57 4.93 2.11 3.30 (0.40)
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Less distributions from:
Net investment income 0.41 0.44 0.48 0.48 0.49
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net realized gains on investments gains 0.36 1.96 0.72 -- 0.41
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net asset value, end of period $ 21.92 $ 19.12 $ 16.59 $ 15.68 $ 12.86
============================================= ========== ========== ========== ========== ============
TOTAL RETURN(C): 19.17% 31.04% 13.73% 26.00% (2.64)%
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 65,742 $ 47,290 $ 32,082 $ 31,712 $ 31,150
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Ratio to average net assets:
Net expenses after expense reimbursement(d) 1.53% 1.57% 1.60% 1.60% 1.60%
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
Gross expenses prior to expense
reimbursement(d) 1.65% 1.74% 1.75% 1.76% 1.76%
- -------------------------------------------- ---------- ---------- ---------- ---------- ------------
Net investment income (loss) after expense
reimbursement(d) 2.08% 5.64% 2.83% 3.29% 3.71%
- -------------------------------------------- ---------- ---------- ---------- ---------- ------------
Portfolio turnover 138% 160% 167% 145% 126%
- --------------------------------------------- ---------- ---------- ---------- ---------- ------------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
96
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Three Months May 31,
Ended Year Ended March 31, 1995(b) to
June 30, -------------------------------------- March 31,
1999(a) 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 20.56 $ 16.60 $ 14.96 $ 12.50
---------- ---------- ---------- ----------
0.29 0.32 0.31 0.24
---------- ---------- ---------- ----------
3.47 4.65 1.64 2.46
---------- ---------- ---------- ----------
3.76 4.97 1.95 2.70
---------- ---------- ---------- ----------
0.27 0.32 0.31 0.24
---------- ---------- ---------- ----------
0.19 0.69 -- --
---------- ---------- ---------- ----------
$ 23.86 $ 20.56 $ 16.60 $ 14.96
========== ========== ========== ==========
18.52% 30.51% 13.01% 21.72%
---------- ---------- ---------- ----------
$ 58,736 $ 36,725 $ 12,740 $ 2,125
---------- ---------- ---------- ----------
2.18% 2.22% 2.25% 2.25%
---------- ---------- ---------- ----------
2.30% 2.33% 3.19% 7.08%
---------- ---------- ---------- ----------
1.44% 5.04% 2.29% 2.59%
---------- ---------- ---------- ----------
138% 160% 167% 145%
---------- ---------- ---------- ----------
<CAPTION>
Class C
------------------------------------------------------------------------------
Three Months
Ended Year Ended March 31,
June 30, ---------------------------------------------------------------
1999(a) 1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$ 22.40 $ 19.55 $ 17.05 $ 15.89 $ 13.03 $ 14.28
---------- ---------- ---------- ---------- ---------- -----------
0.07 0.28 0.34 0.37 0.40 0.41
---------- ---------- ---------- ---------- ---------- -----------
1.37 3.25 4.60 1.66 2.86 (0.89)
---------- ---------- ---------- ---------- ---------- -----------
1.44 3.53 4.94 2.03 3.26 (0.48)
---------- ---------- ---------- ---------- ---------- -----------
0.06 0.25 0.34 0.37 0.40 0.41
---------- ---------- ---------- ---------- ---------- -----------
-- 0.43 2.10 0.50 -- 0.36
---------- ---------- ---------- ---------- ---------- -----------
$ 23.78 $ 22.40 $ 19.55 $ 17.05 $ 15.89 $ 13.03
========== ========== ========== ========== ========== ===========
6.45% 18.45% 30.22% 12.91% 25.24% (3.26)%
---------- ---------- ---------- ---------- ---------- -----------
$ 100,276 $ 95,998 $ 81,561 $ 62,143 $ 58,997 $ 61,792
---------- ---------- ---------- ---------- ---------- -----------
2.10% 2.18% 2.22% 2.25% 2.25% 2.25%
---------- ---------- ---------- ---------- ---------- -----------
2.10% 2.30% 2.31% 2.29% 2.28% 2.29%
---------- ---------- ---------- ---------- ---------- -----------
1.17% 1.44% 4.99% 2.18% 2.64% 3.05%
---------- ---------- ---------- ---------- ---------- -----------
28% 138% 160% 167% 145% 126%
---------- ---------- ---------- ---------- ---------- -----------
</TABLE>
97
<PAGE>
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' 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 each 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
Funds' Shareholder Servicing Agent at:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
Please contact the Funds' Shareholder Servicing Agent with any questions you may
have about the Funds.
You can also obtain information about the Funds from the SEC's Public Reference
Room (1-800-SEC-0330). Reports and other information about the Funds may be
obtained at the SEC's Internet site at www.sec.gov, and copies of this
information may be obtained, upon payment of a duplication fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
The SEC may charge you a fee for this information.
SEC file numbers: 811-7428
SEC file numbers: 811-9040 (Pilgrim Advisory Funds, Inc.), 811-4031 (Pilgrim
Government Securities Income Fund, Inc.), 811-1939 (Pilgrim Investment Funds,
Inc.), 811-4504 (Pilgrim Bank and Thrift Fund, Inc.), 811-7428 (Pilgrim Mutual
Funds)
Prospectus
PROSQ1199-110199 November 1, 1999
<PAGE>
Prospectus
Class: Q
November 1, 1999
U.S. EQUITY FUNDS
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
INCOME FUNDS
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund
Pilgrim High Yield Fund II
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
This prospectus contains important information about these funds. 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 truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page
----
FUNDS AT A GLANCE ............................................. 2
U.S. EQUITY FUNDS
Pilgrim LargeCap Growth Fund ............................... 4
Pilgrim MidCap Growth Fund ................................. 6
Pilgrim SmallCap Growth Fund ............................... 8
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund .............................. 10
Pilgrim International Core Growth Fund ..................... 12
Pilgrim International SmallCap Growth Fund ................. 14
Pilgrim Emerging Countries Fund ............................ 16
INCOME FUNDS
Pilgrim Strategic Income Fund .............................. 18
Pilgrim High Yield Fund .................................... 20
Pilgrim High Yield Fund II ................................. 22
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund ...................................... 24
Pilgrim Convertible Fund ................................... 26
FEES AND EXPENSES ............................................. 28
SHAREHOLDER GUIDE
How to Purchase Shares ..................................... 30
How to Redeem Shares ....................................... 31
Transaction Policies ....................................... 32
Distribution and Shareholder Service Fees .................. 33
MANAGEMENT OF THE FUNDS
Adviser .................................................... 34
Sub-Advisers ............................................... 35
DIVIDENDS, DISTRIBUTIONS AND TAXES ............................ 36
MORE INFORMATION ABOUT RISKS .................................. 37
FINANCIAL HIGHLIGHTS .......................................... 41
1
<PAGE>
FUNDS
AT A
GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
U.S. Equity Funds LargeCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
MidCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Worldwide Growth Fund Long-term capital appreciation
Equity Funds Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Core Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Emerging Countries Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Income Funds Strategic Income Fund Maximum Total Return
Adviser: Pilgrim Investments, Inc.
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
High Yield Fund II High level of current income and
Adviser: Pilgrim Investments, Inc. capital growth.
Equity & Income Balanced Fund Long-term capital appreciation and
Funds Adviser: Pilgrim Investments, Inc. current income
Convertible Fund Total return, consisting of capital
Adviser: Pilgrim Investments, Inc. appreciation and current income
Sub-Adviser: Nicholas-Applegate Capital Mgt.
</TABLE>
2
<PAGE>
MAIN INVESTMENTS MAIN RISKS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Equity securities of large Price volatility and other risks that accompany an
U.S. companies investment in growth-oriented equity securities.
Equity securities of medium-sized Price volatility and other risks that
U.S companies accompany an investment in equity securities
of growth-oriented and medium-sized
companies. Particularly sensitive to price
swings during periods of economic
uncertainty.
Equity securities of small-sized Price volatility and other risks that
U.S. companies accompany an investment in equity securities
of growth-oriented and small-sized companies.
Particularly sensitive to price swings during
periods of economic uncertainty.
Equity securities of issuers Price volatility and other risks that
located in at least three different accompany an investment in growth-oriented
countries around one of, which may foreign equities. Sensitive to currency
be the U.S. exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Equity securities of issuers Price volatility and other risks that
located in countries outside accompany an investment in growth-oriented
the U.S. foreign equities. Sensitive to currency
exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Equity securities of small-sized Price volatility, liquidity and other risks
companies located outside the U.S. that accompany an investment in equity
securities of foreign, small-sized companies.
Sensitive to currency exchange rates,
international political and economic
conditions and other risks that affect
foreign securities.
Equity securities of issuers Price volatility, liquidity and other risks
located in countries with that accompany an investment in equities from
emerging securities markets emerging countries. Sensitive to currency
exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Investment grade and high yield Credit, interest rate, prepayment and other
debt securities risks that accompany an investment in debt
securities, including high yield debt
securities. May be sensitive to credit risk
during economic downturns.
High yield debt securities Credit, interest rate and other risks that
accompany an investment in lower-quality debt
securities. Particularly sensitive to credit
risk during economic downturns.
High yield debt securities Credit, interest rate and other risks that
accompany an investment in lower-quality debt
securities. Particularly sensitive to credit
risk during economic downturns.
A mix of equity and debt Price volatility and other risks that
securities accompany an investment in equity
securities. Credit, interest rate and other
risks that accompany an investment in debt
securities.
Convertible securities of Price volatility and other risks that
companies of various sizes accompany an investment in equity securities.
Credit, interest rate, liquidity and other
risks that accompany an investment in debt
securities.
</TABLE>
3
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in; corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated; U.S. Government securities; and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful growing
companies that are managing change advantageously and are poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-advisor
seeks to uncover signs of "change at the margin" -- positive business
developments which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests primarily in equity securities
of larger companies, which sometimes have more stable prices than smaller
companies.
4
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the U.S., and
foreign controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
60.02%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (7/21/97)
------ ---------------
Class Q 60.02% 45.28%
Russell 1000 Growth Index 38.71% 44.57%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 37.95% (Q4 1998)
Worst quarter for period in bar chart: -8.44% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was _____% *
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
5
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of medium-sized U.S. companies and at least 75% of its total
assets in common stocks. It may invest the remainder of its assets in preferred
and convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in medium-sized companies,
which are more susceptible to price swings than larger companies, but usually
tend to have less volatile price swings than smaller companies.
6
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
38.24% 16.06% 16.20% 14.32%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (6/30/94)
------ ---------------
Class Q 14.32% 18.75%
Russell Midcap Growth Index 17.86% 21.46%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 25.24% (Q4 1998)
Worst quarter for period in bar chart: -17.67% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was _____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
7
<PAGE>
U.S. EQUITY
FUND
PILGRIM
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions the Fund invests at least 65% of its total assets in
equity securities of small U.S. companies, and at least 75% of its total assets
in common stocks. It may invest the remainder in preferred and convertible
securities, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, and securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in foreign
equity or debt securities. The Fund may also use options and futures contracts
involving securities, securities indices, interest rates and foreign currencies
as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small-cap companies, which
are more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and many
are dependent on a few key managers.
8
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
19.44% 11.56% 4.26%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 4.26% 11.85%
Russell 2000 Growth Index 1.23% 8.62%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 27.03% (Q4 1998)
Worst quarter for period in bar chart: -23.41% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth
orientation. The Index has an inherent performance advantage over the Fund since
it has no cash in its portfolio and incurs no operating expenses. An investor
cannot invest directly in an index.
9
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries, one of
which may be the U.S.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities, which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may also invest in small and
medium-sized companies, which may be more susceptible to greater price swings
than larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
10
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks, or
may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
18.32% 17.64% 37.92%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 37.92% 21.71%
MSCI World Index 22.78% 16.80%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 28.33% (Q4 1998)
Worst quarter for period in bar chart: -13.33% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was _____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. The Index has
an inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
11
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in large companies, which
sometimes have more stable prices than smaller companies.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities at
all.
12
<PAGE>
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.22%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (2/28/97)
------ ---------------
Class Q 21.22% 21.92%
MSCI EAFE Index 20.33% 12.97%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 17.31% (Q1 1998)
Worst quarter for period in bar chart: -14.85% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. The
Index has an inherent performance advantage over the Fund since it has no cash
in its portfolio and incurs no operating expenses. An investor cannot invest
directly in an index.
13
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund considers a company to be
small if it has a market capitalization below $1.5 billion. The Fund emphasizes
companies in the bottom 75% of publicly traded companies as measured by stock
market capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small companies, which may
be more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market diversification
and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund
14
<PAGE>
invests. Rather, the market could favor value-oriented stocks or large company
stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
17.98% 13.93% 35.96%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 35.96% 20.24%
Salomon EPAC EM Index 14.14% 3.43%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 25.12% (Q1 1998)
Worst quarter for period in bar chart: -15.26% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Salomon EPAC Extended Market Index, an unmanaged index
comprised of smaller-capitalization companies in 22 countries excluding Canada
and the United States. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
15
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets -- that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach, and seeks issuers in the
early stages of development, growth companies, cyclical companies, or companies
believed to be undergoing a basic change in operations. It uses a blend of
traditional fundamental research of individual securities, calling on the
expertise of many external analysts in different countries throughout the world,
and a computer intensive ranking system that analyzes and ranks securities. The
Investment Adviser currently selects portfolio securities from an investment
universe of approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than larger
companies because they may have fewer financial resources, limited product and
market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
16
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks or
large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. Investments in emerging markets countries are generally
riskier than other kinds of foreign investments, partly because emerging market
countries may be less politically and economically stable than other countries.
It may also be more difficult to buy and sell securities in emerging market
countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
27.75% 10.00% -21.46%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q -21.46% 1.42%
MSCI Emerging Markets Free Index -27.52% -12.63%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 15.06% (Q2 1997)
Worst quarter for period in bar chart: -25.99% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Emerging Markets
Free Index, an unmanaged index comprised of companies representative of the
market structure of 22 emerging market countries in Europe, Latin America and
the Pacific Basin. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
17
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. There is no minimum credit rating for high yield
debt securities in which the Fund may invest.
The Fund may invest in debt securities of any maturity; however, the average
portfolio duration of the Fund will generally range from two to eight years. The
Fund may invest up to 30% of its total assets in securities payable in foreign
currencies. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The Fund does not invest in interest-only or principal-only
stripped mortgage-backed securities.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund may
be subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the
18
<PAGE>
Fund will be forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.77% 8.96% 8.18%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the
Fund, which is no longer offered, for prior periods, restated to reflect
Class Q operating expenses. Class Q shares, after adjustment for class
expenses, would have had substantially similar returns because Institutional
Class shares were invested in the same portfolio of securities. Also, prior
to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q* 8.18% 8.23%
Lehman Aggregate Bond Index 8.67% 8.20%
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class Q expenses, because
Class Q of the Fund did not have a full year's performance as of December 31,
1998. See the footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year.
Best quarter for period in bar chart: 3.68% (Q2 1997)
Worst quarter for period in bar chart: -3.16% (Q1 1996)
The Fund's year-to-date total return as of September 30, 1999 was _____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. The Index has an inherent performance
advantage over the Fund since it has no cash in its portfolio and incurs no
operating expenses. An investor cannot invest directly in an index.
19
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND
INVESTMENT OBJECTIVE:
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective.
Adviser:
Pilgrim Investments, Inc.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. There is no minimum credit rating for high yield debt securities in which
the Fund may invest. The Fund may invest in debt securities of any maturity. In
selecting securities for the Fund, preservation of capital is a consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage-related securities, and
participation interests and assignments in floating rate loans and notes. The
Fund may also invest up to 10% of its assets in foreign debt securities of any
rating. The Fund reserves the right to also invest in financial futures and
related options to attempt to hedge risk, although the Fund has not invested in
such instruments since Pilgrim Investments became the adviser in 1995 through
the date of this prospectus.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
20
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
* Because Class Q shares were first offered in 1999, the returns in the bar
chart are based upon the performance of Class A shares of the Fund, for prior
periods. Class Q shares would have had substantially similar returns because
Class A shares invest in the same portfolio of securities and have the same
operating expenses as Class Q shares.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
1 Year 5 Years 10 Years
------ ------- --------
Class Q* -7.60% 7.36% 8.88%
Lehman High Yield Index 1.87% 8.57% 10.55%
* This table shows performance of the Class A shares of the Fund, restated to
reflect the absence of a sales charge, because Class Q of the Fund did not
have a full year's performance as of December 31, 1998. See the footnote to
the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
21
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND II
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME AND CAPITAL GROWTH.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies. The Fund is not restricted to investments in
companies of any particular size, but currently intends to invest principally in
companies with market capitalization above $100 million at the time of purchase.
The Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
The Board of Trustees of the Fund has approved, subject to approval of the
shareholders of High Yield Fund II, a proposed reorganization of the Fund into
Pilgrim High Yield Fund. If shareholder approval is obtained, it is expected
that the reorganization will take place in the summer of 1999.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long term
maturities. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the owners of underlying mortgages pay off their mortgages
sooner than scheduled. If interest rates are falling, the Fund will be forced to
reinvest this money at lower yields.
22
<PAGE>
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign banks or
securities depositories than those in the U.S., and foreign controls on
investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.07% 5.03%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the
Fund, which is no longer offered, for prior periods, restated to reflect
Class Q operating expenses. Class Q shares, after adjustment for class
expenses, would have had substantially similar returns because Institutional
Class shares were invested in the same portfolio of securities. Also, prior
to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (7/31/96)
------ ---------------
Class Q* 5.03% 15.37%
First Boston High Yield Index .58% 8.43%
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class Q expenses, because
Class Q of the Fund did not have a full year's performance as of December 31,
1998. See the footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year.
Best quarter for period in bar chart: 8.31% (Q3 1997)
Worst quarter for period in bar chart: -7.02% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart. the table refects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
23
<PAGE>
EQUITY &
INCOME FUNDS
PILGRIM
BALANCED
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A BALANCE OF LONG-TERM CAPITAL APPRECIATION AND CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions.
The remainder of the Fund's assets will be invested in equity securities, which
will be managed in accordance with the principal investment strategies of the
Pilgrim LargeCap Leaders Fund, which invests primarily in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization of over $5 billion is
considered to be a large company, although the Fund may also invest to a limited
degree in companies that have a market capitalization between $1 billion and $5
billion.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit quality for the high yield debt securities in which the Fund may
invest. The Fund and may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities. When the adviser anticipates unusual market or other
conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
CHANGES IN INTEREST RATES -- the value of the debt securities held by the Fund
may fall when interest rates rise. The Fund may be sensitive to changes in
interest rates because it may invest in debt securities with intermediate and
long terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
debt securities with shorter durations. Zero coupon securities are particularly
sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes
24
<PAGE>
bankrupt. This Fund may be subject to more credit risk than the other income
funds, because it may invest in high yield debt securities, which are considered
predominantly speculative with respect to the issuer's continuing ability to
meet interest and principal payments. This is especially true during periods of
economic uncertainty or economic downturns.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities--markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
16.88% 21.46% 23.52%
* Prior to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 23.52% 18.17%
Composite Index 20.93% 20.65%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 14.48% (Q4 1998)
Worst quarter for period in bar chart: -5.00% (Q1 1997)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- a composite index consisting of 60% Standard & Poor's 500
Composite Stock Price Index and 40% Lehman Brothers Government/Corporate Bond
Index. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio and incurs no operating expenses. An investor
cannot invest directly in an index.
25
<PAGE>
EQUITY &
INCOME
PILGRIM
CONVERTIBLE
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN, CONSISTING OF CAPITAL APPRECIATION AND
CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. Convertible securities are generally preferred stock or
other securities, including debt securities, that are convertible into common
stock. The Fund emphasizes companies with market capitalizations above $500
million. Through investments in convertible securities, the Fund seeks to
capture the upside performance of the underlying equities with less downside
exposure. The Fund may invest the remainder of its assets in common and
preferred stocks, debt securities of any maturity, and securities issued by the
U.S. Government and its agencies and instrumentalities. The Fund may also use
options and futures contracts involving securities, securities indices, interest
rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit rating for high yield securities in which the Fund may invest.
The Fund also may invest up to 35% of its net assets in zero coupon securities.
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" -- positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, issuer and other risks, and their values may go up or down, sometimes
rapidly and unpredictably. Market risk is the risk that securities may decline
in value due to factors affecting securities markets generally or particular
industries. Issuer risk is the risk that the value of a security may decline for
reasons relating to the issuer, such as changes in the financial condition of
the issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility. The Fund may
invest in small and medium-sized companies, which may be more susceptible to
greater price swings than larger companies because they may have fewer financial
resources, limited product and market diversification and many are dependent on
a few key managers.
CHANGES IN INTEREST RATES -- the value of the convertible and debt securities
held by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in securities with intermediate
and long terms to maturity. Securities with longer durations tend to be more
sensitive to changes in interest
26
<PAGE>
rates, usually making them more volatile than securities with shorter durations.
Zero coupon securities are particularly sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a convertible or debt
security is unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic downturns.
This Fund may be subject to more credit risk than the other bond funds, because
the convertible securities and debt securities in which it invests may be
lower-rated securities.
INABILITY TO SELL SECURITIES -- lower rated securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.74% 23.04% 21.40%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 21.40% 20.57%
First Boston Convertible Index 6.55% 11.82%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 19.88% (Q4 1998)
Worst quarter for period in bar chart: -9.03% (Q3 1998)
The Fund's year-to-date total return as of September 30, 1999 was ____%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
27
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
The following table describes the fees and expenses that you may pay if you hold
shares of a Fund. The Funds do not charge you any fees for buying, selling or
exchanging Class Q shares.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)(1)
Total
Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
LargeCap Growth 0.75% 0.25% 0.72% 1.72 (0.47)% 1.25%
MidCap Growth 0.75 0.25 0.26 1.26 (0.01) 1.25
SmallCap Growth 1.00 0.25 0.34 1.59 (0.09) 1.50
Worldwide Growth 1.00 0.25 0.45 1.70 (0.10) 1.60
International Core Growth 1.00 0.25 0.55 1.80 (0.15) 1.65
International SmallCap Growth 1.00 0.25 0.48 1.73 (0.08) 1.65
Emerging Countries 1.25 0.25 0.68 2.18 (0.28) 1.90
Strategic Income 0.45 0.25 0.91 1.61 (0.76) 0.85
High Yield(3) 0.60 0.25 0.32 1.17 (0.17) 1.00
High Yield II 0.60 0.25 0.36 1.21 (0.21) 1.00
Balanced 0.75 0.25 0.48 1.48 (0.23) 1.25
Convertible 0.75 0.25 0.29 1.29 (0.04) 1.25
</TABLE>
1 This table shows the estimated operating expenses for each Fund by class as
a ratio of expenses to average daily net assets. These estimated are based
on each Fund's actual operating expenses for its most recent complete
fiscal year and fee waivers to which the Adviser has agreed.
2 Pilgrim Investments has entered into expense limitation agreements with
each of the Funds, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." For High Yield
Fund, the current limit will continue through December 31, 1999, at which
time it will change to 1.10% through at least October 31, 2001. For each
remaining Fund, the expense limit will continue through at least October
31, 2001. Nicholas-Applegate Capital Management bears 50% of the cost of
maintaining the expense limit for Funds for which is serves as sub-adviser.
3 Because Class Q shares are new for the High Yield Fund, its expenses are
based on Class A expenses of the Fund.
4 Except for High Yield Fund, other expenses have been restated to reflect
the elimination of certain administrative fees effective May 24, 1999.
28
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. Each Example assumes
that you invest $10,000 in the Fund for the time period indicated and then
redeem all your shares at the end of the time period indicated. Each Example
also assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Fund 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- --------
LargeCap Growth $127 $448 $ 843 $1,950
MidCap Growth 127 398 690 1,521
SmallCap Growth 153 484 848 1,874
Worldwide Growth 163 516 904 1,991
International Core Growth 168 536 946 2,091
International SmallCap Growth 168 529 923 2,027
Emerging Countries 193 627 1,117 2,468
Strategic Income 87 355 728 1,778
High Yield 112 357 630 1,408
High Yield II 102 341 623 1,428
Balanced 127 422 763 1,728
Convertible 127 401 700 1,549
29
<PAGE>
SHAREHOLDER
GUIDE
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES. Class Q Shares are offered at net asset value without a
sales charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time. Certain Funds also offer Class A, B, C and M Shares, which have
different sales charges and other expenses that may affect their performance.
You can obtain more information about these other share Classes by calling (800)
992-0180.
RETIREMENT PLANS. You may invest in each Fund through various retirement plans,
including IRAs, Simplified Employee Plan (SEP) IRAs, Roth IRAs 403(b) plans, 457
plans, and all qualified retirement plans. For further information about any of
the plans, agreements, applications and annual fees, contact the Distributor,
your financial representative or plan sponsor. To determine which retirement
plan is appropriate for you, consult your tax adviser. For further information,
contact the Shareholder Servicing Agent at (800) 992-0180.
If you are a participant in a qualified retirement plan, you should make
purchases through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other purchasers may purchase shares by the methods outlined in the table on
the right.
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Funds reserve the right to liquidate sufficient shares to recover
annual transfer agent fees should you fail to maintain your account value at a
minimum of $250,000.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment
Your Investment professional with an
Professional authorized firm
can help you establish
and maintain your
account.
By Mail Visit or consult an Visit or consult an
investment investment
professional. professional.
Make your check Fill out the Account
payable to the Pilgrim Additions form
Funds and mail it, included on the bottom
along with a completed of your account
Application. Please statement along with
indicate your your check payable to
investment professional the Fund and mail
on the New Account them to the address on
Application the account statement.
Remember to write your account
number on the check.
By Wire Call the Pilgrim Wire the funds in the
Operations Department same manner described
at (800) 336-3436 to under "Initial
obtain an account Investment."
number and indicate
your investment
professional on the
account.
Instruct your bank to
wire funds to the Fund
in the care of:
Investors Fiduciary
Trust Co. ABA
#101003621 Kansas
City, MO credit to:
-----------------------
(the Fund) A/C #751-8315;
for further credit to:
Shareholder A/C
#
-----------------------
(A/C # you received
over the telephone)
Shareholder Name:
------------------------
(Your Name Here)
After wiring funds you
must complete the
Account Application
and send it to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO
64141-6368
30
<PAGE>
How to Redeem Shares
- --------------------------------------------------------------------------------
If you are a participant in a qualified retirement plan, you should make
redemptions through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other shareholders may redeem shares by the methods outlined in the table on
the right.
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account on a regular basis.
* Your account must have a current value of at least $250,000.
* Minimum withdrawal amount is $1,000.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
<TABLE>
<CAPTION>
<S> <C>
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge for
their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in
which the account is registered, and the dollar
value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification
is provided on the Account Application.
A signature guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check
the box on the Account Application which signifies
that you do not wish to use telephone redemptions.
