As filed with the Securities and Exchange Commission on July 1, 1999
Securities Act File No. 33-56094
Investment Company Act File No. 811-7428
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act Of 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 70 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 71 [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
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It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective
date for a previously filed post-effective amendment.
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<PAGE>
PILGRIM
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FUND FOR SERIOUS INVESTORS
PROSPECTUS
CLASSES: B AND C
July 1, 1999
PILGRIM MONEY MARKET FUND
This prospectus contains important information about the Pilgrim Money Market
Fund. You should read it care- fully before you invest, and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is true or complete. Any
representation to the contrary is a criminal offense.
<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
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PILGRIM
MONEY
MARKET
FUND
PRINCIPAL INVESTMENT STRATEGIES
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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 U.S. banks which may be purchased by the 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 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.
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2
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PRINCIPAL RISKS
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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
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Since this is a new fund, there are no investment returns to report at this
time.
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3
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FEES AND
EXPENSES
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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)
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CLASS B CLASS C
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Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) None None
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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
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(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)
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<TABLE>
<CAPTION>
TOTAL OTHER EXPENSES
DISTRIBUTION ------------------------- TOTAL
MONEY MARKET MANAGEMENT AND SERVICE ADMINISTRATIVE OTHER ANNUAL FUND
FUND(2) FEES(3) (12B-1) FEES EXPENSES(4) EXPENSES OPERATING EXPENSES(5)
- ------------ ---------- ------------ -------------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
Class B 0.25% 1.00% 0.25% 0.50% 2.00%
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Class C 0.25% 1.00% 0.25% 0.50% 2.00%
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</TABLE>
(1) Shown as a ratio of expenses to average daily net assets.
(2) The Fund is new, and therefore, has no historical expense data. Thus, the
numbers are estimates.
(3) The 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.
(4) Pilgrim Investments, Inc. receives an annual administration fee equal to
0.25% of average daily net assets.
(5) 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 June 30, 2000.
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4
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FEES AND
EXPENSES
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EXAMPLES
The hypothetical examples below show what your expenses would be if you invested
$10,000 over the time frames indicated, assuming a 5% return each year, that you
reinvest all distributions, and that operating expenses for the Fund 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
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Class C $303 $627 $203 $627
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5
<PAGE>
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SHAREHOLDER
GUIDE
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CHOOSING A SHARE CLASS
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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
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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.
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6
<PAGE>
HOW TO PURCHASE SHARES
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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 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
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By Contacting An investment professional
Your Investment with an authorized firm
Professional can help you establish
and maintain your account.
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By Mail Visit or consult an Visit or consult an
investment professional. investment 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 in the envelope
Application provided with the
account statement.
Remember to write.
your account number
on the check.
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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
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7
<PAGE>
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SHAREHOLDER
GUIDE
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HOW TO REDEEM SHARES
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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, 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.
METHOD PROCEDURES
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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.
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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.
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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.
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8
<PAGE>
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SHAREHOLDER
GUIDE
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TRANSACTION POLICIES
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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 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 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.
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9
<PAGE>
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SHAREHOLDER
GUIDE
- -----------
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Pilgrim Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Pilgrim Funds (except for the Fund) are not intended as a
short-term trading vehicle. The adviser may prohibit excessive exchanges (more
than four per year). The adviser also may, on 60 days' prior notice, restrict
the frequency of, otherwise modify, or impose charges of up to $5.00 upon
exchanges. You will automatically have the ability to request an exchange by
calling the Shareholder Servicing Agent unless you mark the box on the Account
Application that indicates that you do not wish to have the telephone exchange
privilege. 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
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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 June 25,
1999, Pilgrim Investments managed over $7.4 billion in assets. Pilgrim
Investments is an indirect, wholly owned subsidiary of Pilgrim Capital
Corporation (NYSE: PFX). Through its subsidiaries, Pilgrim Capital Corporation
engages in the financial services business, focusing on providing investment
advisory, administrative and distribution services to open-end and closed-end
investment companies and private accounts.
The Fund invests all of its assets in 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, 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 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 Primary Institutional Fund, it will
be indirectly exposed to the following techniques and risks based on the Primary
Institutional Fund's investments:
BORROWING. 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, 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 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',
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 Fund in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Fund's annual and semi-annual reports list the holdings of the Fund's
portfolios, describe the Fund's performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about 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
Fund's 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 number: 811-7428
Prospectus
July 1, 1999
MMPROB&C0799-070199
<PAGE>
PILGRIM MUTUAL FUNDS
40 North Central Avenue
Phoenix, Arizona 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
July 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' March 31, 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-18
Investment Restrictions.....................................................B-52
Portfolio Transactions......................................................B-55
Additional Purchase And Redemption Information..............................B-58
Determination Of Share Price................................................B-64
Shareholder Information.....................................................B-65
Shareholder Services And Privileges.........................................B-66
Distributions...............................................................B-69
Tax Considerations..........................................................B-69
Calculation Of Performance Data.............................................B-75
General Information.........................................................B-80
Financial Statements........................................................B-81
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
</TABLE>
On May 24, 1999, the names of the following Funds were changed as follows:
<TABLE>
<CAPTION>
OLD NAME NEW NAME
- -------- --------
<S> <C>
Pilgrim International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund
Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund
Pilgrim High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund II that, if approved by shareholders of High Yield Fund II, will
result in the reorganization of High Yield Fund II into the Pilgrim High Yield
Fund series of Pilgrim Investment Funds, Inc. If the Agreement and Plan of
Reorganization is approved by shareholders, the Reorganization is expected to
occur in the summer of 1999.
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").
Walter E. Auch, 6001 North 62nd Place, Paradise Valley, Arizona. (Age
78). Trustee. Trustee, Pilgrim Prime Rate Trust; Director, Pilgrim Bank
and Thrift Fund, Inc.; Advisory Officer, Pilgrim Advisory Funds, Inc.,
Pilgrim Investment Funds, Inc. and Pilgrim Government Securities Income
Fund, Inc. Director of Legend Properties, Inc. (since 1984); Arizona
Heart Institute (since 1983); Banyan Strategic Realty Trust (since
1987); Fort Dearborn Fund (since 1987); Semele Group (since 1987);
Brinson Funds (since 1994), registered investment companies; Pimco
Advisors L.P., an investment manager (since 1994); and Advisors Series
Trust (since 1997). Trustee of Salomon Smith Barney Trak Funds (since
1994); Salomon Smith Barney Concert Series (since 1994); and Hillsdale
College (since 1996). Formerly Chairman and Chief Executive Officer,
Chicago Board Options Exchange (1979 to 1986); Senior Executive Vice
President, Director and Member of the Executive Committee, PaineWebber,
Inc. (until 1979); Trustee, Nicholas-Applegate Institutional Fund (1992
- 1999) and Nicholas-Applegate Mutual Funds (1992 - 1999). Although Mr.
Auch is on the board of a company a subsidiary of which is a
broker-dealer, the Board has determined pursuant to Rule 2a19-1 that
Mr. Auch shall not be considered to be an "interested person."
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix,
Arizona 85016. (Age 59) Trustee. Realtor, Coldwell Banker Success
Realty (formerly, The Prudential Arizona Realty) for more than the last
five years. Ms. Baldwin is also Vice President, United States Olympic
Committee (November 1996 - Present), and formerly Treasurer, United
States Olympic Committee (November 1992 - November 1996). Ms. Baldwin
is also a director and/or trustee of each of the funds managed by the
Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130.
(Age 67) Trustee. Commissioner of Banking, State of Connecticut
(January 1995 - Present). Mr. Burke was formerly President of Bristol
Savings Bank (August 1992 - January 1995) and President of Security
Savings and Loan (November 1989 - August 1992). Mr. Burke is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
71) Trustee. President of Al Burton Productions for more than the last
five years; formerly Vice President, First Run Syndication, Castle Rock
Entertainment (July 1992 - November 1994). Mr. Burton is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
(Age 53) Trustee. 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.
B-3
<PAGE>
*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).
Each Fund pays each Trustee who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $25,000; (ii) $2,500 per quarterly
and special Board meeting; (iii) $500 per committee meeting; (iv) $500 per
special telephonic meeting; and (v) out-of-pocket expenses. The pro rata share
paid by each Fund is based on the Funds' average net assets as a percentage of
the average net assets of all the funds managed by the Investment Manager for
which the Trustees serve in common as directors/trustees (and, in the case of
Walter E. Auch, Funds for which he serves as an Advisory Officer).
CHANGE IN TRUSTEES. Except for Mr. Auch, each Trustee became a Trustee of the
Trust on May 24, 1999. Prior to that date, the Trustees of the Trust were: Fred
C. Applegate, Dann V. Angeloff, Walter E. Auch, Theodore J. Coburn, Darlene
Deremer, George F. Keane, Arthur B. Laffer and Charles E. Young. Also, prior to
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 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.
B-4
<PAGE>
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**
- ---- ------------ ---------------------- ---------------- ---------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate* $22,000 None N/A $22,000 (1)
Arthur B. Laffer* $18,000 None N/A $18,000 (1)
Charles E. Young* $23,000 None N/A $23,000 (1)
Dann V. Angeloff* $25,000 None N/A $25,000 (1)
Walter E. Auch $19,000 None N/A $19,000 (1)
Theodore J. Coburn* $24,000 None N/A $24,000 (1)
Darlene Deremer* $21,000 None N/A $21,000 (1)
George F. Keane* $23,000 None N/A $23,000 (1)
</TABLE>
- ----------
* Resigned as Trustee effective May 21, 1999.
** 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. Each of the current Trustees, which are listed above (except for
Mr. Auch), also serve 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.
Mr. Auch is a Director/Trustee of Pilgrim Bank and Thrift Fund, Inc.,
Pilgrim Mutual Funds, Pilgrim Prime Rate Trust and Pilgrim Senior
Floating Rate Trust. Mr. Auch is Advisory Officer, not a Director, of
Pilgrim Advisory Funds, Inc., Pilgrim Investment Funds, Inc. and
Pilgrim Government Securities Fund, Inc. However, he is compensated by
those Companies for his services as Advisory Officer at the same rate
at which Directors of those Companies are compensated.
