As filed with the Securities and Exchange Commission on March 25, 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. 67 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 69 [X]
(Check appropriate box or boxes)
PILGRIM MUTUAL FUNDS
(Formerly Nicholas-Applegate Mutual Funds)
(Exact Name of Registrant Specified in Charter)
600 West Broadway, 30th Floor
San Diego, California 92101
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 551-8643
Arthur E. Nicholas
c/o Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
(Name and Address of Agent for Service)
WITH COPIES TO:
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Robert E. Carlson James M. Hennessy, Esq. Jeffrey S. Puretz, Esq.
Paul, Hastings, Janofsky & Walker LLP Pilgrim Investments, Inc. Dechert Price & Rhoads
555 S. Flower Street, Twentieth Floor 40 North Central Avenue, Suite 1200 1775 Eye Street, N.W.
Los Angeles, California 90071 Phoenix, AZ 85004 Washington, D.C. 20006
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It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date
for a previously filed post-effective amendment.
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Pilgrim
THE VALUE OF INVESTING
CLASSES: A, B, C AND M
This prospectus contains important
information about these funds. You
read it carefully before you invest,
and keep it for future reference.
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund
Pilgrim LargeCap Leaders Fund
Pilgrim Large Cap Growth Fund
Pilgrim MidCap Value Fund
Pilgrim Mid Cap Growth Fund
Pilgrim Small Cap Growth Fund
Pilgrim Bank and Thrift Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim Asia-Pacific Equity Fund
INCOME FUNDS
Pilgrim Strategic Income Fund
Pilgrim Government Securities Income Fund
Pilgrim High Yield Fund
OTHER FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
The Securities and Exchange Commission has
not approved or disapproved these securities,
or determined if this prospectus is truthful
or complete. Any representation to the
contrary is a criminal offense.
Prospectus
May 24, 1999
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FUNDS AT A GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page __.
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FUND INVESTMENT OBJECTIVE
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U.S. EQUITY FUNDS MagnaCap Fund Growth of capital, with dividend
Adviser: Pilgrim Investments, Inc. income as a secondary consideration
LargeCap Leaders Fund
Adviser: Pilgrim Investments, Inc. Long-term capital appreciation
LargeCap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
MidCap Value Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Cramer Rosenthal McGlynn LLC Long-term capital appreciation
Mid Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Small Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Bank and Thrift Fund Long-term capital appreciation, with
Adviser: Pilgrim Investments, Inc. income as a secondary objective
INTERNATIONAL EQUITY Worldwide Growth Fund
FUNDS Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
International Core Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
International Small Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Emerging Countries Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Asia-Pacific Equity Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: HSBC Asset Management Long-term capital appreciation
INCOME FUNDS Strategic Income Fund
Adviser: Pilgrim Investments, Inc. Maximum Total Return
Government Securities Income Fund High current income, consistent with
Adviser: Pilgrim Investments, Inc. liquidity and preservation of capital
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
OTHER FUNDS Balanced Fund
Adviser: Pilgrim Investments, Inc. Long-term capital appreciation and
Convertible Fund current income
Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital Mgt. Total return, consisting of capital
appreciation and current income
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MAIN INVESTMENTS MAIN RISKS
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Equity securities that meet disciplined Price volatility and other risks that accompany an
selection criteria investment in equity securities.
Equity securities of large U.S. Price volatility and other risks that accompany an
companies believed to be leaders in investment in equity securities.
their industry
Equity securities of large U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented equity securities.
Equity securities of medium-sized U.S. Price volatility and other risks that accompany an
companies investment in medium-sized companies. Particularly sensitive
to price swings during periods of economic uncertainty.
Equity securities of medium-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and medium-sized companies.
Particularly sensitive to price swings during periods of
economic uncertainty.
Equity securities of small-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and small-sized companies.
Particularly sensitive to price swings during periods of
economic uncertainty.
Equity securities of banks and thrifts Price volatility and other risks that accompany an
or their holding or parent companies, investment in equity securities. Susceptible to risks of
and savings accounts of mutual thrifts decline in the price of securities concentrated in the
banking and thrift industries.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries around the world, which may investment in growth-oriented foreign equities. Sensitive to
include the U.S. currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries outside the U.S. investment in growth-oriented foreign equities. Sensitive to
currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of small-sized Price volatility, liquidity and other risks that accompany
companies located outside the U.S. an investment in foreign, small-sized companies. Sensitive
to currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of issuers located in Price volatility, liquidity and other risks that accompany
countries with emerging securities an investment in emerging Sensitive to currency exchange
markets. rates, international political and countries economic
conditions and other risks that affect foreign securities.
Equity securities of companies based in Price volatility and other risks that accompany an
the Asia-Pacific region, excluding investment in foreign equities and in securities of issuers
Australia and Japan in a single region. Sensitive to currency exchange rates,
international political and economic conditions and other
risks that affect foreign securities.
Investment grade and high yield debt Credit, interest rate, prepayment and other risks that
securities. accompany an investment in debt securities, including high
yield debt May be sensitive to credit securities risk during
economic downturns.
Securities issued or guaranteed by the Credit, interest rate, prepayment and other risks that
U.S. Government and certain of its accompany an investment in government bonds and mortgage
agencies or instrumentalities related investments. Generally has less credit risk than the
other income funds.
High yield debt securities Credit, interest rate and other risks that accompany an
investment in lower-quality debt securities. Particularly
sensitive to credit risk during economic downturns.
A mix of equity and debt securities Price volatility and other risks that accompany an
investment in equity securities. Credit, interest rate and
other risks that accompany an investment in debt securities.
Convertible securities of companies of Price volatility and other risks that accompany an
various sizes investment in equity securities. Credit, interest rate,
liquidity and other risks that accompany an investment in
debt securities
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MAGNACAP FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks growth of capital, with dividend income as a secondary
consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Fund is managed with the philosophy that companies that can best meet the
Fund's objectives have paid increasing dividends or have had the capability to
pay rising dividends from their operations. The Fund normally invests at least
65% of its assets in equity securities of companies that meet the following
criteria:
+ CONSISTENT DIVIDENDS. A company must have paid or had the financial
capability from its operations to pay a dividend in 8 out of the last 10
years.
+ SUBSTANTIAL DIVIDEND INCREASES. A company must have increased its dividend
or had the financial capability from its operations to have increased its
dividend at least 100% over the past 10 years.