To redeem by telephone, call the Shareholder
Servicing Agent at (800) 992-0180. Receiving
Proceeds By Check: You may have redemption
proceeds (up to a maximum of $100,000) mailed to
an address which has been on record with Pilgrim
Funds for at least 30 days. Receiving Proceeds By
Wire: You may have redemption proceeds (subject to
a minimum of $5,000) wired to your pre-designated
bank account. You will not be able to receive
redemption proceeds by wire unless you check the
box on the Account Application which signifies
that you wish to receive redemption proceeds by
wire and attach a voided check. Under normal
circumstances, proceeds will be transmitted to
your bank on the business day following receipt of
your instructions, provided redemptions may be
made. In the event that share certificates have
been issued, you may not request a wire redemption
by telephone.
</TABLE>
31
<PAGE>
SHAREHOLDER
GUIDE
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
NET ASSET VALUE. The net asset value (NAV) per share for Class Q shares of each
Fund 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 per
share of Class Q shares of each Fund is calculated by taking the value of the
Fund's assets attributable to Class Q shares, subtracting the Fund's liabilities
attributable to Class Q shares, and dividing by the number of Class Q shares
that are outstanding. Because foreign securities may trade on days when the
Funds do not price shares, the net asset value of a Fund that invests in foreign
securities may change on days when shareholders will not be able to purchase or
redeem the Fund's shares
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith by the Board of Directors or Trustees, although the actual calculations
will be made by persons acting under the supervision of the Board. Valuing
Securities at fair value involves greater reliance on judgment than securities
that have readily available market quotations.
PRICE OF SHARES. When you buy shares, you pay the NAV. When you sell shares, you
receive the NAV. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "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
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
EXCHANGES. You may exchange Class Q shares of a Fund for Class Q shares of any
other Pilgrim Fund that offers Class Q shares. The total value of shares being
exchanged must at least equal the minimum investment requirement for Class Q
shares of the Fund into which they are being exchanged. Exchanges of shares are
sales and may result in a gain or loss for federal and state income tax
purposes. There is no specific limit on exchange frequency; however, the Funds
are intended for long term investment and not as a 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 Service 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. You may elect to have a specified dollar amount
of Class Q 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 Class Q shares 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.
32
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY). If you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to Fund performance.
DISTRIBUTION AND
SHAREHOLDER SERVICE FEES
To pay for the cost of servicing your shareholder account, each Fund has adopted
a Rule 12b-1 plan for Class Q shares which requires fees to be paid out of the
assets of the class. Over time the fees will increase your cost of investing and
may exceed the cost of paying other types of sales charges. Each Fund pays a
service fee at an annual rate of 0.25% of the average daily net assets of the
Class Q shares of the Fund.
33
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of September 30, 1999,
Pilgrim Investments managed over $___ billion in assets. Pilgrim Investments
acquired certain assets of previous advisers to the Funds in separate
transactions that closed on April 7, 1995 and May 21, 1999. Pilgrim Investments
is an indirect, wholly owned subsidiary of ReliaStar Financial Corp. (NYSE:
RLR). Through its subsidiaries, offers individuals and institutions life
insurance and annuities, employee benefits products and services, live and
health reinsurance, retirement plans, mutual funds, bank products and personal
finance education.
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year of as a percentage of that Fund's average daily
net assets:
Fund Advisory Fee
- ---- ------------
LargeCap Growth 0.75%
MidCap Growth 0.75
SmallCap Growth 1.00
Worldwide Growth 1.00
International Core Growth 1.00
International SmallCap Growth 1.00
Emerging Countries 1.25
Strategic Income 0.45
High Yield 0.60
High Yield II 0.60
Balanced 0.75
Convertible 0.75
PILGRIM INVESTMENTS DIRECTLY MANAGES THE PORTFOLIOS OF THE FOLLOWING FUNDS:
STRATEGIC INCOME FUND
The following individuals share responsibility for the day-to-day management of
the Strategic Income Fund:
Robert K. Kinsey, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey
manages Strategic Income Fund's assets that are invested in assets other than
high yield debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was
a Vice President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
HIGH YIELD FUND AND HIGH YIELD FUND II
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund and High Yield Fund II since June 1995 and May, 1999,
respectively.
34
<PAGE>
- --------------------------------------------------------------------------------
BALANCED FUND
The following individuals share responsibility for the day-to-day management of
the Balanced Fund:
G. David Underwood, Vice President and Senior Portfolio Manager for Pilgrim
Investments, has served as Senior Portfolio Manager of the equity portion of the
Balanced Fund's assets since May 24, 1999. Mr. Underwood is the Lead Portfolio
Manager of Pilgrim LargeCap Leaders Fund. Prior to joining Pilgrim Investments
in December, 1996, Mr. Underwood served as Director of Funds Management for
First Interstate Capital Management. Mr. Underwood's prior experience includes a
10 year association with Integra Trust Company of Pittsburgh where he served as
Director of Research and Senior Portfolio Manager.
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
Robert K. Kinsey, whose background is described above, has also served as a
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
SUB-ADVISER
For the following Funds, Pilgrim Investments has engaged a Sub-Adviser to
provide the day-to-day management of the Fund's portfolio. The Sub-Adviser is
among the most respected institutional investment advisers in the world, and has
been selected primarily on the basis of its successful application of a
consistent, well-defined, long-term investment approach over a period of several
market cycles.
LARGECAP GROWTH FUND, MIDCAP GROWTH FUND, SMALLCAP GROWTH FUND, INTERNATIONAL
CORE GROWTH FUND, WORLDWIDE GROWTH FUND, INTERNATIONAL SMALLCAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$22 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
In connection with the acquisition of certain assets relating to certain of the
Funds in 1999, Pilgrim Investments and certain of its affiliates entered into an
agreement with Nicholas-Applegate Capital Management and its affiliates which
provides that Pilgrim Investments (not the Funds) will be obligated to pay to
Nicholas-Applegate Capital Management a specified amount upon termination of the
sub-advisory agreement with Nicholas-Applegate Capital Management.
35
<PAGE>
DIVIDENDS,
DISTRIBUTION
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
Annually Quarterly Monthly
- -------- --------- -------
LargeCap Growth(1) Balanced(3) Strategic
MidCap Growth(1) Convertible(3) Income(2)
SmallCap Growth(1) High Yield(2)
International Core High Yield II(2)
Growth(3)
Worldwide Growth(1)
International SmallCap
Growth(1)
Emerging Countries(1)
1 Distributions normally expected to consist primarily of capital gains.
2 Distributions normally expected to consist primarily of ordinary income.
3 Distributions normally expected to consist, on an annual basis, of a variable
combination of capital gains and ordinary income.
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class Q shares of a Fund invested in another Pilgrim Fund which offers
the Class Q 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 a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
36
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques used by the Funds, see the Statement of Additional Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter 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 or to help 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 the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as
zero-coupon or pay-in-kind securities tend to be more volatile. The secondary
market in which high yield securities are traded is generally less liquid than
the
37
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
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.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
OTHER INVESTMENT COMPANIES. Each Fund (except the High Yield Fund) may invest up
to 10% of its assets in other investment companies. When a Fund invests in other
investment companies, you indirectly pay a proportionate share of the expenses
of that other investment company (including management fees, administration
fees, and custodial fees) in addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities. If a security is illiquid, the Fund might be unable to sell
the security at a time when the adviser might wish to sell, and the security
could have the effect of decreasing the overall level of the Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less liquid
than registered securities traded on established secondary markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk
38
<PAGE>
- --------------------------------------------------------------------------------
of nonpayment of principal or interest. Substantial increases in interest rates
may cause an increase in loan defaults. Although the loans will generally be
fully collateralized at the time of acquisition, the collateral may decline in
value, be relatively illiquid, or lose all or substantially all of its value
subsequent to the Fund's investment. Many loans are relatively illiquid, and may
be difficult to value.
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund
may lend portfolio securities in an amount up to 331|M/3% of total Fund assets
to broker-dealers, major banks, or other recognized domestic institutional
borrowers of securities. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the sale
of a security, with an agreement to repurchase the same securities at an agreed
upon price and date. Whether such a transaction produces a gain for a Fund
depends upon the costs of the agreements and the income and gains of the
securities purchased with the proceeds received from the sale of the security.
If the income and gains on the securities purchased fail to exceed the costs,
net asset value will decline faster than otherwise would be the case. Reverse
repurchase agreements, as leveraging techniques, may increase a Fund's yield;
however, such transactions also increase a Fund's risk to capital and may result
in a shareholder's loss of principal.
SHORT SALES. Each Fund (except High Yield Fund) may make short sales. A "short
sale" is the sale by a Fund of a security which has been borrowed from a third
party on the expectation that the market price will drop. If the price of the
security rises, the Fund may have to cover its short position at a higher price
than the short sale price, resulting in a loss.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
39
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure. When a Fund
takes a temporary defensive strategy, it may limit the Fund's ability to achieve
its investment objective.
PORTFOLIO TURNOVER. Each Fund may engage in frequent and active trading of
portfolio securities to achieve its investment objective. A high portfolio
turnover rate involves greater expenses to a Fund, including brokerage
commissions and other transaction costs, and is likely to generate more taxable
short-term gains for shareholders, which may have an adverse effect on the
performance of the Fund.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. 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 Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally. Foreign issuers may be
more susceptible to risks associated with the Year 2000 Problem than domestic
issuers.
40
<PAGE>
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
41
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Three Months Year July 21, 1997
Ended Ended to
June 30, March 31, March 31,
1999(b) 1999 1998(a)
-------------- ----------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.66 $ 12.50
- ------------------------------------------------------------- ----------- -----------
Income from investment operations:
Net investment income (loss) (0.02) (0.01)
- ------------------------------------------------------------- ----------- -----------
Net realized and unrealized gains on investments 9.87 3.26
- ------------------------------------------------------------- ----------- -----------
Total from investment operations 9.85 3.25
- ------------------------------------------------------------- ----------- -----------
Less distributions from:
Net investment income -- (0.01)
- ------------------------------------------------------------- ----------- -----------
Net realized gains on investments (0.27) (0.08)
- ------------------------------------------------------------- ----------- -----------
Net asset value, end of period $ 25.24 $ 15.66
============================================================= =========== ===========
TOTAL RETURN(C): 63.76% 62.47%
- ------------------------------------------------------------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 4,908 $ 799
- ------------------------------------------------------------- ----------- -----------
Ratios to average net assets:
Net expenses after expense reimbursement(d) 1.26% 1.25%
- ------------------------------------------------------------- ----------- -----------
Gross expenses prior to expense reimbursement(d) 1.91% 10.45%
- ------------------------------------------------------------- ----------- -----------
Net investment income (loss) after expense reimbursement(d) (0.28)% (0.62)%
- ------------------------------------------------------------- ----------- -----------
Portfolio turnover 253% 306%
- ------------------------------------------------------------- ----------- -----------
</TABLE>
(a) The Fund commenced operations on June 21, 1997.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
42
<PAGE>
U.S. EQUITY
FUNDS
- ---------
- ---------
PILGRIM
MIDCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months June 30,
Ended Year Ended March 31, 1994(b)
June 30, ----------------------------------------------- to March 31,
1999(a) 1999 1998 1997 1996 1995
-------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 23.30 $ 18.01 $ 17.99 $ 13.66 $ 12.50
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Income from investment operations:
Net investment income (loss) (0.12) (0.21) (0.04) (0.07) (0.02)
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Net realized and unrealized gains
on investments 3.56 7.48 0.32 4.86 1.18
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Total from investment operations 3.49 7.27 0.28 4.79 1.16
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Less distributions from:
Net investment income -- -- -- -- --
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Net realized gains on investments (1.60) (1.98) (0.26) (0.46) --
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Net asset value, end of period $ 25.14 $ 23.30 $ 18.01 $ 17.99 $ 13.66
===================================== =========== =========== =========== =========== ============
TOTAL RETURN(C): 15.77% 42.00% 1.39% 35.37% 9.28%
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 14,350 $ 12,204 $ 13,115 $ 4,274 $ 2,121
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Ratios to average net assets:
Net expenses after expense
reimbursement(d) 1.23% 1.22% 1.25% 1.23% 1.24%
- ------------------------------------ ----------- ----------- ----------- ----------- ------------
Gross expenses prior to expense
reimbursement(d) 1.31% 1.95% 1.84% 2.84% 3.52%
- ------------------------------------ ----------- ----------- ----------- ----------- ------------
Net investment income (loss) after
expense reimbursement(d) (0.71)% (0.97)% (0.69)% (0.57)% (0.33)%
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
Portfolio turnover 154% 200% 153% 114% 98%
- ------------------------------------- ----------- ----------- ----------- ----------- ------------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc. became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of dividends and capital
gain distributions at net asset value and excluding the deduction of sales
charges. Total return for less than one year is not annualized.
(d) Annualized
43
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995(b)
June 30, ---------------------------------------- to March 31,
1999(a) 1999 1998 1997 1996
-------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.27 $ 13.19 $ 14.16 $ 12.50
- --------------------------------------------- -------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) (0.15) 0.03 (0.07) (0.03)
- --------------------------------------------- -------- ----------- ----------- -----------
Net realized and unrealized gains (loss)
on investments 0.22 6.16 (0.77) 1.69
- --------------------------------------------- -------- ----------- ----------- -----------
Total from investment operations 0.07 6.19 (0.84) 1.66
- --------------------------------------------- -------- ----------- ----------- -----------
Less distributions from:
Net investment income -- -- -- --
- --------------------------------------------- -------- ----------- ----------- -----------
Net realized gains on investments (0.78) (0.11) (0.13) --
- --------------------------------------------- -------- ----------- ----------- -----------
Net asset value, end of period $ 18.56 $ 19.27 $ 13.19 $ 14.16
============================================= ======== =========== =========== ===========
TOTAL RETURN(C): 0.96% 47.01% (6.03)% 13.28%
- --------------------------------------------- -------- ----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 9,107 $ 12,508 $ 1,013 $ 314
- --------------------------------------------- -------- ----------- ----------- -----------
Ratio to average net assets,
Net expenses after expense reimbursement(d) 1.53% 1.52% 1.51% 1.49%
- --------------------------------------------- -------- ----------- ----------- -----------
Gross expenses prior to expense
reimbursement(d) 1.63% 2.39% 10.79% 37.86%
- -------------------------------------------- -------- ----------- ----------- -----------
Net investment income (loss)
after expense reimbursement(d) 0.97% (1.52)% (1.02)% (1.05)%
- --------------------------------------------- -------- ----------- ----------- -----------
Portfolio turnover 90% 92% 113% 130%
- --------------------------------------------- -------- ----------- ----------- -----------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
44
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995(b)
June 30, ---------------------------------------- to March 31,
1999(a) 1999 1998 1997 1996
-------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.63 $ 15.00 $ 13.27 $ 12.50
- --------------------------------------------- ----------- ----------- ----------- -------------
Income from investment operations:
Net investment income (loss) 0.22 (0.11) 0.01 (0.04)
- --------------------------------------------- ----------- ----------- ----------- -------------
Net realized and unrealized gains (loss)
on investments 6.15 5.29 1.72 0.81
- --------------------------------------------- ----------- ----------- ----------- -------------
Total from investment operations 6.37 5.18 1.73 0.77
- --------------------------------------------- ----------- ----------- ----------- -------------
Less distributions from:
Net investment income (0.15) -- -- --
- --------------------------------------------- ----------- ----------- ----------- -------------
Net realized gains (loss) on investments (1.26) (0.55) -- --
- --------------------------------------------- ----------- ----------- ----------- -------------
Net asset value, end of period $ 24.59 $ 19.63 $ 15.00 $ 13.27
============================================= =========== =========== =========== =============
TOTAL RETURN(C): 33.97% 35.11% 12.87% 6.32%
- --------------------------------------------- ----------- ----------- ----------- -------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 7,320 $ 645 $ 642 $ 1
- --------------------------------------------- ----------- ----------- ----------- -------------
Ratios to average net assets:
Net expenses after expense reimbursement(d) 1.59% 1.61% 1.61% 1.60%
- --------------------------------------------- ----------- ----------- ----------- -------------
Gross expenses prior to expense
reimbursement(d) 1.76% 3.75% 34.99% 3,232.53%
- -------------------------------------------- ----------- ----------- ----------- -------------
Net investment income (loss)
after expense reimbursement(d) (0.17)% (0.47)% (0.91)% (0.50)%
- --------------------------------------------- ----------- ----------- ----------- -------------
Portfolio turnover 247% 202% 182% 132%
- --------------------------------------------- ----------- ----------- ----------- -------------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
45
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL CORE
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months February 28,
Ended Year Ended March 31, 1997(a)
June 30, --------------------------- to March 31,
1999(b) 1999 1998 1997
-------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.43 $ 12.75 $ 12.50
- ---------------------------------------------- ----------- ----------- ----------
Income from investment operations:
Net investment income (loss) 0.09 (0.04) --
- ---------------------------------------------- ----------- ----------- ----------
Net realized and unrealized gains
on investments 0.97 4.72 0.25
- ---------------------------------------------- ----------- ----------- ----------
Total from investment operations 1.06 4.68 0.25
- ---------------------------------------------- ----------- ----------- ----------
Less distributions from:
Net investment income (0.13) -- --
- ---------------------------------------------- ----------- ----------- ----------
Net realized on investments gains -- -- --
- ---------------------------------------------- ----------- ----------- ----------
Net asset value, end of period $ 18.36 $ 17.43 $ 12.75
============================================== =========== =========== ==========
TOTAL RETURN(C): 6.11% 36.63% 2.00%
- ---------------------------------------------- ----------- ----------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 11,268 $ 1,719 $ 1
- ---------------------------------------------- ----------- ----------- ----------
Ratios to average net assets:
Net expenses after expenses reimbursement(d) 1.63% 1.66% 0.00%
- ---------------------------------------------- ----------- ----------- ----------
Gross expenses prior to expense
reimbursement(d) 1.87% 3.18% 2,667.07%
- --------------------------------------------- ----------- ----------- ----------
Net investment income (loss)
after expense reimbursement(d) (0.27)% (0.47)% 0.00%
- ---------------------------------------------- ----------- ----------- ----------
Portfolio turnover 214% 274% 76%
- ---------------------------------------------- ----------- ----------- ----------
</TABLE>
(a) Commencement of offering shares.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
46
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995(b)
June 30, ----------------------------------------- to March 31,
1999(c) 1999 1998 1997 1996
-------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.18 $ 14.01 $ 13.52 $ 12.50
- --------------------------------------------- ----------- ------------ ----------- ---------
Income from investment operations:
Net investment income (loss) (0.02) 0.05 (0.06) 0.01
- --------------------------------------------- ----------- ------------ ----------- ---------
Net realized and unrealized gains (losses)
on investments 3.36 5.12 2.01 1.01
- --------------------------------------------- ----------- ------------ ----------- ---------
Total from investment operations 3.34 5.17 1.95 1.02
- --------------------------------------------- ----------- ------------ ----------- ---------
Less distributions from:
Net investment income (0.09) -- -- --
- --------------------------------------------- ----------- ------------ ----------- ---------
Net realized gains on investments (0.20) -- (1.46) --
- --------------------------------------------- ----------- ------------ ----------- ---------
Net asset value, end of period $ 22.23 $ 19.18 $ 14.01 $ 13.52
============================================= =========== ============ =========== =========
TOTAL RETURN(D): 17.61% 36.90% 15.03% 8.16%
- --------------------------------------------- ----------- ------------ ----------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 32,819 $ 8,810 $ 42 $ 19
- --------------------------------------------- ----------- ------------ ----------- ---------
Ratio to average net assets:
Net expenses after expense reimbursement(d) 1.65% 1.66% 1.66% 1.65%
- --------------------------------------------- ----------- ------------ ----------- ---------
Gross expenses prior to expense
reimbursement(d) 1.80% 6.15% 151.33% 531.72%
- -------------------------------------------- ----------- ------------ ----------- ---------
Net investment income (loss)
after expense reimbursement(d) (0.50)% (0.43)% (0.64)% 0.33%
- --------------------------------------------- ----------- ------------ ----------- ---------
Portfolio turnover 146% 198% 206% 141%
- --------------------------------------------- ----------- ------------ ----------- ---------
</TABLE>
(a) Commencement of offering shares.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
47
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995(b)
June 30, --------------------------------------- to March 31,
1999(c) 1999 1998 1997 1996
-------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.76 $ 16.47 $ 13.18 $ 12.50
- --------------------------------------------- ----------- -------- ----------- ---------
Income from investment operations:
Net investment income (loss) (0.01) 0.07 (0.04) 0.01
- --------------------------------------------- ----------- -------- ----------- ---------
Net realized and unrealized gains (loss)
on investments (3.78) 1.33 3.37 0.67
- --------------------------------------------- ----------- -------- ----------- ---------
Total from investment operations $ (3.79) $ 1.40 $ 3.33 $ 0.68
- --------------------------------------------- ----------- -------- ----------- ---------
Less distributions from:
Net investment income (0.18) -- -- --
- --------------------------------------------- ----------- -------- ----------- ---------
Net realized gains on investments -- (0.11) (0.04) --
- --------------------------------------------- ----------- -------- ----------- ---------
Net asset value, end of period $ 13.79 $ 17.76 $ 16.47 $ 13.18
============================================= =========== ======== =========== =========
TOTAL RETURN(D): (21.42)% 8.60% 25.29% 5.44%
- --------------------------------------------- ----------- -------- ----------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 53,125 $ 46,711 $ 8,660 $ 350
- --------------------------------------------- ----------- -------- ----------- ---------
Ratio to average net assets:
Net expenses after expense reimbursement(d) 1.94% 1.91% 1.91% 1.90%
- --------------------------------------------- ----------- -------- ----------- ---------
Gross expenses prior to expense
reimbursement(d) 2.23% 2.43% 4.20% 44.24%
- -------------------------------------------- ----------- -------- ----------- ---------
Net investment income (loss)
after expense reimbursement(d) (0.01)% 1.06% (0.87)% 0.47%
- --------------------------------------------- ----------- -------- ----------- ---------
Portfolio turnover 213% 243% 176% 118%
- --------------------------------------------- ----------- -------- ----------- ---------
</TABLE>
(a) Commencement of offering shares.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
48
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months July 27,
Ended 1998(a)
June 30, to March 31,
1999(b) 1999
-------------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.43
- ------------------------------------------------------------- --------
Income from investment operations:
Net investment income (loss) 0.48
- ------------------------------------------------------------- --------
Net realized and unrealized gains (loss) on investments (0.04)
- ------------------------------------------------------------- --------
Total from investment operations 0.44
- ------------------------------------------------------------- --------
Less distributions from:
Net investment income (0.50)
- ------------------------------------------------------------- --------
Net realized gains on investments (0.11)
- ------------------------------------------------------------- --------
Net asset value, end of period $ 12.26
============================================================= ========
TOTAL RETURN(C): 5.78%
- ------------------------------------------------------------- --------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 314
- ------------------------------------------------------------- --------
Ratio of expenses to average net assets:
Net expenses, after expense reimbursement(d) 0.69%
- ------------------------------------------------------------- --------
Gross expenses prior to expense reimbursement(d) 1.74%
- ------------------------------------------------------------- --------
Net investment income (loss) after expense reimbursement(d) 6.03%
- ------------------------------------------------------------- --------
Portfolio turnover 274%
- ------------------------------------------------------------- --------
</TABLE>
(a) The Fund commenced operations on July 27, 1998.
(b) Effective May 24, 1999, Pilgrim Investment Inc. became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(d) Annualized
49
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For period ended June 30, 1999, the information in the table has been audited by
KPMG LLP, independent auditors.
<TABLE>
<CAPTION>
From June 17
thru June 30,
1999(a)
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)
- ---------------------------------------------------------------------------
Net realized and unrealized gains (loss)
on investments
- ---------------------------------------------------------------------------
Total from investment operations
- ---------------------------------------------------------------------------
Less distributions from:
Net investment income
- ---------------------------------------------------------------------------
Realized capital gains
- ---------------------------------------------------------------------------
Net asset value, end of period
===========================================================================
TOTAL RETURN(B):
- ---------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's)
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement(c)
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets, before expense reimbursement(c)
- ---------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets, after expense
- ---------------------------------------------------------------------------
reimbursement(c)
- ---------------------------------------------------------------------------
Portfolio turnover
- ---------------------------------------------------------------------------
</TABLE>
(a) Commencement of offering of shares
(b) Total return is calculated assuming reinvestment of all dividends and
capital gains distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) Annualized.
50
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND II
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months Year March 27,
Ended Ended 1998(a)
June 30, March 31, to March 31,
1999 1999 1998
-------------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.72 $ 12.70
- --------------------------------------------- -------- ---------
Income from investment operations:
Net investment income (loss) 1.16 0.01
- --------------------------------------------- -------- ---------
Net realized and unrealized gains (loss)
on securities and foreign currency (1.01) 0.01
- --------------------------------------------- -------- ---------
Total from investment operations 0.15 0.02
- --------------------------------------------- -------- ---------
Less distributions from:
Net investment income (1.19) --
- --------------------------------------------- -------- ---------
Net asset value, end of period $ 11.68 $ 12.72
============================================= ======== =========
TOTAL RETURN(C): 1.40% 0.16%
- --------------------------------------------- -------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 6,502 $ 567
- --------------------------------------------- -------- ---------
Ratio to average net assets:
Net expenses after expense reimbursement(d) 0.87% 0.97%
- --------------------------------------------- -------- ---------
Gross expenses prior to
expense reimbursement(2) 1.28% 0.97%
- --------------------------------------------- -------- ---------
Net investment income (loss)
after expense reimbursement(d) 10.01% 7.53%
- --------------------------------------------- -------- ---------
Portfolio turnover 242% 484%
- --------------------------------------------- -------- ---------
</TABLE>
(a) The Fund commenced operations on March 27, 1998.
(b) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(c) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(d) Annualized
51
<PAGE>
EQUITY &
INCOME FUNDS
PILGRIM
BALANCED
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995 to
June 30, ----------------------------------------- March 31,
1999(a) 1999 1998 1997 1996
-------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.48 $ 13.42 $ 12.69 $ 12.50
- ----------------------------------------- -------- ---------- -------- ----------
Income from investment operations:
Net investment income 0.44 0.30 0.24 0.15
- ----------------------------------------- -------- ---------- -------- ----------
Net realized and unrealized gains
on investments 2.50 5.07 0.73 0.19
- ----------------------------------------- -------- ---------- -------- ----------
Total from investment operations 2.94 5.37 0.97 0.34
- ----------------------------------------- -------- ---------- -------- ----------
Less distributions from:
Net investment income (0.50) (0.31) (0.24) (0.15)
- ----------------------------------------- -------- ---------- -------- ----------
Net realized gains on investments (2.07) -- -- --
- ----------------------------------------- -------- ---------- -------- ----------
Net asset value, end of period $ 18.85 $ 18.48 $ 13.42 $ 12.69
========================================= ======== ========== ======== ==========
TOTAL RETURN(C): 17.49% 40.21% 7.60% 2.77%
- ----------------------------------------- -------- ---------- -------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 176 $ 166 $ 73 $ 1
- ----------------------------------------- -------- ---------- -------- ----------
Ratio to average net assets:
Net expenses after expense
reimbursement(d) 1.25% 1.26% 1.26% 1.25%
- ---------------------------------------- -------- ---------- -------- ----------
Gross expenses prior to
expense reimbursement(d) 1.63% 11.28% 126.75% 3,094.48%
- ----------------------------------------- -------- ---------- -------- ----------
Net investment income (loss)
after expense reimbursement(d) 2.41% 4.09% 2.15% 2.16%
- ----------------------------------------- -------- ---------- -------- ----------
Portfolio turnover 165% 260% 213% 197%
- ----------------------------------------- -------- ---------- -------- ----------
</TABLE>
(a) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(b) Annualized
52
<PAGE>
EQUITY &
INCOME FUNDS
PILGRIM
CONVERTIBLE
FUND
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table has been
audited by KPMG LLP, independent auditors. For all periods ending prior to June
30, 1999, the financial information was audited by another independent auditor.