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-5
<PAGE>
STANLEY D. VYNER, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48)
President and Chief Executive Officer (since August 1996), Pilgrim
Investments; Executive Vice President 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 40)
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 35)
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 30)
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 48) Vice
President, Pilgrim Investments (since December 1996). Formerly Director
of Funds Management, First Interstate Capital Management (January 1995
- November 1996); Vice President, Director of Research and Manager of
Investment Products, Integra Trust Company (1993 - January 1995).
B-6
<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 May 17, 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 May 17, 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") (28.48%), CNA Trust Corp.
Trustee, FBO Dalby Wendland & Co., P.C., P.O. Box 5024, Costa Mesa, California
92628-5024 (5.33%), Carn & Co., Catawba Rental Co., Retirement Savings Plan,
Attn: Mutual Funds Star, P.O. Box 96211, Washington, D.C. 20090-6211 (14.14%);
Class B - MLFP&S (35.38%); Class C - MLFP&S (48.09%); Class Q - Charles Schwab &
Co., Inc., 101 Montgomery Street, 11th Floor, San Francisco, California
94104-41122 ("Charles Schwab") (81.03%).
MidCap Growth Fund: Class A - MLFP&S (55.64%); Class B - MLFP&S (30.89%); Class
C - MLFP&S (75.43%); Class Q - Clark & Co., FBO Swedish American Hospital, P.O.
Box 39, Westerville, Ohio 43086-0039 (52.72%), Donald A. Pels, 375 Park Avenue,
Suite 3305, New York, New York 10152-3399 (16.83%).
SmallCap Growth Fund: Class A - MLFP&S (64.87%); Class B - MLFP&S (49.59%);
Class C - MLFP&S (78.90%); Class Q - Charles Schwab (47.49%), 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 (14.11%), Suntrust Bank Central Florida FBO Hubbard Construction
Company PSP and 401K Plan, c/o Fascorp Recordkeeper, 8515 E. Orchard Road,
Englewood, California 80111-5002 (9.76%), Susan S. Rand, P.O. Box 452,
Salisbury, Connecticut 06068-0452 (7.54%).
International Core Growth Fund: Class B - MLFP&S (7.07%); Class C - MLFP&S
(26.37%), PaineWebber for the Benefit of Arnold I. Richman, 218 North Charles
Street, Suite 500, Baltimore, Maryland 21201-4019 (9.32%); Class Q - Charles
Schwab (43.49%).
Worldwide Growth Fund: Class A - MLFP&S (48.66%), Blush & Co., P.O. Box 976, New
York, New York 10268-0976 (6.75%); Class B - MLFP&S (31.09%); Class C - MLFP&S
(78.52%); Class Q - Charles Schwab (36.49%).
International SmallCap Growth Fund: Class A - MLFP&S (19.83%), Donaldson Lufkin
& Jenrette Securities Corporation, Inc., P.O. Box 2052, Jersey City, New Jersey
07303-2052 (5.48%); Class B - MLFP&S (20.06%); Class C - MLFP&S (31.63%); Class
Q - Charles Schwab (66.26%), FTC & Co., Attn: Datalynk #118, P.O. Box 173736,
Denver, Colorado 80217-3736 (6.92%); Capinco, c/o Firstar Bank East, P.O. Box
1787, Milwaukee, Wisconsin 53201-1787 (6.63%).
Emerging Countries Fund: Class A - MLFP&S (8.09%); Class B - MLFP&S (24.05%);
Class C - MLFP&S (43.15%); Class Q - Charles Schwab (45.88%).
Strategic Income Fund: Class A - MLFP&S (56.61%), CAN Trust Corp. Trustee FBO
Dalby Wendland & Co., P.C., P.O. Box 5024, Costa Mesa, California 92628-5024
(5.61%), Eastern Bank & Trust FBO Munksjo Paper 401K, 217 Essex Street, Salem,
Massachusetts 01970-3792 (8.01%); Class B - MLFP&S (36.07%); Class C - MLFP&S
(71.33%); Class Q - Charles Schwab (100%).
B-7
<PAGE>
Convertible Fund: Class A - MLFP&S (31.56%), First Union Bank FBO Atty. Title
Ins. Fund, 1525 West Harris Boulevard, Charlotte, North Carolina 28262-8522;
Class B - MLFP&S (24.47%); Class C - MLFP&S (69.99%); Class Q - Charles Schwab
(36.17%), Dalton L. Knauss Trustee, Elaine V. Knauss Revocable Trust, P.O. Box
1108, Carefree, Arizona 85377-1108 (14.74%), Dalton L. Knauss Trustee, Dalton L.
Knauss Revocable Trust, P.O. Box 1108, Carefree, Arizona 85377-1108 (14.78%),
Knauss Family Partnership, P.O. Box 2173, Carefree, Arizona 85377-2173 (6.09%).
Balanced Fund: Class A - MLFP&S (41.26%); Class B - MLFP&S (18.29%); Class C -
MLFP&S (76.91%); Class Q - Charles Schwab (97.23%).
High Yield Fund II: Class A - Wachovia Securities, P.O. Box 1220, Charlotte,
North Carolina 28201-1220 (5.23%), PaineWebber for the Benefit of Publix Super
Markets Charities, Inc., Attn: Marvin Weathers, P.O. Box 32018, Lakeland,
Florida 33802-2018 (6.01%), PaineWebber for the Benefit of Publix Super Markets,
Inc. Profit Sharing Plan & Trust, Attn: Marvin Weathers, P.O. Box 407, Lakeland,
Florida 33802-2018 (12.15%); 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") (29.81%); Class C - MLFP&S II
(29.23%); Class Q - Charles Schwab (94.71%).
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 May 14, 1999, the Investment Manager had assets under management
of approximately $5.8 billion. The Investment Manager is a wholly-owned
subsidiary of Pilgrim Group, Inc., which is itself a wholly-owned subsidiary of
Pilgrim America Capital Corporation, a Delaware corporation, the shares of which
are traded on the New York Stock Exchange (NYSE:PFX) and which is a holding
company that through its subsidiaries engages in the financial services
business.
The Investment Management Agreement provides that the Investment Manager, with
the approval of the Trust's Board of Trustees, may select and employ investment
advisers to serve as portfolio manager for any Fund ("Portfolio Manager"), and
shall monitor the Portfolio Manager's investment programs and results, and
coordinate the investment activities of the Portfolio Manager to ensure
compliance with regulatory restrictions.
The Investment Manager employs a Portfolio Manager to provide investment
advisory services to certain Funds. More information regarding the Portfolio
Manager is provided below.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all fees
payable to the Portfolio Managers, executive salaries and expenses of the
Trustees and Officers of the Trust who are employees of the Investment Manager
or its affiliates and office rent of the Trust. The Portfolio Manager pays all
of its expenses arising from the performance of its obligations under the
Portfolio Management Agreement. Subject to the expense reimbursement provisions
described in this Statement of Additional Information, other expenses incurred
in the operation of the Trust are borne by the Funds, including, without
limitation, investment advisory fees; brokerage commissions; interest; legal
fees and expenses of attorneys; fees of independent auditors, transfer agents
and dividend disbursing agents, accounting agents, and custodians; the expense
of obtaining quotations for calculating each Fund's net asset value; taxes, if
any, and the preparation of each Fund's tax returns; cost of stock certificates
and any other expenses (including clerical expenses) of issue, sale, repurchase
or redemption of shares; fees and expenses of registering and maintaining the
registration of shares of the Funds under federal and state laws and
regulations; salaries of personnel involved in placing orders for the execution
of the Fund's portfolio transactions; expenses of printing and distributing
reports, notices and proxy materials to existing shareholders; expenses of
printing and filing reports and other documents filed with governmental
agencies; expenses of annual and special shareholder meetings; expenses of
printing and distributing prospectuses and statements of additional information
to existing shareholders; fees and expenses of Trustees of the Trust who are not
employees of the Investment Manager or any Portfolio Manager, or their
affiliates; membership dues in 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.
B-8
<PAGE>
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:
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
B-9
<PAGE>
SERIES ANNUAL INVESTMENT MANAGEMENT FEE*
- ------ ---------------------------------
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 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
Money Market Fund* 0.50% of average net assets if Fund has not
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
fees paid by each Fund for the fiscal years ended March 31, 1999, 1998 and 1997
were:
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $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
B-10
<PAGE>
(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
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 (or predecessor portfolios thereof):
B-11
<PAGE>
FUND 1999 1998 1997
- ---- ---- ---- ----
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
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.
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
B-12
<PAGE>
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Emerging Countries Fund 0.625% of the Fund's average net assets
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International SmallCap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International Core 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
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 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 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.
B-13
<PAGE>
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 America 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.
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.
B-14
<PAGE>
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
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.
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.
B-15
<PAGE>
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.
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-16
<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
assurance that any of the Funds will achieve their investment objectives.
References to the Money Market Fund include investments by the Primary Fund in
which it invests.
B-17
<PAGE>
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
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.
B-18
<PAGE>
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-19
<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-20
<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
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.
B-21
<PAGE>
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.
B-22
<PAGE>
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
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
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.
B-23
<PAGE>
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-24
<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-25
<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
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
B-26
<PAGE>
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 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 Fund in which the Money Market Fund invests substantially all of its
assets will not invest in foreign mortgage-related securities.
B-27
<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 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-28
<PAGE>
FOREIGN BANK OBLIGATIONS. Through its investment in the Primary 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 curriencies) 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-29
<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-30
<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
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.
B-31
<PAGE>
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,
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.
B-32
<PAGE>
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-33
<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.
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<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.
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<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
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.
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<PAGE>
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
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.
B-37
<PAGE>
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.
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<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
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.
B-39
<PAGE>
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.
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<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
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.
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<PAGE>
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.
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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
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.
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<PAGE>
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 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.
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<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
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.
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<PAGE>
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.
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.
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<PAGE>
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
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 Institutional
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.
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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* 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 Fund in
which the Money Market Fund invests substantially all of its assets:
The Primary 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;
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<PAGE>
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.
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.
B-51
<PAGE>
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
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.
B-52
<PAGE>
Brokerage commissions paid by each Fund (or by the master fund predecessor of
the Fund) for each of the last three fiscal years are as follows:
Year Ended March 31,
----------------------------------------
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $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
(1) The Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the Strategic Income Fund paid no brokerage fees in
the fiscal year ended March 31, 1998.