+ REINVESTED EARNINGS. Dividend payout must be less than 65% of current
earnings.
+ STRONG BALANCE SHEET. Long term debt should be no more than 25% of the
company's total capitalization or a company's bonds must be rated at least
A- or A-3.
+ ATTRACTIVE PRICE. A company's current share price should be in the lower
half of the stock's price/earnings ratio range for the past ten years, or
the ratio of the share price to its anticipated future earnings must be an
attractive value in relation to the average for its industry peer group or
that of the Standard & Poor's 500 Composite Stock Price Index.
The equity securities in which the Fund may invest include common stocks,
convertible securities, and rights or warrants. The remainder of the Fund's
assets may be invested in equity securities that the adviser believes have
growth potential because they represent an attractive value. In selecting
securities for the Fund, preservation of capital is also an important
consideration. Although the Fund normally will be invested as fully as
practicable in equity securities, assets that are not invested in equity
securities may be invested in high quality debt securities. The Fund may invest
up to 5% of its assets, measured at the time of investment, in foreign
securities. When the adviser anticipates unusual market or other conditions, the
Fund may temporarily depart from its principal investment strategies as a
defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in equity securities of larger companies, which
sometimes have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities that meet the Fund's disciplined investment criteria. Rather,
the market could favor growth-oriented stocks or small company stocks, or
may not favor equities at all.
3
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An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
22.46% -3.11% 25.28% 8.02% 9.25% 4.15% 35.22% 18.51% 27.73% 16.09%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 18.93% (Q4 1998)
Worst quarter for period in bar chart: -15.99% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASSES B AND M (7/17/95)
------ ------- -------- -------------------------
Class A 9.40% 18.46% 15.13% --
Class B 10.26% -- -- 20.73%
Class M 11.56% -- -- 20.31%
S&P 500 Index 28.58% 23.81% 18.95% __%
* Class C shares of MagnaCap Fund were not offered during the period ended
December 31, 1998.
4
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LARGECAP LEADERS FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge,
and seeks companies it believes sell at reasonable prices relative to their
projected earnings. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to be a large
company, although the Fund may also invest to a limited degree in companies that
have a market capitalization between $1 billion and $5 billion. The equity
securities in which the Fund may invest include common stock, convertible
securities, preferred stock, American Depositary Receipts, and warrants. The
Fund normally invests as fully as practicable (at least 80%) in equity
securities. When the adviser anticipates unusual market or other conditions, the
Fund may temporarily depart from its principal investment strategies as a
defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in equity securities of larger companies, which
sometimes have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
5
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PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- 21.07% 20.15% 20.08%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 24.58% (Q4 1998)
Worst quarter for period in bar chart: -12.86% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to ____, 1998, the Fund's investment policies were different in that
they emphasized large company value stocks without necessarily emphasizing
industry leaders. Pilgrim Investments has been the Fund's investment adviser
since the Fund commenced operations; however, prior to November 1, 1997, the
Fund was managed by a sub-adviser.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses.
An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A 13.16% 18.67%
Class B 14.33% 19.28%
Class M 15.43% 18.93%
S&P 500 Index 28.58% _____%
* Class C shares of LargeCap Leaders Fund were not offered during the
period ended December 31, 1998.
6
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Adviser: Pilgrim Investments, Inc.
LARGE CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated, U.S. Government securities and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
When the sub-adviser anticipates unusual market or other conditions, the Fund
may temporarily depart from its principal investment strategies as a defensive
measure.
The sub-adviser searches for companies it believes are successful and growing
that are managing change advantageously and are poised to exceed growth
expectations. It focuses on a "bottom-up" analysis that evaluates the financial
condition and competitiveness of individual companies. It uses a blend of both
traditional fundamental research and computer intensive systematic disciplines
to uncover signs of "change at the margin"-- positive business developments
which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests primarily in equity securities of
larger companies, which sometimes have more stable prices than smaller
companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
7
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unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the
U.S., and foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- -- -- 59.45%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 37.87% (Q4 1998)
Worst quarter for period in bar chart: -8.50% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (7/21/97)
------ -------------------------
Class A 51.11% __%
Class B 53.68% __%
Class C 57.34% __%
Russell 1000 Growth Index __% __%
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Adviser: Pilgrim Investments, Inc.
MIDCAP VALUE FUND Sub-Adviser: Cramer Rosenthal McGlynn LLC
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests as fully as practicable (at least 80% of its assets)
in equity securities of medium-sized U.S. companies. The Fund considers
companies with market capitalizations between $200 million and $5 billion to be
medium-sized, although the Fund may also invest to a limited degree in companies
that have larger or smaller market capitalizations. The equity securities in
which the Fund may invest include common stock, convertible securities,
preferred stock and warrants. When the sub-adviser anticipates unusual market or
other conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
The Fund is managed with the disciplined investment style that its sub-adviser
employs in managing midcap value portfolios. As a value adviser, the sub-adviser
does not attempt to time market fluctuations; rather it relies on stock
selection to achieve investment results. The sub-adviser uses a "bottom-up"
approach, and seeks companies that are undervalued based on fundamental value
measures, underfollowed or misunderstood by the market and undergoing
fundamental change.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests in medium-sized companies, which are more susceptible to
price swings than larger companies, but usually tend to have less volatile
price swings than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
mid-cap value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or large company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
9
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PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
-- -- -- -- -- -- -- 29.56% 21.87% 4.89%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 13.87% (Q1 1998)
Worst quarter for period in bar chart: -13.94% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of two broad
measures of market performance - the Russell Midcap Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index, and the
Russell MidCap Value Index, an unmanaged index consisting of companies in the
Russell Midcap Index with lower book-to-price ratios and lower forecasted growth
values. Unlike the bar chart, the table reflects the impact of sales charges.
The Indices have an inherent performance advantage over the Fund since each has
no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A -1.15% 15.53%
Class B -0.75% 16.07%
Class M 0.63% 15.70%
Russell Midcap Index 10.10% ___%
Russell Midcap Value Index 5.08% ___%
* Class C shares of MidCap Value Fund were not offered during the period
ended December 31, 1998.
10
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Adviser: Pilgrim Investments, Inc.
MID CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of medium-sized U.S. companies.