<TABLE>
<CAPTION>
Three Months August 31,
Ended Year Ended March 31, 1995(b)
June 30, --------------------------------------- to March 31,
1999(a) 1999 1998 1997 1996
-------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.47 $ 15.19 $ 13.72 $ 12.50
- --------------------------------------------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss) 0.43 0.48 0.42 0.17
- --------------------------------------------- -------- -------- -------- --------
Net realized and unrealized gains (loss)
on investments 3.09 4.19 1.50 1.22
- --------------------------------------------- -------- -------- -------- --------
Total from investment operations 3.52 4.67 1.92 1.39
- --------------------------------------------- -------- -------- -------- --------
Less distributions from:
Net investment income (0.46) (0.48) (0.42) (0.17)
- --------------------------------------------- -------- -------- -------- --------
Net realized gains on investments gains (0.31) (0.91) (0.03) --
- --------------------------------------------- -------- -------- -------- --------
Net asset value, end of period $ 21.22 $ 18.47 $ 15.19 $ 13.72
============================================= ======== ======== ======== ========
TOTAL RETURN(C): 19.66% 31.54% 14.13% 11.13%
- --------------------------------------------- -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 8,741 $ 7,080 $ 4,599 $ 1,085
- --------------------------------------------- -------- -------- -------- --------
Ratio to average net assets,
Net expenses after expense reimbursement(d) 1.23% 1.22% 1.25% 1.25%
- --------------------------------------------- -------- -------- -------- --------
Gross expenses prior to
expense reimbursement(d) 1.35% 2.35% 2.90% 9.21%
- --------------------------------------------- -------- -------- -------- --------
Net investment income (loss)
after expense reimbursement(d) 2.37% 5.99% 3.29% 3.59%
- --------------------------------------------- -------- -------- -------- --------
Portfolio turnover 138% 160% 167% 145%
- --------------------------------------------- -------- -------- -------- --------
</TABLE>
(a) Effective May 24, 1999, Pilgrim Investment Inc., became the Investment
Manager of the Fund, concurrently Nicholas-Applegate Capital Management was
appointed as sub-advisor.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
53
<PAGE>
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' 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 each 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
Funds' Shareholder Servicing Agent at:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
Please contact the Funds' Shareholder Servicing Agent with any questions you may
have about the Funds.
You can also obtain information about the Funds from the SEC's Public Reference
Room (1-800-SEC-0330). Reports and other information about the Funds may be
obtained at the SEC's Internet site at www.sec.gov, and copies of this
information may be obtained, upon payment of a duplication fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
The SEC may charge you a fee for this information.
SEC file numbers: 811-7428
Prospectus
MMPROS&C1199-110199 November 1, 1999
<PAGE>
Prospectus
Classes: B and C
November 1, 1999
PILGRIM MONEY MARKET FUND
This prospectus contains important information about 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 truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page
----
PILGRIM MONEY MARKET FUND .................................... 2
FEES AND EXPENSES ............................................. 4
SHAREHOLDER GUIDE
Choosing a Share Class -- Pilgrim Purchase Options(TM)...... 6
How to Purchase Shares...................................... 7
How to Redeem Shares ....................................... 8
Transaction Policies ....................................... 9
Distribution and Shareholder Service Fees................... 10
MANAGEMENT OF THE FUND
Adviser..................................................... 11
DIVIDENDS, DISTRIBUTIONS AND TAXES............................. 12
MORE INFORMATION ABOUT RISKS................................... 13
1
<PAGE>
Pilgrim
Money
Market
Fund
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE:
The Fund seeks to provide as high a level of current income as is consistent
with the preservation of capital and liquidity.
ADVISER:
PILGRIM INVESTMENTS, INC.
Since the Fund invests substantially all of its assets in another investment
company, the Fund could be considered a feeder fund in an arrangement resembling
a master/feeder structure.
The Fund invests all of its assets in Class A shares of the Primary
Institutional Fund, a series of Reserve Institutional Trust, a registered
open-end management investment company, rather than directly in a portfolio of
securities. In turn, the Primary Institutional Fund seeks to provide as high a
level of current income as is consistent with the preservation of capital and
liquidity. This structure is different from that of other Pilgrim Funds and many
other investment companies, which directly acquire and manage their own
portfolio of securities.
The Primary Institutional Fund seeks to achieve its investment objective by
investing in instruments issued by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"); deposit-type obligations, such
as negotiable certificates of deposit and time deposits, bankers' acceptances
and letters of credit of domestic, foreign banks and foreign branches of foreign
banks, savings and loan associations and savings banks; other short-term
instruments of similar quality; and instruments fully collateralized by such
obligations.
The Primary Institutional Fund may invest in obligations of U.S. banking
institutions that are insured by the Federal Deposit Insurance Corporation. The
Primary Institutional Fund may also invest in obligations of foreign branches of
both U.S. banks and foreign banks (Eurodollars). Investment in foreign banks
will be limited to those located in Australia, Canada, Western Europe and Japan
and which, at the time of investment, have more than $25 billion (or the
equivalent in other currencies) in total assets and which, in the opinion of the
Primary Institutional Fund's investment adviser, are of comparable quality to
the obligations of U.S. banks which may be purchased by the Primary
Institutional Fund. The Primary Institutional Fund may also invest in municipal
obligations, the interest on which is not exempt from federal income taxation.
The Primary Institutional Fund may also engage in repurchase agreements and
periodically lend securities on a short-term basis to banks, brokers and dealers
(but not individuals) and receive as collateral cash or securities issued by the
U.S. Government or its agencies or instrumentalities (or any combination
thereof). The value of the securities loaned cannot exceed 25% of the Primary
Institutional Fund's total assets.
The Primary Institutional Fund may invest, without limitation, in U.S.
Government Securities and in instruments secured or collateralized by U.S.
Government Securities. The Primary Institutional Fund will not invest more than
10% of its net assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven (7) days after notice and will not
concentrate more than 25% of its total assets in securities of issuers in a
single industry, except that it may invest more than 25% of its assets in bank
obligations. In addition, the Primary Institutional Fund will not invest more
than 5% of its assets in the securities of any single issuer (except U.S.
Government Securities or repurchase agreements). The Primary Institutional Fund
may borrow money for extraordinary or emergency purposes but not in an amount
exceeding 5% of its total assets.
The Primary Institutional Fund uses the amortized cost method of valuation to
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.
Investment of the Fund's assets in the Class A shares of the Primary
Institutional Fund is not a fundamental policy of the Fund and a shareholder
vote is not required for the Fund to withdraw its investment in the Primary
Institutional Fund.
- --------------------------------------------------------------------------------
2
<PAGE>
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.
The Fund may be affected by these other risks by virtue of its investment in the
Primary Institutional 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 90 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.
U.S. GOVERNMENT SECURITIES -- some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government Securities
may be subject to price declines in the securities due to changing interest
rates. If an obligation, such as obligations issued by the Federal National
Mortgage Association, the Student Loan Marketing Association, the Federal Home
Loan Bank and the Federal Home Loan Mortgage Corporation is supported only by
the credit of the agency or instrumentality issuing the obligation, the investor
must look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. Securities directly supported by the full faith and credit
of the United States have less credit risk.
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.
RISKS OF FOREIGN INVESTING -- to the extent the Primary Institutional Fund
invests in letters of credit and other deposit-type obligations of foreign banks
and foreign branches of foreign banks, foreign investments may be riskier than
U.S. investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure banks and foreign
controls on investment.
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.
SECURITIES LENDING -- loans of securities involve risks of delay in receiving
additional collateral or in recovering the securities lent or even loss of
rights to the collateral in the event of insolvency of the borrower of the
securities.
PERFORMANCE
The fund commenced operations on July 1, 1999, there are no annual returns to
report at this time.
- --------------------------------------------------------------------------------
3
<PAGE>
Fees and
Expenses
- --------------------------------------------------------------------------------
The following tables(1) show what it will cost you directly or indirectly to
invest in the Fund. The shareholder transaction fees and annual fund operating
expenses for the Money Market Fund are high in relation to the expenses of many
other money market funds. Shareholders should consider whether this Fund should
be a long-term investment. It is intended as a temporary investment vehicle for
investors pursuing a short-term defensive strategy.
SHAREHOLDER TRANSACTION FEES
(fees paid directly from your investment)
- --------------------------------------------------------------------------------
Class B Class C
------- -------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) None None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of original purchase
price or redemption proceeds) 5.00%(2) 1.00%(3)
Exchange Fee None None
- --------------------------------------------------------------------------------
1 The tables reflect the expenses of both the Fund and the Class A shares of
the Primary Institutional Fund in which it invests.
2 Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
3 Imposed upon redemption within 1 year from purchase.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)(1)
Distribution
Management and Service Other Annual Fund
Class Fees(2) (12b-1) Fees Expenses(3) Operating Expenses(4)
- ----- ------- ------------ ----------- ---------------------
Class B 0.25% 1.00% 0.75% 2.00%
- --------------------------------------------------------------------------------
Class C 0.25% 1.00% 0.75% 2.00%
- --------------------------------------------------------------------------------
1 Shown as a ratio of expenses to average daily net assets. The Fund is new,
and therefore, has no historical expense data. Thus, the numbers are
estimates.
2 The Primary Institutional Fund charges a comprehensive annual management
fee of 0.25% of average daily net assets for both advisory and ordinary
operating expenses. Pursuant to its investment advisory agreement with the
Fund, Pilgrim Investments. Inc. charges a maximum annual advisory fee equal
to 0.50% of average daily net assets if the Fund does not invest
substantially all of its assets in another investment company. Pursuant to
the Fund's investment advisory agreement, if the Fund invests substantially
all of its assets in another investment company, Pilgrim Investments, Inc.
does not charge an advisory fee. The Fund anticipates investing
substantially all of its assets in another investment company for at least
the Fund's initial fiscal year.
3 Pilgrim Investments, Inc. receives an annual administration fee equal to
0.25% of average daily net assets.
4 Pursuant to an expense limitation agreement between Pilgrim Investments,
Inc. and Pilgrim Mutual Funds, on behalf of the Fund, Pilgrim Investments,
Inc. will limit expenses of the Fund to 2.25% of average daily net assets
for Classes B and C, excluding interest, taxes, brokerage, and
extraordinary expenses, subject to possible reimbursement to Pilgrim
Investments, Inc. within three years. The expense limit will continue until
at least October 31, 2001.
- --------------------------------------------------------------------------------
4
<PAGE>
Fees and
Expenses
- --------------------------------------------------------------------------------
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 remain the
same. The examples reflect expenses of both the Fund and the Class A shares of
the Primary Institutional Fund in which it invests. The example is for
comparison only, and does not represent the Fund's actual expenses and returns,
either past or future.
MONEY MARKET FUND
Assuming you redeem at the Assuming you do not redeem
end of each time period. at the end of each time period.
------------------------ -------------------------------
1 year 3 years 1 year 3 years
------ ------- ------ -------
Class B $703 $927 $203 $627
- --------------------------------------------------------------------------------
Class C $303 $627 $203 $627
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
Shareholder
Guide
Choosing A Share Class
- --------------------------------------------------------------------------------
PILGRIM PURCHASE OPTIONS (TM)
You may select from two separate classes of shares of the Fund: Class B and
Class C.
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.
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.
SALES CHARGE CALCULATION
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.
* 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. This
privilege can be used only once per calendar year. If you want to use the
Reinstatement Privilege, contact your financial representative or the
Shareholder Servicing Agent. Consult the Statement of Additional Information for
more information.
- --------------------------------------------------------------------------------
6
<PAGE>
How to Purchase Shares
- --------------------------------------------------------------------------------
The minimum initial investment amounts are as follows:
* Non-retirement accounts: $1,000
* Retirement accounts: $250
* Pre-Authorized Investment Plan: $100 to open; you must invest at least $100
a month
The minimum additional investment is $100
Make your investment using the table on the right.
The 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
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (`IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment Visit or consult an
Your Investment professional with an investment professional.
Professional authorized firm can
help you establish Fill out the Account
and maintain your Additions form included
account. on the bottom of your
account statement along
By Mail Visit or consult an with your check payable
investment to the Fund and mail them
professional. in the envelope provided
with the account
Make your check payable statement
to the Pilgrim Funds and
mail it, along with a Remember to write. your
completed Application. account number on the
Please indicate your check.
investment professional
on the New Account
Application
By Wire Call the Pilgrim Wire the funds in the
Operations Department at same manner described
(800) 336-3436 to obtain under "Initial
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
- --------------------------------------------------------------------------------
7
<PAGE>
Shareholder
Guide
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem shares using the table on the right:
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from
your account on a regular basis.
* Your account must have a current value of at least $10,000.
* Minimum withdrawal amount is $100.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, the Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder.
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your
Investment Professional investment professional. Investment
professionals may charge for their
services in connection with your
redemption request, but neither the Fund
nor the Distributor imposes any such
charge.
By Mail Send a written request specifying the
Fund name and share class, your account
number, the name(s) in which the account
is registered, and the dollar value or
number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 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 --
Expedited Redemption You may redeem shares by telephone on
all accounts other than retirement
accounts, unless you check the box on
the Account Application which signifies
that you do not wish to use telephone
redemptions. To redeem by telephone,
call the Shareholder Servicing Agent at
(800) 992-0180.
Receiving Proceeds By Check:
You may have redemption proceeds (up to
a maximum of $100,000) mailed to an
address which has been on record with
Pilgrim Funds for at least 30 days.
Receiving Proceeds By Wire:
You may have redemption proceeds
(subject to a minimum of $5,000) wired
to your pre-designated bank account.
You will not be able to receive
redemption proceeds by wire unless you
check the box on the Account Application
which signifies that you wish to receive
redemption proceeds by wire and attach a
voided check.
Under normal circumstances, proceeds
will be transmitted to your bank on the
business day following receipt of your
instructions, provided redemptions may
be made.
- --------------------------------------------------------------------------------
8
<PAGE>
Shareholder
Guide
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. The Fund's investment in the Class A shares of the Primary Institutional
Fund is valued at the NAV of the Primary Institutional Fund's Class A shares
held by the Fund. Primary Institutional Fund calculates the NAV of its shares on
the same day and at about the same time as the Fund. Net asset value per share
of the Class A shares of the Primary Institutional Fund is computed by taking
the sum of the value of the Primary Institutional Fund's investments (amortized
cost value is used for this purpose) and any cash or other assets attributable
to Class A, subtracting liabilities attributable to Class A and dividing by the
total number of Class A Primary Institutional Fund shares outstanding. The per
share NAV of Class B and Class C of the Fund is calculated by dividing each
Class's NAV by the number of Class 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 the Primary
Institutional Fund uses the amortized cost method of valuing the securities held
by it and rounds its per share net asset value to the nearest whole cent, it is
anticipated that the net asset value of Primary Institutional Fund will remain
constant at $1.00 per share. However, the Fund makes no assurance that either it
or the Primary Institutional Fund can maintain a $1.00 net asset value per
share.
PRICE OF SHARES. When you buy shares, you pay the NAV. When you sell shares,
you receive the NAV minus any applicable deferred sales charge. Exchange orders
are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "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
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.
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.
EXCHANGES. You may exchange shares of the Fund for shares of the same class of
any other Pilgrim Fund without paying any additional sales charge. 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
- --------------------------------------------------------------------------------
9
<PAGE>
Shareholder
Guide
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
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. The
Fund may change or cancel its exchange policies at any time, upon 60 days
written notice to shareholders.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the 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, other than as a result of a decline in the NAV per share.
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 Service Fee
---------------- -----------
Class B(1) 0.75% 0.25%
Class C(1) 0.75% 0.25%
1 Amounts payable under the Fund's plan are reduced by any amounts received
by Pilgrim Securities, Inc. or its affiliates from the adviser or
distributor of the Fund in which it invests substantially all of its
assets. If the Fund does not invest substantially all of its assets in
another investment company or receive any amounts pursuant to the previous
sentence, the Fund will pay the full distribution fee. Currently, the Fund
pays the full distribution fee.
- --------------------------------------------------------------------------------
10
<PAGE>
Management
of the Fund
ADVISER
- --------------------------------------------------------------------------------
Pilgrim Investments, Inc. has overall responsibility for the management of the
Fund. Pilgrim Investments, Inc. 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. Pilgrim
Investments, Inc. charges an investment advisory fee equal to 0.50% of average
net assets if the Fund does not invest substantially all of its assets in
another investment company; otherwise Pilgrim Investments, Inc. does not charge
an advisory fee.
Organized in December 1994, Pilgrim Investments, Inc. is registered as an
investment adviser with the Securities and Exchange Commission. As of September
30, 1999, Pilgrim Investments managed over $ billion in assets. Pilgrim
Investments is an indirect, wholly owned subsidiary of ReliaStar Financial
Corp. (NYSE: RLR). Through its subsidiaries, offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education.
The Fund invests all of its assets in Class A shares of the Primary
Institutional Fund, another registered management investment company. The
Investment Adviser for the Primary Institutional Fund is Reserve Management
Company, Inc., located at 1250 Broadway, 32nd Floor, New York, NY 10001-3701.
Primary Institutional Fund pays Reserve Management Company, Inc. a comprehensive
management fee calculated on an annual basis at 0.25% of the Primary
Institutional Fund's average daily net assets. Under the terms of the Investment
Management Agreement, Reserve Management Company, Inc. manages the Primary
Institutional Fund and invests in furtherance of its objectives and policies
subject to the overall control and direction of Reserve Institutional Trust's
Board of Trustees. In addition, under the terms of the Investment Management
Agreement, Reserve Management Company, Inc. pays all employee and ordinary
operating costs of the Primary Institutional Fund (excluding interest, taxes,
brokerage fees, extraordinary legal and accounting fees and expenses, and fees
for Trustees who are not "interested persons" of Reserve Institutional Trust (as
defined in the 1940 Act)).
- --------------------------------------------------------------------------------
11
<PAGE>
Dividends,
Distributions
and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS
The Fund generally distributes most or all of its net earnings in the form of
dividends. The Fund declares dividends daily and pays them monthly.
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 B or C shares of the Fund invested in another Pilgrim Fund which
offers the same class of 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 on 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 is not expected that the Fund will make capital
gains distributions. 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.
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.
- --------------------------------------------------------------------------------
12
<PAGE>
More
Information
About
Risks
- --------------------------------------------------------------------------------
To the extent that the Fund invests in the Class A shares of the Primary
Institutional Fund, it will be indirectly exposed to the following techniques
and risks based on the Class A shares of Primary Institutional Fund's
investments:
BORROWING. The Primary Institutional Fund may borrow up to 5% of its total
assets for emergency purposes. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of the Primary Institutional Fund, and money borrowed will be subject to
interest costs. Interest costs on borrowings may fluctuate with changing market
rates of interest and may partially offset or exceed the return earned on
borrowed funds.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
- --------------------------------------------------------------------------------
13
<PAGE>
More
Information
About
Risks
- --------------------------------------------------------------------------------
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 Primary Institutional 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,
Inc. 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 the Primary Institutional 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',
the Primary Institutional 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. Foreign issuers may be more susceptible to risks
associated with the Year 2000 Problem than domestic issuers.
- --------------------------------------------------------------------------------
14
<PAGE>
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' 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 each 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
Funds' Shareholder Servicing Agent at:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
Please contact the Funds' Shareholder Servicing Agent with any questions you may
have about the Funds.
You can also obtain information about the Funds from the SEC's Public Reference
Room (1-800-SEC-0330). Reports and other information about the Funds may be
obtained at the SEC's Internet site at www.sec.gov, and copies of this
information may be obtained, upon payment of a duplication fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
The SEC may charge you a fee for this information.
SEC file numbers: 811-7428
SEC file numbers: 811-9040 (Pilgrim Advisory Funds, Inc.), 811-4031 (Pilgrim
Government Securities Income Fund, Inc.), 811-1939 (Pilgrim Investment Funds,
Inc.), 811-4504 (Pilgrim Bank and Thrift Fund, Inc.), 811-7428 (Pilgrim Mutual
Funds)
Prospectus
PROS1199-110199 November 1, 1999
<PAGE>
PILGRIM MUTUAL FUNDS
40 North Central Avenue
Phoenix, Arizona 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
November 1, 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 ("International Core Growth Fund");
Pilgrim Worldwide Growth Fund ("Worldwide Growth Fund"); Pilgrim International
SmallCap Growth Fund ("International SmallCap Growth Fund"); Pilgrim Emerging
Countries Fund ("Emerging Countries Fund"); Pilgrim LargeCap Growth Fund
("LargeCap Growth Fund"); Pilgrim MidCap Growth Fund ("MidCap Growth Fund");
Pilgrim SmallCap Growth Fund ("SmallCap Growth Fund"); Pilgrim Convertible Fund
("Convertible Fund"); Pilgrim Balanced Fund ("Balanced Fund"); Pilgrim High
Yield Fund II ("High Yield Fund II"), Pilgrim Strategic Income Fund ("Strategic
Income Fund") and Pilgrim Money Market Fund ("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' June 30, 1999 Annual Reports are
incorporated herein by reference (excluding the Money Market Fund which is newly
organized). Copies of the Funds' Prospectus and Annual Reports may be obtained
without charge by contacting the Trust at the address and phone number written
above.
TABLE OF CONTENTS
General Information..........................................................B-2
Management Of The Funds......................................................B-3
Investment Objectives, Policies And Risks...................................B-21
Investment Restrictions.....................................................B-51
Portfolio Transactions......................................................B-54
Additional Purchase And Redemption Information..............................B-57
Determination Of Share Price................................................B-63
Shareholder Information.....................................................B-64
Shareholder Services And Privileges.........................................B-65
Distributions...............................................................B-68
Tax Considerations..........................................................B-68
Calculation Of Performance Data.............................................B-74
General Information.........................................................B-79
Financial Statements........................................................B-80
B-1
<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 a newly organized
series of the Trust. All of the Funds except the Money Market Fund consist of
four classes of shares, Class A, B, C and Q. The Money Market Fund consists of
Class 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 High Quality Bond Fund
On May 24, 1999, the names of the following Funds were changed as follows:
Old Name New Name
- -------- --------
Pilgrim International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund
Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund
Pilgrim High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
B-2
<PAGE>
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").
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 59) Director. Realtor, Coldwell Banker Success Realty (formerly, The
Prudential Arizona Realty) for more than the last five years. Ms. Baldwin is
also Vice President, United States Olympic Committee (November 1996 - Present),
and formerly Treasurer, United States Olympic Committee (November 1992 -
November 1996). Ms. Baldwin 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 71)
Director. President of Al Burton Productions for more than the last five years;
formerly Vice President, First Run Syndication, Castle Rock Entertainment (July
1992 - November 1994). Mr. Burton is also a director and/or trustee of each of
the funds managed by the Investment Manager.
Paul S. Doherty, ________________________________. (Age 65) Director. President,
of Doherty, Wallace, Pillsbury and Murphy, P.C., Attorneys. Mr Doherty is a
Director of Tambrands, Inc. Mr. Doherty is also a director and/or trustee of
each of the funds managed by the Investment Manager.
Robert B. Goode, ________________________________. (Age 69) Director. Currently
retired. Mr. Goode was formerly Chairman of The First Reinsurance Company of
Hartford (1990-1991) and President and Director of American Skandis Life
Assurance Company (1987-1989). Mr. Goode is also a director and/or trustee of
each of the funds managed by the Investment Manager.
Alan L. Gosule, __________________________________. (Age 58) Director. Partner,
Rogers & Wells. Mr. Gosule is a Director of F.L. Putnam Investment Management
Co., Inc. Mr. Gosule is also a director and/or trustee of each of the funds
managed by the Investment Manager.
Mark Lipson, _____________________________________. (Age 59) Director. Chairman
and Chief Executive Officer of Northstar Investment Management Corporation,
Northstar Holding, Inc. and Northstar Distributors, Inc. Mr. Lipson is Director
of Northstar Administrators Corporation, Director and President of Northstar
Funding, Inc. and Trustee and President of Northstar affiliated investment
companies. Mr. Lipson was formerly the Director, President and Chief Executive
Officer of National Securities & Research Corporation and Director/Trustee and
President of the National Affiliated Investment Companies and certain of
National's subsidiaries (prior to August 1993).
Walter H. May, _______________________________________. (Age 62) Director.
Retires. Mr. May was formerly a Senior Executive for Piper Jaffray, Inc. Mr. May
is also a director and/or trustee of each of the funds managed by the Investment
Manager.
B-3
<PAGE>
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 53)
Director. Private Investor. Director of Hypercom Corporation (since January
1999); Stuart Entertainment, Inc. (since January 1999); and JDA Software Group,
Inc. (since January 1999). Mr. Patton was formerly Director of Artisoft, Inc.
(August 1994 - July 1998); President and Co-owner, 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.
David W.C. Putnam, __________________________________. (Age 59) Director.
President, Clerk and Director of F.L. Putnam Securities Company, Inc., F.L.
Putnam Investment Management Company, Inc., Trust Realty Corp. and Bow Ridge
Mining Co. Mr. Putnam is Director of Anchor Investment Management Corporation
and President and Director/Trustee of Anchor Capital Accumulation Trust, Anchor
International Bond Trust, Anchor Gold and Currency Trust, Anchor Resources and
Commodities Trust and Anchor Strategic Assets Trust. Mr. Putnam is also a
director and/or trustee of each of the funds managed by the Investment Manager..
John R. Smith, _________________________________________. (Age 76) Director.
President of New England Fiduciary Company (financial planning) (since 1991).
Mr. Smith is Chairman of Massachusetts Educational Financing Authority (since
1987), Vice Chairman of Massachusetts Health and Education Authority and
formerly Financial Vice President of Boston College (1970-1991). Mr. Smith is
also a director and/or trustee of each of the funds managed by the Investment
Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
(Age 50) 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).