Of the total commissions paid during the fiscal year ended March 31, 1999,
$1,312,257 (13.53%) 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 year ended March 31, 1999, the following Funds (or their
predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: 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 March 31, 1999: Worldwide Growth Fund -- J. P. Morgan & Co.
($45,197,000); Convertible Fund -- J. P. Morgan & Co. ($2,270,000), Merrill
Lynch & Co. ($11,412,487), Morgan Stanley Dean Witter Discover Co. ($9,630,708);
Balanced Fund -- Donaldson Lufkin & Jenrette ($257,563), Merrill Lynch & Co.
($159,099), Morgan Stanley Dean Witter Discover & Co. ($430,516); Strategic
Income -- Donaldson Lufkin & Jenrette ($1,571,920), J. P. Morgan & Co.
($697,763), Merrill Lynch & Co. ($215,567), Morgan Stanley Dean Witter Discover
& Co. ($748,750).
ABOUT THE MONEY MARKET FUND. With respect to the Primary Institutional Fund in
which the Money Market Fund invests its assets, RMCI is responsible for
decisions to buy and sell securities, broker-dealer selection and negotiation of
commission rates. As investment securities transactions made by the Primary
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.
B-53
<PAGE>
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
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.
B-54
<PAGE>
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
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.
B-55
<PAGE>
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
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.
B-56
<PAGE>
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
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.
B-57
<PAGE>
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.
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.
B-58
<PAGE>
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:
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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
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.
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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 shares of the Primary Institutional Fund in which the Money Market Fund
invests substantially all of its assets are valued at the net asset value of the
Primary Institutional Fund's shares held by the Money Market Fund 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.).
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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
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.
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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.
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<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.
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<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.
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The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund 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
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.
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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.
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Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of a
Fund's income flows through to its shareholders. With respect to a Fund, gains
from the sale of securities will be treated as derived from U.S. sources and
certain currency fluctuation gains, including fluctuation gains from foreign
currency denominated debt securities, 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-68
<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.
B-69
<PAGE>
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
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-70
<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-71
<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 Primary Fund.
The current yields for the Primary Fund quoted will be the net average
annualized yield for an identified period, usually seven consecutive calendar
days. Yield for the Primary Fund will be computed by assuming that an account
was established with a single share of the Primary 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 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 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 Primary Institutional Fund's
operating expenses. 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.
B-72
<PAGE>
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-73
<PAGE>
Yields for the following Classes of the following Funds for the
thirty-day period ended March 31, 1999 were as follows:
FUND AND CLASS
--------------
Convertible Fund
Class A 1.46%
Class B 0.92%
Class C 0.92%
Class Q 1.83%
Strategic Income Fund
Class A 5.72%
Class B 5.57%
Class C 5.58%
Class Q 6.29%
Balanced
Class A 1.95%
Class B 1.41%
Class C 1.41%
Class Q 2.40%
High Yield Fund II
Class A 9.54%
Class B 9.33%
Class C 9.33%
Class Q 10.29%
The average annual total returns, including sales charges, for each class of
shares of each Fund for the one-five-and ten-year periods ended March 31, 1999,
if applicable, and for classes that have not been in operation for ten years,
the average annual total return for the period from commencement of operations
to March 31, 1999, is as follows:
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION INCEPTION DATE
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
International Core Growth
Class A -0.21% N/A N/A 15.75% 2/28/97
Class B 0.24% N/A N/A 17.89% 2/28/97
Class C 4.20% N/A N/A 19.19% 2/28/97
Class Q 6.10% N/A N/A 20.58% 2/28/97
Worldwide Growth
Class A 25.58% 17.74% N/A 18.20% 4/19/93
Class B 27.74% N/A N/A 23.45% 5/31/95
Class C 31.73% 18.39% N/A 18.64% 4/19/93
Class Q 33.97% 19.50% N/A 24.19% 8/31/95
International SmallCap Growth
Class A 10.51% 14.52% N/A 14.21% 12/27/93
Class B 11.57% N/A N/A 19.49% 5/31/95
Class C 15.56% 15.05% N/A 14.85% 12/27/93
Class Q 17.61% 16.06% N/A 21.42% 8/31/95
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION INCEPTION DATE
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Emerging Countries
Class A -26.70% N/A N/A 2.57% 11/28/94
Class B -26.10% N/A N/A 3.28% 5/31/95
Class C -22.99% N/A N/A 3.00% 11/28/94
Class Q -21.42% N/A N/A 3.41% 8/31/95
LargeCap Growth
Class A 53.68% N/A N/A 47.95% 7/21/97
Class B 57.28% N/A N/A 48.95% 7/21/97
Class C 60.97% N/A N/A 52.24% 7/21/97
Class Q 63.76% N/A N/A 53.57% 7/21/97
MidCap Growth
Class A 8.71% 16.66% N/A 15.00% 4/19/93
Class B 9.59% N/A N/A 20.93% 5/31/95
Class C 13.60% 17.35% N/A 15.43% 4/19/93
Class Q 15.77% 18.36% N/A 20.92% 6/30/94
SmallCap Growth
Class A -5.38% 13.99% N/A 12.56% 12/27/93
Class B -4.98% N/A N/A 15.96% 5/31/95
Class C -1.13% 14.68% N/A 13.15% 12/27/93
Class Q 0.95% 15.96% N/A 13.63% 8/31/95
Convertible
Class A 12.30% 15.48% N/A 16.31% 4/19/93
Class B 13.52% N/A N/A 21.25% 5/31/95
Class C 17.45% 16.12% N/A 16.71% 4/19/93
Class Q 19.66% 17.29% N/A 21.30% 8/31/95
Balanced
Class A 10.37% 15.29% N/A 14.40% 4/19/93
Class B 11.49% N/A N/A 25.91% 5/31/95
Class C 15.42% 15.90% N/A 14.84% 4/19/93
Class Q 17.49% N/A N/A 18.25% 8/31/95
High Yield II
Class A -3.64% N/A N/A -3.46% 3/27/98
Class B -4.04% N/A N/A -3.26% 3/27/98
Class C -0.37% N/A N/A 0.70% 3/27/98
Class Q 1.40% N/A N/A 1.55% 3/27/98
Strategic Income
Class A N/A N/A N/A -1.21% 8/31/95
Class B N/A N/A N/A -2.66% 8/31/95
Class C N/A N/A N/A 3.25% 8/31/95
Class Q N/A N/A N/A 6.25% 8/31/95
</TABLE>
No performance information is provided for the Money Market Fund because it had
not yet commenced operations as of March 31, 1999.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to age characteristics, of various countries and
regions in which a Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of a Fund's portfolio; (v) the major industries located in various
jurisdictions; (vi) the number of shareholders in the Funds or other Pilgrim
Funds and the dollar amount of the assets under management; (vii) descriptions
of investing methods such as dollar-cost averaging, best day/worst day
scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Funds and individual stocks in a Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of a
Fund or other industry specialists, (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
B-75
<PAGE>
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
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.
B-76
<PAGE>
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. Ernst & Young LLP served as the independent auditor for
each Fund for the fiscal year ended March 31, 1999, and in that capacity
examined the annual financial statements of the Trust. KPMG LLP has been
approved as independent auditor for each Fund for the period ended June 30,
1999.
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' March 31, 1999 Annual Reports are
incorporated herein by reference. Copies of the Funds' Annual Reports may be
obtained without charge by contacting Pilgrim Funds at Suite 1200, 40 North
Central Avenue, Phoenix, Arizona 85004, (800) 992-0180. There are no financial
statements for the Money Market Fund at this time.
B-77
<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
(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.(m)
(2) Form of Portfolio Management Agreement between Pilgrim
Investments, Inc. and Nicholas-Applegate Capital Management (m)
(3) Form of Amendment to Investment Management Agreement relating to
Money Market Fund
(e) (1) Form of Underwriting Agreement between the Trust and Pilgrim
Securities, Inc. (m)
(2) Form of Amendment to Underwriting Agreement relating to Money
Market Fund (n)
(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
(7) Form of Agreement among Reserve Institutional Trust; Reserve
Management Company, Inc.; Resrv Partners, Inc.; Pilgrim Mutual
Funds; Pilgrim Investments, Inc. with Pilgrim Securities, Inc.
(i) Opinion and Consent of Counsel
(j) Not applicable
C-2
<PAGE>
(k) None.
(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 of March 25, 1999 and
incorporated herein by reference.
(n) Field as an exhibit to Post-Effective Amendment No. 68 to the
Registrant's Form N-1A Registration Statement of May 24, 1999 and
incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Article 5.2 of the Amended and Restated Declaration of Trust provides
for the indemnification of Registrant's trustees, officers, employees and agents
against liabilities incurred by them in connection with the defense or
disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("disabling conduct").
Section 8 of Registrant's Administration Agreement provides for the
indemnification of Registrant's Administrator against all liabilities incurred
by it in performing its obligations under the agreement, except with respect to
matters involving its disabling conduct. Section 9 of Registrant's Distribution
Agreement provides for the indemnification of Registrant's Distributor against
all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its disabling conduct.
Section 4 of the Shareholder Service Agreement provides for the indemnification
of Registrant's Distributor against all liabilities incurred by it in performing
its obligations under the Agreement, except with respect to matters involving
its disabling conduct.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
C-4
<PAGE>
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) Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
C-5
<PAGE>
(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
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix and State of
Arizona on the 1st day of July, 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 July 1, 1999
- -------------------------- Chief Executive Officer
Robert W. Stallings (Principal Executive Officer)
/s/ Mary A. Baldwi Trustee July 1, 1999
- --------------------------
Mary A. Baldwin *
/s/ John P. Burke Trustee July 1, 1999
- --------------------------
John P. Burke *
/s/ Al Burton Trustee July 1, 1999
- --------------------------
Al Burton *
<PAGE>
/s/ Jock Patton Trustee July 1, 1999
- --------------------------
Jock Patton *
/s/ Michael J. Roland Principal Financial Officer July 1, 1999
- --------------------------
Michael J. Roland *
* By: /s/ James M. Hennessy
--------------------------
James M. Hennessy
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.