Under normal conditions, the Fund invests at least 75% of its total assets in
common stocks. It may invest the remainder of its assets in preferred and
convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies that are managing change advantageously and poised
to exceed growth expectations. It focuses on a "bottom-up" analysis that
evaluates the financial condition and competitiveness of individual companies.
It uses a blend of both traditional fundamental research and computer intensive
systematic disciplines to uncover what it calls "change at the margin"--positive
business developments which are not yet fully reflected in the company's stock
price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in medium-sized companies, which are
more susceptible to price swings than larger companies, but usually tend to
have less volatile price swings than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
mid-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
11
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -11.00% 37.64% 15.84% 15.88% 14.14%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 25.53% (Q4 1998)
Worst quarter for period in bar chart: -17.73% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. Unlike the bar chart,
the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 8.15% 12.20% ___% --
Class B 8.29% -- -- ___%
Class C 12.44% 12.75% ___% --
Russell Midcap
Growth Index ___% ___% ___% ___%
12
<PAGE>
Adviser: Pilgrim Investments, Inc.
SMALL CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of small U.S. companies. Under
normal conditions, the Fund invests at least 75% of its total assets in common
stocks. It may invest the remainder in preferred and convertible securities,
debt securities of any maturity which are rated investment grade by a nationally
recognized statistical rating agency, or of comparable quality if unrated, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may invest up to 20% of its total assets in foreign securities. The
Fund may also use options and futures contracts involving securities, securities
indices, interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser searches for successful, growing companies that are
managing change advantageously and poised to exceed growth expectations. It
focuses on a "bottom-up" analysis that evaluates the financial condition and
competitiveness of individual companies. It uses a blend of both traditional
fundamental research and computer intensive systematic disciplines to uncover
what it calls "change at the margin"--positive business developments which are
not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small-cap companies, which are
more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and
many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
13
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -4.03% 34.87% 18.27% 11.24% 3.68%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 26.90% (Q4 1998)
Worst quarter for period in bar chart: -23.64% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth orientation
. Unlike the bar chart, the table reflects the impact of sales charges. The
Index has an inherent performance advantage over the Fund since it has no cash
in its portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (12/27/93) CLASS B (5/31/95)
------ ------- -------------------------- -----------------
Class A -1.79% 10.84% ___% --
Class B -1.96% -- -- ___%
Class C 2.12% 11.37% ___% --
Russell 2000
Growth Index -2.60% 11.90% ___% ___%
14
<PAGE>
BANK AND THRIFT FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund primarily seeks long-term capital appreciation; a secondary objective
is income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of national and state-chartered banks (other than
money center banks), thrifts, and the holding or parent companies of such
depository institutions, and in savings accounts of mutual thrifts that may
allow the Fund to participate in stock conversions of the mutual thrift. This
policy may only be changed with approval of the shareholders of the Fund. The
equity securities described above include common stocks, convertible securities
(including convertible preferred stock) and warrants, but do not include
non-convertible preferred stocks or adjustable rate preferred stocks.
The Fund may invest up to 35% of its total assets in equity securities,
including preferred stocks or adjustable rate preferred stocks, of other types
of issuers, including money center banks, other financial services companies,
and companies that are not in financial services industries, and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) that are either issued or guaranteed by the
United States Government or an agency thereof or issued by a corporation or
other issuer and rated investment grade or comparable quality by at least one
nationally recognized rating organization. The Fund may invest up to 10% of its
assets in securities of other investment companies. When the adviser anticipates
unusual market or other conditions, the Fund may temporarily depart from its
principal investment strategies as a defensive measure.
The adviser selects securities primarily on the basis of fundamental investment
value and potential for future growth, including securities of institutions that
the adviser believes are well positioned to take advantage of investment
opportunities in the banking and thrift industries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in small- to medium-sized companies, which are
more susceptible to price swings than larger companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks or large company stocks, or may not favor equities
at all.
+ RISKS OF CONCENTRATION - because the Fund's investments are concentrated in
the banking and thrift industries, the value of the Fund may be subject to
15
<PAGE>
greater volatility than a Fund with a portfolio that is less concentrated.
If securities of banks and thrifts as a group falls out of favor, the Fund
could underperform funds that focus on other types of companies.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
20.79% -18.14% 49.49% 32.36% 7.79% -1.89% 49.69% 41.10% 64.86% -1.83%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 16.43% (Q3 1997)
Worst quarter for period in bar chart: -20.36% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
The following table compares the Fund's performance to that of two broad
measures of market performance - the S&P Major Regional Banks Index, an
unmanaged index comprised of major regional banks in the S&P 500 Index, and the
NASDAQ 100 Financial Index, an index of the 100 largest financial companies
traded on NASDAQ. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASS B (10/17/97)
------ ------- -------- ------------------
Class A -7.48% 25.89% 20.90% --
Class B -7.27% -- -- 4.29%
S&P Major Regional
Banks Index 10.42% 23.77% 21.41% __%
NASDAQ 100 Financial
Index -1.09% -- -- __%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
16
<PAGE>
Adviser: Pilgrim Investments, Inc.
WORLDWIDE GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located around the world, which may include the U.S. The
Fund may invest up to 50% of its total assets in U.S. issuers.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities, which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may also invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks, or may not favor equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
17
<PAGE>
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- 2.45% 14.74% 17.92% 17.28% 37.34%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 26.87% (Q4 1998)
Worst quarter for period in bar chart: -13.43% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. Unlike the
bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 30.16% 16.17% ___% --
Class B 31.68% -- -- ___%
Class C 35.39% 17.78% ___% --
MSCI World Index 24.30% 15.70% ___% ___%
18
<PAGE>
Adviser: Pilgrim Investments, Inc.
INTERNATIONAL CORE GROWTH FUND Sub-Adviser:
Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser searches for successful, growing companies managing
change advantageously and poised to exceed growth expectations. It focuses on a
"bottom-up" analysis that evaluates the financial conditions and competitiveness
of individual companies worldwide. It uses a blend of both traditional
fundamental research, calling on the expertise of many external analysts in
different countries throughout the world, and computer intensive systematic
disciplines to uncover signs of "change at the margin"--positive business
developments which are not yet fully reflected in a company's stock price. It
gathers financial data on 20,000 companies in over 50 countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in large companies, which sometimes
have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities
at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
19
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- -- -- 20.92%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 17.16% (Q1 1998)
Worst quarter for period in bar chart: -14.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (2/28/97)
------ -------------------------
Class A 14.60% ___%
Class B 15.31% ___%
Class C 19.20% ___%
MSCI EAFE Index 20.33% ___%
20
<PAGE>
Adviser: Pilgrim Investments, Inc.