*John G. Turner, _____________________________________. (Age 59) Chairman and
Chief Executive Officer of ReliaStar Financial Corp. and ReliaStar Life
Insurance Co. (since 1993); Chairman of ReliaStar United Services Life Insurance
Company and ReliaStar Life Insurance Company of New York (since 1995); Chairman
of Northern Life Insurance Company (since 1992). Director of Northstar
Investment Management Corporation and affiliates (since October 1993); Chairman
and Director/Trustee of the Northstar affiliated investment companies (since
October 1993). Mr. Turner was formerly President of ReliaStar Financial Corp.
and ReliaStar Life Insurance Co. (1991-1993), Chief Operating Officer of
ReliaStar Financial Corp. (1989-1991) and President and Chief Operating Officer
of ReliaStar Life Insurance Company (1986 to 1991).
David W. Wallace, ____________________________________. (Age 75) Director.
Chairman of Putnam Trust Company, Lone Star Industries and FECO Engineered
Systems, Inc. Mr. Wallace is President and Director/ Trustee of the Robert R.
Young Foundation, Governor of the New York Hospital and Director of UMC
Electronics and Zurn Industries, Inc. Mr. Wallace was formerly Chairman and
B-4
<PAGE>
Chief Executive Officer of Todd Shipyards and Bangor Punta Corporation and
National Securities & Research Corporation. Mr. Wallace is also a director
and/or trustee of each of the funds managed by the Investment Manager.
Each Fund pays each Director 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 Directors serve in common as directors/trustees.
CHANGE IN TRUSTEES. Except for Mary Baldwin, Al Burton, Jock Patton and Robert
Stallings, each Trustee became a Trustee of the Trust on October __, 1999. Prior
to that date but after May 24, 1999, the other two Trustees were Walter E. Auch
and John P. Burke. Prior to May 24, 1999, 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
May 24, 1999, 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 fiscal 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>
Aggregate Pension or Retirement Estimated Annual Total Compensation from
Compensation Benefits Accrued as Benefits Upon Registrant and Fund Complex
Name from Trust Part of Trust Expenses Retirement Paid to Trustee(3)
- ---- ---------- ---------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Fred C. Applegate(1) $22,000 None N/A $22,000 (1 Board)
Arthur B. Laffer(1) $18,000 None N/A $18,000 (1 Board)
Charles E. Young(1) $23,000 None N/A $23,000 (1 Board)
Dann V. Angeloff(1) $25,000 None N/A $25,000 (1 Board)
Walter E. Auch(2) $19,000 None N/A $19,000 (1 Board)
Theodore J. Coburn(1) $24,000 None N/A $24,000 (1 Board)
Darlene Deremer(1) $21,000 None N/A $21,000 (1 Board)
George F. Keane(1) $23,000 None N/A $23,000 (1 Board)
</TABLE>
- ----------
(1) Resigned as Trustee effective May 21, 1999.
(2) Resigned as Trustee effective October __, 1999
(3) Prior to May 24, 1999, the Trust was part of a different Fund complex.
Effective May 24, 1999, when Pilgrim Investments, Inc. became the
investment adviser to the Funds, the Trust joined the Pilgrim family of
funds.
The Trust has recently changed its fiscal year end to June 30. The following
table sets forth information regarding compensation of Trustees by the Trust and
other funds managed by the Trust's investment adviser for the fiscal period from
April 1, 1999 through June 30, 1999. Officers of the Trust and Trustees who are
interested persons of the Trust do not receive any compensation from the Funds.
B-5
<PAGE>
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 From Benefits Accrued as Benefits Upon Fund Complex Paid to
Name of Person, Position Pilgrim Mutual Funds Part of Fund Expenses Retirement Directors
- ------------------------ -------------------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
Walter E. Auch* $
Director/Advisory
Officer................. $ N/A N/A (3 boards)
Mary A. Baldwin(1)(2) $
Director................ $ N/A N/A (6 boards)
John P. Burke* $
Director................ $ N/A N/A (6 boards)
Al Burton(1)(2) $
Director................ $ N/A N/A (6 boards)
Jock Patton(1)(2) $
Director ............... $ N/A N/A (6 boards)
Robert W. Stallings(2)(3) $0
Director ............... $0 N/A N/A (6 boards)
</TABLE>
- ----------
* Resigned as Director effective __________, 1999.
(1) Member of the Audit Committee.
(2) Each of the current Trustees, which are identified under "Board of
Trustees" above, also serves on the Board of Directors/Trustees of Pilgrim
Advisory Funds, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim
Government Securities Income Fund, Inc., Pilgrim Investment Funds, Inc.,
Pilgrim Prime Rate Trust and Pilgrim Senior Floating Rate Trust.
(3) "Interested person," as defined in the Investment Company Act of 1940, of
the Company because of the affiliation with the Investment Manager.
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), Executive Vice President (since April
1995), and Director of Structured Finance (since April 1998), Pilgrim
Group, Inc. and Pilgrim Investments; Director (since December 1994) and
Vice Chairman (since November 1995) of Pilgrim Securities; Executive Vice
President, Assistant Secretary and Chief Credit Officer of Pilgrim Prime
Rate Trust; Executive Vice President and Assistant Secretary of each of the
other Pilgrim Funds. Chief Financial Officer (since December 1993), Vice
Chairman and Assistant Secretary (since April 1993) and former President
(May 1991 - December 1993), Pilgrim Capital (formerly Express America
Holdings Corporation). Presently serves or has served as an officer or
director of other affiliates of Pilgrim Capital.
B-6
<PAGE>
Stanley D. Vyner, Executive Vice President 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004. (Age 49) President and Chief Executive
Officer (since August 1996), Pilgrim Investments; Executive Vice President
of most of the other Pilgrim Funds (since July 1996). Formerly Chief
Executive Officer (November 1993 -December 1995) HSBC Asset Management
Americas, Inc., and Chief Executive Officer, and Actuary (May 1986 -
October 1993) HSBC Life Assurance Co.
James M. Hennessy, Executive Vice President and Secretary 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50) Executive Vice
President and Secretary (since April 1998), Pilgrim Capital (formerly
Express America Holdings Corporation), Pilgrim Group, Pilgrim Securities
and Pilgrim Investments; Executive Vice President and Secretary of each of
the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim Capital
(April 1995 - April 1998); Senior Vice President, Express America Mortgage
Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 -June 1992).
Michael J. Roland, Senior Vice President and Principal Financial Officer 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41) Senior
Vice President and Chief Financial Officer, Pilgrim Group, Pilgrim
Investments and Pilgrim Securities (since June 1998); Senior Vice President
and Principal Financial Officer of each of the other Pilgrim Funds. He
served in same capacity from January, 1995 - April, 1997. Formerly, Chief
Financial Officer of Endeaver Group (April, 1997 to June, 1998).
Robert S. Naka, Vice President and Assistant Secretary 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 36) Vice President,
Pilgrim Investments (since April 1997) and Pilgrim Group, Inc. (since
February 1997). Vice President and Assistant Secretary of each of the other
Pilgrim Funds. Formerly Assistant Vice President, Pilgrim Group, Inc.
(August 1995 - February 1997). Formerly Operations Manager, Pilgrim Group,
Inc. (April 1992 - April 1995).
Robyn L. Ichilov, Vice President and Treasurer 40 North Central Avenue,
Suite 1200, Phoenix, Arizona 85004. (Age 31) Vice President, Pilgrim
Investments (since August 1997), Accounting Manager (since November 1995).
Vice President and Treasurer of most of the other Pilgrim Funds. Formerly
Assistant Vice President and Accounting Supervisor for PaineWebber (June
1993 - April 1995).
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager 40
North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 40) Senior Vice
President, Pilgrim Investments (since July 1998). Formerly Vice President,
Pilgrim Investments (August 1995 - July 1998); Vice President, Van Kampen
America Capital (May 1987 - April 1995).
G. David Underwood, Vice President and Senior Portfolio Manager. 40 North
Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 50) Vice President,
Pilgrim Investments (since December 1996). Formerly Director of Funds
Management, First Interstate Capital Management (January 1995 - November
1996); Vice President, Director of Research and Manager of Investment
Products, Integra Trust Company (1993 - January 1995).
B-7
<PAGE>
Robert K. Kinsey, Vice President and Portfolio Manager. 40 North Central
Avenue, Suite 1200, Phoenix, AZ 85004. (Age 41) Vice President, Pilgrim
Investments (since March 1999). Formerly Vice President and Fixed Income
Portfolio Manager, Federated Investors (January 1995 - March 1999);
Principal and Portfolio Manager, Harris Investment Management (July 1992 -
January 1995).
PRINCIPAL SHAREHOLDERS. As of July 29, 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 July 29, 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:
LargeCap Growth Fund: Merrill Lynch Pierce Fenner & Smith for the Sole Benefit
of its Customers, Attn: Fund Administration, 4800 Deer Lake Drive East, 3rd
Floor, Jacksonville, Florida 32246-6484 ("MLFP&S") (31.86%), Carn & Co., Catawba
Rental Co., Retirement Savings Plan, Attn: Mutual Funds Star, P.O. Box 96211,
Washington, D.C. 20090-6211 (7.33%); Class B - MLFP&S (42.02%); Class C - MLFP&S
(57.84%); Class Q - Charles Schwab & Co., Inc., 101 Montgomery Street, 11th
Floor, San Francisco, California 94104-41122 ("Charles Schwab") (80.93%).
MidCap Growth Fund: Class A - MLFP&S (55.93%); Class B - MLFP&S (31.23%); Class
C - MLFP&S (75.69%); Class Q -Clark & Co., FBO Swedish American Hospital, P.O.
Box 39, Westerville, Ohio 43086-0039 (54.38%), Donald A. Pels, 375 Park Avenue,
Suite 3305, New York, New York 10152-3399 (16.84%).
SmallCap Growth Fund: Class A - MLFP&S (63.09%); Class B - MLFP&S (49.41%);
Class C - MLFP&S (78.63%); Class Q -Charles Schwab (19.11%), Suntrust Bank
Central Florida FBO Akerman Senterfitt & Edison, P.A. Cash or Deferred PS PL &
Trust, c/o Fascorp Recordkeeper, 8515 E. Orchard Road, Englewood, California
80111-5002 (21.45%), Suntrust Bank Central Florida FBO Hubbard Construction
Company PSP and 401K Plan, c/o Fascorp Recordkeeper, 8515 E. Orchard Road,
Englewood, California 80111-5002 (16.62%), Susan S. Rand, P.O. Box 452,
Salisbury, Connecticut 06068-0452 (11.79%).
International Core Growth Fund: Class A - MLFP&S (9.68%), PaineWebber for the
Benefit of Thomas R. Sloan, 705 Sunset Drive, Greensboro, NC 27408-6414 (9.59%);
Class B - MLFP&S (7.26%); Class C - MLFP&S (28.56%), PaineWebber for the Benefit
of Arnold I. Richman, 218 North Charles Street, Suite 500, Baltimore, Maryland
21201-4019 (9.10%); Class Q - Charles Schwab (64.37%).
Worldwide Growth Fund: Class A - MLFP&S (41.65%), Blush & Co., P.O. Box 976, New
York, New York 10268-0976 (5.63%); Class B - MLFP&S (31.55%); Class C - MLFP&S
(76.05%); Class Q - Charles Schwab (16.01%).
International SmallCap Growth Fund: Class A - MLFP&S (20.55%); Class B - MLFP&S
(22.40%); Class C - MLFP&S (31.32%); Class Q - Charles Schwab(64.61%), FTC &
Co., Attn: Datalynk #118, P.O. Box 173736, Denver, Colorado 80217-3736 (6.33%);
Capinco, c/o Firstar Bank East, P.O. Box 1787, Milwaukee, Wisconsin 53201-1787
(6.04%).
Emerging Countries Fund: Class A - MLFP&S (8.95%); Class B - MLFP&S (23.73%);
Class C - MLFP&S (40.97%); Class Q - Charles Schwab (40.10%).
Strategic Income Fund: Class A - MLFP&S (35.59%), CNA Trust Corp. Trustee FBO
Dalby Wendland & Co., P.C., P.O. Box 5024, Costa Mesa, California 92628-5024
(7.73%), Eastern Bank & Trust FBO Munksjo Paper 401K, 217 Essex Street, Salem,
B-8
<PAGE>
Massachusetts 01970-3792 (11.63%); Class B - MLFP&S (35.55%); Class C - MLFP&S
(70.66%); Class Q -Charles Schwab (99.98%).
Convertible Fund: Class A - MLFP&S (35.88%),; Class B - MLFP&S (23.43%); Class C
- - MLFP&S (68.14%); Class Q - Charles Schwab (34.64%), Trust Company of America
FBO TCA, 7103 S. Revere Pkwy, Englewood, CO 80112-3936 (5.45%), Dalton L. Knauss
Trustee, Elaine V. Knauss Revocable Trust, P.O. Box 1108, Carefree, Arizona
85377-1108 (13.32%), Dalton L. Knauss Trustee, Dalton L. Knauss Revocable Trust,
P.O. Box 1108, Carefree, Arizona 85377-1108 (13.36%), Knauss Family Partnership,
P.O. Box 2173, Carefree, Arizona 85377-2173 (5.51%).
Balanced Fund: Class A - MLFP&S (39.24%); Class B - MLFP&S (16.61%); Class C -
MLFP&S (75.87%); Class Q - Charles Schwab (96.75%).
High Yield Fund II: Class A - Wachovia Securities, P.O. Box 1220, Charlotte,
North Carolina 28201-1220 (5.25%), PaineWebber for the Benefit of Publix Super
Markets Charities, Inc., Attn: Marvin Weathers, P.O. Box 32018, Lakeland,
Florida 33802-2018 (6.12%), PaineWebber for the Benefit of Publix Super Markets,
Inc. Profit Sharing Plan & Trust, Attn: Marvin Weathers, P.O. Box 407, Lakeland,
Florida 33802-2018 (12.38%); Class B - Merrill Lynch Pierce Fenner & Smith,
Mutual Fund Operations, Attn: Bank Reconciliations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484 ("MLFP&S II") (30.11%); Class C - MLFP&S II
(30.38%), New Life Corp of America FBO Novell L. Olive President, PO Box 906,
Hendersonville, TN 37077-0906 (5.68%); Class Q - Charles Schwab (94.65%).
Money Market Fund: Class B - First Clearing Corporation, Leslie W. Six IRA, 134
Rosemary Place, Chula Vista, CA 91910-1944 (6.67%), Salomon Smith Barney, Inc.,
333 West 34th St., 3rd Floor, New York, NY 10001-2483 (11.54%), Everen
Securities, Inc., Helen M. Janis, 111 East Kilbourn Ave, Milwaukee, WI
53202-6611 (8.01%), George S Ormsby & Wilma M Ormsby, 4434 Wigton, Houston, TX
77096-4431 (19.84%), Murray J Goulas & Vada J Goulas, 21514 Santa Clara Dr,
Katy, TX 77450-7607 (10.40%), Banc of America Securities, LLC, Attn: Mutual
Funds Dept, 600 Montgomery St., San Francisco, CA 94111-2702 (5.07%); Class C
- -Salomon Smith Barney, Inc., 333 West 34th St, 3rd Floor, New York, NY
10001-2483 (55.44%), Prudential Securities, Inc. FBO Leanne Widlacki & Felix
Widlacki, 15178 Grand View Dr., Orland Park, IL 60467-7368 (36.02%).
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.
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 ReliStar Financial Corporation (NYSE:RLR). Through
its subsidiaries, ReliStar Financial Corporation offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education.
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.
B-9
<PAGE>
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 trade associations; 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
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:
B-10
<PAGE>
Series Annual Investment Management Fee*
- ------ ---------------------------------
SmallCap Growth Fund 1.00% of the Fund's average net assets
MidCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the
Fund's average net assets, 0.675% of the next
$500 million of average net assets, and 0.65% of
the average net assets in excess of $1 billion
Balanced Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250
million of average net assets, and 0.35% of the
average net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the
Fund's average net assets, 0.90% of the next
$500 million of average net assets, and 0.85% of
the average net assets in excess of $1 billion
International SmallCap Growth 1.00% of the first $500 million of the Fund's
Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
Money Market 0.50% of average net assets if Fund has not
Fund* invested substantially all of its assets in
another investment company, 0.00% if
substantially all of its assets are invested in
another investment company
- ----------
* The Money Market Fund will also pay advisory fees to Reserve Management
Company, Inc., the investment adviser of Primary Institutional Fund, a
series of Reserve Institutional Trust, the investment company in which the
Money Market Fund invests substantially all of its assets.
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
B-11
<PAGE>
fees paid by each Fund for the fiscal years ended March 31, 1999, 1998 and 1997
and fiscal period ended June 30, 1999 were:
<TABLE>
<CAPTION>
March 31,
June 30, -------------------------------------------
FUND 1999 1999 1998 1997
- ---- ---- ---- ---- ----
<S> <C> <C> <C>
International Core Growth Fund $1,061,288 $ 308,562 $ 5,726
Worldwide Growth Fund 1,472,492 1,251,181 1,028,250
International SmallCap Growth Fund 1,149,529 658,893 477,212
Emerging Countries Fund 3,476,180 2,790,216 915,615
LargeCap Growth Fund 178,627 32,530 2,359
MidCap Growth Fund 3,049,230 3,422,148 3,594,196
SmallCap Growth Fund 5,334,833 6,613,874 5,836,182
Convertible Fund 1,997,038 1,427,198 902,615
Balanced Fund 261,803 220,025 109,321
Strategic Income Fund 1/ 124,514 94,359 43,319
High Yield Fund II 466,926 36,505 17,627
Money Market Fund N/A N/A N/A
</TABLE>
- ----------
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
- ----- ------- ------- ------- -------
SmallCap Growth Fund 1.95% 2.60% 2.60% 1.50%
MidCap Growth Fund 1.60% 2.25% 2.25% 1.25%
LargeCap 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 SmallCap Growth Fund 1.95% 2.60% 2.60% 1.65%
International Core Growth Fund 1.95% 2.60% 2.60% 1.65%
Money Market Fund* N/A 2.25% 2.25% N/A
- ----------
* The Money Market Fund has a separate expense limitation agreement with
Pilgrim Investments, Inc. under which Pilgrim Investments, Inc. agrees to
waive its fees or bear the Money Market Fund's expenses in an amount that
would limit operating expenses to a ratio of expenses to average daily net
assets of not more than 2.25% per share. To the extent that the Fund
invests substantially all of its assets in a separate underlying investment
company, the expenses of the Fund shall be deemed to include the Money
Market Fund's allocable portion of the expenses of the underlying fund.
This expense limitation agreement is in addition to the waiver provided
under the Money Market Fund's Service and Distribution Plan, described
further below.
Each Fund will at a later date recoup from the Investment Manager management
fees waived and other expenses assumed by the Investment Manager during the
B-12
<PAGE>
previous 36 months, but only if, after such recoupment, the Fund's expense ratio
does not exceed the percentage described above. The Investment Manager will only
recoup fees waived or expenses assumed after the effective date of the expense
limitation agreement. Nicholas-Applegate Capital Management will bear 50% of any
fees waived and other expenses assumed pursuant to the expense limitation
agreement with respect to any Fund for which it serves as sub-adviser, and will
receive 50% of any recoupment amount with respect to such Funds.
The expense limitation agreement provides that these expense limitations shall
continue until at least June 30, 2001. Thereafter, the agreement will
automatically renew for one-year terms unless the Investment Manager, or, in the
case of sub-advised funds, the Portfolio Manager, provides written notice of the
termination of the agreement to the Trust at least 30 days prior to the end of
the then-current term. In addition, the agreement will terminate upon
termination of the Investment Management Agreement, or it may be terminated by
the Trust, without payment of any penalty, upon ninety (90) days' prior written
notice to the Investment Manager at its principal place of business.
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, and for the fiscal period ended June 30, 1999 (or
predecessor portfolios thereof):
<TABLE>
<CAPTION>
March 31,
June 30, -------------------------------------------
FUND 1999 1999 1998 1997
- ---- ---- ---- ---- ----
<S> <C> <C> <C>
SmallCap Growth Fund $518,164 $675,970 $487,625
MidCap Growth Fund 301,613 591,684 652,932
LargeCap Growth Fund 154,098 132,912 5,199
Convertible Fund 318,025 339,803 757,713
Balanced Fund 132,033 182,871 1,122,862
Strategic Income Fund 232,922 419,604 1.148.587
High Yield Fund II 318,323 111,479 15,731
Emerging Countries Fund 816,718 628,044 811,357
Worldwide Growth Fund 242,660 381,568 980,833
International SmallCap Growth Fund 168,199 389,240 851,489
International Core Growth Fund 283,811 204,723 37,345
</TABLE>
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 SmallCap
Growth Fund; Emerging Countries Fund; LargeCap Growth Fund; MidCap Growth Fund;
SmallCap 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.
B-13
<PAGE>
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
- ------ -------------------------------
SmallCap Growth Fund 0.50% of the Fund's average net assets
MidCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Emerging Countries Fund 0.625% of the Fund's average net assets
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International SmallCap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International Core Growth 0.50% of the first $500 million of the Fund's
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 PRIMARY INSTITUTIONAL FUND. The Money Market Fund invests
substantially all of its assets in the Class A shares of the Primary
Institutional Fund. The Primary Institutional Fund is managed by Reserve
Management Company, Inc. ("RMCI"). RMCI currently manages assets in excess of $5
billion and has over 27 years of investment experience. The Investment
Management Agreement for Primary Institutional Fund provides that RMCI shall not
be liable for any act or omission in connection with the matters to which the
B-14
<PAGE>
Agreement relates, except a loss resulting from the willful misfeasance, bad
faith or gross negligence on the part of RMCI or from reckless disregard by it
of its duties and obligations thereunder. RMCI may make such advertising and
promotional expenditures, using its own resources, as it from time to time deems
appropriate.
Under the terms of the Investment Management Agreement for the Primary
Institutional Fund, the Primary Institutional Fund pays RMCI a comprehensive
management fee calculated on an annual basis at 0.25% of its average daily net
assets. RMCI provides continuous investment advisory and management services to
the Primary Institutional Fund and pays all employee and ordinary operating
costs of the Primary Institutional Fund. Excluded from the definition of
ordinary operating costs are interest, taxes, brokerage fees, extraordinary
legal and accounting fees and expenses, and the fees of the disinterested
trustees.
ADMINISTRATION. Prior to May 24, 1999, the Trust had an Administration Agreement
with Investment Company Administration ("ICA"), 4455 East Camelback Road, Suite
261-E, Phoenix, Arizona 85018. Pursuant to an Administration Agreement with the
Trust, ICA 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, ICA received aggregate compensation of $1,059,155 and $848,799,
respectively, for all of the series of the Trust.
Also, prior to May 24, 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 ICA or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. For the
fiscal years ended March 31, 1999 and 1998, NACM received aggregate compensation
of $1,603,130 and $1,972,037, respectively, for all of the series of the Trust
pursuant to the Administrative Services Agreement.
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 Capital Corporation.
Prior to May 24, 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 $1,291,255,
$909,296 and $500,337, respectively. For the fiscal period ended June 30, 1999,
the aggregate commissions received by Pilgrim Securities, Inc. in connection
with sales of shares in the Funds were $___________.
B-15
<PAGE>
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% (0.75% for
Strategic Income Fund) 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% (0.75%
for Strategic Income Fund) 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 (0.75% for Strategic Income 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 (0.75% for Strategic Income Fund); and (iv) 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.
As applies to the Money Market Fund, under its 12b-1 Plan the Distributor may be
entitled to payment for distribution of Class B and C shares of up to 1.00%
provided, however, that the distribution fee is reduced by that amount, if any,
paid to the Distributor or any affiliate of Distributor from the investment
adviser or distributor of any investment company in which the Pilgrim Money
Market Fund invests substantially all of its assets. Currently, neither the
Distributor nor its affiliates receive any such amounts.
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
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 (0.50% for Strategic
Income Fund) 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% (0.75% for Strategic Income Fund), 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.
B-16
<PAGE>
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
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.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, C and Q shares for the
fiscal period ended June 30, 1999 were as follows:
B-17
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- --------------------- ------- ------- ------- -------
INTERNATIONAL CORE GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
WORLDWIDE GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
INT'L SMALLCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
EMERGING COUNTRIES FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
LARGECAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
MIDCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
SMALLCAP GROWTH FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
B-18
<PAGE>
Distribution Expenses Class A Class B Class C Class Q
- --------------------- ------- ------- ------- -------
CONVERTIBLE FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
BALANCED FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
HIGH YIELD FUND II $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
STRATEGIC INCOME FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
MONEY MARKET FUND $ -- $ -- $ -- $ --
Advertising $ -- $ -- $ -- $ --
Printing $ -- $ -- $ -- $ --
Salaries & Commissions $ -- $ -- $ -- $ --
Broker Servicing $ -- $ -- $ -- $ --
Miscellaneous $ -- $ -- $ -- $ --
Total $ -- $ -- $ -- $ --
Prior to May 24, 1999, the Trust had 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:
B-19
<PAGE>
Fund Name 12b-1 Payments
- --------- --------------
International Core Growth Fund $ 174,064
Worldwide Growth Fund 822,399
International SmallCap Growth Fund 208,084
Emerging Countries Fund 549,129
LargeCap Growth Fund 102,429
MidCap Growth Fund 1,526,263
SmallCap Growth Fund 1,874,462
Convertible Fund 1,108,863
Balanced Fund 210,891
Strategic Income Fund 52,773
High Yield Fund II 411,227
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 if NAS's actual expenses were less than the
shareholder service fee. However, effective May 24, 1999, the Funds were no
longer responsible for those excess amounts.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no longer be able to avail themselves of any automatic
investment or other service then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder Servicing
Agent for the Funds. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. Each Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian out-of-pocket fees, proxy solicitation costs, and the compensation
of 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
B-20
<PAGE>
assurance that any of the Funds will achieve their investment objectives.
References to the Money Market Fund include investments by the Primary
Institutional Fund in which it invests.
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 LargeCap Growth
Fund, some of these companies will be organizations with market capitalizations
of $500 million or less or companies that have limited product lines, markets
and financial resources and are dependent upon a limited management group.
Examples of possible investments include emerging growth companies employing new
technology, cyclical companies, initial public offerings of companies offering
high growth potential, or other corporations offering good potential for high
growth in market value. The securities of such companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
PREFERRED STOCK
Each Fund (other than the Money Market Fund) may invest in preferred stock.
Preferred stock, unlike common stock, offers a stated dividend rate payable from
a corporation's earnings. Such preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be
"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
B-21
<PAGE>
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).
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.
B-22
<PAGE>
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
Each Fund (other than the Money Market Fund) may invest in 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
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.
B-23
<PAGE>
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.
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. The Primary Institutional Fund in which the Money Market Fund
invests substantially all of its assets, requires that the foreign banks whose
obligations it acquires have capital, surplus and undivided profits of $25
billion.