<PAGE>
EXHIBIT LIST
Exhibit Number Name of Exhibit
- -------------- ---------------
(d)(3) Form of Amendment to Investment Management Agreement relating to
Money Market Fund
(h)(6) Form of Expense Limitation Agreement pertaining to Money
Market Fund
(h)(7) Form of Agreement among Reserve Institutional Trust; Reserve
Management Company, Inc.; Resrv Partners, Inc.; Pilgrim Mutual
Funds; Pilgrim Investments, Inc. and Pilgrim Securities, Inc.
(i) Opinion and Consent of Dechert Price & Rhoads
AMENDMENT NO. 2 TO INVESTMENT MANAGEMENT AGREEMENT
Amendment No. 2 to the Investment Management Agreement dated May __,
1999, between Pilgrim Mutual Funds, a Delaware business trust (the "Fund"), and
Pilgrim Investments, Inc., a Delaware corporation (the "Manager").
Pursuant to the terms of the Agreement, Schedule A of the Agreement is
hereby amended and restated to include the following information concerning the
investment advisory fees of a new series, the Pilgrim Money Market Fund:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
Pilgrim Money Market Fund 0.50% of the Series' average net assets
if substantially all assets are invested
in another investment company, 0.00% if
the Series does not invest substantially
all of its assets in another investment
company
PILGRIM MUTUAL FUNDS
By
-------------------------------
Title
-----------------------------
PILGRIM INVESTMENTS, INC.
By
-------------------------------
Title
-----------------------------
Dated: July 1, 1999
EXPENSE LIMITATION AGREEMENT
PILGRIM MONEY MARKET FUND
EXPENSE LIMITATION AGREEMENT, effective as of ___________, 1999 by and
between Pilgrim Investments, Inc. (the "Investment Manager") and Pilgrim Mutual
Funds (the "Trust"), on behalf of Pilgrim Money Market Fund, a series of the
Company (the "Fund").
WHEREAS, the Trust is a Delaware business trust, and is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management company of the series type, and the Fund is a series of the
Trust; and
WHEREAS, the Trust and the Investment Manager have entered into an
Investment Management Agreement dated May 21, 1999, as amended May 24, 1999
("Management Agreement"), pursuant to which the Investment Manager provides
investment management services to the Fund for compensation ("management fees")
that is based on a percentage of the average daily net assets of the Fund; and
WHEREAS, the Trust and the Investment Manager have entered into an
Administration Agreement dated May 21, 1999, as amended May 24, 1999
("Administration Agreement"), pursuant to which the Investment Manager provides
administrative services to the Fund for compensation ("administrative fees")
that is based on a percentage of the average daily net assets of the Fund; and
WHEREAS, the Trust and the Investment Manager have determined that it
is appropriate and in the best interests of the Fund and its shareholders to
maintain the expenses of the Fund at a level, as specified herein, agreed upon
by the Trust and the Investment Manager;
NOW THEREFORE, the parties hereto agree as follows:
1. APPLICABLE EXPENSE LIMIT. To the extent that the ordinary operating
expenses incurred by a class of shares of the Fund at any time, including but
not limited to investment management and administrative fees payable to the
Investment Manager, but excluding interest, taxes, brokerage commissions,
extraordinary expenses such as litigation, other expenses not incurred in the
ordinary course of the Fund's business, and expenses of any counsel or other
persons or services retained by the Company's trustees who are not "interested
persons," as that term is defined in the 1940 Act, of the Investment Manager
("Fund Operating Expenses"), exceed the Operating Expense Limit or Voluntary
Operating Expense Limit (as applicable), as defined in Section 2 below
(collectively, "Expense Limits"), the Investment Manager shall waive the
management and/or administrative fees otherwise payable to it, or, to the extent
necessary, assume the expenses in excess of the amount of the management and
administrative fees so waived. The amounts so waived or assumed shall be
referred to herein as the "Excess Amount."
<PAGE>
2. OPERATING EXPENSE LIMIT; Voluntary Operating Expense Limit. The
Operating Expense Limit shall be the amount specified in Schedule A. The
Voluntary Operating Expense Limit shall be such lower amount as Pilgrim
Investments, Inc. may determine from time to time in its sole discretion. 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 Fund's allocable portion of the expenses of the underlying fund.
3. METHOD OF COMPUTATION. To determine the Investment Manager's
obligation or right with respect to the Expense Limits and the Recoupment
Amount, as specified below, each day the Fund Operating Expenses for each class
of the Fund shall be annualized. If the annualized Fund Operating Expenses for
that day of a class exceed the Operating Expense Limit or Voluntary Expense
Limit (as applicable at the time), the Investment Manager shall waive fees
payable to it or assume expenses, both as specified in Sections 1 and 2, in an
amount equal to the Excess Amount.
4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the
first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the amount of the management and/or
administrative fees waived or reduced and other payments remitted by the
Investment Manager to a class of the Fund with respect to the previous fiscal
year shall equal the total Excess Amount for that period.
5. RECOUPMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
(a) RECOUPMENT. If on any day during which the Management
Agreement is in effect, the estimated annualized Fund Operating Expenses of a
class of the Fund shown in Schedule A for that day are less than the Operating
Expense Limit, the Investment Manager shall be entitled to recoup from the class
of the Fund the Excess Amount of fees waived and other payments remitted by the
Investment Manager to that class of the Fund pursuant to Sections 1 and 2 hereof
(the "Recoupment Amount") during the period 36 months previous to such day. Any
amounts paid to the Investment Manager under this provision will in no event
exceed the total Excess Amount and will not include any amounts previously
recouped.
(b) YEAR-END ADJUSTMENT. If necessary, on or before the last
day of the first month of each fiscal year, an adjustment payment shall be made
by the appropriate party in order that the actual Fund Operating Expenses of a
class of the Fund for the prior fiscal year (including any recoupment payments
hereunder with respect to such fiscal year) do not exceed the Operating Expense
Limit.
6. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall have an initial term through May 31, 2000, or if
it becomes the end of the Fund's fiscal year, June 30, 2000. Thereafter, this
Agreement shall automatically renew for one-year terms unless the Investment
Manager provides written notice of the termination of this Agreement to the
Trust at least 30 days prior to the end of the then-current term. In addition,
this Agreement shall terminate upon termination of the Management Agreement, or
it may be terminated by the Trust, without payment of any penalty, upon ninety
(30) days' prior written notice to the Investment Manager at its principal place
of business.
2
<PAGE>
7. MISCELLANEOUS.
(a) CAPTIONS. The captions in this Agreement are included for
convenience of reference only and in no other way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
(b) INTERPRETATION. Nothing herein contained shall be deemed
to require the Trust or the Funds to take any action contrary to the Trust's
Certificate of Trust, Declaration of Trust or By-Laws, or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Trust's Board of Trustees of its
responsibility for and control of the conduct of the affairs of the Trust or the
Fund.
(c) DEFINITIONS. Any question of interpretation of any term or
provision of this Agreement, including but not limited to the investment
management fee, administration fee, the computations of net asset values, and
the allocation of expenses, having a counterpart in or otherwise derived from
the terms and provisions of the Management Agreement, Administration Agreement
or the 1940 Act, shall have the same meaning as and be resolved by reference to
such Management Agreement, Administration Agreement or the 1940 Act.
(d) NOT BINDING ON TRUSTEES. The obligations under this
agreement are binding upon the Trust with respect to the Fund. No trustee,
officer, employee, or agent of the Trust shall be subject to any personal
liability whatsoever, in his or her individual capacity, in connection with the
obligations of the Trust under this agreement. The Investment Manager may look
only to the property of the Trust held for the Fund for satisfaction of any
claim against a trustee, officer, employee, or agent of the Trust.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and year first above
written.
PILGRIM MUTUAL FUNDS ON BEHALF OF
PILGRIM MONEY MARKET FUND
By:
--------------------------------
Name:
Title:
PILGRIM INVESTMENTS, INC.
By:
--------------------------------
Name:
Title:
4
<PAGE>
SCHEDULE A
OPERATING EXPENSE LIMITS
The Operating Expense Limit specified in Section 2 of this Agreement is the
following annual rate of expenses to average daily net assets for the following
classes:
Pilgrim Money Market Fund
Class B: 2.25%
Class C: 2.25%
5
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the ___
day of ________, 1999, by and among Reserve Institutional Trust, a Massachusetts
business trust ("Reserve"), for itself and on behalf of its series, the Primary
Institutional Fund (the "Portfolio"); Reserve Management Company, Inc., a New
Jersey corporation (the "Reserve Adviser"); Resrv Partners, Inc., a New Jersey
corporation (the "Reserve Distributor"); Pilgrim Mutual Funds, a Delaware
business trust (the "Company"), for itself and on behalf of its series, the
Pilgrim Money Market Fund (the "Fund"); Pilgrim Investments, Inc., a Delaware
corporation (the "Company Adviser"); and Pilgrim Securities, Inc. (the "Company
Distributor"), a Delaware corporation.
WITNESSETH
WHEREAS, Company and Reserve are each registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as open-end management
investment companies;
WHEREAS, the Fund and the Portfolio have the same investment objective
and substantially the same investment policies;
WHEREAS, the Fund desires to invest on an ongoing basis all or
substantially all of its investable assets (the "Assets") in exchange for shares
of beneficial interest in the Portfolio (the "Investments") on the terms and
conditions set forth in this Agreement;
WHEREAS, Company Adviser acts as the investment adviser to Company and
is registered as an investment adviser under the Investment Advisers Act of
1940, as amended (the "Advisers Act");
WHEREAS, Reserve Adviser acts as the investment adviser to Reserve and
is registered as an investment adviser under the Advisers Act;
WHEREAS, Company Distributor is the distributor of shares of Fund and
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended (the "1934 Act");
WHEREAS, Reserve Distributor is the distributor of shares of Portfolio
and is registered as a broker-dealer under the 1934 Act;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
made herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
1.1 COMPANY. Company, Company Adviser and Company Distributor
represent and warrant to Reserve, Reserve Adviser and Reserve Distributor that:
(a) ORGANIZATION. Company is a business trust duly organized, validly
existing and in good standing under the laws of the State of Delaware, and the
Fund is a duly and validly designated series of Company. Each of Company and the
Fund has the requisite power and authority to own its property and conduct its
business as proposed to be conducted pursuant to this Agreement.