INTERNATIONAL SMALL CAP GROWTH FUND Sub-Adviser:
Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund emphasizes companies in the
bottom 75% of publicly traded companies as measured by stock market
capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small companies, which may be
more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
21
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- 5.51% 17.58% 13.46% 35.57%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 24.53% (Q1 1998)
Worst quarter for period in bar chart: -15.35% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Salomon EPAC Extended Market Index, an unmanaged
index comprised of smaller-capitalization companies in 22 countries excluding
Canada and the United States. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (8/31/94) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 28.42% 14.50% ___% --
Class B 29.83% -- -- ___%
Class C 33.89% 14.90% ___% --
Salomon EPAC
EM Index ___% ___%
22
<PAGE>
Adviser: Pilgrim Investments, Inc.
EMERGING COUNTRIES FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets--that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, seeks issuers in
the early stages of development, growth companies, cyclical companies, or
companies believed to be undergoing a basic change in operations. The Investment
Adviser currently selects portfolio securities from an investment universe of
approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at
all.
23
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. Investments in emerging markets countries
are generally riskier than other kinds of foreign investments, partly
because emerging market countries may be less politically and economically
stable than other countries. It may also be more difficult to buy and sell
securities in emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- 6.34% 27.50% 9.44% -22.19%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 15.01% (Q2 1995)
Worst quarter for period in bar chart: -26.06% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Emerging
Markets Free Index, an unmanaged index comprised of companies representative of
the market structure of 22 emerging market countries in Europe, Latin America
and the Pacific Basin. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR CLASSES A AND C (11/28/94) CLASS B (5/31/95)
------ -------------------------- -----------------
Class A -26.28% ___% --
Class B -26.05% -- ___%
Class C -22.98% ___% --
MSCI Emerging
Markets Free Index -25.30% ___% ___%
24
<PAGE>
Adviser: Pilgrim Investments, Inc.
Sub-Adviser: HSBC Asset Management Americas, Inc. and
ASIA-PACIFIC EQUITY FUND HSBC Asset Management Hong Kong Limited
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests in equity securities listed on stock exchanges in
countries in the Asia-Pacific region or issued by companies based in this
region. Asia-Pacific countries in which the Fund invests include, but are not
limited to, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand, but do not include Japan and Australia. The
equity securities in which the Fund may invest include common stock, convertible
securities, preferred stock, warrants, American Depositary Receipts, European
Depositary Receipts and other depositary receipts. When the sub-adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
The Fund is managed using the investment philosophy that the sub-adviser, HSBC
Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Limited
(HSBC), uses in managing private Asia-Pacific portfolios. HSBC bases investment
decisions on a disciplined approach that takes into consideration the following
factors: a macroeconomic overview of the region, specific country analysis,
setting target country weightings, evaluation of industry sectors within each
country, and selection of specific stocks. Decisions on company selection
include analysis of such fundamental factors as absolute rates of change of
earnings growth, earnings growth relative to the market and industry, quality of
earnings and stability of earnings growth, quality of management and product
line, interest rate sensitivity and liquidity of the stock.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: the country in which the issuer was organized; the
country in which the principal securities market for that issuer is located; the
country in which the issuer derives at least 50% of its revenues or profits from
goods produced or sold, investments made, or services performed; or the country
in which at least 50% of the issuer's assets are located .
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
25
<PAGE>
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF CONCENTRATION - because the Fund concentrates on a single region
of the world, the Fund's performance may be more volatile than that of a
Fund that invests globally. If Asia-Pacific securities fall out of favor,
it may cause the Fund to underperform funds that focus on other types of
stocks.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
-- -- -- -- -- -- -- 9.46% -43.73% -15.51%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 23.32% (Q4 1998)
Worst quarter for period in bar chart: -33.22% (Q4 1997)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Far East Free
ex-Japan Index, an unmanaged index of Far East markets excluding Japan. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A -20.37% -19.55%
Class B -20.57% -19.51%
Class M -19.26% -19.47%
MSCI Far East ex-Japan Index -4.82% ___7.80%
26
<PAGE>
STRATEGIC INCOME FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks maximum total return.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. The Fund may also invest in participation
interests and assignments in secured floating rate loans and notes, and may
invest up to 10% of its assets in other investment companies, including up to 5%
in Pilgrim Prime Rate Trust, a closed-end investment company that invests in
secured floating rate loans.
The average portfolio duration of the Fund will range from two to eight years.
The Fund may invest up to 30% of its total assets in securities payable in
foreign currencies. The Fund may also use options, futures contracts and
interest rate and currency swaps as hedging techniques. The Fund does not invest
in highly leveraged derivatives, such as swaps, interest-only or principal-only
stripped mortgage-backed securities, or interest rate futures contracts. When
the adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other
income funds, because it may invest in high yield debt securities, which
are considered predominantly speculative with respect to the issuer's
continuing ability to meet interest and principal payments.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. A security whose credit rating has been
lowered may be particularly difficult to sell. Foreign securities and
mortgage-related and asset-backed debt securities may be less liquid than
other debt securities. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
27
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options, futures contracts
and interest rate and currency swaps to help it achieve its investment
objective. There's always a risk that these techniques could reduce returns
or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
YEAR-BY-YEAR TOTAL RETURNS* Plot points for bar chart:
-- -- -- -- -- -- -- 1.77% 9.04% 7.94%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Institutional Class
shares of the Fund for prior periods, restated to reflect Class A expenses.
Class A, Class B and Class C shares, after adjustment for class expenses, would
have had substantially similar returns because Institutional Class shares were
invested in the same portfolio of securities. Also, prior to May __, 1999, a
different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (8/31/95)
------ -------------------------
Institutional Class* ___% ___%
Lehman Aggregate Bond Index ___% ___%
* This table shows performance of the Institutional Class shares of the Fund,
restated to reflect Class A expenses, because Classes A, B and C of the
Fund did not have a full year's performance as of December 31, 1998. See
the footnote to the bar chart above.