A Fund holding instruments of foreign banks or financial institutions may be
subject to additional investment risks that are different in some respects from
those incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. See "Foreign Investments" below. Domestic banks and foreign banks are
subject to different governmental regulations with respect to the amount and
types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry depends largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
Federal and state laws and regulations require domestic banks to maintain
B-24
<PAGE>
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 (A-1 for the Primary Institutional Fund in which the
Money Market Fund invests substantially all of its assets) by S&P, "Prime-l" or
"Prime-2" by Moody's (Prime-1 for the Primary Institutional Fund in which the
Money Market Fund invests substantially all of its assets), or similarly rated
by another nationally recognized statistical rating organization or, if unrated,
will be determined by the Investment Manager or Portfolio Manager to be of
comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds (other
than Money Market Fund) may purchase corporate obligations which have remaining
maturities of one year or less from the date of purchase and which are rated
"AA" or higher by S&P or "Aa" or higher by Moody's.
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 (other than the Money Market 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
B-25
<PAGE>
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
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
B-26
<PAGE>
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 (other than the
Money Market Fund) may invest in tax-exempt industrial development bonds and
pollution control bonds which, in most cases, are revenue bonds and generally
are not payable from the unrestricted revenues of an issuer. They are issued by
or on behalf of public authorities to raise money to finance privately operated
facilities for business, manufacturing, housing, sport complexes, and pollution
control. Consequently, the credit quality of these securities is dependent upon
the ability of the user of the facilities financed by the bonds and any
guarantor to meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS. The Funds (other than the Money Market Fund) may
invest in lease obligations or installment purchase contract obligations of
municipal authorities or entities ("municipal lease obligations"). Although
lease obligations do not constitute general obligations of the municipality for
which its taxing power is pledged, a lease obligation is ordinarily backed by
the municipality's covenant to budget for, appropriate and make the payment due
under the lease obligation. A Fund may also purchase "certificates of
participation," which are securities issued by a particular municipality or
municipal authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality, agency
or authority. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for such
purpose for such year. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
default and foreclosure might prove difficult. In addition, these securities
represent a relatively new type of financing, and certain lease obligations may
therefore be considered to be illiquid securities.
The Funds will attempt to minimize the special risks inherent in municipal lease
obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at least
one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Manager or Portfolio Manager to be critical to
the lessee's ability to deliver essential services; and (4) contain legal
features which the Investment Manager or Portfolio Manager deems appropriate,
such as covenants to make lease payments without the right of offset or
counterclaim, requirements for insurance policies, and adequate debt service
reserve funds.
SHORT-TERM 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.
B-27
<PAGE>
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.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund (other than the Money Market Fund) may acquire variable and floating
rate instruments. Credit rating agencies frequently do not rate such
instruments; however, the Investment Manager or Portfolio Manager will determine
what unrated and variable and floating rate instruments are of comparable
quality at the time of the purchase to rated instruments eligible for purchase
by the Fund. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by a Fund. The absence of such
an active secondary market could make it difficult for the Fund to dispose of
the variable or floating rate instrument involved in the event of the issuer of
the instrument defaulting on its payment obligation or during periods in which
the Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default. Variable and
floating rate instruments may be secured by bank letters of credit.
B-28
<PAGE>
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
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 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
B-29
<PAGE>
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
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. The Primary Institutional Fund in which the
Money Market Fund invests substantially all of its assets will not invest in
CMOs.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (e.g., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans. The
Primary Institutional Fund in which the Money Market Fund invests substantially
all of its assets will not invest in foreign mortgage-related securities.
B-30
<PAGE>
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds invest
include, but are not limited to, interests in pools of receivables, such as
credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number of
respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities. The Primary Institutional Fund in which the Money Market Fund
invests substantially all of its assets will not invest in asset-backed
securities.
"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 (except the Money Market Fund) may invest in securities of foreign
issuers that are not publicly traded in the United States. Each Fund (except for
the Money Market 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.
B-31
<PAGE>
FOREIGN BANK OBLIGATIONS. Through its investment in the Primary Institutional
Fund, the Money Market Fund invests in obligations of foreign banks (including
their U.S. and foreign branches) which, at the time of investment have more than
$25 billion (or the equivalent in other currencies) and foreign branches of U.S.
banks. Obligations of foreign banks (including their U.S. and foreign branches)
and foreign branches of U.S. banks involve somewhat different investment risks
from those affecting obligations of U.S. banks, including the possibilities that
liquidity could be impaired because of future political and economic
developments; the obligations may be less marketable than comparable obligations
of U.S. banks; a foreign jurisdiction might impose withholding taxes on interest
income payable on those obligations; foreign deposits may be seized or
nationalized; foreign governmental restrictions (such as foreign exchange
controls) may be adopted which might adversely affect the payment of principal
and interest on those obligations; and the selection of those obligations may be
more difficult because there may be less publicly available information
concerning foreign banks. In addition, the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. In that connection, foreign banks
are not subject to examination by any U.S. government agency or instrumentality.
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.
SOVEREIGN DEBT SECURITIES. Certain Funds (other than Money Market Fund) 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 (other than the Money Market 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.
B-32
<PAGE>
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
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.
B-33
<PAGE>
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
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
B-34
<PAGE>
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.
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,
B-35
<PAGE>
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.
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.
B-36
<PAGE>
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
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.
B-37
<PAGE>
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
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.
B-38
<PAGE>
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.
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
B-39
<PAGE>
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
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
B-40
<PAGE>
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).
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.
B-41
<PAGE>
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
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
B-42
<PAGE>
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
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.
B-43
<PAGE>
NON-HEDGING STRATEGIC TRANSACTIONS
A Fund's options, futures and swap transactions will generally be entered into
for hedging purposes -- to protect against possible changes in the market values
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, currency or interest rate fluctuations, to protect the
Fund's unrealized gains in the values of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchase or sale of particular
securities. However, in addition to the hedging transactions referred to above,
the Strategic Income Fund may enter into options, futures and swap transactions
to enhance potential gain in circumstances where hedging is not involved. Each
Fund's net loss exposure resulting from transactions entered into for each
purposes will not exceed 5% of the Fund's net assets at any one time and, to the
extent necessary, the Fund will close out transactions in order to comply with
this limitation. Such transactions are subject to the limitations described
above under "Options," "Futures Contracts," and "Interest Rate and Currency
Swaps."
INVESTMENT COMPANY SECURITIES
Each Fund may invest up to 10% of its total assets in the shares of other
investment companies. The Funds (except the Money Market Fund) may invest in
money market mutual funds in connection with the management of their daily cash
positions. The Funds (except the Money Market Fund) may also make indirect
foreign investments through other investment companies that have comparable
investment objectives and policies as the Funds. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Fund would also bear its pro rata portions of each other investment company's
advisory and operational expenses. The Money Market Fund is not subject to the
restrictions of this paragraph if it invests substantially all of its assets in
another money market fund.
INVESTMENT COMPANIES THAT INVEST IN SENIOR LOANS. The Funds (other than the
Money Market Fund), and in particular the Strategic Income and Balanced Funds,
may invest in investment companies that invest primarily in interests in
variable or floating rate loans or notes ("Senior Loans"). Senior Loans in most
circumstances are fully collateralized by assets of a corporation, partnership,
limited liability company, or other business entity. Senior Loans vary from
other types of debt in that they generally hold a senior position in the capital
structure of a borrower. Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.
Substantial increases in interest rates may cause an increase in loan defaults
as borrowers may lack resources to meet higher debt service requirements. The
value of a Fund's assets may also be affected by other uncertainties such as
economic developments affecting the market for Senior Loans or affecting
borrowers generally.
Senior Loans usually include restrictive covenants which must be maintained by
the borrower. Under certain interests in Senior Loans, an investment company
investing in a Senior Loan may have an obligation to make additional loans upon
demand by the borrower. Senior Loans, unlike certain bonds, usually do not have
call protection. This means that interests, while having a stated one to
ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
CREDIT RISK. Information about interests in Senior Loans generally is not be in
the public domain, and interests are generally not currently rated by any
nationally recognized rating service. Senior Loans are subject to the risk of
nonpayment of scheduled interest or principal payments. Issuers of Senior Loans
B-44
<PAGE>
generally have either issued debt securities that are rated lower than
investment grade, or, if they had issued debt securities, such debt securities
would likely be rated lower than investment grade. However, unlike other types
of debt securities, Senior Loans are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments on
Senior Loans, an investment company investing in that Senior Loan could
experience a reduction in its income, and would experience a decline in the
market value of the particular Senior Loan so affected, and may experience a
decline in the NAV or the amount of its dividends. In the event of a bankruptcy
of the borrower, the investment company could experience delays or limitations
with respect to its ability to realize the benefits of the collateral securing
the Senior Loan.
COLLATERAL. Senior Loans typically will be secured by pledges of collateral from
the borrower in the form of tangible assets and intangible assets. In some
instances, an investment company may invest in Senior Loans that are secured
only by stock of the borrower or its subsidiaries or affiliates. The value of
the collateral may decline below the principal amount of the Senior Loan
subsequent to an investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
there is a risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized.
LIMITED SECONDARY MARKET. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
Senior Loans may be illiquid. In addition, Senior Loans generally require the
consent of the borrower prior to sale or assignment. These consent requirements
may delay or impede a fund's ability to sell Senior Loans. In addition, because
the secondary market for Senior Loans may be limited, it may be difficult to
value Senior Loans. Market quotations may not be available and valuation may
require more research than for liquid securities. In addition, elements of
judgment may play a greater role in the valuation, because there is less
reliable, objective data available.
HYBRID LOANS. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). With
Hybrid Loans, a fund may not possess a senior claim to all of the collateral
securing the Hybrid Loan. Hybrid Loans also may not include covenants that are
typical of Senior Loans, such as covenants requiring the maintenance of minimum
interest coverage ratios. As a result, Hybrid Loans present additional risks
besides those associated with traditional Senior Loans, although they may
provide a relatively higher yield. Because the lenders in Hybrid Loans waive or
forego certain loan covenants, their negotiating power or voting rights in the
event of a default may be diminished. As a result, the lenders' interests may
not be represented as significantly as in the case of a conventional Senior
Loan. In addition, because an investment company's security interest in some of
the collateral may be subordinate to other creditors, the risk of nonpayment of
interest or loss of principal may be greater than would be the case with
conventional Senior Loans.
SUBORDINATED AND UNSECURED LOANS. Certain investment companies may invest in
subordinated and unsecured loans. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans.
B-45
<PAGE>
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Manager or Portfolio Manager, subject to the
seller's agreement to repurchase and the Fund's agreement to resell such
securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry
System or an equivalent foreign system. The seller under a repurchase agreement
will be required to maintain the value of the underlying securities at not less
than 102% (100% for the Money Market Fund) of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund holding
the repurchase agreement will suffer a loss to the extent that the proceeds from
a sale of the underlying securities is less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans under the Investment Company
Act.
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 (except the Money Market 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
B-46
<PAGE>
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 may borrow up to 20% (other than the Money Market Fund which is
limited to 5%) of its total assets for temporary, extraordinary or emergency
purposes. Each Fund may also borrow money through reverse repurchase agreements.
In addition, each Fund (other than the Money Market Fund) may borrow money
through 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.
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 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. Loans by
the Primary Institutional Fund in which the Money Market Fund invests will not
exceed 25% of the Fund's total assets.
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.
B-47
<PAGE>
SHORT SALES
Certain Funds (not the Money Market Fund) 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
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
B-48
<PAGE>
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."
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.
B-49
<PAGE>
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 (other than the Money Market 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
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 (other than the Money Market Fund) is "diversified" within the meaning
of the Investment Company Act. In order to qualify as diversified, a Fund must
diversify its holdings so that at all times at least 75% of the value of its
B-50
<PAGE>
total assets is represented by cash and cash items (including receivables),
securities issued or guaranteed as to principal or interest by the United States
or its agencies or instrumentalities, securities of other investment companies,
and other securities (for this purpose other securities of any one issuer are
limited to an amount not greater than 5% of the value of the total assets of the
Fund and to not more than 10% of the outstanding voting securities of the
issuer). The Primary Institutional Fund in which the Money Market Fund will
invest substantially all of its assets is a non-diversified fund. However, the
Primary Institutional Fund intends to comply with the diversification
requirement of Rule 2a-7 under the Investment Company Act which generally limits
a money-market fund to investing no more than 5% of its total assets in the
securities, except U.S. government securities, of any one issuer.
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Portfolio Manager
in approximately equal amounts, and the Investment Manager or Portfolio Manager
attempts to stay fully invested within the applicable percentage limitations set
forth in the Prospectus. In addition, for each issuer whose securities are added
to an investment portfolio, the Investment Manager or Portfolio Manager sells
the securities of one of the issuers currently included in the portfolio.
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).
All percentage limitations set forth below apply immediately after a purchase or
initial investment, and any subsequent change in any applicable percentage
resulting from market fluctuations will not require elimination of any security
from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In addition, no
Fund:
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.
B-51
<PAGE>
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.
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, and shall
not apply to the Money Market Fund.
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 MidCap Growth, SmallCap Growth,
Worldwide Growth, International Core Growth, International SmallCap Growth,
Strategic Income and High Yield II Funds), except that a Fund may use such
short-term credits as are necessary for the clearance of transactions.
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.
B-52
<PAGE>
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. This restriction does not apply to the
Money Market Fund.
- ----------
* For the LargeCap Growth, MidCap Growth, Worldwide Growth, Emerging
Countries, High Yield II and Balanced Funds, as of the date of this
Statement of Additional Information this investment restriction reads: "May
invest more than 15% of the value of its net assets in securities that at
the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid." At a Meeting of Shareholders on May 21, 1999, a
change to this investment restriction was approved by the shareholders of
all Funds except the LargeCap Growth, MidCap Growth, Worldwide Growth,
Emerging Countries, High Yield II and Balanced Funds. The Meeting has been
adjourned with respect to those Funds, and upon shareholder approval the
investment restriction will be changed as described above.
For purposes of investment restriction number 5, the Trust considers the
restriction to prohibit the Funds from entering into instruments that have the
character of a loan, I.E., instruments that are negotiated on a case-by-case
basis between a lender and a borrower. The Trust considers the phrase "publicly
distributed debt instruments" in that investment restriction to include, among
other things, registered debt securities and unregistered debt securities that
are offered pursuant to Rule 144A under the Securities Act of 1933. As a result,
the Funds may invest in such securities. Further, the Trust does not consider
investment restriction number 5 to prevent the Funds from investing in
investment companies that invest in loans.
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.
2. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market
daily.
PRIMARY INSTITUTIONAL FUND RESTRICTIONS
The following are the fundamental operating restrictions of the Primary
Institutional Fund in which the Money Market Fund invests substantially all of
its assets:
B-53
<PAGE>
The Primary Institutional Fund cannot:
1. borrow money except as a temporary or emergency measure and not in an
amount to exceed 5% of the market value of its total assets;
2. issue senior securities except in compliance with the Investment Company
Act;
3. act as an underwriter with respect to the securities of others except to
the extent that, in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter under federal securities
law;
4. concentrate investments in any particular industry except to the extent
that its investments are concentrated exclusively in U.S. government
securities and bank obligations, including obligations of foreign branches
of domestic banks where the domestic parent would be unconditionally liable
in the event that the foreign branch failed to pay on its instruments for
any reason, and Municipal Obligations or instruments secured by such
obligations;
5. purchase, sell or otherwise invest in real estate or commodities or
commodity contracts;
6. lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
7. sell any security short or write, sell or purchase any futures contract or
put or call option; and
8. make investments on a margin basis.
Notwithstanding the foregoing investment restrictions, the Primary Institutional
Fund may invest substantially all of its assets in another open-end investment
company with substantially the same investment objective as the Primary
Institutional Fund.
PRIMARY INSTITUTIONAL FUND OPERATING RESTRICTIONS
As a matter of operating (non-fundamental policy) the Primary Institutional Fund
may not:
1. invest for the purpose of exercising control.
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.
B-54
<PAGE>
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.
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
B-55
<PAGE>
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:
<TABLE>
<CAPTION>
March 31,
June 30, -----------------------------------
Fund 1999 1999 1998 1997
- ---- ---- ---- ---- ----
<S> <C> <C> <C>
International Core Growth Fund $1,150,595 $ 464,615 $ 24,643
Worldwide Growth Fund 1,166,321 1,065,153 970,564
International SmallCap Growth Fund 873,671 745,259 692,326
Emerging Countries Fund 3,945,783 3,634,338 1,427,861
LargeCap Growth Fund 115,558 30,907 4,620
MidCap Growth Fund 1,291,517 1,809,755 1,139,938
SmallCap Growth Fund 974,722 1,002,867 987,245
Convertible Fund 158,049 130,017 114,243
Balanced Fund 25,782 43,966 35,105
Strategic Income Fund 1/ 0 100 0
Money Market Fund N/A N/A N/A
</TABLE>
- ----------
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 period ended June 30, 1999,
$______ (_____%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
During the fiscal period ended June 30, 1999, the following Funds (or their
predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: International Core Growth Fund -- J. P. Morgan & Co.; Worldwide Growth
Fund -- J. P. Morgan & Co.; MidCap Growth Fund -- Donaldson Lufkin & Jenrette,
J. P. Morgan & Co.; SmallCap Growth Fund -- J. P. Morgan & Co.; Convertible Fund
- -- J. P. Morgan & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter Discover
Co.; Balanced Fund -- Donaldson Lufkin & Jenrette, Merrill Lynch & Co., Morgan
Stanley Dean Witter Discover & Co.; Strategic Income -- Donaldson Lufkin &
Jenrette, J. P. Morgan & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter
Discover & Co. The holdings of securities of such brokers and dealers were as
follows as of June 30, 1999: Worldwide Growth Fund -- J. P. Morgan & Co.
($_____); Convertible Fund -- J. P. Morgan & Co. ($_____), Merrill Lynch & Co.
($______), Morgan Stanley Dean Witter Discover Co. ($_____); Balanced Fund --
Donaldson Lufkin & Jenrette ($_____), Merrill Lynch & Co. ($_____), Morgan
Stanley Dean Witter Discover & Co. ($_____); Strategic Income -- Donaldson
Lufkin & Jenrette ($_____), J. P. Morgan & Co. ($_____), Merrill Lynch & Co.
($_____), Morgan Stanley Dean Witter Discover & Co. ($_____).
ABOUT THE MONEY MARKET FUND. The Money Market Fund invests its assets in Class A
shares of the Primary Institutional Fund. With respect to the Primary
Institutional Fund in which the Money Market Fund invests its assets, RMCI is
B-56
<PAGE>
responsible for decisions to buy and sell securities, broker-dealer selection
and negotiation of commission rates. As investment securities transactions made
by the Primary Institutional Fund are normally principal transactions at net
prices, the Primary Institutional Fund does not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. The Primary
Institutional Fund has not paid any brokerage commissions during the past three
fiscal years.
The Primary Institutional Fund's policy of investing in debt securities maturing
within 13 months results in high portfolio turnover. However, because the cost
of these transactions is minimal, high turnover does not have a material,
adverse effect upon the net asset value ("NAV") or yield of the Primary
Institutional Fund.
Subject to the overall supervision of the officers of the Primary Institutional
Fund and the Board of Trustees of Reserve Institutional Trust, RMCI places all
orders for the purchase and sale of the Primary Institutional Fund's investment
securities. In general, in the purchase and sale of investment securities, RMCI
will seek to obtain prompt and reliable execution of orders at the most
favorable prices and yields. In determining best price and execution, RMCI may
take into account a dealer's operational and financial capabilities, the type of
transaction involved, the dealer's general relationship with RMCI, and any
statistical, research, or other services provided by the dealer to RMCI. To the
extent such non-price factors are taken into account the execution price paid
may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Primary Institutional Fund as determined by RMCI.
Brokers or dealers who execute investment securities transactions may also sell
shares of the Primary Institutional Fund; however, any such sales will be
neither a qualifying nor disqualifying factor in the selection of brokers or
dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Primary Institutional Fund and other investment
companies managed by RMCI, the transactions are allocated as to amount in
accordance with each order placed for each fund. However, RMCI may not always be
able to purchase or sell the same security on identical terms for all investment
companies affected.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased, redeemed
or exchanged appears in the Prospectus under "Shareholder Guide." Shares of the
Funds are offered at the net asset value next computed following receipt of the
order by the dealer (and/or the Distributor) or by the Trust's transfer agent,
DST Systems, Inc. ("Transfer Agent"), plus, for Class A shares, a varying sales
charge depending upon the class of shares purchased and the amount of money
invested, as set forth in the Prospectus.
Certain investors may purchase shares of the Funds with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Portfolio Manager intends to retain the security in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
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 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
B-57
<PAGE>
for such funds) within the previous 90 days. The amount that may be so
reinvested in the Fund is limited to an amount up to, but not exceeding, the
redemption proceeds (or to the nearest full share if fractional shares are not
purchased). In order to exercise this privilege, a written order for the
purchase of shares must be received by the Transfer Agent, or be postmarked,
within 90 days after the date of redemption. This privilege may only be used
once per calendar year. Payment must accompany the request and the purchase will
be made at the then current net asset value of the Fund. Such purchases may also
be handled by a securities dealer who may charge a shareholder for this service.
If the shareholder has realized a gain on the redemption, the transaction is
taxable and any reinvestment will not alter any applicable Federal capital gains
tax. If there has been a loss on the redemption and a subsequent reinvestment
pursuant to this privilege, some or all of the loss may not be allowed as a tax
deduction depending upon the amount reinvested, although such disallowance is
added to the tax basis of the shares acquired upon the reinvestment.
Class A Shares of the Funds may also be purchased at net asset value by any
person who can document that Fund shares were purchased with proceeds from the
redemption (within the previous 90 days) of shares from any unaffiliated mutual
fund on which a sales charge was paid or which were subject at any time to a
CDSC, and the Distributor has determined in its discretion that the unaffiliated
fund invests primarily in the same types of securities as the Pilgrim Fund
purchased.
Additionally, Class A 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,
allow registered investment advisers to make investments on behalf of their
clients at net asset value without any commission or concession.
Class A shares may also be purchased at net asset value by certain fee based
registered investment advisers, trust companies and bank trust departments under
certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another open-end fund managed by the Investment Manager or from
Pilgrim Prime Rate Trust.
Class A 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
B-58
<PAGE>
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 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
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 in 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
B-59
<PAGE>
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.
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
B-60
<PAGE>
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. Shareholders will be charged a CDSC if certain of those
shares are redeemed within the applicable time period as stated in the
prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares or (iii) were exchanged for
shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services, except that a CDSC or redemption fee may be waived in certain
circumstances involving redemptions in connection with a distribution from a
qualified employer retirement plan in connection with termination of employment
or termination of the employer's plan and the transfer to another employer's
plan or to an IRA. The shareholder must notify the Fund either directly or
through the Distributor at the time of redemption that the shareholder is
entitled to a waiver of CDSC or redemption fee. The waiver will then be granted
subject to confirmation of the shareholder's entitlement.
B-61
<PAGE>
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. Except for Class B shares of the Money Market
Fund, 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 24, 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.
DEALER COMMISSIONS AND OTHER INCENTIVES. In connection with the sale of shares
of the Funds, the Distributor may pay Authorized Dealers of record a sales
commission as a percentage of the purchase price. In connection with the sale of
Class A shares, the Distributor will reallow to Authorized Dealers of record
from the sales charge on such sales the following amounts:
Equity Funds and
Amount of Transaction Equity & Income Funds Income Funds
--------------------- --------------------- ------------
Less than $50,000 5.00% 4.25%
$50,000 - $99,999 3.75% 4.00%
$100,000 - $249,999 2.75% 3.00%
$250,000 - $499,000 2.00% 2.25%
$500,000 - $999,999 1.75% 1.75%
$1,000,000 and over See below See below
The Distributor may pay to Authorized Dealers out of its own assets commissions
on shares sold in Classes A, B and C, at net asset value, which at the time of
investment would have been subject to the imposition of a contingent deferred
sales charge ("CDSC") if redeemed. There is no sales charge on purchases of
$1,000,000 or more of Class A shares. However, such purchases may be subject to
a CDSC, as disclosed in the Prospectus. The Distributor will pay Authorized
Dealers of record commissions at the rates shown in the table below for
purchases of Class A shares that are subject to a CDSC:
B-62
<PAGE>
Dealer Commission as a Percentage of
Amount of Transaction Amount Invested
- --------------------- ---------------
$1,000,000 to $2,499,000 1.00%
$2,500,000 to $4,999,999 0.50%
$5,000,000 and over 0.25%
Also, the Distributor will pay out of its own assets a commission of 1% of the
amount invested for purchases of Class A shares of less than $1 million by
qualified employer retirement plans with 50 or more participants.
The Distributor will pay out of its own assets a commission of 4% of the amount
invested for purchases of Class B shares subject to a CDSC. For purchases of
Class C shares subject to a CDSC, the Distributor may pay out of its own assets
a commission of 1% of the amount invested of each Fund other than Strategic
Income Fund and 0.75% of the amount invested of Strategic Income Fund.
The Distributor may, from time to time, at its discretion, allow a selling
dealer to retain 100% of a sales charge, and such dealer may therefore be deemed
an "underwriter" under the Securities Act of 1933, as amended. The Distributor,
at its expense, may also provide additional promotional incentives to dealers.
The incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualifying registered representatives
and members of their families to locations within or outside of the United
States, merchandise or other items. For more information on incentives, see
"Management of the Funds -- 12b-1 Plans" in this Statement of Additional
Information.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each class
of each Fund's shares will be determined once daily as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during
each day on which that Exchange is open for trading. As of the date of this
Statement of Additional Information, the New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the mean between the last reported
bid and asked prices on the valuation day. Portfolio securities underlying
traded call options 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. Other
debt securities are valued at bid prices obtained from independent pricing
services or from one or more dealers making markets in the securities, with the
exception of Convertible Fund which values at the mean between the bid and ask.
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
B-63
<PAGE>
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.
The Class A shares of the Primary Institutional Fund in which the Money Market
Fund invests substantially all of its assets are valued at net asset value,
which is based on the net asset value per share determined by the Primary
Institutional Fund.
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
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.).
B-64
<PAGE>
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.
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
B-65
<PAGE>
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, Class B and Class C 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.
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.
B-66
<PAGE>
(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.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $100 ($1,000 in the case of Class Q) to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000 ($250,000 in the case of Class Q). To
establish a systematic cash withdrawal, complete the Systematic Withdrawal Plan
section of the Account Application. To have funds deposited to your bank
account, follow the instructions on the Account Application. You may elect to
have monthly, quarterly, semi-annual or annual payments. Redemptions are
normally processed on the fifth day prior to the end of the month, quarter or
year. Checks are then mailed or proceeds are forwarded to your bank account on
or about the first of the following month. You may change the amount, frequency
and payee, or terminate the plan by giving written notice to the Transfer Agent.
A Systematic Withdrawal Plan may be modified at any time by the Fund or
terminated upon written notice by the relevant Fund.