(b) BINDING AGREEMENT. This Agreement, when executed and delivered by
Company on behalf of the Fund, shall constitute a legal, valid and binding
obligation of Company, enforceable against the Fund in accordance with its
terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally, and subject to general principles of equity. No
meeting of, or consent by, shareholders of the Fund is necessary to approve or
implement the Investments.
(c) 1940 ACT REGISTRATION. Company is duly registered under the 1940
Act as an open-end management investment company, and such registration is in
full force and effect.
(d) SEC FILINGS. Company has duly filed all forms, reports, proxy
statements and other documents (collectively, the "SEC Filings") required to be
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "1933 Act"), the 1934 Act, and the 1940
Act, and the rules and regulations thereunder, along with the securities laws of
any other applicable jurisdictions (collectively, the "Securities Laws"), in
connection with the registration of the Fund's shares, any meetings of its
shareholders and its registration as an investment company. All SEC Filings
relating to the Fund were prepared to comply in all material respects with the
requirements of the applicable Securities Laws and do not, as of the date of
this Agreement, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
2
<PAGE>
(e) STATE FILINGS. Interests in the Fund are either noticed or
qualified for sale or exempt from notice or qualification requirements under
applicable securities laws in those states and other jurisdictions in which
Interests are offered and sold. Company has duly filed all forms, reports, and
other documents as may be required to be filed with any securities commission or
similar authority by the laws or regulations of any state, territory or
possession of the United States, including the District of Columbia, in which
shares of the Fund are or will be noticed for sale ("State Filings of the
Fund"). All State Filings of the Fund were prepared to comply in all material
respects in accordance with the requirements of the applicable state and federal
law or will be prepared in accordance with the requirements of applicable state
and federal law and the rules and regulations thereunder and do not, as of the
date of this Agreement, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Shares of the Fund shall be offered and sold solely
in the United States to residents thereof.
(f) FUND ASSETS. The Fund currently intends on an ongoing basis to
invest its Assets solely in the Portfolio.
(g) REGISTRATION STATEMENT. Company has reviewed Reserve's and the
Portfolio's registration statement on Form N-lA, as filed with the SEC.
(h) TAX STATUS. The Fund is taxable as a regulated investment company
for federal income tax purposes under the Internal Revenue Code of 1986, as
amended (the "Code").
(i) INSURANCE. As of the date of this Agreement, Company has in force
an errors and omissions liability insurance policy insuring the Fund (among
other insureds) against loss up to $15 million for negligence or wrongful acts.
1.2 RESERVE. Reserve, Reserve Adviser and Reserve Distributor
represent and warrant to Company, Company Adviser and Company Distributor that:
(a) ORGANIZATION. Reserve is a business trust duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Massachusetts and the Portfolio is a duly and validly designated series of
Reserve. Each of Reserve and the Portfolio has the requisite power and authority
to own its property and conduct its business as now being conducted and as
proposed to be conducted pursuant to this Agreement.
(b) BINDING AGREEMENT. This Agreement when executed and delivered by
Reserve on behalf of the Portfolio shall constitute a legal, valid and binding
obligation of Reserve and the Portfolio, enforceable against Reserve and the
Portfolio in accordance with its terms, except as may be limited by or subject
to any bankruptcy, insolvency, reorganization, moratorium or other similar law
affecting the enforcement of creditors' rights generally, and subject to general
principles of equity. No meeting of, or consent by, interestholders of the
Portfolio is necessary to approve the issuance of the Interests (as defined
below) to the Fund.
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(c) ISSUANCE OF BENEFICIAL INTEREST. The issuance by Reserve of shares
of beneficial interests in the Portfolio ("Interests") in exchange for the
Investments by the Fund of its Assets has been duly authorized by all necessary
action on the part of the Board of Trustees of Reserve. When issued in
accordance with the terms of this Agreement, the Interests will be validly
issued, fully paid and non-assessable.
(d) 1940 ACT REGISTRATION. Reserve is duly registered under the 1940
Act as an open-end management investment company, and such registration is in
full force and effect.
(e) SEC FILINGS. Reserve has duly filed all SEC Filings, as defined
herein, required to be filed with the SEC under the Securities Laws in
connection with the registration of the Portfolio's shares, any meetings of its
shareholders and its registration as an investment company. All SEC Filings
relating to the Portfolio were prepared to comply in all material respects with
the requirements of the applicable Securities Laws and do not, as of the date of
this Agreement, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(f) STATE FILINGS. Interests in the Portfolio are either noticed or
qualified for sale or exempt from notice or qualification requirements under
applicable securities laws in those states and other jurisdictions in which
Interests are offered and sold. Reserve has duly filed all forms, reports and
other documents as may be required to be filed with any securities commission or
similar authority by the laws or regulations of any state, territory or
possession of the United States, including the District of Columbia, in which
shares of the Portfolio are or will be noticed for sale ("State Filings of the
Portfolio"). All State Filings of the Portfolio were prepared to comply in all
material respects in accordance with the requirements of the applicable state
and federal law or will be prepared in accordance with the requirements of
applicable state and federal law and the rules and regulations thereunder and do
not, as of the date of this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) TAX STATUS. The Portfolio is taxable as a regulated investment
company for federal income tax purposes under the Code.
(h) TAXABLE AND FISCAL YEAR. The taxable and fiscal year end of the
Portfolio is currently May 31.
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(i) INSURANCE. As of the date of this Agreement, Reserve has in force
an errors and commissions liability insurance policy insuring the Portfolio
against loss up to $10 million for negligence and wrongful acts.
(j) REDEMPTION IN KIND. Reserve has taken all steps necessary,
including, but not limited to, the filing of an election pursuant to Rule 18f-1
under the 1940 Act, to authorize the Portfolio to pay redemption requests in
portfolio securities "in kind."
1.3 COMPANY ADVISER. Company Adviser represents and warrants
to Reserve, Reserve Adviser and Reserve Distributor that:
(a) BINDING AGREEMENT. This Agreement when executed and delivered by
Company Adviser shall constitute a legal, valid and binding obligation of
Company Adviser, enforceable against Company Adviser in accordance with its
terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
(b) ADVISERS ACT REGISTRATION. Company Adviser is duly registered under
the Advisers Act as an investment adviser, and such registration is in full
force and effect.
1.4 RESERVE ADVISER. Reserve Adviser represents and warrants
to Company, Company Adviser and Company Distributor that:
(a) BINDING AGREEMENT. This Agreement when executed and delivered by
Reserve Adviser shall constitute a legal, valid and binding obligation of
Reserve Adviser, enforceable against Reserve Adviser in accordance with its
terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
(b) ADVISERS ACT REGISTRATION. Reserve Adviser is duly registered under
the Advisers Act as an investment adviser, and such registration is in full
force and effect.
1.5 COMPANY DISTRIBUTOR. Company Distributor represents and
warrants to Reserve, Reserve Adviser and Reserve Distributor that:
(a) BINDING AGREEMENT. This Agreement when executed and delivered by
Company Distributor shall constitute a legal, valid and binding obligation of
Company Distributor, enforceable against Company Distributor in accordance with
its terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
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(b) 1934 ACT REGISTRATION. Company Distributor is duly registered under
the 1934 Act as a broker-dealer, and such registration is in full force and
effect.
(c) NASD MEMBERSHIP. Company Distributor is a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD").
1.6 RESERVE DISTRIBUTOR. Reserve Distributor represents and
warrants to Company, Company Adviser and Company Distributor that:
(a) BINDING AGREEMENT. This Agreement when executed and delivered by
Reserve Distributor shall constitute a legal, valid and binding obligation of
Reserve Distributor, enforceable against Reserve Distributor in accordance with
its terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
(b) 1934 ACT REGISTRATION. Reserve Distributor is duly registered under
the 1934 Act as a broker-dealer, and such registration is in full force and
effect.
(c) NASD MEMBERSHIP. Reserve Distributor is a member in good standing
of the NASD.
ARTICLE II
COVENANTS
2.1 COMPANY. Company, Company Adviser and Company Distributor
covenant that:
(a) ADVANCE REVIEW OF CERTAIN DOCUMENTS. Company will furnish Reserve,
at least ten (10) business days prior to the earlier of filing or first use,
with drafts of the Fund's registration statement on Form N-lA and any amendments
thereto, and also will furnish Reserve, at least three (3) business days' prior
to the earlier of filing or first use, with drafts of any prospectus or
statement of additional information supplements. In addition, Company will
furnish or will cause to be furnished to Reserve at least two (2) business days
prior to the earlier of filing with the NASD or any other regulatory authority
or first use, as the case may be, any proposed advertising or sales literature
that contains language that describes or refers to Reserve or the Portfolio and
that was not previously approved by Reserve. For purposes of this Agreement, the
phrase "sales literature" includes, but is not limited to, advertisements (such
as material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, computerized media, or other public
media), sales literature (i.e., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
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(i) Company agrees that it will include in such Fund
registration statement any disclosures that may be required by law, and
that it will incorporate in such Fund registration statement and any
supplements thereto any material and reasonable comments provided by or
on behalf of Reserve. Reserve will not, however, in any way be liable
to Company for any errors or omissions in such Fund registration
statement, whether or not Reserve makes any objection thereto, except
to the extent such errors or omissions result from written information
provided to Company, Company Adviser or Company Distributor by or on
behalf of Reserve, Reserve Adviser or Reserve Distributor for use in
Fund's registration statement and any supplements thereto. Any such
written information provided by Reserve, Reserve Adviser or Reserve
Distributor shall be presumed to be for use by Company unless Reserve,
Reserve Adviser or Reserve Distributor specifically notify Company,
Company Adviser or Company Distributor to the contrary.
(ii) Except as provided in Section 2.2(f), Company shall not
use any advertising or sales literature without the prior approval of
Reserve, provided that Reserve provides comments within the two (2)
business day period referred to in Section 2.1(a), and which prior
approval shall not be unreasonably withheld. Company agrees that it
will include in all such Fund advertising or sales literature any
disclosures that may be required by law, and that it will incorporate
in all such advertising or sales literature any material and reasonable
comments provided by Reserve. Reserve will not, however, in any way be
liable to Company for any errors or omissions in such advertising or
sales literature, whether or not Reserve makes any objection thereto,
except to the extent such errors or omissions result from information
derived from the Portfolio's current 1933 Act registration statement or
otherwise provided to Company, Company Adviser or Company Distributor
by or on behalf of Reserve, Reserve Adviser or Reserve Distributor for
use in such advertising or sales literature. Any such information
provided by Reserve, Reserve Adviser or Reserve Distributor shall be
presumed to be for use by Company unless Reserve, Reserve Adviser or
Reserve Distributor specifically notify Company, Company Adviser or
Company Distributor to the contrary.