28
<PAGE>
GOVERNMENT SECURITIES INCOME FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks high current income, consistent with liquidity and preservation
of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 70% of its total assets in securities issued
or guaranteed by the U.S. Government and the following agencies or
instrumentalities of the U.S. Government: the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct
obligations of the U.S. Treasury and mortgage-backed securities. The Fund may
fall below the 70% threshold due to changes in the value of the Fund's holdings
or the sale of securities to meet redemptions, in which case the Fund will
purchase only U.S. Government securities until the 70% level is restored. The
remainder of the Fund's assets may be invested in securities issued by other
agencies and instrumentalities of the U.S. Government and in instruments
collateralized by securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The foregoing policies are fundamental and may
not be changed without shareholder approval.
The Fund may invest in U.S. Government securities of any maturity; however, the
Fund is expected to have a weighted average maturity of 1 to 3 years. The
adviser determines the composition and weighted average maturity of the Fund's
portfolio on the basis of its judgment of existing market conditions. The Fund
may enter into reverse repurchase agreements, dollar roll transactions or
pairing off transactions. The Fund does not invest in highly leveraged
derivatives, such as swaps, interest-only or principal-only stripped
mortgage-backed securities, or interest rate futures contracts. When the adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities. You
could lose money on an investment in the Fund. The Fund may be affected by the
following risks, among others:
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. This Fund may be particularly sensitive to
interest rates because it primarily invests in U.S. government securities
and may invest in securities with long terms to maturity. Debt securities
with longer durations tend to be more sensitive to changes in interest
rates, usually making them more volatile than debt securities with shorter
durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is
subject to less credit risk than the other income funds because it
principally invests in debt securities issued or guaranteed by the U.S.
government, its agencies and government sponsored enterprises.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
29
<PAGE>
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
12.92% 8.03% 11.90% 7.46% 14.71% -3.61% 14.51% 2.56% 7.85% 5.61%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 7.76% (Q2 1989)
Worst quarter for period in bar chart: -2.66% (Q1 1994)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of two broad
measures of market performance - the Lehman Brothers Intermediate Government
Index and the Merrill Lynch Treasuries/Agencies 1-3 Year Index. Unlike the bar
chart, the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
CLASSES B AND M
1 YEAR 5 YEARS 10 YEARS(1) (7/17/95)
------ ------- -------- ------------------
Class A 0.63% 4.20% 6.56% --
Class B -0.15% -- -- 4.42%
Class M 1.66% -- -- 4.50%
Lehman Interm. Gov't. 8.49% 6.45% 8.34% __%
Merrill Lynch 1-3 Year** 6.98% 5.98% 7.38% __%
* Class C shares of Government Securities Income Fund were not offered during
the period ended December 31, 1998.
** The Fund has started comparing its performance to the Merrill Lynch
Treasuries/Agency 1-3 Year Index because the Fund has recently adopted a
policy of seeking an average portfolio maturity of 1 to 3 years.
Previously, the Fund's average portfolio maturity was generally longer than
1 to 3 years.
(1) The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would
have been had the Fund adhered to its borrowing restriction.
30
<PAGE>
HIGH YIELD FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. In selecting securities for the Fund, preservation of capital is a
consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage related securities,
financial futures and related options, and participation interests and
assignments in floating rate loans and notes. The Fund may also invest up to 10%
of its assets in foreign debt securities of any rating. When the adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in
high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund. A security whose credit rating has been lowered may be particularly
difficult to sell.
31
<PAGE>
+ RISKS OF USING DERIVATIVES - this Fund may use options and financial
futures to help it achieve its investment objective. There's always a risk
that these techniques could reduce returns or increase the Fund's
volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASSES B AND M (7/17/95)
------ ------- -------- -------------------------
Class A -7.60% 7.36% 8.88% --
Class B -8.02% -- -- 7.75%
Class M -6.58% -- -- 7.69%
Lehman High
Yield Index 1.87% 8.57% 10.55% __%
* Class C shares of High Yield Fund were not offered during the period ended
December 31, 1998.
32
<PAGE>
BALANCED FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a balance of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions. The
remainder will be invested in equity securities, which will be managed in
accordance with the principal investment strategies of the LargeCap Leaders
Fund.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also invest in participation interests and assignments in secured floating rate
loans and notes, and may invest up to 10% of its assets in other investment
companies, including up to 5% in Pilgrim Prime Rate Trust, a closed-end
investment company that invests in secured floating rate loans. The Fund may
invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities. When the adviser anticipates unusual market or other
conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
+ CHANGES IN INTEREST RATES - the value of the debt securities held by the
Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer
durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet
interest and principal payments. This is especially true during periods of
economic uncertainty or economic downturns.
33
<PAGE>
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options to help it achieve
its investment objective. There's always a risk that these techniques could
reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -6.29% 23.44% 16.39% 20.50% 23.34%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 14.44% (Q3 1997)
Worst quarter for period in bar chart: -5.88% (Q2 1994)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - a composite index consisting of 60% Standard & Poor's
500 Composite Stock Price Index and 40% Lehman Brothers Government/Corporate
Bond Index. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 16.87% 13.64% ___% --
Class B 17.80% -- -- ___%
Class C 21.52% 14.14% ___% --
Composite Index ___% ___% ___% ___%
34
<PAGE>
Adviser: Pilgrim Investments, Inc.
CONVERTIBLE FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum total return, consisting of capital appreciation and
current income.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. The Fund emphasizes companies with market
capitalizations above $500 million. Through investments in convertible
securities, the Fund seeks to capture the upside performance of the underlying
equities with less downside exposure. The Fund may invest the remainder of its
assets in common and preferred stocks, debt securities of any maturity, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in debt
securities rated below investment grade by a nationally recognized statistical
rating agency, or of comparable quality if unrated. The Fund also may invest up
to 35% of its net assets in zero coupon securities. When the adviser anticipates
unusual market or other conditions, the Fund may temporarily depart from its
principal investment strategies as a defensive measure.
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" - positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, financial and other risks, and their values may go up or down,
sometimes rapidly and unpredictably. While equities may offer the potential
for greater long-term growth than most debt securities, they generally have
higher volatility. The Fund may invest in small and medium-sized companies,
which may be more susceptible to greater price swings than larger companies
because they may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ CHANGES IN INTEREST RATES - the value of the convertible and debt
securities held by the Fund may fall when interest rates rise. The Fund may
be sensitive to changes in interest rates because it may invest in
securities with intermediate and long terms to maturity. Securities with
longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than securities with shorter durations.