During the withdrawal period, you may purchase additional shares for deposit to
your account, subject to any applicable sales charge, if the additional
purchases are equal to at least one year's scheduled withdrawals, or $1,200
($12,000 in the case of Class Q), whichever is greater. There are no separate
charges to you under this Plan, although a CDSC may apply if you purchased Class
A, B or C shares. Shareholders who elect to have a systematic cash withdrawal
must have all dividends and capital gains reinvested. As shares of a Fund are
redeemed under the Plan, you may realize a capital gain or loss for income tax
purposes.
B-67
<PAGE>
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting both
income dividends and capital gains distributions, if any, in additional shares
of a respective class of a Fund at the then current net asset value, with no
sales charge. The Funds' management believes that most investors desire to take
advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and its shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and shareholders are
advised to consult their own tax advisers with respect to the particular
federal, state, local and foreign tax consequences to them of an investment in
the Funds. This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations issued thereunder, and judicial and
administrative authorities as in effect on the date of this Statement of
Additional Information, all of which are subject to change, which change may be
retroactive.
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each Fund
must, among other things: (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
B-68
<PAGE>
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.
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
B-69
<PAGE>
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
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.
B-70
<PAGE>
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 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.
B-71
<PAGE>
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, notional principal contract, futures or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options, futures and forward contracts
and short sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-day period ending with the 30th
day after the close of the Fund's taxable year, if certain conditions are met.
Requirements relating to 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
B-72
<PAGE>
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING. Each Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish a Fund with the shareholder's correct taxpayer
identification number or social security number and to make such certifications
as a Fund may require, (2) the IRS notifies the shareholder or a Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United States, is
a nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder. If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends 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.
B-73
<PAGE>
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
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.
B-74
<PAGE>
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.
Certain Funds may also from time to time advertise their 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 Class A shares of the Primary
Institutional Fund.
The current yields for the Class A shares of the Primary Institutional Fund
quoted will be the net average annualized yield for an identified period,
usually seven consecutive calendar days. Yield for the Class A shares of the
Primary Institutional Fund will be computed by assuming that an account was
established with a single Class A share of the Primary Institutional 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, and any
B-75
<PAGE>
realized gains and losses 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 Primary Institutional Fund may also furnish a quotation of
effective yield for the Class A shares of the Primary Institutional 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 Primary Institutional Fund's portfolio and the
operating expenses of the Class A shares of the Primary Institutional Fund.
Quotations of yields will be accompanied by information concerning the average
weighted maturity of the Primary Institutional 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 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.
B-76
<PAGE>
Yields for the following Classes of the following Funds for the
thirty-day period ended June 30, 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
Class A %
Class B %
Class C %
Class Q %
High Yield Fund II
Class A %
Class B %
Class C %
Class Q %
The average annual total returns, including sales charges, for each class of
shares of each Fund for the one-five-and ten-year periods ended June 30, 1999,
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 June 30, 1999, is as follows:
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception Inception Date
------ ------ ------- --------------- --------------
Int'l Core Growth
<S> <C> <C> <C> <C> <C>
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
Int'l SmallCap 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-77
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception Inception Date
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Emerging Countries
Class A % N/A N/A % 11/28/94
Class B % N/A N/A % 5/31/95
Class C % N/A N/A % 11/28/94
Class Q % N/A N/A % 8/31/95
LargeCap 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 % 7/21/97
MidCap 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 % 6/30/94
SmallCap 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
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 % 4/19/93
Class B % N/A N/A % 5/31/95
Class C % % 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 % 8/31/95
Class B % N/A N/A % 8/31/95
Class C % N/A N/A % 8/31/95
Class Q % N/A N/A % 8/31/95
</TABLE>
No performance information is provided for the Money Market Fund because it had
not yet commenced operations as of June 30, 1999.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to age characteristics, of various countries and
regions in which a Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of a Fund's portfolio; (v) the major industries located in various
B-78
<PAGE>
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
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.
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 the International Core Growth,
Worldwide Growth, International SmallCap Growth and Emerging Countries Funds are
held by Brown Brothers Harriman, 40 Water Street, Boston, Massachusetts
02109-3661, as Custodian, which takes no part in the decisions relating to the
purchase or sale of a Fund's portfolio securities. The cash and securities owned
B-79
<PAGE>
by each other Fund are held by Investors Fiduciary Trust Company, 801
Pennsylvania, Kansas City, Missouri 64105, as Custodian, which takes no part in
the decisions relating to the purchase or sale of a Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Trust are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS. KPMG LLP, 725 Figueroa Street, Los Angeles, California
90017, serves as independent auditor for each Fund.
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 statements 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,
employee or agent against any liability to the trust or its investors to which
the Trustee, officer, employee or agent would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
or her duties. The Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to a designated Fund shall be enforceable against the assets and
property of such Fund only, and not against the assets or property of any other
Fund or the investors therein.
FINANCIAL STATEMENTS
The financial statements from the Funds' June 30, 1999 Annual Reports are
incorporated herein by reference. Copies of the Funds' Annual Reports and a
more-recent Semi-Annual Report, if available, 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-80
<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)
(28) Form of Amendment No. 23 to Amended and Restated Declaration
of Trust (n)
(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 Management Agreement between the Trust and Pilgrim
Investments, Inc.
(2) Form of Portfolio Management Agreement between Pilgrim Investments,
Inc. and Nicholas-Applegate Capital Management
(e) (1) Form of Underwriting Agreement between the Trust and Pilgrim
Securities, Inc.
(f) None.
(g) (1) Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co. dated as of June 1, 1998. (k)
(2) Form of Amendment to Custodian Agreement between Registrant and
Brown Brothers Harriman & Co. (k)
(3) Form of Foreign Custody Manager Delegation Agreement between
Registrant and Brown Brothers Harriman & Co. dated as of
June 1, 1998 (k)
(4) Form of Novation Agreement to Custody Agreement with Brown Brothers
Harriman & Co. (n)
(5) Form of Appendix C to Custody Agreement with Brown Brothers
Harriman & Co. (n)
(6) Form of Novation Agreement to Foreign Custody Manager Delegation
Agreement with Brown Brothers Harriman & Co. (n)
(7) Form of Appendix C to Foreign Custody Manager Delegation Agreement
with Brown Brothers Harriman & Co. (n)
(8) Form of Custodian Agreement with Investors Fiduciary Trust Company (n)
(h) (1) Form of Administration Agreement (n)
(2) Form of Agency Agreement (n)
(3) Form of Shareholder Service Agreement (n)
(4) Form of Expense Limitation Agreement (n)
(5) Form of Recordkeeping Agreement (n)
(6) Form of Expense Limitation Agreement pertaining to Money Market
Fund (o)
(7) Form of Agreement among Reserve Institutional Trust; Reserve
Management Company, Inc.; Resrve Partners, Inc.; Pilgrim Mutual
Funds; Pilgrim Investments, Inc. with Pilgrim Securities, Inc. (o)
(i) Opinion of Counsel (o)
(j) (1) Consent of Independent Auditors *
(2) Consent of Counsel
(k) None.
C-2
<PAGE>
(l) Form of Investment Letter of Initial Investors in Registrant dated
April 1, 1993 (b)
(m) (1) Form of Amended and Restated Service and Distribution Plan
for Class A (m)
(2) Form of Amended and Restated Service and Distribution Plan
for Class B (m)
(3) Form of Amended and Restated Service and Distribution Plan
for Class C (m)
(4) Form of Amended and Restated Service Plan for Class Q (m)
(5) Form of Amendment to Amended and Restated Service and Distribution
Plan for Class B (n)
(6) Form of Amendment to Amended and Restated Service and Distribution
Plan for Class C (n)
(n) Not Applicable.
(o) (1) Form of Multiple Class Plan Pursuant to Rule 18f-3 (n)
- ----------
(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.
C-3
<PAGE>
(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.
(m) Filed as an exhibit to Post-Effective Amendment No. 67 to the Registrant's
Form N-1A Registration Statement on March 25, 1999 and incorporated herein
by reference.
(n) Filed as an exhibit to Post-Effective Amendment No. 68 to the Registrant's
Form N-1A Registration Statement on May 24, 1999 and incorporated herein by
reference.
(o) Filed as an exhibit to Post-Effective Amendment No. 71 to the Registrant's
Form N-1A Registration Statement on July 1, 1999 and incorporated herein by
reference.
* To be provided by Amendment.
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
C-4
<PAGE>
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
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Investment Manager in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-48282) filed
under the Investment Advisers Act of 1940 and is incorporated herein by
reference thereto.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Pilgrim Investment Funds, Inc.; Pilgrim Government Securities Income
Fund, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim Prime Rate Trust and
Pilgrim Mutual Funds.
(b) Information as to the directors and officers of the Distributor,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Distributor in the last two years, is included in its application for
registration as a broker-dealer on Form BD (File No. 8-48020) filed under the
Securities Exchange Act of 1934 and is incorporated herein by reference thereto.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of (a) the Registrant, (b) Pilgrim
Group, Inc., (c) Pilgrim Investments, Inc., (d) the Portfolio Managers, (e) the
Custodians and (e) the Transfer Agent. The address of each is as follows:
(a) Pilgrim Advisory Funds, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(b) Pilgrim Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
C-5
<PAGE>
(c) Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(d) Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
(e) Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105
(f) Brown Brothers Harriman
40 Water Street
Boston, Massachusetts 02109-3661
(g) Investors Fiduciary Trust Company
c/o DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141
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.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, Registrant certifies that it has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix and
State of Arizona on the 30th day of August, 1999.
PILGRIM MUTUAL FUNDS
By: /s/ Robert W. Stallings
-------------------------------------
Robert W. Stallings
President and Chief Executive Officer
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
--------- ----- ----
/s/ Robert W. Stallings Trustee, President and August 30, 1999
- --------------------------- Chief Executive Officer
Robert W. Stallings (Principal Executive Officer)
Trustee August 30, 1999
- ---------------------------
Walter E. Auch*
Trustee August 30, 1999
- ---------------------------
Mary A. Baldwin *
Trustee August 30, 1999
- ---------------------------
John P. Burke *
Trustee August 30, 1999
- ---------------------------
Al Burton *
Trustee August 30, 1999
- ---------------------------
Jock Patton *
Principal Financial Officer August 30, 1999
- ---------------------------
Michael J. Roland *
* By: /s/ Robert W. Stallings
-------------------------
Robert W. Stallings
Attorney-in-Fact**
** Powers of Attorney for the Trustees were filed as part of Post-Effective
Amendment No. 68 to the Registrant's Form N-1A Registration Statement of
May 24, 1999 and incorporated by reference.
C-7
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
- -------------- ---------------
(d)(1) Form of Investment Management Agreement between the
Trust and Pilgrim Investments, Inc.
(d)(2) Form of Portfolio Management Agreement between
Pilgrim Investments, Inc. and Nicholas-Applegate Capital
Management
(e)(1) Form of Underwriting Agreement between the Trust and
Pilgrim Securities, Inc.
(j)(2) Consent of Dechert Price & Rhoads
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this ____ day of ____, 1999 between Pilgrim Mutual Funds
(the "Fund"), a Delaware business trust and Pilgrim Investments, Inc. (the
"Manager"), a Delaware corporation (the "Agreement").
WHEREAS, the Fund is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund is authorized to issue shares of beneficial interest in
separate series with each such series representing interests in a separate
portfolio of securities and other assets;
WHEREAS, the Fund may offer shares of additional series in the future, and
currently intends to offer shares of additional series in the future;
WHEREAS, the Fund desires to avail itself of the services of the Manager
for the provision of advisory and management services for the Fund; and
WHEREAS, the Manager is willing to render such services to the Fund;
NOW, THEREFORE, in consideration of the premises, the promises and mutual
covenants herein contained, it is agreed between the parties as follows:
1. APPOINTMENT. The Fund hereby appoints the Manager, subject to the
direction of the Board of Trustees, for the period and on the terms set forth in
this Agreement, to provide advisory, management, and other services, as
described herein, with respect to each series of the Fund (individually and
collectively referred to herein as "Series"). The Manager accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
In the event the Fund establishes and designates additional series with
respect to which it desires to retain the Manager to render advisory services
hereunder, it shall notify the Manager in writing. If the Manager is willing to
render such services, it shall notify the Fund in writing, whereupon such
additional series shall become a Series hereunder.
2. SERVICES OF THE MANAGER. The Manager represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940
and will maintain such registration for so long as required by applicable law.
Subject to the general supervision of the Board of Trustees of the Fund, the
Manager shall provide the following advisory, management, and other services
with respect to the Series:
(a) Provide general, overall advice and guidance with respect to the
Series and provide advice and guidance to the Fund's Trustees, and oversee the
management of the investments of the Series and the composition of each Series'
portfolio of securities and investments, including cash, and the purchase,
retention and disposition thereof, in accordance with each Series' investment
objective or objectives and policies as stated in the Fund's current
registration statement, which management may be provided by others selected by
the Manager and approved by the Board of Trustees as provided below or directly
by the Manager as provided in Section 3 of this Agreement;
<PAGE>
(b) In the event that the Manager wishes to select others to render
investment management services, the Manager shall analyze, select and recommend
for consideration and approval by the Fund's Board of Trustees investment
advisory firms (however organized) to provide investment advice to one or more
of the Series, and, at the expense of the Manager, engage (which engagement may
also be by the Fund) such investment advisory firms to render investment advice
and manage the investments of such Series and the composition of each such
Series' portfolio of securities and investments, including cash, and the
purchase, retention and disposition thereof, in accordance with the Series'
investment objective or objectives and policies as stated in the Fund's current
registration statement (any such firms approved by the Board of Trustees and
engaged by the Fund and/or the Manager are referred to herein as "Portfolio
Managers");
(c) Periodically monitor and evaluate the performance of the Portfolio
Managers with respect to the investment objectives and policies of the Series;
(d) Monitor the Portfolio Managers for compliance with the investment
objective or objectives, policies and restrictions of each Series, the 1940 Act,
Subchapter M of the Internal Revenue Code, and if applicable, regulations under
such provisions, and other applicable law;
(e) If appropriate, analyze and recommend for consideration by the
Fund's Board of Trustees termination of a contract with a Portfolio Manager
under which the Portfolio Manager provides investment advisory services to one
or more of the Series;
(f) Supervise Portfolio Managers with respect to the services that
such Portfolio Managers provide under respective portfolio management agreements
("Portfolio Management Agreements");
(g) Render to the Board of Trustees of the Fund such periodic and
special reports as the Board may reasonably request; and
(h) Make available its officers and employees to the Board of Trustees
and officers of the Fund for consultation and discussions regarding the
administration and management of the Series and services provided to the Fund
under this Agreement.
3. INVESTMENT MANAGEMENT AUTHORITY. In the event the Manager wishes to
render investment management services directly to a Series, then with respect to
any such Series, the Manager, subject to the supervision of the Fund's Board of
Trustees, will provide a continuous investment program for the Series' portfolio
and determine the composition of the assets of the Series' portfolio, including
determination of the purchase, retention, or sale of the securities, cash, and
other investments contained in the portfolio. The Manager will provide
investment research and conduct a continuous program of evaluation, investment,
sales, and reinvestment of the Series' assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Series, when these transactions should be executed, and what
portion of the assets of the Series should be held in the various securities and
other investments in which it may invest, and the Manager is hereby authorized
to execute and perform such services on behalf of the Series. To the extent
permitted by the investment policies of the Series, the Manager shall make
decisions for the Series as to foreign currency matters and make determinations
as to, and execute and perform, foreign currency exchange contracts on behalf of
the Series. The Manager will provide the services under this Agreement in
accordance with the Series' investment objective or objectives, policies, and
restrictions as stated in the Fund's Registration Statement filed with the
Securities and Exchange Commission (the "SEC"), as amended. Furthermore:
-2-
<PAGE>
(a) The Manager will manage the Series so that each will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code. In
managing the Series in accordance with these requirements, the Manager shall be
entitled to receive and act upon advice of counsel to the Fund or counsel to the
Manager.
(b) The Manager will conform with the 1940 Act and all rules and
regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Fund's Board of
Trustees, and the provisions of the Registration Statement of the Fund under the
Securities Act of 1933 and the 1940 Act, as supplemented or amended.
(c) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Series as well as any other
investment advisory clients, the Manager may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to, aggregate the
securities to be so sold or purchased with those of its other clients where such
aggregation is not inconsistent with the policies set forth in the Registration
Statement. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Manager in
a manner that is fair and equitable in the judgment of the Manager in the
exercise of its fiduciary obligations to the Fund and to such other clients.
(d) In connection with the purchase and sale of securities of the
Series, the Manager will arrange for the transmission to the custodian for the
Fund on a daily basis, of such confirmation, trade tickets, and other documents
and information, including, but not limited to, Cusip, Cedel, or other numbers
that identify securities to be purchased or sold on behalf of the Series, as may
be reasonably necessary to enable the custodian to perform its administrative
and recordkeeping responsibilities with respect to the Series. With respect to
portfolio securities to be purchased or sold through the Depository Trust
Company, the Manager will arrange for the prompt transmission of the
confirmation of such trades to the Fund's custodian.
(e) The Manager will assist the custodian or portfolio accounting
agent for the Fund in determining, consistent with the procedures and policies
stated in the Registration Statement for the Fund, the value of any portfolio
securities or other assets of the Series for which the custodian or portfolio
accounting agent seeks assistance or review from the Manager.
(f) The Manager will make available to the Fund, promptly upon
request, any of the Series' investment records and ledgers as are necessary to
assist the Fund to comply with requirements of the 1940 Act, as well as other
applicable laws. The Manager will furnish to regulatory authorities having the
requisite authority any information or reports in connection with its services
which may be requested in order to ascertain whether the operations of the Fund
are being conducted in a manner consistent with applicable laws and regulations.
(g) The Manager will regularly report to the Fund's Board of Trustees
on the investment program for the Series and the issuers and securities
represented in the Series' portfolio, and will furnish the Fund's Board of
Trustees with respect to the Series such periodic and special reports as the
Trustees may reasonably request.
(h) In connection with its responsibilities under this Section 3, the
Manager is responsible for decisions to buy and sell securities and other
investments for the Series' portfolio, broker-dealer selection, and negotiation
of brokerage commission rates. The Manager's primary consideration in effecting
a security transaction will be to obtain the best execution for the Series,
taking into account the factors specified in the Prospectus and/or Statement of
Additional Information for the Fund, which include price (including the
-3-
<PAGE>
applicable brokerage commission or dollar spread), the size of the order, the
nature of the market for the security, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer involved,
the quality of the service, the difficulty of execution, execution capabilities
and operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. Accordingly, the price to the Series in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified, in the judgment of the Manager in the
exercise of its fiduciary obligations to the Fund, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Trustees may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Series to pay a broker-dealer for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Manager's overall responsibilities with respect to
the Series and to its other clients as to which it exercises investment
discretion. To the extent consistent with these standards and in accordance with
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, the Manager is further authorized to allocate the orders placed by
it on behalf of the Series to the Manager if it is registered as a broker-dealer
with the SEC, to an affiliated broker-dealer, or to such brokers and dealers who
also provide research or statistical material or other services to the Series,
the Manager or an affiliate of the Manager. Such allocation shall be in such
amounts and proportions as the Manager shall determine consistent with the above
standards, and the Manager will report on said allocation regularly to the Board
of Trustees of the Fund indicating the broker-dealers to which such allocations
have been made and the basis therefor.
4. CONFORMITY WITH APPLICABLE LAW. The Manager, in the performance of its
duties and obligations under this Agreement, shall act in conformity with the
Registration Statement of the Fund and with the instructions and directions of
the Board of Trustees of the Fund and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws and
regulations.
5. EXCLUSIVITY. The services of the Manager to the Fund under this
Agreement are not to be deemed exclusive, and the Manager, or any affiliate
thereof, shall be free to render similar services to other investment companies
and other clients (whether or not their investment objectives and policies are
similar to those of any of the Series) and to engage in other activities, so
long as its services hereunder are not impaired thereby.
6. DOCUMENTS. The Fund has delivered properly certified or authenticated
copies of each of the following documents to the Manager and will deliver to it
all future amendments and supplements thereto, if any:
(a) certified resolution of the Board of Trustees of the Fund
authorizing the appointment of the Manager and approving the form of this
Agreement;
(b) the Registration Statement as filed with the SEC and any
amendments thereto; and
(c) exhibits, powers of attorney, certificates and any and all other
documents relating to or filed in connection with the Registration Statement
described above.
-4-
<PAGE>
7. RECORDS. The Manager agrees to maintain and to preserve for the periods
prescribed under the 1940 Act any such records as are required to be maintained
by the Manager with respect to the Series by the 1940 Act. The Manager further
agrees that all records which it maintains for each Series are the property of
the Fund and it will promptly surrender any of such records upon request.
8. EXPENSES. During the term of this Agreement, the Manager will pay all
expenses incurred by it in connection with its activities under this Agreement,
except such expenses as are assumed by the Fund under this Agreement and such
expenses as are assumed by a Portfolio Manager under its Portfolio Management
Agreement. The Manager further agrees to pay all fees payable to the Portfolio
Managers, executive salaries and expenses of the Trustees of the Fund who are
employees of the Manager or its affiliates, and office rent of the Fund. The
Fund shall be responsible for all of the other expenses of its operations,
including, without limitation, the management fee payable hereunder; brokerage
commissions; interest; legal fees and expenses of attorneys; fees of auditors,
transfer agents and dividend disbursing agents, custodians and shareholder
servicing agents; the expense of obtaining quotations for calculating each
Fund's net asset value; taxes, if any, and the preparation of the Fund's tax
returns; cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase or redemption of shares; expenses of
registering and qualifying shares of the Fund under federal and state laws and
regulations (including the salary of employees of the Manager engaged in the
registering and qualifying of shares of the Fund under federal and state laws
and regulations or a pro-rata portion of the salary of employees to the extent
so engaged); 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 in connection with shareholder and trustee meetings; expenses
of printing and distributing prospectuses and statements of additional
information to existing shareholders; fees and expenses of Trustees of the Fund
who are not employees of the Manager or any Portfolio Manager, or their
affiliates; trade association dues; insurance premiums; extraordinary expenses
such as litigation expenses. To the extent the Manager incurs any costs or
performs any services which are an obligation of the Fund, as set forth herein,
the Fund shall promptly reimburse the Manager for such costs and expenses. To
the extent the services for which the Fund is obligated to pay are performed by
the Manager, the Manager shall be entitled to recover from the Fund only to the
extent of its costs for such services.
9. COMPENSATION. For the services provided by the Manager to each Series
pursuant to this Agreement, the Fund will pay to the Manager an annual fee equal
to the amount specified for such Series in Schedule A hereto, payable monthly in
arrears. Payment of the above fees shall be in addition to any amount paid to
the Manager for the salary of its employees for performing services which are an
obligation of the Fund as provided in Section 8. The fee will be appropriately
pro-rated to reflect any portion of a calendar month that this Agreement is not
in effect between us.
10. LIABILITY OF THE MANAGER. The Manager may rely on information
reasonably believed by it to be accurate and reliable. Except as may otherwise
be required by the 1940 Act or the rules thereunder, neither the Manager nor its
stockholders, officers, directors, employees, or agents shall be subject to, and
the Fund will indemnify such persons from and against, any liability for, or any
damages, expenses, or losses incurred in connection with, any act or omission
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Manager's duties, or by reason of reckless disregard of the
Manager's obligations and duties under this Agreement. Except as may otherwise
be required by the 1940 Act or the rules thereunder, neither the Manager nor its
stockholders, officers, directors, employees, or agents shall be subject to, and
the Fund will indemnify such persons from and against, any liability for, or any
damages, expenses, or losses incurred in connection with, any act or omission by
-5-
<PAGE>
a Portfolio Manager or any of the Portfolio Manager's stockholders or partners,
officers, directors, employees, or agents connected with or arising out of any
services rendered under a Portfolio Management Agreement, except by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Manager's duties under this Agreement, or by reason of reckless disregard of the
Manager's obligations and duties under this Agreement. No trustee, officer,
employee or agent of the Fund shall be subject to any personal liability
whatsoever, in his or her official capacity, to any person, including the
Portfolio Manager, other than to the Fund or its shareholders, in connection
with Fund property or the affairs of the Fund, save only that arising from his
or her bad faith, willful misfeasance, gross negligence or reckless disregard of
his or her duty to such person; and all such persons shall look solely to the
Fund property for satisfaction of claims of any nature against a trustee,
officer, employee or agent of the Fund arising in connection with the affairs of
the Fund. Moreover, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a Series shall be
enforceable against the assets and property of that Series only, and not against
the assets or property of any other series of the Fund.
11. CONTINUATION AND TERMINATION. This Agreement shall become effective on
the date first written above, subject to the condition that the Fund's Board of
Trustees, including a majority of those Trustees who are not interested persons
(as such term is defined in the 1940 Act) of the Manager, and the shareholders
of each Series, shall have approved this Agreement. Unless terminated as
provided herein, the Agreement shall continue in full force and effect for two
(2) years from the effective date of this Agreement, and shall continue from
year to year thereafter with respect to each Series so long as such continuance
is specifically approved at least annually (i) by the vote of a majority of the
Board of Trustees of the Fund, or (ii) by vote of a majority of the outstanding
voting shares of the Series (as defined in the 1940 Act), and provided
continuance is also approved by the vote of a majority of the Board of Trustees
of the Fund who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may not be
amended in any material respect without a majority vote of the outstanding
voting shares (as defined in the 1940 Act).
However, any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of a Series shall be effective
to continue this Agreement with respect to such Series notwithstanding (i) that
this Agreement has not been approved by the holders of a majority of the
outstanding shares of any other Series or (ii) that this Agreement has not been
approved by the vote of a majority of the outstanding shares of the Fund, unless
such approval shall be required by any other applicable law or otherwise. This
Agreement may be terminated by the Fund at any time, without the payment of any
penalty, by vote of a majority of the Board of Trustees of the Fund or by a vote
of a majority of the outstanding voting shares of the Fund, or with respect to a
Series, by vote of a majority of the outstanding voting shares of such Series,
on sixty (60) days' written notice to the Manager, or by the Manager at any
time, without the payment of any penalty, on sixty (60) days' written notice to
the Fund. This Agreement will automatically and immediately terminate in the
event of its "assignment" (as described in the 1940 Act).
12. USE OF NAME. It is understood that the name "Pilgrim Investments, Inc."
or any derivative thereof (including the name "Pilgrim") or logo associated with
that name is the valuable property of the Manager and its affiliates, and that
the Fund and/or the Series have the right to use such name (or derivative or
logo) only so long as this Agreement shall continue with respect to such Fund
and/or Series. Upon termination of this Agreement, the Fund (or Series) shall
forthwith cease to use such name (or derivative or logo) and, in the case of the
Fund, shall promptly amend its Declaration of Trust to change its name (if such
name is included therein).
-6-
<PAGE>
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
14. APPLICABLE LAW.
(a) This Agreement shall be governed by the laws of the State of
Arizona, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
(b) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(c) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PILGRIM MUTUAL FUNDS
By:
------------------------------------
Title
----------------------------------
PILGRIM INVESTMENTS, INC.