(b) SEC AND BLUE SKY FILINGS. Company will file all SEC Filings
required to be filed with the SEC under the Securities Laws in connection with
the registration of the Fund's shares, any meetings of its shareholders, and its
registration as a series of an investment company. Company will file all
required State Filings of the Fund. The Fund's SEC Filings will be prepared in
all material respects in accordance with the requirements of the applicable
Securities Laws, and, insofar as they relate to information other than that
supplied or required to be supplied by Reserve, will not, at the time they are
filed or used to offer the Fund shares, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The State Filings of
the Fund will be prepared in accordance with the requirements of applicable
state and federal law and the rules and regulations thereunder. Company will
provide copies of all such definitive filings to Reserve at least ten (10) days
before the filing of such documents with the SEC or other regulatory authority
if such documents contain information which may reasonably be construed to have
a material effect on Reserve or the Portfolio. Otherwise Company will provide
Reserve copies of the documents referenced in this paragraph promptly after the
filing of such documents with the SEC or other regulatory authorities.
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(c) 1940 ACT REGISTRATION. Company will continue to be duly registered
as an open-end management investment company under the 1940 Act.
(d) TAX STATUS. The Fund will qualify for treatment as a regulated
investment company under Subchapter M of the Code for any taxable year during
which this Agreement continues in effect except to the extent a failure to so
qualify may result from any action or omission of the Portfolio or Reserve.
Company shall notify Reserve immediately upon having a reasonable basis for
believing that the Fund has ceased to so qualify or that it might not so qualify
in the future.
(e) PROXY VOTING. If requested to vote on matters pertaining to Reserve
or the Portfolio, Company will vote such shares in accordance with applicable
law or exemption therefrom. The Company will hold such meeting of the Fund
shareholders in accordance with a timetable reasonably established by Reserve.
To the extent that the officers of Company determine to solicit instructions on
the voting of the shares of the Portfolio from the shareholders of the Fund,
Reserve shall provide to Company proxy statements and any other solicitation
material that Reserve sends to Portfolio's shareholders in a reasonable amount
requested by Company or Company Adviser, and Reserve or Reserve Adviser shall
bear any printing, delivery or other expenses incurred by Company, Company
Adviser or Company Distributor associated with the solicitation of voting
instructions, to the extent those expenses are comparable to those normally
incurred by brokerage firms, banks and other intermediaries distributing fund
proxy materials to their clients.
(f) REPRESENTATIONS CONCERNING THE PORTFOLIO. Company, Company Adviser
and Company Distributor agree that neither they nor any of their affiliates will
make or give any other written or oral representations, information or
statements concerning the Portfolio other than the representations or
information contained in the registration statement or prospectus for Portfolio
shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the
Portfolio, or in advertising or sales literature approved by Reserve, Reserve
Adviser or Reserve Distributor, or advertising or sales literature provided by
Reserve Adviser or Reserve Distributor, except with the prior permission of
Reserve.
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(g) COMPLIANCE WITH LAWS. Company shall comply, in all material
respects, with all applicable laws, rules and regulations in connection with
conducting its operations as a registered investment company.
(h) YEAR 2000 READINESS. Company shall use reasonable efforts to ensure
the readiness of its computer systems, or those used by Company Adviser in the
performance of its duties (which shall not include the computer systems of any
custodian, transfer agent or recordkeeping agent of Company), to properly
process information and data from and after January 1, 2000. Company shall
promptly notify Reserve of any significant problems that arise or potential
problems that come to the Company's attention in connection with such readiness.
(i) AUDITORS. The Fund shall be responsible for any extraordinary costs
and expenses associated with the need for Reserve's independent public
accountants to provide information to the Fund's independent public accountants.
(j) PORTFOLIO AS A FEEDER FUND. It is contemplated that, on an ongoing
basis, the Portfolio may invest substantially all of its investable assets in
shares of a beneficial interest in another investment company or series of an
investment company. Upon the occurrence of such an event, the Fund shall also
invest on an ongoing basis all of its Assets in exchange for a beneficial
interest in the same investment company or series of an investment company in
which Portfolio is investing all of its investable assets, subject to the
provisions of this Agreement. Reserve agrees to provide to Company Adviser
notice of at least one hundred twenty (120) days prior to Portfolio investing
substantially all of its investable assets in a separate investment company, and
to provide at such time a good faith estimate of any changes in expenses
associated with investment in Portfolio expected as a result of investing in a
separate investment company.
2.2 RESERVE. Reserve, Reserve Adviser and Reserve Distributor
covenant that:
(a) REDEMPTION. Except as otherwise provided in this Section 2.2(a),
redemptions of Interests owned by the Fund will be effected pursuant to Section
2.2(b). In the event the Fund desires to withdraw its entire Investment from the
Portfolio, either by submitting a redemption request or by terminating this
Agreement in accordance with Section 5.1 hereof, the Portfolio, unless otherwise
agreed to by the parties, and in all cases subject to the 1940 Act and the rules
and regulations thereunder including without limitation, Sections 17 and 18
thereof, will effect such redemption in federal funds on the 46th day following
the request to the Fund. The Portfolio further agrees that, to the extent
legally possible, it will not take or cause to be taken any action without
Company's prior approval that would cause the withdrawal of the Fund's
Investments to be treated as a taxable event to the Fund.
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<PAGE>
(b) ORDINARY COURSE REDEMPTIONS. The Portfolio will effect redemptions
of Interests in accordance with the provisions of the 1940 Act and the rules and
regulations thereunder, including, without limitation, Section 17 thereof, and
the Prospectus of Reserve and the Portfolio. Other than a withdrawal of the
Fund's entire Investment in the Portfolio under Section 2.2(a), all redemption
requests, including any redemption requests which the Fund receives from its
shareholders which necessitate a redemption request to the Portfolio, will be
effected in cash at the next determined net asset value after the redemption
request is received. The Portfolio will use its best efforts to settle
redemptions on the business day following the receipt of a redemption request by
the Fund and if such next business day settlement is not practicable, then as
soon thereafter as practicable, and will immediately notify the Fund regarding
the anticipated settlement date, which shall in all events be a date permitted
under the 1940 Act. Reserve may request to inspect the Fund's records pertaining
to shareholder redemptions at a reasonable time to confirm the nature of
redemption requests from the Fund to the Portfolio.
(c) SEC AND BLUE SKY FILINGS. Reserve will file all SEC Filings
required to be filed with the SEC under the Securities Laws in connection with
the registration of the Portfolio's shares, any meetings of the Portfolio's
shareholders, and its registration as a series of an investment company. Reserve
will file all required State Filings of the Portfolio. The Portfolio's SEC
Filings will be prepared in all material respects in accordance with the
requirements of the applicable Securities Laws and will not, at the time they
are filed or used to offer the Portfolio shares, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The State Filings of
the Portfolio will be prepared in accordance with the requirements of applicable
state and federal law and the rules and regulations thereunder. Reserve will
provide copies of all such definitive filings to Company at least ten (10) days
before the filing of such documents with the SEC or other regulatory authority
if such documents contain information which may reasonably be construed to have
a material effect on the Company or the Fund. Otherwise Reserve will provide
Company copies of the documents referenced in this paragraph promptly after the
filing of such documents with the SEC or other regulatory authorities.
(d) 1940 ACT REGISTRATION. Reserve will remain duly registered as an
open-end management investment company under the 1940 Act.
(e) TAX STATUS. The Portfolio will qualify for treatment as a regulated
investment company under Subchapter M of the Code for any taxable year during
which this Agreement continues in effect and Reserve shall notify Company
immediately upon having a reasonable basis for believing that the Portfolio has
ceased to so qualify or that it might not so qualify in the future.
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(f) TOTAL RETURN AND YIELD PERFORMANCE INFORMATION. Reserve agrees that
total return and yield performance information of the Portfolio derived from the
prospectus or registration statement of the Portfolio or from reports provided
by Reserve, Reserve Adviser and Reserve Distributor may be used by Company and
Company Distributor in connection with the sale of shares of the Fund without
prior approval of Reserve, and Company and Company Distributor shall be
responsible for using such information in conformity with the information it is
provided.
(g) REPRESENTATIONS CONCERNING THE FUND. Reserve, Reserve Adviser and
Reserve Distributor agree that neither they nor any of their affiliates will
make or give any other written or oral representations, information or
statements concerning the Fund other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in advertising
or sales literature approved by, or on behalf of Company, Company Adviser or
Company Distributor, or provided by Company Adviser or Company Distributor,
except with the prior permission of Company.
(h) ADVERTISING OR SALES LITERATURE. Reserve will furnish or will cause
to be furnished to Company at least two (2) business days prior to the earlier
of filing with the NASD or any other regulatory authority or first use, as the
case may be, any proposed advertising or sales literature that contains language
that describes or refers to Company or the Fund and that was not previously
approved by Company and that no such material shall be used without the prior
approval of Company, provided the Company provides comments within such two (2)
business day period, and which prior approval shall not be unreasonably
withheld. Company will not, however, in any way be liable to Reserve for any
errors or omissions in such advertising or sales literature, whether or not
Company makes any objection thereto, except to the extent such errors or
omissions result from information provided to Reserve, Reserve Adviser or
Reserve Distributor by or on behalf of Company, Company Adviser or Company
Distributor for use in Reserve's or Portfolio's advertising or sales materials.
Any such information provided by Company, Company Adviser or Company Distributor
shall be presumed to be for use by Reserve unless Company, Company Adviser or
Company Distributor specifically notify Reserve, Reserve Adviser or Reserve
Distributor to the contrary.
(i) ADVANCE NOTICE OF CERTAIN CHANGES. Reserve shall provide Company
with at least one hundred twenty (120) days' advance notice, or such lesser time
as may be agreed to by the parties, of any change in the Portfolio's investment
objective, and at least sixty (60) days' advance notice, or if Reserve has
knowledge or should have knowledge that one of the following changes is likely
to occur more than sixty (60) days in advance of such event, notice shall be
provided as soon as reasonably possible after Reserve obtains or should have
obtained such knowledge, of any material change in the Portfolio's investment
policies or activities, any material increase in the Portfolio's fees or
expenses, or any change in the Portfolio's fiscal year or time for calculating
net asset value for purposes of Rule 22c-1.