35
<PAGE>
+ CREDIT RISK - the Fund could lose money if the issuer of a convertible or
debt security is unable to meet its financial obligations or goes bankrupt.
This is especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other bond
funds, because the convertible securities and debt securities in which it
invests may be lower-rated securities.
+ INABILITY TO SELL SECURITIES - lower rated securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -8.23% 21.67% 20.29% 22.58% 20.86%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 19.73% (Q4 1998)
Worst quarter for period in bar chart: -9.08% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
36
<PAGE>
The following table compares the Fund's performance to that of a broad measure
of market performance - the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C CLASS B
(4/19/93) (5/31/95)
------ ------- ------------------ ------------------
Class A 14.54% 13.52% ___% --
Class B 15.31% -- -- ___%
Class C 19.12% 14.03% ___% --
First Boston
Convertible Index 17.35% 12.97% ___% ___%
37
<PAGE>
FEES AND EXPENSES
The following tables show what it will cost you directly or indirectly to invest
in a Fund.
SHAREHOLDER TRANSACTION FEES (fees paid directly from your investment)
CLASS A CLASS B CLASS C(1) CLASS M(2)
------- ------- ---------- ----------
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price)
EQUITY FUNDS AND CONVERTIBLE
AND BALANCED FUNDS 5.75%(3) None None 3.50%(3)
INCOME FUNDS 4.75%(3) None None 3.25%(3)
Maximum deferred sales charge
(load) (as a percentage of the
lower of original purchase price
or redemption proceeds)
EQUITY FUNDS AND CONVERTIBLE
AND BALANCED FUNDS None(4) 5.00%(5) 1.00%(6) None
INCOME FUNDS None(4) 5.00%(5) 1.00%(6) None
(1) Bank and Thrift Fund and Asia-Pacific Equity Fund do not offer Class C
shares.
(2) Class M shares are offered only by MagnaCap Fund, LargeCap Leaders Fund,
MidCap Value Fund, Asia-Pacific Equity Fund, Government Securities Income
Fund and High Yield Fund.
(3) Reduced for purchases of $50,000 and over. See Shareholder Guide.
(4) A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See Shareholder
Guide.
(5) Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
(6) Imposed upon redemption within 1 year from purchase.
38
<PAGE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)1
CLASS A
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 0.30% 0.35% 1.37% -- 1.37%
LargeCap Leaders 1.00 0.25 1.03 2.28 (0.53)% 1.75
Large Cap Growth 0.75 0.35 -- -- -- 1.60
MidCap Value 1.00 0.25 0.53 1.78 (0.03) 1.75
Mid Cap Growth 0.75 0.35 -- -- -- 1.60
Small Cap Growth 1.00 0.35 -- -- -- 1.95
Bank and Thrift 0.72 0.25 0.23 1.20 -- 1.20
Worldwide Growth 1.00 0.35 -- -- -- 1.85
International Core Growth 1.00 0.35 -- -- -- 1.95
International Small Cap Growth 1.00 0.35 -- -- -- 1.95
Emerging Countries 1.25 0.35 -- -- -- 2.25
Asia-Pacific Equity 1.25 0.25 1.30 2.80 (0.80) 2.00
Government Securities Income 0.50 0.25 0.83 1.58 (0.08) 1.50
Strategic Income 0.45 0.35 -- -- -- 0.95
High Yield 0.60 0.25 0.32 1.17 (0.17) 1.00
Balanced 0.75 0.35 -- -- -- 1.60
Convertible 0.75 0.35 -- -- -- 1.60
CLASS B
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
Large Cap Growth 0.75 1.00 -- -- -- 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
Mid Cap Growth 0.75 1.00 -- -- -- 2.25
Small Cap Growth 1.00 1.00 -- -- -- 2.60
Bank and Thrift 0.72 1.00 0.23 1.95 -- 1.95
Worldwide Growth 1.00 1.00 -- -- -- 2.50
International Core Growth 1.00 1.00 -- -- -- 2.60
International Small Cap Growth 1.00 1.00 -- -- -- 2.60
Emerging Countries 1.25 1.00 -- -- -- 2.90
Asia-Pacific Equity 1.25 1.00 1.30 3.55 (0.80) 2.75
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 1.00 -- -- -- 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
Balanced 0.75 1.00 -- -- -- 2.25
Convertible 0.75 1.00 -- -- -- 2.25
</TABLE>
39
<PAGE>
CLASS C3
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
Large Cap Growth 0.75 1.00 -- -- -- 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
Mid Cap Growth 0.75 1.00 -- -- -- 2.25
Small Cap Growth 1.00 1.00 -- -- -- 2.60
Worldwide Growth 1.00 1.00 -- -- -- 2.50
International Core Growth 1.00 1.00 -- -- -- 2.60
International Small Cap Growth 1.00 1.00 -- -- -- 2.60
Emerging Countries 1.25 1.00 -- -- -- 2.90
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 1.00 -- -- -- 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
Balanced 0.75 1.00 -- -- -- 2.25
Convertible 0.75 1.00 -- -- -- 2.25
CLASS M
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
MagnaCap 0.72% 0.75% 0.35% 1.82% -- 1.82%
LargeCap Leaders 1.00 0.75 1.03 2.78 (0.53)% 2.25
MidCap Value 1.00 0.75 0.53 2.28 (0.03) 2.25
Asia-Pacific Equity 1.25 0.75 1.30 3.30 (0.80) 2.50
Government Securities Income 0.50 0.75 0.83 2.08 (0.08) 2.00
High Yield 0.60 0.75 0.32 1.67 (0.17) 1.50
</TABLE>
- ----------
(1) Shown as a ratio of expenses to average daily net assets.
(2) Pilgrim Investments has entered into expense limitation agreements with
each of the funds except MagnaCap Fund, Bank and Thrift Fund and Government
Securities Income Fund, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." Pilgrim
Investments has separately agreed to reimburse Government Securities Income
Fund to the extent that total Fund operating expenses, excluding interest,
taxes, brokerage commissions, extraordinary expenses, and distribution fees
in excess of 0.25%, exceed 1.50% of the Fund's average daily net asset on
the first $40 million in net assets and 1.00% of average daily net assets
in excess of $40 million.
(3) Because Class C shares are new for the MagnaCap, LargeCap Leaders, MidCap
Value, Government Securities Income and High Yield Funds, their expenses
are based on Class B expenses.