By:
------------------------------------
Title
----------------------------------
-8-
<PAGE>
Schedule A
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
Pilgrim SmallCap Growth Fund 1.00% of the Series' average net assets
Pilgrim MidCap Growth Fund 0.75% of the first $500 million of the
Series' 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
Pilgrim LargeCap Growth Fund 0.75% of the first $500 million of the
Series' 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
Pilgrim Convertible Fund 0.75% of the first $500 million of the
Series' 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
Pilgrim Balanced Fund 0.75% of the first $500 million of the
Series' 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
Pilgrim Strategic Income Fund 0.45% of the first $500 million of the
Series' 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
Pilgrim Emerging Countries Fund 1.25% of the Series' average net assets
Pilgrim Worldwide Growth Fund 1.00% of the first $500 million of the
Series' 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
Pilgrim International 1.00% of the first $500 million of the
SmallCap Growth Fund Series' 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
Pilgrim International Core 1.00% of the first $500 million of the
Growth Fund Series' 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
Pilgrim High Yield Fund II 0.60% of the Series' average net assets
Pilgrim Money Market Fund 0.50% of the Series' average net assets,
provided, however, that to the extent the
Pilgrim Money Market Fund invests
substantially all of its assets in another
investment company which pays investment
advisory fees, the investment advisory fees
shall be 0.15% of average net assets.
-9-
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this ____ day of ________, 1999 between Pilgrim Investments,
Inc., a Delaware corporation (the "Manager"), and Nicholas-Applegate Capital
Management, a California limited partnership (the "Portfolio Manager").
WHEREAS, Pilgrim Mutual Funds (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end,
management investment company;
WHEREAS, the Fund is authorized to issue separate series, each series
having its own investment objective or objectives, policies, and limitations;
WHEREAS, the Fund may offer shares of additional series in the future, and
currently intends to offer shares of additional series in the future;
WHEREAS, pursuant to a Management Agreement, dated the date hereof (the
"Management Agreement"), a copy of which has been provided to the Portfolio
Manager, the Fund has retained the Manager to render advisory and management
services with respect to each of the Fund's series; and
WHEREAS, pursuant to authority granted to the Manager in the Management
Agreement, the Manager wishes to retain the Portfolio Manager to furnish
investment advisory services to one or more of the series of the Fund, and the
Portfolio Manager is willing to furnish such services to the Fund and the
Manager;
NOW, THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Manager and the
Portfolio Manager as follows:
1. APPOINTMENT. The Manager hereby appoints the Portfolio Manager to act as
the investment adviser and manager to the series of the Fund set forth on
Schedule A hereto (the "Series") for the periods and on the terms set forth in
this Agreement The Portfolio Manager accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
In the event the Fund designates one or more series (other than the Series)
with respect to which the Manager wishes to retain the Portfolio Manager to
render investment advisory services hereunder, it shall notify the Portfolio
Manager in writing. If the Portfolio Manager is willing to render such services,
it shall notify the Manager in writing, whereupon such series shall become a
Series hereunder, and be subject to this Agreement.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of the Fund's
Board of Trustees and the Manager, the Portfolio Manager will provide a
continuous investment program for each Series' portfolio and determine in its
discretion the composition of the assets of each Series' portfolio, including
determination of the purchase, retention, or sale of the securities, cash, and
<PAGE>
other investments contained in the portfolio. The Portfolio Manager will provide
investment research and conduct a continuous program of evaluation, investment,
sales, and reinvestment of each Series' assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Series, when these transactions should be executed, and what
portion of the assets of the Series should be held in the various securities and
other investments in which it may invest. To the extent permitted by the
investment policies of each Series, the Portfolio Manager shall make decisions
for the Series as to foreign currency matters and make determinations as to and
execute and perform foreign currency exchange contracts on behalf of the Series.
The Portfolio Manager will provide the services under this Agreement in
accordance with each Series' investment objective or objectives, policies, and
restrictions as stated in the Fund's Registration Statement filed with the
Securities and Exchange Commission ("SEC"), as amended, copies of which shall be
sent to the Portfolio Manager by the Manager prior to the commencement of this
Agreement and promptly following any such amendment. The Portfolio Manager
further agrees as follows:
(a) The Portfolio Manager will conform with the 1940 Act and all rules
and regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Fund's Board of
Trustees of which the Portfolio Manager has been sent a copy, and the provisions
of the Registration Statement of the Fund filed under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Portfolio Manager has received a copy, and with the Manager's portfolio manager
operating policies and procedures as in effect on the date hereof, as such
policies and procedures may be revised or amended by the Manager and agreed to
by the Portfolio Manager.
(b) In connection with the purchase and sale of securities for each
Series, the Portfolio Manager will arrange for the transmission to the custodian
and portfolio accounting agent for the Series on a daily basis, such
confirmation, trade tickets, and other documents and information, including, but
not limited to, Cusip, Cedel, or other numbers that identify securities to be
purchased or sold on behalf of the Series, as may be reasonably necessary to
enable the custodian and portfolio accounting agent to perform its
administrative and recordkeeping responsibilities with respect to the Series.
With respect to portfolio securities to be settled through the Depository Trust
Company, the Portfolio Manager will arrange for the prompt transmission of the
confirmation of such trades to the Fund's custodian and portfolio accounting
agent.
(c) The Portfolio Manager will make available to the Fund and the
Manager, promptly upon request, any of the Series' investment records and
ledgers maintained by the Portfolio Manager (which shall not include the records
and ledgers maintained by the custodian or portfolio accounting agent for the
Fund) as are necessary to assist the Fund and the Manager to comply with
-2-
<PAGE>
requirements of the 1940 Act and the Investment Advisers Act of 1940 (the
"Advisers Act"), as well as other applicable laws. The Portfolio Manager will
furnish to regulatory authorities having the requisite authority any information
or reports in connection with such services in respect to the Series which may
be requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
(d) The Portfolio Manager will provide reports to the Fund's Board of
Trustees for consideration at meetings of the Board on the investment program
for each Series and the issuers and securities represented in each Series'
portfolio, and will furnish the Fund's Board of Trustees with respect to each
Series such periodic and special reports as the Trustees and the Manager may
reasonably request.
3. BROKER-DEALER SELECTION. The Portfolio Manager is authorized to make
decisions to buy and sell securities and other investments for each Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates in effecting a security transaction. The Portfolio Manager's primary
consideration in effecting a security transaction will be to obtain the best
execution for the Series, taking into account the factors specified in the
prospectus and/or statement of additional information for the Fund, and
determined in consultation with the Manager, which include price (including the
applicable brokerage commission or dollar spread), the size of the order, the
nature of the market for the security, the timing of the transaction, the
reputation, the experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution, and the
execution capabilities and operational facilities of the firm involved, and the
firm's risk in positioning a block of securities. Accordingly, the price to a
Series in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified, in the judgment of the
Portfolio Manager in the exercise of its fiduciary obligations to the Fund, by
other aspects of the portfolio execution services offered. Subject to such
policies as the Fund's Board of Trustees or Manager may determine and consistent
with Section 28(e) of the Securities Exchange Act of 1934, the Portfolio Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having caused a
Series to pay a broker-dealer for effecting a portfolio investment transaction
in excess of the amount of commission another broker-dealer would have charged
for effecting that transaction, if the Portfolio Manager determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer, viewed in
terms of either that particular transaction or the Portfolio Manager's or the
Manager's overall responsibilities with respect to the Series and to their
respective other clients as to which they exercise investment discretion. The
Portfolio Manager will consult with the Manager to the end that portfolio
transactions on behalf of a Series are directed to broker-dealers on the basis
of criteria reasonably considered appropriate by the Manager. To the extent
consistent with these standards, the Portfolio Manager is further authorized to
allocate the orders placed by it on behalf of a Series to the Portfolio Manager
if it is registered as a broker-dealer with the SEC, to an affiliated
broker-dealer, or to such brokers and dealers who also provide research or
statistical material, or other services to the Series, the Portfolio Manager, or
an affiliate of the Portfolio Manager. Such allocation shall be in such amounts
and proportions as the Portfolio Manager shall determine consistent with the
above standards, and the Portfolio Manager will report on said allocation
-3-
<PAGE>
regularly to the Fund's Board of Trustees indicating the broker-dealers to which
such allocations have been made and the basis therefor.
4. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has reviewed
Post-Effective Amendment No. 71 to the Registration Statement for the Fund filed
with the SEC that contains disclosure about the Portfolio Manager, and
represents and warrants that, with respect to the disclosure about the Portfolio
Manager or information relating, directly or indirectly, to the Portfolio
Manager, such Registration Statement contains, as of the date hereof, no untrue
statement of any material fact and does not omit any statement of a material
fact which was required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. The Portfolio Manager further represents and warrants that it is a
duly registered investment adviser under the Advisers Act and will maintain such
registration so long as this Agreement remains in effect. The Portfolio Manager
will provide the Manager with a copy of the Portfolio Manager's Form ADV, Part
II at the time the Form ADV is filed with the SEC.
5. EXPENSES. During the term of this Agreement, the Portfolio Manager will
pay all expenses incurred by it and its staff and for their activities in
connection with its portfolio management duties under this Agreement. The
Manager or the Fund shall be responsible for all the expenses of the Fund's
operations.
6. COMPENSATION. For the services provided to each Series, the Manager will
pay the Portfolio Manager an annual fee equal to the amount specified for such
Series in Schedule A hereto, payable monthly in arrears. The fee will be
appropriately prorated to reflect any portion of a calendar month that this
Agreement is not in effect among the parties. In accordance with the provisions
of the Management Agreement, the Manager is solely responsible for the payment
of fees to the Portfolio Manager, and the Portfolio Manager agrees to seek
payment of its fees solely from the Manager; provided, however, that if the Fund
fails to pay the Manager all or a portion of the management fee under said
Management Agreement when due, and the amount that was paid is insufficient to
cover the Portfolio Manager's fee under this Agreement for the period in
question, then the Portfolio Manager may enforce against the Fund any rights it
may have as a third-party beneficiary under the Management Agreement and the
Manager will take all steps appropriate under the circumstances to collect the
amount due from the Fund.
7. COMPLIANCE.
(a) The Portfolio Manager agrees to use reasonable compliance
techniques as the Manager or the Board of Trustees may adopt, including any
written compliance procedures.
(b) The Portfolio Manager agrees that it shall promptly notify the
Manager and the Fund (1) in the event that the SEC has censured the Portfolio
Manager; placed limitations upon its activities, functions or operations;
suspended or revoked its registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these actions, or (2)
upon having a reasonable basis for believing that the Series has ceased to
qualify or might not qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code. The Portfolio Manager further agrees to notify
the Manager and the Fund promptly of any material fact known to the Portfolio
Manager respecting or relating to the Portfolio Manager that is not contained in
-4-
<PAGE>
the Registration Statement or prospectus for the Fund (which describes the
Series), or any amendment or supplement thereto, or if any statement contained
therein that becomes untrue in any material respect.
(c) The Manager agrees that it shall promptly notify the Portfolio
Manager (1) in the event that the SEC has censured the Manager or the Fund;
placed limitations upon either of their activities, functions, or operations;
suspended or revoked the Manager's registration as an investment adviser; or has
commenced proceedings or an investigation that may result in any of these
actions, or (2) upon having a reasonable basis for believing that the Series has
ceased to qualify or might not qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code.
8. BOOKS AND RECORDS. The Portfolio Manager hereby agrees that all records
which it maintains for the Series are the property of the Fund and further
agrees to surrender promptly to the Fund any of such records upon the Fund's or
the Manager's request in compliance with the requirements of Rule 31a-3 under
the 1940 Act, although the Portfolio Manager may, at its own expense, make and
retain a copy of such records. The Portfolio Manager further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-l under the 1940 Act.
9. COOPERATION; CONFIDENTIALITY. Each party to this Agreement agrees to
cooperate with the other party and with all appropriate governmental authorities
having the requisite jurisdiction (including, but not limited to, the SEC) in
connection with any investigation or inquiry relating to this Agreement or the
Fund. Subject to the foregoing, the Portfolio Manager shall treat as
confidential all information pertaining to the Fund and actions of the Fund, the
Manager and the Portfolio Manager, and the Manager shall treat as confidential
and use only in connection with the Series all information furnished to the Fund
or the Manager by the Portfolio Manager, in connection with its duties under the
agreement except that the aforesaid information need not be treated as
confidential if required to be disclosed under applicable law, if generally
available to the public through means other than by disclosure by the Portfolio
Manager or the Manager, or if available from a source other than the Manager,
Portfolio Manager or this Fund.
10. REPRESENTATIONS RESPECTING PORTFOLIO MANAGER. The Manager agrees that
neither the Manager, nor affiliated persons of the Manager, shall give any
information or make any representations or statements in connection with the
sale of shares of the Series concerning the Portfolio Manager or the Series
other than the information or representations contained in the Registration
Statement, prospectus, or statement of additional information for the Fund's
shares, as they may be amended or supplemented from time to time, or in reports
or proxy statements for the Fund, or in sales literature or other promotional
material approved in advance by the Portfolio Manager, except with the prior
permission of the Portfolio Manager.
11. [Intentionally Omitted]
12. CONTROL. Notwithstanding any other provision of the Agreement, it is
understood and agreed that the Fund shall at all times retain the ultimate
-5-
<PAGE>
responsibility for and control of all functions performed pursuant to this
Agreement and has reserved the right to reasonably direct any action hereunder
taken on its behalf by the Portfolio Manager.
13. LIABILITY. Except as may otherwise be required by the 1940 Act or the
rules thereunder or other applicable law, the Manager agrees that the Portfolio
Manager, any affiliated person of the Portfolio Manager, and each person, if
any, who, within the meaning of Section 15 of the 1933 Act controls the
Portfolio Manager (1) shall bear no responsibility and shall not be subject to
any liability for any act or omission respecting any series of the Fund that is
not a Series hereunder, and (2) shall not be liable for, or subject to any
damages, expenses, or losses in connection with, any act or omission connected
with or arising out of any services rendered under this Agreement, except by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of the Portfolio Manager's duties, or by reason of reckless disregard of the
Portfolio Manager's obligations and duties under this Agreement.
14. INDEMNIFICATION.
(a) The Manager agrees to indemnify and hold harmless the Portfolio
Manager, any affiliated person of the Portfolio Manager, and each person, if
any, who, within the meaning of Section 15 of the 1933 Act controls
("controlling person") the Portfolio Manager (all of such persons being referred
to as "Portfolio Manager Indemnified Persons") against any and all losses,
claims, damages, liabilities, or litigation (including legal and other expenses)
to which a Portfolio Manager Indemnified Person may become subject under the
1933 Act, the 1940 Act, the Advisers Act, under any other statute, at common law
or otherwise, arising out of the Manager's responsibilities to the Trust which
(1) may be based upon the Manager's willful misfeasance, bad faith, or
negligence in the performance of its duties (which could include a negligent
action or a negligent omission to act), or by reason of the Manager's reckless
disregard of its obligations and duties under this Agreement or (2) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or prospectus covering shares of the
Trust or any Series, or any amendment thereof or any supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon information
furnished to the Manager or the Trust or to any affiliated person of the Manager
by a Portfolio Manager Indemnified Person; provided however, that in no case
shall the indemnity in favor of the Portfolio Manager Indemnified Person be
deemed to protect such person against any liability to which any such person
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of obligations and duties under this Agreement.
(b) Notwithstanding Section 13 of this Agreement, the Portfolio
Manager agrees to indemnify and hold harmless the Manager, any affiliated person
of the Manager, and any controlling person of the Manager (all of such persons
being referred to as "Manager Indemnified Persons") against any and all losses,
claims, damages, liabilities, or litigation (including legal and other expenses)
to which a Manager Indemnified Person may become subject under the 1933 Act,
1940 Act, the Advisers Act, under any other statute, at common law or otherwise,
arising out of the Portfolio Manager's responsibilities as Portfolio Manager of
-6-
<PAGE>
the Series which (1) may be based upon the Portfolio Manager's willful
misfeasance, bad faith, or negligence in the performance of its duties (which
could include a negligent action or a negligent omission to act), or by reason
of the Portfolio Manager's reckless disregard of its obligations and duties
under this Agreement, or (2) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
prospectus covering the shares of the Trust or any Series, or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact known or which should have been known to the Portfolio Manager and
was required to be stated therein or necessary to make the statements therein
not misleading, if such a statement or omission was made in reliance upon
information furnished to the Manager, the Trust, or any affiliated person of the
Manager or Trust by the Portfolio Manager or any affiliated person of the
Portfolio Manager; provided, however, that in no case shall the indemnity in
favor of a Manager Indemnified Person be deemed to protect such person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under this Agreement.
(c) The Manager shall not be liable under Paragraph (a) of this
Section 14 with respect to any claim made against a Portfolio Manager
Indemnified Person unless such Portfolio Manager Indemnified Person shall have
notified the Manager in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon such Portfolio Manager Indemnified Person (or after such
Portfolio Manager Indemnified Person shall have received notice of such service
on any designated agent), but failure to notify the Manager of any such claim
shall not relieve the Manager from any liability which it may have to the
Portfolio Manager Indemnified Person against whom such action is brought except
to the extent the Manager is prejudiced by the failure or delay in giving such
notice. In case any such action is brought against the Portfolio Manager
Indemnified Person, the Manager will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Portfolio Manager
Indemnified Person, to assume the defense thereof, with counsel satisfactory to
the Portfolio Manager Indemnified Person. If the Manager assumes the defense of
any such action and the selection of counsel by the Manager to represent the
Manager and the Portfolio Manager Indemnified Person would result in a conflict
of interests and therefore, would not, in the reasonable judgment of the
Portfolio Manager Indemnified Person, adequately represent the interests of the
Portfolio Manager Indemnified Person, the Manager will, at its own expense,
assume the defense with counsel to the Manager and, also at its own expense,
with separate counsel to the Portfolio Manager Indemnified Person, which counsel
shall be satisfactory to the Manager and to the Portfolio Manager Indemnified
Person. The Portfolio Manager Indemnified Person shall bear the fees and
expenses of any additional counsel retained by it, and the Manager shall not be
liable to the Portfolio Manager Indemnified Person under this Agreement for any
legal or other expenses subsequently incurred by the Portfolio Manager
Indemnified Person independently in connection with the defense thereof other
than reasonable costs of investigation. The Manager shall not have the right to
compromise on or settle the litigation without the prior written consent of the
Portfolio Manager Indemnified Person if the compromise or settlement results, or
may result in a finding of wrongdoing on the part of the Portfolio Manager
Indemnified Person.
-7-
<PAGE>
(d) The Portfolio Manager shall not be liable under Paragraph (b) of
this Section 14 with respect to any claim made against a Manager Indemnified
Person unless such Manager Indemnified Person shall have notified the Portfolio
Manager in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon such Manager Indemnified Person (or after such Manager Indemnified
Person shall have received notice of such service on any designated agent), but
failure to notify the Portfolio Manager of any such claim shall not relieve the
Portfolio Manager from any liability which it may have to the Manager
Indemnified Person against whom such action is brought except to the extent the
Portfolio Manager is prejudiced by the failure or delay in giving such notice.
In case any such action is brought against the Manager Indemnified Person, the
Portfolio Manager will be entitled to participate, at its own expense, in the
defense thereof or, after notice to the Manager Indemnified Person, to assume
the defense thereof, with counsel satisfactory to the Manager Indemnified
Person. If the Portfolio Manager assumes the defense of any such action and the
selection of counsel by the Portfolio Manager to represent both the Portfolio
Manager and the Manager Indemnified Person would result in a conflict of
interests and therefore, would not, in the reasonable judgment of the Manager
Indemnified Person, adequately represent the interests of the Manager
Indemnified Person, the Portfolio Manager will, at its own expense, assume the
defense with counsel to the Portfolio Manager and, also at its own expense, with
separate counsel to the Manager Indemnified Person, which counsel shall be
satisfactory to the Portfolio Manager and to the Manager Indemnified Person. The
Manager Indemnified Person shall bear the fees and expenses of any additional
counsel retained by it, and the Portfolio Manager shall not be liable to the
Manager Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Manager Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Portfolio Manager shall not have the right to compromise on
or settle the litigation without the prior written consent of the Manager
Indemnified Person if the compromise or settlement results, or may result in a
finding of wrongdoing on the part of the Manager Indemnified Person.
15. DURATION AND TERMINATION.
(a) This Agreement shall become effective on the date first indicated
above, subject to the condition that the Fund's Board of Trustees, including a
majority of those Trustees who are not interested persons (as such term is
defined in the 1940 Act) of the Manager or the Portfolio Manager, and the
shareholders of each Series, shall have approved this Agreement. Unless
terminated as provided herein, this Agreement shall remain in full force and
effect for two years from such date and continue on an annual basis thereafter
with respect to each Series covered by this Agreement; provided that such annual
continuance is specifically approved each year by (a) the Board of Trustees of
the Fund, or by the vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of each Series, and (b) the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons (as such
term is defined in the 1940 Act) of any such party to this Agreement cast in
person at a meeting called for the purpose of voting on such approval. However,
any approval of this Agreement by the holders of a majority of the outstanding
shares (as defined in the 1940 Act) of a Series shall be effective to continue
this Agreement with respect to such Series notwithstanding (i) that this
-8-
<PAGE>
Agreement has not been approved by the holders of a majority of the outstanding
shares of any other Series or (ii) that this agreement has not been approved by
the vote of a majority of the outstanding shares of the Fund, unless such
approval shall be required by any other applicable law or otherwise.
Notwithstanding the foregoing, this Agreement may be terminated with respect to
any Series covered by this Agreement: (a) by the Manager at any time, upon sixty
(60) days' written notice to the Portfolio Manager and the Fund, (b) at any time
without payment of any penalty by the Fund, by the Fund's Board of Trustees or a
majority of the outstanding voting securities of each Series, upon sixty (60)
days' written notice to the Manager and the Portfolio Manager, or (c) by the
Portfolio Manager upon three (3) months written notice unless the Fund or the
Manager requests additional time to find a replacement for the Portfolio
Manager, in which case the Portfolio Manager shall allow the additional time
requested by the Fund or Manager not to exceed three (3) additional months
beyond the initial three-month notice period; provided, however, that the
Portfolio Manager may terminate this Agreement at any time without penalty,
effective upon written notice to the Manager and the Fund, in the event either
the Portfolio Manager (acting in good faith) or the Manager ceases to be
registered as an investment adviser under the Advisers Act or otherwise becomes
legally incapable of providing investment management services pursuant to its
respective contract with the Fund, or in the event the Manager becomes bankrupt
or otherwise incapable of carrying out its obligations under this Agreement, or
in the event that the Portfolio Manager does not receive compensation for its
services from the Manager or the Fund as required by the terms of this
agreement.
In the event of termination for any reason, all records of each Series
for which the Agreement is terminated shall promptly be returned to the Manager
or the Fund, free from any claim or retention of rights in such record by the
Portfolio Manager, although the Portfolio Manager may, at its own expense, make
and retain a copy of such records. This Agreement shall automatically terminate
in the event of its assignment (as such term is described in the 1940 Act). In
the event this Agreement is terminated or is not approved in the manner
described above, the Sections or Paragraphs numbered 2(g), 8, 9, 10, 12, 13 and
14 of this Agreement shall remain in effect, as well as any applicable provision
of this Section numbered 15 and, to the extent that only amounts are owed to the
Portfolio Manager as compensation for services rendered while the agreement was
in effect, Section 6.
(b) NOTICES.
Any notice must be in writing and shall be sufficiently given (1) when
delivered in person, (2) when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by postage prepaid first class air mail
simultaneously dispatched), (3) when sent by internationally recognized
overnight courier service (with receipt confirmed by such overnight courier
service), or (4) when sent by registered or certified mail, to the other party
at the address of such party set forth below or at such other address as such
party may from time to time specify in writing to the other party.
If to the Fund:
Pilgrim Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Attention: James M. Hennessy
-9-
<PAGE>
If to the Portfolio Manager:
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, CA 92101
Attention: E. Blake Moore
16. AMENDMENTS. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) the holders of a majority of the
outstanding voting securities of the Series, and (ii) the Trustees of the Fund,
including a majority of the Trustees of the Fund who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, if such approval is required by applicable
law.
17. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of the State of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act or rules or orders of the SEC
thereunder, and without regard for the conflicts of laws principle thereof. The
term "affiliate" or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The Manager and the Portfolio Manager acknowledge that the Fund
enjoys the rights of a third-party beneficiary under this Agreement, and the
Manager acknowledges that the Portfolio Manager enjoys the rights of a third
party beneficiary under the Management Agreement.
(c) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(d) To the extent permitted under Section 15 of this Agreement, this
Agreement may only be assigned by any party with the prior written consent of
the other parties.
(e) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable.
(f) Nothing herein shall be construed as constituting the Portfolio
Manager as an agent or co-partner of the Manager, or constituting the Manager as
an agent or co-partner of the Portfolio Manager.
(g) This agreement may be executed in counterparts.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first above written.
PILGRIM INVESTMENTS, INC.
By:
------------------------------------
Title
----------------------------------
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
By:
------------------------------------
Title
----------------------------------
-11-
<PAGE>
Schedule A
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Pilgrim Small Cap Growth Fund 0.50% of the Series' average net assets
Pilgrim Mid Cap Growth Fund 0.375% of the first $500 million of the
Series' 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
Pilgrim Large Cap Growth Fund 0.375% of the first $500 million of the
Series' 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
Pilgrim Emerging Countries Fund 0.625% of the Series' average net assets
Pilgrim Worldwide Growth Fund 0.50% of the first $500 million of the
Series' 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
Pilgrim International Small 0.50% of the first $500 million of the
Cap Growth Fund Series' 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
Pilgrim Convertible Fund 0.375% of the first $500 million of the
Series' 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
Pilgrim International 0.50% of the first $500 million of the
Core Growth Fund Series' 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
-12-
<PAGE>
PILGRIM INVESTMENTS, INC.
TWO RENAISSANCE SQUARE
PHOENIX, ARIZONA 85004-4424
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
Reference is hereby made to Section 2(a) of the Portfolio Management
Agreement dated as of May 21, 1999 between you and us in respect of Pilgrim
Mutual Funds which provides that in carrying out your duties under such
Agreement you will comply with our portfolio manager operating policies and
procedures in effect on the date of such Agreement. Attached hereto as Annex I
is a list of such policies and procedures. Please sign below to acknowledge your
receipt and acceptance of these policies and procedures.
Very truly yours,
PILGRIM INVESTMENTS, INC.
By:
------------------------------
Acknowledged and Agreed:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
By:
---------------------------------
<PAGE>
Annex I
PORTFOLIO MANAGER OPERATING POLICIES AND PROCEDURES
In carrying its duties under the Portfolio Management Agreement, the
Portfolio Manager will comply with the following policies and procedures
(capitalized terms used herein shall have the meaning given such terms in the
Portfolio Management Agreement):
(a) The Portfolio Manager will manage each Series so that it meets the
income and asset diversification requirements of Section 851 of the Internal
Revenue Code.