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(j) COMPLIANCE WITH LAWS. Reserve shall comply, in all material
respects, with all applicable laws, rules and regulations in connection with
conducting its operations as a registered investment company. Without limiting
the foregoing, Reserve and Reserve Adviser shall take all steps necessary so
that Portfolio complies in all material respects with Rule 2a-7 under the 1940
Act.
(k) YEAR 2000 READINESS. Reserve shall use reasonable efforts to ensure
the readiness of its computer systems, or those used by Reserve Adviser in the
performance of its duties (which shall not include the computer systems of any
custodian of Reserve), to properly process information and data from and after
January 1, 2000. Reserve shall promptly notify Company of any significant
problems that arise or potential problems that come to Reserve's attention in
connection with such readiness.
2.3 REASONABLE ACTIONS. Each party covenants that it will,
subject to the provisions of this Agreement, from time to time, as and when
requested by another party or in its own discretion, as the case may be, execute
and deliver or cause to be executed and delivered all such documents,
assignments and other instruments, take or cause to be taken such actions, and
do or cause to be done all things reasonably necessary, proper or advisable in
order to conduct the business contemplated by this Agreement and to carry out
its intent and purpose.
ARTICLE III
INDEMNIFICATION
3.1 COMPANY, FUND, COMPANY ADVISER AND COMPANY DISTRIBUTOR
(a) Company, the Fund, Company Adviser and Company Distributor agree,
jointly and severally, to indemnify and hold harmless Reserve, the Portfolio,
Reserve Adviser and Reserve Distributor and any director, trustee, officer,
employee or agent of Reserve, the Portfolio, Reserve Adviser or Reserve
Distributor (in this Section, each, a "Covered Person" and collectively,
"Covered Persons"), against any and all losses, claims, demands, damages,
liabilities or expenses (including, with respect to each Covered Person, the
reasonable cost of investigating and defending against any claims therefor and
reasonable counsel fees incurred in connection therewith, except as provided in
subparagraph (b)), that:
(i) arise out of or are based upon any violation or alleged
violation of any of the Securities Laws (including any violation or
alleged violation of Section 36(b) of the 1940 Act), or any other
applicable statute, rule, regulation or common law, or are incurred in
connection with or as a result of any formal or informal administrative
proceeding or investigation by a regulatory agency, insofar as such
violation or alleged violation, proceeding or investigation arises out
of or is based upon any direct or indirect omission or commission (or
alleged omission or commission) by Company, Company Adviser or Company
Distributor or by any of its or their trustees, directors, officers,
employees or agents, but only insofar as such omissions or commissions
relate to the Fund; or
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(ii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
advertising or sales literature used by the Company, Company Adviser or
Company Distributor, or in the prospectus, registration statement, or
any other SEC Filing or any amendments or supplements to the foregoing
(in this Section, collectively "Offering Documents") relating to the
Fund, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was not made
in the Offering Documents in reliance upon and in conformity with
Reserve's registration statement on Form N-1A, reports to shareholders,
proxy statements, advertisements or sales literature provided by or on
behalf of Reserve, Reserve Adviser or Reserve Distributor, or other
written information furnished by or on behalf of Reserve, Reserve
Adviser, Reserve Distributor or by any service provider of Reserve to
the Fund, Company Adviser or Company Distributor for use therein or for
use by the Fund in preparing such documents. Any such written
information provided by or on behalf of Reserve, Reserve Adviser or
Reserve Distributor shall be presumed to be for use by Company unless
Reserve, Reserve Adviser or Reserve Distributor specifically notify
Company, Company Adviser or Company Distributor to the contrary; or
(iii) arise out of or are based upon any material breach of
the representations, warranties, or covenants set forth in this
Agreement by Company, Company Adviser, Company Distributor or any of
its or their trustees, directors, officers, employees or agents, but
only insofar as such omissions or commissions relate to the Fund;
PROVIDED, HOWEVER, that in no case shall Company, the Fund, Company Adviser or
Company Distributor be liable for indemnification hereunder with respect to any
claims made against any Covered Person unless a Covered Person shall have
notified Company, Company Adviser or Company Distributor in writing within ten
(10) business days after the summons, other first legal process, notice of a
federal, state or local tax deficiency, or formal initiation of a regulatory
investigation or proceeding giving information of the nature of the claim shall
have properly been served upon or provided to a Covered Person seeking
indemnification. Failure to notify Company, Company Adviser or Company
Distributor of such claim shall not relieve Company, the Fund, Company Adviser
or Company Distributor from any liability that it may have to any Covered Person
otherwise than on account of the indemnification contained in this Section.
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(b) Company, Company Adviser and Company Distributor each will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
Company, Company Adviser and/or Company Distributor elect(s) to assume the
defense, such defense shall be conducted by counsel approved by Reserve, Reserve
Adviser, Reserve Distributor or Covered Persons, as applicable, which approval
shall not be unreasonably withheld. In the event Company, Company Adviser and/or
Company Distributor elect(s) to assume the defense of any such suit and retain
such counsel, each Covered Person in the suit may retain additional counsel but
shall bear the fees and expenses of such counsel unless (A) Company, Company
Adviser and/or Company Distributor shall have specifically authorized the
retaining of and payment of fees and expenses of such counsel or (B) the parties
to such suit include any Covered Person and Company, Company Adviser and/or
Company Distributor, and any such Covered Person has been advised in a written
opinion by counsel acceptable to Company, Company Adviser and/or Company
Distributor in its reasonable judgment that one or more legal defenses may be
available to it that may not be available to Company, Company Adviser and/or
Company Distributor, in which case Company, Company Adviser and/or Company
Distributor shall not be entitled to assume the defense of such suit
notwithstanding their obligation to bear the reasonable fees and expenses of one
counsel to such persons. Company, Company Adviser and/or Company Distributor
shall not be required to indemnify any Covered Person for any settlement of any
such claim effected without its written consent, which consent, in each case,
shall not be unreasonably withheld or delayed. The indemnities set forth in
paragraph (a) will be in addition to any liability that Company, Company Adviser
and/or Company Distributor might otherwise have to Covered Persons.
3.2 RESERVE, RESERVE ADVISER AND RESERVE DISTRIBUTOR.
(a) Reserve, Reserve Adviser and Reserve Distributor agree, jointly
and severally, to indemnify and hold harmless Company, the Fund, Company
Adviser, Company Distributor, and any affiliate of the Company, Company
Adviser, Company Distributor and/or the Fund, and any trustee, director,
officer, employee or agent of any of them (in this Section, each, a "Covered
Person" and collectively, "Covered Persons"), against any and all losses,
claims, demands, damages, liabilities or expenses (including, with respect to
each Covered Person, the reasonable cost of investigating and defending
against any claims therefor and any counsel fees incurred in connection
therewith, except as provided in subparagraph (b)), that:
(i) arise out of or are based upon any violation or alleged
violation of any of the Securities Laws (including any violation or
alleged violation of Rule 2a-7 under the 1940 Act), or any other
applicable statute, rule, regulation or common law, or are incurred in
connection with or as a result of any formal or informal administrative
proceeding or investigation by a regulatory agency, insofar as such
violation or alleged violation, proceeding or investigation arises out
of or is based upon any direct or indirect omission or commission (or
alleged omission or commission) by Reserve, Reserve Adviser, Reserve
Distributor or any of its or their trustees, directors, officers,
employees or agents but only insofar as such omissions or commissions
relate to the Portfolio; or
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(ii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Offering
Documents relating to the Portfolio, or arise out of or are based upon
the omission or alleged omission to state therein, a material fact
required to be stated therein, or necessary to make the statements
therein in light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was not made in the Offering Documents in reliance
upon and in conformity with Company's registration statement on Form
N-1A, reports to shareholders, proxy statements, advertisements or
sales literature provided by or on behalf of Company, Company Adviser
or Company Distributor, or other written information furnished by or on
behalf of Company, Company Adviser, Company Distributor or by any
service provider of Company to Reserve, Reserve Adviser or Reserve
Distributor for use therein or for use by the Fund in preparing such
documents. Any such written information provided by Company, Company
Adviser or Company Distributor shall be presumed to be for use by
Reserve unless Company, Company Adviser or Company Distributor
specifically notify Reserve, Reserve Adviser or Reserve Distributor to
the contrary; or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any Offering
Documents relating to Company, the Fund or relating to the Company
Adviser or Company Distributor or any of their affiliates or arise out
of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were
made, not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company, Fund,
Company Adviser or Company Distributor by Reserve. Reserve Adviser or
Reserve Distributor; or
(iv) arise out of or are based upon any material breach of the
representations, warranties, or covenants set forth in this Agreement
by Reserve, Reserve Adviser, Reserve Distributor or any of its or their
trustees, directors, officers, employees or agents, but only insofar as
such omissions or commissions relate to the Portfolio;
PROVIDED, HOWEVER, that in no case shall Reserve, Reserve Adviser or Reserve
Distributor be liable for indemnification hereunder with respect to any claims
made against any Covered Person unless a Covered Person shall have notified
Reserve, Reserve Adviser or Reserve Distributor in writing within ten (10)
business days after the summons, other first legal process, notice of a federal,
state or local tax deficiency, or formal initiation of a regulatory
investigation or proceeding giving information of the nature of the claim shall
have properly been served upon or provided to a Covered Person seeking
indemnification. Failure to notify Reserve, Reserve Adviser or Reserve
Distributor of such claim shall not relieve Reserve, Reserve Adviser or Reserve
Distributor from any liability that it may have to any Covered Person otherwise
than on account of the indemnification contained in this Section.