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 each Fund remain the
same. The example is for comparison only, and does not represent the Funds'
actual expenses and returns, either past or future.
40
<PAGE>
CLASS A
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $706 $ 984 $1,282 $2,127 $706 $ 984 $1,282 $2,127
LargeCap Leaders 743 1,094 1,469 2,519 743 1,094 1,469 2,519
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 743 1,094 1,469 2,519 743 1,094 1,469 2,519
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Bank and Thrift 690 934 1,197 1,946 690 934 1,197 1,946
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Asia-Pacific Equity 766 1,166 1,591 2,768 766 1,166 1,591 2,768
Government Securities Income 620 927 1,255 2,180 620 927 1,255 2,180
Strategic Income -- -- -- -- -- -- -- --
High Yield 572 778 1,001 1,641 572 778 1,001 1,641
Balanced -- -- -- -- -- -- -- --
CLASS B
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $710 $ 949 $1,314 $2,221 $210 $649 $1,114 $2,221
LargeCap Leaders 753 1,079 1,531 2,652 253 779 1,331 2,652
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 753 1,079 1,531 2,652 253 779 1,331 2,652
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Bank and Thrift 698 912 1,252 2,080 198 612 1,052 2,080
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Asia-Pacific Equity 778 1,153 1,654 2,900 278 853 1,454 2,900
Government Securities Income 728 1,003 1,405 2,396 228 703 1,205 2,396
Strategic Income -- -- -- -- -- -- -- --
High Yield 678 851 1,149 1,864 178 551 949 1,864
Balanced -- -- -- -- -- -- -- --
</TABLE>
41
<PAGE>
CLASS C
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $310 $649 $1,114 $2,400 $210 $649 $1,114 $2,400
LargeCap Leaders 353 779 1,331 2,836 253 779 1,331 2,836
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 353 779 1,331 2,836 253 779 1,331 2,836
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Government Securities Income 328 703 1,205 2,585 228 703 1,205 2,585
Strategic Income -- -- -- -- -- -- -- --
High Yield 278 551 949 2,062 178 551 949 2,062
Balanced -- -- -- -- -- -- -- --
CLASS M
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $528 $ 902 $1,301 $2,412 $528 $ 902 $1,301 $2,412
LargeCap Leaders 570 1,029 1,513 2,844 570 1,029 1,513 2,844
MidCap Value 570 1,029 1,513 2,844 570 1,029 1,513 2,844
Asia-Pacific Equity 594 1,101 1,634 3,087 594 1,101 1,634 3,087
Government Securities Income 521 932 1,368 2,577 521 932 1,368 2,577
High Yield 473 784 1,117 2,057 473 784 1,117 2,057
</TABLE>
42
<PAGE>
SHAREHOLDER GUIDE
CHOOSING A SHARE CLASS - PILGRIM PURCHASE OPTIONS(TM)
Depending upon the Fund, you may select from up to four separate classes of
shares: Class A, Class B, Class C and Class M.
CLASS A
+ Front-end sales charge, as described below
+ Distribution and service (12b-1) fees of 0.25% to 0.35%.
CLASS B
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00% o A contingent deferred
sales charge, as described below.
+ Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses. Class B shares acquired initially through Funds
that were part of the Nicholas-Applegate Mutual Funds at the time of
purchase will convert after seven years from the date of original purchase.
CLASS C
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00%
+ A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
+ No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
+ Not offered by Bank and Thrift Fund and Asia-Pacific Equity Fund.
CLASS M
+ Lower front-end sales charge than Class A, as described below o
Distribution and service (12b-1) fees of 0.75%.
+ No automatic conversion to Class A shares, so annual expenses continue at
the Class M level throughout the life of your investment.
+ Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield
Fund.
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the initial sales charge or the contingent deferred sales
charge. The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Higher distribution
fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A or Class M shares.
Orders for Class B shares and Class M shares in excess of $250,000 and
$1,000,000, respectively, will be accepted as orders for Class A shares or
declined. You should discuss which Class of shares is right for you with your
investment professional.
43
<PAGE>
SALES CHARGE CALCULATION
CLASS A
Class A shares of the funds are sold subject to the following sales charge.
<TABLE>
<CAPTION>
EQUITY FUNDS, BALANCED FUND AND
CONVERTIBLE FUND INCOME FUNDS
--------------------------------- -------------------------------
AS A % OF THE AS A % OF NET AS A % OF THE AS A % OF NET
YOUR INVESTMENT OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
- --------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000 5.75% 6.10% 4.75% 4.99%
$50,000 - $99,999 4.50% 4.71% 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63% 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56% 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04% 2.00% 2.04%
$1,000,000 and over See below See below
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE. There is no front-end sales charge if you
purchase Class A shares in an amount of $1 million or more. However, the shares
will be subject to a contingent deferred sales charge if they are redeemed
within one or two years of purchase, depending on the amount of the purchase, as
follows:
PERIOD DURING WHICH
YOUR INVESTMENT CDSC CDSC APPLIES
- --------------- ---- ------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares that were purchased in an amount of $1 million or more
through Funds that were part of the Nicholas-Applegate Mutual Funds at the time
of purchase will be subject to a contingent deferred sales charge of 1% within
one year from the date of purchase.
CLASS B AND CLASS C
Class B and Class C shares are offered at their net asset value per share
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares that you sell within a certain period of
time after you bought them. The amount of the CDSC is based on the lesser of the
net asset value of the shares at the time of purchase or redemption. There is no
CDSC on shares acquired through the reinvestment of dividends and capital gains
distributions. The CDSCs are as follows:
CLASS B DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
- -------------------- ----------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6th year none
44
<PAGE>
CLASS C DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
- -------------------- ----------
1st year 1%
After 1st year none
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Funds will first redeem shares in your account that are not subject
to a CDSC, and then will sell shares that have the lowest CDSC.
CLASS M
Class M shares of the funds are sold subject to the following sales charge.
<TABLE>
<CAPTION>
MAGNACAP, LARGECAP LEADERS,
MIDCAP VALUE, AND GOVERNMENT SECURITIES INCOME
ASIA-PACIFIC EQUITY FUNDS AND HIGH YIELD FUNDS
-------------------------------- -------------------------------
AS A % OF THE AS A % OF NET AS A % OF THE AS A % OF NET
YOUR INVESTMENT OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
- --------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.25% 3.36%
$50,000 - $99,999 2.50% 2.56% 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52% 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01% 1.00% 1.01%
$500,000 and over none none none none
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCED SALES CHARGES. You may reduce the initial sales charge on a purchase of
Class A or Class M shares of the funds by combining multiple purchases to take
advantage of the breakpoints in the sales charge schedules. You may do this by:
LETTER OF INTENT - lets you purchase shares over a 13 month period and pay the
same sales charge as if the shares had all been purchased at once.