(b) The Portfolio Manager will vote all proxies solicited by or with
respect to the issuers of securities which assets of the Series are invested
consistent with any procedures or guidelines promulgated by the Board or the
Manager, or if none, in the discretion of the Portfolio Manager based upon the
best interests of the Series. The Portfolio Manager will maintain appropriate
records detailing its voting of proxies on behalf of the Fund and will provide
to the Fund at least quarterly a report setting forth the proposals voted on and
how the Series' shares were voted since the prior report, including the name of
the corresponding issuers.
(c) In connection with the purchase and sale of securities for each Series,
the Portfolio Manager will arrange for the transmission to the custodian and
portfolio accounting agent for the Series on a daily basis, such confirmation,
trade tickets, and other documents and information, including, but not limited
to, Cusip, Sedol, or other numbers that identify securities to be purchased or
sold on behalf of the Series, as may be reasonably necessary to enable the
custodian and portfolio accounting agent to perform its administrative and
recordkeeping responsibilities with respect to the Series. With respect to
portfolio securities to be settled through the Depository Trust Company, the
Portfolio Manager will arrange for the prompt transmission of the confirmation
of such trades to the Fund's custodian and portfolio accounting agent.
(d) The Portfolio Manager will assist the custodian and portfolio
accounting agent for the Fund in determining or confirming, consistent with the
procedures and policies stated in the Registration Statement for the Fund or
adopted by the Board of Trustees, the value of any portfolio securities or other
assets of the Series for which the custodian and portfolio accounting agent
seeks assistance from or identifies for review by the Portfolio Manager. The
parties acknowledge that the Portfolio Manager is not a custodian of the Series'
assets and will not take possession or custody of such assets.
-14-
<PAGE>
(e) The Portfolio Manager will provide the Manager, no later than the 20th
day following the end of each of the first three fiscal quarters of each Series
and the 45th day following the end of each Series' fiscal year, a letter to
shareholders (to be subject to review and editing by the Manager) containing a
discussion of those factors referred to in Item 5(a) of 1940 Act Form N-1A in
respect of both the prior quarter and the fiscal year to date.
(f) The Portfolio Manager will complete and deliver to the Manager a
written compliance checklist in a form provided by the Manager for each month by
the 10th day of the following month.
(g) The parties agree that in the event that the Manager or an affiliated
person of the Manager sends sales literature or other promotional material to
the Portfolio Manager for its approval and the Portfolio Manager has not
commented within 10 days, the Manager and its affiliated persons may use and
distribute such sales literature or other promotional material.
-15-
PILGRIM MUTUAL FUNDS
40 N. Central Avenue, Suite 1200
Phoenix, Arizona 85004
___________, 1999
Pilgrim Securities, Inc.
40 N. Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: Underwriting Agreement
Ladies and Gentlemen:
Pilgrim Mutual Funds is a Delaware business trust operating as an open-end
management investment company (hereinafter referred to as the "Trust"). The
Trust is registered as such under the Investment Company Act of 1940, as amended
(the "1940 Act"), and its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"). The Trust consists of eleven separate series:
Pilgrim International Core Growth Fund, Pilgrim Worldwide Growth Fund, Pilgrim
International Small Cap Growth Fund, Pilgrim Emerging Countries Fund, Pilgrim
Large Cap Growth Fund, Pilgrim Mid Cap Growth Fund, Pilgrim Small Cap Growth
Fund, Pilgrim Convertible Fund, Pilgrim Balanced Growth Fund, Pilgrim High Yield
Fund II and Pilgrim High Quality Bond Fund (the "Funds"). The Trust on behalf of
the Funds desires to offer and sell the authorized but unissued shares of the
Funds to the public in accordance with applicable federal and state securities
laws.
You have informed us that Pilgrim Securities, Inc. is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934 and is
a member in good standing of the National Association of Securities Dealers,
Inc. You have indicated your desire to act as the exclusive selling agent and
principal underwriter for the shares of the Funds. We have been authorized by
the Trust to execute and deliver this Agreement to you by a resolution of our
Board of Trustees (the "Trustees") adopted at a meeting of the Trustees, at
which a majority of Trustees, including a majority of our Trustees who are not
otherwise interested persons of our investment manager or its related
organizations, were present and voted in favor of the said resolution approving
this Underwriting Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for distribution of the shares (other than sales made directly by the
Trust without sales charge) and agree that we will deliver to you such shares as
you may sell. You agree to use your best efforts to promote the sale of the
shares, but you are not obligated to sell any specific number of the shares.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind the Trust or the Funds by your actions, conduct or
contracts, except that you are authorized to accept orders for the purchase or
<PAGE>
repurchase of the shares as our agent. You may appoint sub-agents or distribute
the shares through dealers (or otherwise) as you may determine necessary or
desirable from time to time. This Agreement shall not, however, be construed as
authorizing any dealer or other person to accept orders for sale or repurchase
on our behalf or to otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares of the Funds shall be offered at a price
equivalent to their net asset value plus, as appropriate, a variable percentage
of the public offering price as a sales load, as set forth in the Funds'
Prospectus. On each business day on which the New York Stock Exchange is open
for business, we will furnish you with the net asset value of the shares, which
shall be determined and become effective as of the close of business of the New
York Stock Exchange on that day. The net asset value so determined shall apply
to all orders for the purchase of the shares received by dealers prior to such
determination, and you are authorized in your capacity as our agent to accept
orders and confirm sales at such net asset value; PROVIDED THAT, such dealers
notify you of the time when they received the particular order and that the
order is placed with you prior to your close of business on the day on which the
applicable net asset value is determined. To the extent that our Shareholder
Servicing and Transfer Agent (collectively, "Agent") and the Custodian(s) for
any pension, profit-sharing, employer or self-employed plan receive payments on
behalf of the investors, such Agent and Custodian(s) shall be required to record
the time of such receipt with respect to each payment, and the applicable net
asset value shall be that which is next determined and effective after the time
of receipt by them. In all events, you shall forthwith notify all of the dealers
comprising your selling group and the Agent and Custodian(s) of the effective
net asset value as received from us. Should we at any time calculate our net
asset value more frequently than once each business day, you and we will follow
procedures with respect to such additional price or prices comparable to those
set forth above in this Section 3.
4. ORDERS. You shall promptly advise us of all purchase orders for shares
of the Funds received by you. Any order may be rejected by us; provided,
however, that we and the Trust will not arbitrarily or without reasonable cause
refuse to accept or confirm orders for the purchase of shares of a Fund. We or
our agent will confirm orders upon receipt, will make appropriate book entries
and, upon receipt by the Trust (or its agent) of payment therefor, will deliver
deposit receipts for the shares.
5. SALES COMMISSION.
(a) In respect of each Class of Shares other than Class B Shares:
(i) You shall be entitled to receive a sales commission on the
sale of shares of the Funds in the amounts and according to the procedures set
forth in the Funds' Prospectus then in effect under the 1933 Act (including any
supplements or amendments thereto).
(ii) In addition to the payments of the sales commissions to you
provided for in paragraph 5(a)(i), you may also receive reimbursement for
expenses or a maintenance or trail fee as may be required by and described in
the distribution plans adopted by the Funds pursuant to Rule 12b-1 under the
1940 Act (the "Distribution Plans").
-2-
<PAGE>
(b) In respect of the Class B Shares of each Fund, the following
provisions shall apply:
(i) In consideration of your services as principal underwriter of
the Funds' Class B Shares pursuant to this Underwriting Agreement and our
distribution plan pursuant to Rule 12b-1 under the 1940 Act in respect of such
shares (the "Class B Distribution Plan"), we agree: (I) to pay to you monthly in
arrears your "Allocable Portion" (as hereinafter defined) of a fee (the
"Distribution Fee") which shall accrue daily in an amount equal to the product
of (A) the daily equivalent of 0.75% per annum multiplied by (B) the net asset
value of the Class B Shares of each Fund outstanding on such day, and (II) to
withhold from redemption proceeds your Allocable Portion of the Contingent
Deferred Sales Charges ("CDSCs") and to pay the same over to you or at your
direction.
(ii) The Allocation Schedule attached hereto as Schedule A and
each of the provisions set forth in clauses (I) through (V) of the second
sentence of Section 1(A) of the Class B Distribution Plan as in effect on the
date hereof, together with the related definitions, are hereby incorporated
herein by reference with the same force and effect as if set forth herein in
their entirety.
(iii) In addition to the payments of amounts provided for in
Section 5(b)(i) and (ii), you may also receive reimbursement for expenses or a
maintenance or trail fee as may be required by and described in the Class B
Distribution Plan.
(c) You may allow appointed sub-agents or dealers such commissions or
discounts (not exceeding the total sales commission) as you shall deem
advisable, so long as any such commissions or discounts are set forth in the
Funds' then current Prospectus, to the extent required by the applicable federal
and state securities laws.
6. PAYMENT OF SHARES. At or prior to the time of delivery of any of our
shares you will pay or cause to be paid to the Custodian, for our account, an
amount in cash equal to the net asset value of such shares. In the event that
you pay for shares sold by you prior to your receipt of payment from purchasers,
you are authorized to reimburse yourself for the net asset value of such shares
from the offering price of such shares when received by you.
7. REDEMPTION. (a) We represent that any of the outstanding shares of a
Fund may be tendered for redemption at any time, and we represent that the Trust
will repurchase or redeem the shares so tendered in accordance with the Trust's
Declaration of Trust and Bylaws and the applicable provisions of the respective
Fund's Prospectus. The price to be paid to redeem or repurchase the shares shall
be equal to the net asset value, less any applicable contingent deferred sales
charge, if any, determined as set forth in the applicable Prospectus (the
"redemption price").
8. REGISTRATION OF SHARES. No shares shall be registered on our books until
(i) receipt by us of your written request therefor; (ii) receipt by the
Custodian and Agent of a certificate signed by an officer of the Trust stating
the amount to be received therefor; and (iii) receipt of payment of that amount
by the Custodian. We will provide for the recording of all shares purchased in
unissued form in "book accounts", unless a request in writing for certificates
-3-
<PAGE>
is received by the Agent, in which case certificates for shares in such names
and amounts as is specified in such writing will be delivered by the Agent, as
soon as practicable after registration thereof on the books.
9. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase shares for your
own account for purposes of resale to the public, but you may purchase shares
for your own investment account upon your written assurance that the purchase is
for investment purposes only and that the shares will not be resold except
through redemption by us.
10. SALE OF SHARES TO AFFILIATES. You may sell the Class A and Class C
shares at net asset value, without a sales charge as appropriate, pursuant to a
uniform offer described in the Funds' current Prospectus (i) to our Trustees and
officers, our investment manager or your company or affiliated companies
thereof, (ii) to the bona fide, full time employees or sales representatives of
any of the foregoing who have acted as such for at least ninety (90) days, (iii)
to any trust, pension, profit-sharing, or other benefit plan for such persons,
or (iv) to any other person set forth in the Funds' then current Prospectus;
PROVIDED that such sales are made in accordance with the rules and regulations
under the 1940 Act and that such sales are made upon the written assurance of
the purchaser that the purchases are made for investment purposes only, not for
the purpose of resale to the public and that the shares will not be resold
except through redemption by us.
11. ALLOCATION OF EXPENSES.
(a) We will pay the following expenses in connection with the sales
and distribution of shares of the Funds:
(i) expenses pertaining to the preparation of our audited and
certified financial statements to be included in any amendments
("Amendments") to our Registration Statement under the 1933 Act,
including the Prospectuses and Statements of Additional Information
included therein;
(ii) expenses pertaining to the preparation (including legal
fees) and printing of all Amendments or supplements filed with the
Securities and Exchange Commission, including the copies of the
Prospectuses and Statements of Additional Information included in such
Amendments and the first ten (10) copies of the definitive
Prospectuses and Statements of Additional Information or supplements
thereto, other than those necessitated by or related to your
(including your "Parents") activities where such amendments or
supplements result in expenses which we would not otherwise have
incurred;
(iii) expenses pertaining to the preparation, printing, and
distribution of any reports or communications, including Prospectuses
and Statements of Additional Information, which are sent to our
existing shareholders;
(iv) filing and other fees to federal and state securities
regulatory authorities necessary to register and maintain registration
of the shares; and
-4-
<PAGE>
(v) expenses of the Agent, including all costs and expenses in
connection with the issuance, transfer and registration of the shares,
including but not limited to any taxes and other governmental charges
in connection therewith.
(b) Except to the extent that you are entitled to reimbursement under
the provisions of any of the Distribution Plans for the Funds, you will pay the
following expenses:
(i) expenses of printing additional copies of the Prospectus and
Statement of Additional Information and any amendments or supplements
thereto which are necessary to continue to offer our shares to the
public;
(ii) expenses pertaining to the preparation (excluding legal
fees) and printing of all amendments and supplements to our
Registration Statement if the Amendment or supplement arises from or
is necessitated by or related to your (including your "Parent")
activities where those expenses would not otherwise have been incurred
by us; and
(iii) expenses pertaining to the printing of additional copies,
for use by you as sales literature, of reports or other communications
which have been prepared for distribution to our existing shareholders
or incurred by you in advertising, promoting and selling our shares to
the public.
12. FURNISHING OF INFORMATION. We will furnish to you such information with
respect to our company and its shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained when so signed will be true and correct. We will also furnish
you with such information and will take such action as you may reasonably
request in order to qualify our shares for sale to the public under the Blue Sky
Laws or in jurisdictions in which you may wish to offer them. We will furnish
you at least annually with audited financial statements of our books and
accounts certified by independent public accountants, and with such additional
information regarding our financial condition, as you may reasonably request
from time to time.
13. CONDUCT OF BUSINESS. Other than the currently effective Prospectus and
Statement of Additional Information, you will not issue any sales material or
statements except literature or advertising which conforms to the requirements
of federal and state securities laws and regulations and which have been filed,
where necessary, with the appropriate regulatory authorities. You will furnish
us with copies of all such material prior to their use and no such material
shall be published if we shall reasonably and promptly object.
You shall comply with the applicable federal and state laws and regulations
where our shares are offered for sale and conduct your affairs with us and with
dealers, brokers or investors in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc.
14. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If shares are tendered to
us for redemption or are repurchased by us within seven (7) business days after
your acceptance of the original purchase order for such shares, you will
immediately refund to us the full amount of any sales commission (net of
allowances to dealers or brokers) allowed to you on the original sale, and will
-5-
<PAGE>
promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of
the balance of sales commissions reallowed by you. We shall notify you of such
tender for redemption within ten (10) days of the day on which notice of such
tender for redemption is received by us.
15. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be
deemed to be exclusive, and you may render similar services and act as an
underwriter, distributor or dealer for other investment companies in the
offering of their shares.
16. TERM OF AGREEMENT. This Agreement shall become effective on the date
first written above or on such later date approved by the Trust's Board of
Trustees, including a majority of those Trustees who are not parties to this
Agreement or interested persons (as such term is defined in the Investment
Company Act of 1940) thereof. Unless terminated as provided herein, the
Agreement shall continue in full force and effect for two (2) years from the
effective date of this Agreement, and shall continue in effect from year to year
thereafter for successive one (1) year periods if approved at least annually (i)
by a vote of a majority of the outstanding voting securities of the Funds or by
a vote of the Trustees of the Trust, and (ii) by a vote of a majority of the
Trustees of the Trust who are not interested persons or parties to this
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on this Agreement.
17. TERMINATION. This Agreement: (i) may be terminated at any time without
the payment of any penalty, either by vote of the Trustees of the Trust or by a
vote of a majority of the outstanding voting securities of each Fund, on sixty
(60) days' written notice to you; (ii) shall terminate immediately in the event
of its assignment; and (iii) may be terminated by you on sixty (60) days'
written notice to us.
18. SUSPENSION OF SALES. We reserve the right at all times to suspend or
limit the public offering of the shares upon written notice to you, and to
reject any order in whole or in part.
19. MISCELLANEOUS. This Agreement shall be subject to the laws of the State
of Arizona and shall be interpreted and construed to further and promote the
operation of the Trust as an open-end investment company. As used herein, the
terms "Net Asset Value," "Offering Price," "Investment Company," "Open-End
Investment Company," "Assignment," "Principal Underwriter," "Interested Person,"
"Parents," and "Majority of the Outstanding Voting Securities," shall have the
meanings set forth in the 1933 Act and the 1940 Act, as applicable, and the
rules and regulations promulgated thereunder.
20. LIABILITY. Nothing contained herein shall be deemed to protect you
against any liability to us or to our shareholders to which you would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
21. AMENDMENT. This Agreement may be amended with respect to a Fund by the
parties only if such amendment is specifically approved by (a) the Trustees or
by the vote of a majority of the outstanding voting securities of the Fund, and
(b) by the vote of a majority of the distinerested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
-6-
<PAGE>
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed counterparts hereof and returning
such counterparts to us, whereupon this shall constitute a binding agreement as
of the date first above written.
Very truly yours,
PILGRIM MUTUAL FUNDS
(on behalf of each series)
By:
----------------------------------------
Title:
-------------------------------------
Agreed to and Accepted:
PILGRIM SECURITIES, INC.
By:
----------------------------------------
Title:
-------------------------------------
-7-
<PAGE>
SCHEDULE A
to the Underwriting Agreement
UNDERWRITING AGREEMENT ALLOCATION PROCEDURES
CDSCs and Distribution Fees related to Shares of each separate series of
Pilgrim Mutual Funds (each a "Fund") shall be allocated by such Fund among
Pilgrim Securities, Inc. ("PSI") and any replacement principal underwriter for
Shares of such Fund (the "Successor Distributor") in accordance with this
Schedule A.
Defined terms used in this Schedule A and not otherwise defined herein
shall have the meaning assigned to them in the Underwriting Agreement for Shares
of each Fund to which this Schedule A is attached. As used herein the following
terms shall have the meanings indicated.
"COMMISSION SHARE" means, in respect of any Fund, each Share of such Fund
which is issued under circumstances which would normally give rise to an
obligation of the holder of such Share to pay a CDSC upon redemption of such
Share (including, without limitation, any Share of such Fund issued in
connection with a Free Exchange) and any such Share shall continue to be a
Commission Share of such Fund prior to the redemption (including a redemption in
connection with a Free Exchange) or conversion of such Share, even though the
obligation to pay the CDSC may have expired or conditions for waivers thereof
may exist.
"DATE OF ORIGINAL ISSUANCE" means in respect of any Commission Share, the
date with reference to which the amount of the CDSC payable on redemption
thereof, if any, is computed.
"FREE EXCHANGE" means an exchange of a Commission Share of one Fund for a
Commission Share of another Fund under circumstances where the CDSC which would
have been payable in respect of a redemption of the exchanged Commission Share
on the date of such exchange is waived and the Commission Share issued in such
exchange is treated as a continuation of the investment in the Commission Share
exchanged for purposes of determining the CDSC payable if such Commission Share
issued in the exchange is thereafter redeemed.
"FREE SHARE" means, in respect of any Fund, each Share of such Fund, other
than a Commission Share, including, without limitation, any Share issued in
connection with the reinvestment of dividends or capital gains.
"INCEPTION DATE" means, in respect of any Fund, the first date on which
such Fund issued Shares.
"NET ASSET VALUE" means, (i) with respect to any Fund, as of the date any
determination thereof is made, the net asset value of such Fund computed in the
manner such value is required to be computed by such Fund in its reports to its
shareholders, and (ii) with respect to any Share of such Fund as of any date,
the quotient obtained by dividing: (A) the net asset value of such Fund (as
computed in accordance with clause (i) above) allocated to Shares of such Fund
(in accordance with the constituent documents for such Fund) as of such date, by
(B) the number of Shares of such Fund outstanding on such date.
-8-
<PAGE>
"OMNIBUS SHARE" means, in respect of the Fund, a Commission Share or Free
Share sold by one of the Selling Agents listed on Exhibit I to this Schedule. If
PSI and its Transferees reasonably determine that the Transfer Agent is able to
track all Commission Shares and Free Shares sold by any of the Selling Agents
listed on Exhibit I (taking into account all information provided to the
Transfer Agent by such Selling Agent on a schedule sufficient to enable the
Transfer Agent to Complete all required reports involving such information in a
timely manner), in the same manner as Commission Shares and Free Shares are
currently tracked in respect of Selling Agents not listed on Exhibit I, then
Exhibit I shall be amended to delete such Selling Agent from Exhibit I so that
Commission Shares and Free Shares sold by such Selling Agent will no longer be
treated as Omnibus Shares.
"SHARE" means, in respect of any Fund, each Class B share of such Fund.
PART I: ATTRIBUTION OF SHARES
Shares of each Fund, which are outstanding from time to time, shall be
attributed to PSI and any Successor Distributor in accordance with the following
rules;
(1) COMMISSION SHARES OTHER THAN OMNIBUS SHARES:
(a) Commission Shares (excluding Omnibus Shares) attributed to PSI shall be
Commission Shares (excluding Omnibus Shares) the Date of Original Issuance of
which occurred on or after the Inception Date of such Fund and on or prior to
the last day on which PSI acts as principal underwriter of Shares for such Fund.
(b) Commission Shares (excluding Omnibus Shares) attributable to the
Successor Distributor shall be Commission Shares (excluding Omnibus Shares) the
Date of Original Issuance of which occurs on or after the first day on which
such Successor Distributor acts as principal underwriter of Shares for such Fund
and on or prior to the last day such Successor for Distributor acts as principal
underwriter of Shares for such Fund.
(c) A Commission Share (other than an Omnibus Share) of a particular Fund
(the "ISSUING FUND") issued in consideration of the investment of proceeds of
the redemption of a Commission Share of another Fund (the "REDEEMING FUND") in
connection with a Free Exchange, is deemed to have a Date of Original Issuance
identical to the Date of Original Issuance of the Commission Share of the
Redeeming Fund and any such Commission Share will be attributed to PSI or the
Successor Distributor based upon such Date of Original Issuance in accordance
with Part I(a) and (b) above.
(d) A Commission Share (other than an Omnibus Share) redeemed (other than
in connection with a Free Exchange) or converted to a Class A share is
attributable to PSI or Successor Distributor based upon the Date of Original
Issuance in accordance with Part I(a), (b) and (c) above.
-9-
<PAGE>
(2) FREE SHARES OTHER THAN OMNIBUS SHARES:
Free Shares (excluding Omnibus Shares) of a Fund outstanding on any date
shall be attributed to PSI or a Successor Distributor, as the case may be, in
the same proportion that the Commission Shares (excluding Omnibus Shares) of
such Fund outstanding on such date are attributed to it on such date; PROVIDED
that if PSI reasonably determines that the Transfer Agent or the Selling Agent
is able to produce monthly reports which track the Date of Original Issuance for
the Commission Shares related to such Free Shares, then the Free Shares shall be
allocated pursuant to clause 1(a), (b) and (c) above.
(3) Omnibus Shares:
Omnibus Shares of the Fund outstanding on any date shall be attributed to
PSI or a Successor Distributor, as the case may be, in the same proportion that
the Commission Shares which are not Omnibus Shares of the Fund outstanding on
such date are attributed to it on such date; PROVIDED that if PSI and its
transferees reasonably determine that the Transfer Agent is able to produce
monthly reports which track the Date of Original Issuance for the Omnibus
Shares, then the Omnibus Shares shall be allocated pursuant to clause 1(a), (b)
and (c) above.
PART II: ALLOCATION OF CDSCs
(1) CDSCS RELATED TO THE REDEMPTION OF COMMISSION SHARES OTHER THAN OMNIBUS
SHARES:
CDSCs in respect of the redemption of Commission Shares which are not
Omnibus Shares shall be allocated to PSI or Successor Distributor depending upon
whether the related redeemed Commission Share is attributable to PSI or
Successor Distributor, as the case may be, in accordance with Part I above.
(2) CDSCS RELATED TO THE REDEMPTION OF OMNIBUS SHARES:
CDSCs in respect of the redemption of Omnibus Shares shall be allocated to
PSI or a Successor Distributor in the same proportion that CDSCs related to the
redemption of Commission Shares are allocated to each thereof; PROVIDED, that if
PSI and its transferees reasonably determine that the Transfer Agent is able to
produce monthly reports which track the Date of Original Issuance for the
Omnibus Shares, then the CDSCs in respect of the redemption of Omnibus Shares
shall be allocated among PSI and any Successor Distributors depending on whether
the related redeemed Omnibus Share is attributable to PSI or a Successor
Distributor, as the case may be, in accordance with Part I above.
-10-
<PAGE>
PART III: ALLOCATION OF DISTRIBUTION FEES
Assuming that the Distribution Fee remains constant over time and among
Funds so that Part IV hereof does not become operative:
(1) The portion of the aggregate Distribution Fees accrued in respect of
all Shares of all Funds during any calendar month allocable to PSI or a
Successor Distributor is determined by multiplying the total of such
Distribution Fees by the following fraction:
(A + C)/2
---------
(B + D)/2
where:
A = The aggregate net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the beginning of such calendar month
B = the aggregate Net Asset Value of all Shares of all Funds at the
beginning of such calendar month
C = The aggregate Net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the end of such calendar month
D = The aggregate Net Asset Value of all Shares of all Funds at the end of
such calendar month
(2) If PSI reasonably determines that the Fund or its transfer agent is
able to produce automated monthly reports which allocate the average Net Asset
Value of the Commission Shares (or all Shares if available) of all Funds among
PSI and each Successor Distributor in a manner consistent with the methodology
detailed in Part I and Part III(1) above, the portion of the Distribution Fees
accrued in respect of all such Shares of all Funds during a particular calendar
month will be allocated to PSI or each Successor Distributor by multiplying the
total of such Distribution Fees by the following fraction:
(A)/(B)
where:
A = Average Net Asset Value of all such Shares of all Funds for such
calendar month attributed to PSI or such Successor Distributor, as the
case may be
B = Total average Net Asset Value of all such Shares of all Funds for such
calendar month
-11-
<PAGE>
PART IV: ADJUSTMENT OF PSI'S SHARE AND SUCCESSOR DISTRIBUTORS' SHARES
If the terms of any Underwriting Agreement, any Plan, any Prospectus, the
Conduct Rules or any other applicable law change the rate at which Distribution
Fees or Service Fees are computed with reference to the Net Asset Value of
Shares of any Fund, these allocation procedures must be revised in light of such
changes in a manner which carries out the intent of these allocation procedures.
-12-
<PAGE>
EXHIBIT I
To Schedule A
to the Pilgrim Mutual Funds
Underwriting Agreement
SELLING AGENTS
Merrill Lynch
-13-
[LETTERHEAD OF DECHERT PRICE & RHOADS]
August 30, 1999
Pilgrim Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim Mutual Funds
(File Nos. 33-56094 and 811-7428)
Dear Sirs:
We hereby consent to the incorporation by reference to our opinion as an
exhibit to Post-Effective Amendment No. 74 to the Registration Statement of
Pilgrim Advisory Funds, Inc., and to all references to our firm therein. In
giving such consent, however, we do not admit that we are within the category of
persons whose consent is required by Section 7 of the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