15
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(b) Reserve, Reserve Adviser and Reserve Distributor each will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but, if
Reserve, Reserve Adviser and/or Reserve Distributor elect(s) to assume the
defense, such defense shall be conducted by counsel approved by Company, Company
Adviser, Company Distributor or Covered Persons, as applicable, which approval
shall not be unreasonably withheld. In the event Reserve, Reserve Adviser and/or
Reserve Distributor elect(s) to assume the defense of any such suit and retain
such counsel, each Covered Person in the suit may retain additional counsel but
shall bear the fees and expenses of such counsel unless (A) Reserve, Reserve
Adviser and/or Reserve Distributor shall have specifically authorized the
retaining of and payment of fees and expenses of such counsel or (B) the parties
to such suit include any Covered Person and/or Reserve, Reserve Adviser and/or
Reserve Distributor, and any such Covered Person has been advised in a written
opinion by counsel acceptable to Reserve, Reserve Adviser and/or Reserve
Distributor in its reasonable judgment that one or more legal defenses may be
available to it that may not be available to Reserve, Reserve Adviser and/or
Reserve Distributor, in which case Reserve, Reserve Adviser and/or Reserve
Distributor shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of one counsel to
such persons. Reserve, Reserve Adviser and/or Reserve Distributor shall not be
required to indemnify any Covered Person for any settlement of any such claim
effected without its written consent, which consent, in each case, shall not be
unreasonably withheld or delayed. The indemnities set forth in paragraph (a)
will be in addition to any liability that Reserve, Reserve Adviser and/or
Reserve Distributor might otherwise have to Covered Persons.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 ACCESS TO INFORMATION. Throughout the life of this
Agreement, Company and Reserve shall afford each other reasonable access at all
reasonable times to such party's officers, employees, agents and offices and to
all relevant books and records and shall furnish each other party with all
relevant financial and other data and information as such other party may
reasonably request.
4.2 CONFIDENTIALITY. Each party agrees that it shall hold in
strict confidence all data and information obtained from another party (unless
such information is or becomes readily ascertainable from public or published
information or trade sources or public disclosure of such information is
required by law) and shall ensure that its officers, employees and authorized
representatives do not disclose such information to others without the prior
written consent of the party from whom it was obtained, except if disclosure is
required by the SEC, any other regulatory body, the Fund's or the Portfolio's
respective auditors, or in the opinion of counsel to the disclosing party such
disclosure is required by law, and then only with as much prior written notice
to the other parties as is practical under the circumstances. Each party hereto
acknowledges that the provisions of this Section 4.2 shall not prevent Company
or Reserve from filing a copy of this Agreement as an exhibit to a registration
statement on Form N-1A as it relates to the Fund or the Portfolio, respectively,
and that such disclosure by Company or Reserve shall not require any additional
consent from the other parties.
16
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4.3 OBLIGATIONS OF COMPANY AND RESERVE. Reserve agrees that
the financial obligations of Company under this Agreement shall be binding only
upon the assets of the Fund, and that except to the extent liability may be
imposed under relevant Securities Laws, Reserve shall not seek satisfaction of
any such obligation from the officers, agents, employees, trustees or
shareholders of Company or the Fund, and in no case shall Reserve or any covered
person have recourse to the assets of any series of the Company other than the
Fund. Company agrees that the financial obligations of Reserve under this
Agreement shall be binding only upon the assets of the Portfolio and that,
except to the extent liability may be imposed under relevant Securities Laws,
Company shall not seek satisfaction of any such obligation from the officers,
agents, employees, trustees or shareholders of Reserve or other series of
Reserve.
ARTICLE V
TERMINATION, AMENDMENT
5.1 TERMINATION. This Agreement may be terminated at any time
by the mutual agreement in writing of all parties, or by any party on thirty
(30) days' advance written notice to the other parties hereto; provided,
however, that nothing in this Agreement shall limit Company's right to redeem
all or a portion of its units of the Portfolio in accordance with the 1940 Act
and the rules thereunder. The provisions of Article III and Sections 4.2 and 4.3
shall survive any termination of this Agreement.
5.2 AMENDMENT. This Agreement may be amended, modified or
supplemented at any time in such manner as may be mutually agreed upon in
writing by the parties.
17
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ARTICLE VI
GENERAL PROVISIONS
6.1 EXPENSES. All costs and expenses incurred in connection
with this Agreement and the conduct of business contemplated hereby shall be
paid by the party incurring such costs and expenses.
6.2 HEADINGS. The headings and captions contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
6.3 ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding between the parties concerning the subject matter of this
Agreement and incorporates or supersedes all prior negotiations and
understandings. There are no covenants, promises, agreements, conditions or
understandings, either oral or written, between the parties relating to the
subject matter of this Agreement other than those set forth herein.
This Agreement may be amended only in a writing signed by all parties.
6.4 SUCCESSORS. Each and all of the provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; PROVIDED, HOWEVER, that neither
this Agreement, nor any rights herein granted may be assigned to, transferred to
or encumbered by any party, without the prior written consent of the other
parties hereto.
6.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
the conflicts of laws provisions thereof; PROVIDED, HOWEVER, that in the event
of any conflict between the Securities Laws and the laws of New York, the
Securities Laws Act shall govern.
6.6 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which shall constitute one and the same instrument, and
any party hereto may execute this Agreement by signing one or more counterparts.
6.7 THIRD PARTIES. Except as expressly provided in Article
III, nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
6.8 NOTICES. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made when delivered in person or three (3) days after being sent by
certified or registered United States mail, return receipt requested, postage
prepaid, addressed:
18
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IF TO THE FUND:
---------------
Pilgrim Mutual Funds
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424
Attention: James Hennessy, Executive Vice President
IF TO COMPANY ADVISER:
----------------------
Pilgrim Investments, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424
Attention: James Hennessy, Executive Vice President
IF TO COMPANY DISTRIBUTOR:
--------------------------
Pilgrim Securities, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424
Attention: James Hennessy, Executive Vice President
IF TO RESERVE:
--------------
Reserve Institutional Trust
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Attention: Bruce R. Bent II, Senior Vice President
IF TO RESERVE ADVISER:
----------------------
Reserve Management Company, Inc.
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Attention: Bruce R. Bent II, Senior Vice President
19
<PAGE>
IF TO RESERVE DISTRIBUTOR:
--------------------------
Resrv Partners, Inc.
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Attention: Bruce R. Bent II, Senior Vice President
6.9 INTERPRETATION. Any uncertainty or ambiguity existing
herein shall not be interpreted against any party, but shall be interpreted
according to the application of the rules of interpretation for arms' length
agreements.
6.10 OPERATION OF THE FUND AND THE PORTFOLIO. Except as
otherwise provided herein, this Agreement shall not limit the authority of the
Fund, Company, Company Adviser or Company Distributor to take such action as it
may deem appropriate or advisable in connection with all matters relating to the
operation of the Fund and the sale of its shares. Except as otherwise provided
herein, this Agreement shall not limit the authority of Reserve, the Portfolio,
Reserve Adviser or Reserve Distributor to take such action as it may deem
appropriate or advisable in connection with all matters relating to the
operation of the Portfolio and the sale of its shares.
6.11 RELATIONSHIP OF PARTIES; NO JOINT VENTURE, ETC. It is
understood and agreed that neither Company, Company Adviser nor Company
Distributor shall hold itself out as an agent of Reserve, Reserve Adviser or
Reserve Distributor with the authority to bind such party, nor shall Reserve,
Reserve Adviser or Reserve Distributor hold itself out as an agent of Company,
Company Adviser or Company Distributor with the authority to bind such party.
6.12 USE OF NAME.
(a) In connection with this Agreement, Reserve, Reserve Adviser and
Reserve Distributor grant Company, Company Adviser and Company Distributor a
limited non-exclusive license to use the name of Reserve, Reserve Adviser and
Reserve Distributor in any prospectus, registration statement, or any other SEC
Filings relating to the Fund, subject to the terms of Section 2.1(a).
(b) Except as otherwise provided herein or required by law (E.G., in
Company's registration statement or any other SEC Filings relating to the Fund),
neither Company, the Fund, Company Adviser nor Company Distributor shall
describe or refer to the name of Reserve, the Portfolio, Reserve Adviser or
Reserve Distributor or any derivation thereof, or any affiliate thereof, or to
the relationship contemplated by this Agreement in any advertising or
promotional materials without the prior written consent of Reserve, Reserve
Adviser or Reserve Distributor, as the case may be, nor shall Reserve, Reserve
Adviser or Reserve Distributor describe or refer to the name of Company, the
Fund, Company Adviser or Company Distributor or any derivation thereof, or any
affiliate thereof, or to the relationship contemplated by this Agreement in any
advertising or promotional materials without the prior written consent of
Company Adviser or Company Distributor, as the case may be. In no case shall any
such consents be unreasonably withheld or delayed. For purposes of this Section
6.12, "the name of Reserve, the Portfolio, Reserve Adviser or Reserve
Distributor or any derivation thereof, or any affiliate thereof" shall include,
without limitation, any logos, trademarks, copyrights or service marks ("marks
or symbols") owned by Reserve, Reserve Adviser or Reserve Distributor or their
affiliates. Reserve, Reserve Adviser and Reserve Distributor retain the right,
upon notice in writing, to require Company, Fund, Company Adviser or Company
Distributor to cease the use of such marks or symbols at any time. In all
events, Company, Fund, Company Adviser and Company Distributor shall cease the
use of such marks or symbols immediately upon termination of this Agreement.
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the date
first written above.
RESERVE INSTITUTIONAL TRUST, for itself
and on behalf of its series, the
PRIMARY INSTITUTIONAL FUND
By:
-------------------------------------
Name:
Title:
RESERVE MANAGEMENT COMPANY, INC.
By:
-------------------------------------
Name:
Title:
RESRV PARTNERS, INC.
By:
-------------------------------------
Name:
Title:
21
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the date
first written above.
PILGRIM MUTUAL FUNDS, for itself
and on behalf of its series, the
PILGRIM MONEY MARKET FUND
By:
-------------------------------------
Name:
Title:
PILGRIM INVESTMENTS, INC.
By:
-------------------------------------
Name:
Title:
PILGRIM SECURITIES, INC.
By:
-------------------------------------
Name:
Title:
22
[DECHERT PRICE & RHOADS LETTERHEAD]
July 1, 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 have examined such documents and records as we deemed necessary to
render this opinion. Based upon the foregoing, we are of the opinion that the
shares to be sold pursuant to the Registration Statement of Pilgrim Mutual Funds
(the "Trust"), when paid for as contemplated in the Trust's Registration
Statement, will be legally and validly issued, fully paid and non-assessable by
the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement, 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