RIGHTS OF ACCUMULATION - lets you add the value of shares of any open-end
Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of
your next purchase for purposes of calculating the sales charge.
COMBINATION PRIVILEGE - shares held by investors in the Pilgrim Funds which
impose a CDSC may be combined with Class A or Class M shares for a reduced sales
charge.
See the Account Application or the Statement of Additional Information for
details, or contact your financial representative or the Shareholder Servicing
Agent for more information.
CDSC WAIVERS. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
+ redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of
death or initial determination of permanent disability.
45
<PAGE>
+ for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan,
up to a maximum of 12% per year of a shareholder's account value based on
the value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
+ mandatory distributions from a tax-deferred retirement plan or an IRA.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. This
privilege can be used only once per calendar year.
SALES CHARGE WAIVERS. Class A or Class M shares may be purchased without a sales
charge by certain individuals and institutions. For additional information,
contact the Shareholder Servicing Agent, or see the Statement of Additional
Information.
46
<PAGE>
PURCHASING SHARES
You may purchase shares by the following methods. The minimum initial investment
in a Fund is $1,000 ($250 for IRAs), and the minimum for additional investment
in a Fund is $100.
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
------ ------------------ ---------------------
<S> <C> <C>
By contacting your + An investment professional with an authorized firm can help you establish and
investment professional maintain your account.
By mail + Visit or consult an investment + Visit or consult an investment
professional professional.
+ Make your check payable to the + Fill out the Account Additions form
Pilgrim Funds and mail it, along with included on the bottom of your
a completed to the Fund and mail them account statement along with your
Application. Please indicate your check payable to the Fund and mail
investment professional on the New them to the address on the account
Account Application statement.
+ Remember to write your account number
on the check.
By wire + Call the Pilgrim Operations + Wire the funds in the same manner
Department at (800) 336-3436 to described under "Initial Investment."
obtain an account 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
</TABLE>
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
47
<PAGE>
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (`IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
HOW TO REDEEM SHARES
You may redeem shares by the following methods:
METHOD PROCEDURES
------ ----------
By contacting Your + You may redeem by contacting your investment
investment professional. Investment Your professionals may
professional charge for their services in connection with your
redemption request, but neither the Fund nor the
Distributor imposes any such charge.
By Mail + Send a written request specifying the Fund name and
share class, your account number, the name(s) in
which the account is registered, and the dollar
value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
+ If certificated shares have been issued, the
certificate must accompany the written request.
+ Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification
is provided on the Account Application.
+ A signature guarantee may be required.
By Telephone -- + You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check the
box on the Account Application which signifies that
you do not wish to use telephone redemptions. To
redeem by telephone, call the Shareholder Servicing
Agent at (800) 992-0180.
+ RECEIVING PROCEEDS BY CHECK:
+ You may have redemption proceeds (up to a maximum
of $100,000) mailed to an address which has been
on record with Pilgrim Funds for at least 30
days.
+ RECEIVING PROCEEDS BY WIRE:
+ You may have redemption proceeds (subject to a
minimum of $5,000) wired to your
pre-designated bank account.
+ You will NOT be able to receive redemption
proceeds by wire unless you check the box on
the Account Application which signifies that
you wish to receive redemption proceeds by
wire and attach a voided check.
+ Under normal circumstances, proceeds will be
transmitted to your bank on the business day
following receipt of your instructions,
provided redemptions may be made.
+ In the event that share certificates have been
issued, you may not request a wire redemption
by telephone.
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $100 to yourself, or to anyone else you
properly designate, as long as the account has a current value of at least
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<PAGE>
$10,000. 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 if the additional purchases are equal to at least one year's
scheduled withdrawals, or $1,200, whichever is greater. There are no separate
charges to you under this Plan, although a CDSC may apply if you purchased Class
A or B shares. 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.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed in a timely fashion, but the Fund will
not release the proceeds until your purchase payment clears. This may take up to
15 days or more. To reduce such delay, purchases should be made by bank wire or
federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
TRANSACTION POLICIES
NET ASSET VALUE. The net asset value (NAV) per share for each Fund and class is
determined each business day as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per share of
each class of each Fund is calculated by taking the value of the Fund's assets
attributable to that class, subtracting the Fund's liabilities attributable to
that class, and dividing by the number of shares of that class that are
outstanding.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations and
short-term debt securities. Portfolio securities for which market quotations are
readily available are stated at market value. Short-term debt securities having
a maturity of 60 days or less are valued at amortized cost, unless the amortized
cost does not approximate market value. Securities prices may be obtained from
automated pricing services. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Directors or Trustees,
although the actual calculations will be made by persons acting under the
supervision of the Board.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable sales
charge. When you sell shares, you receive the NAV minus any applicable deferred
sales charge. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
49
<PAGE>
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
EXCHANGES. You may exchange shares of a Fund for shares of the same class of any
other Pilgrim Fund, without paying any additional sales charge. Shares subject
to a CDSC will continue to age from the date that the original shares were
purchased. If you exchange shares of a Fund that at the time you acquired the
shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the
exchange will be subject to the current CDSC structure and conversion rights of
the Fund being acquired, although the shares will continue to age for CDSC and
conversion purposes from the date the original shares were acquired.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Funds are intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice, restrict the
frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the Funds reserve the right upon 30 days written notice to redeem, at NAV, the
shares of any shareholder whose account (except for IRAs) has a value of less
than $1,000, other than as a result of a decline in the NAV per share.
DISTRIBUTION AND SHAREHOLDER SERVICE FEES
To pay for the cost of promoting the Funds and servicing your shareholder
account, each class of each Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
50
<PAGE>
increase your cost of investing and may exceed the cost of paying other types of
sales charges. The following table shows the distribution and service fees
associated with investing in each class of shares.
DISTRIBUTION FEE SERVICE FEE
CLASS A
MagnaCap Fund 0.05% 0.25%
LargeCap Leaders, MidCap Value, Bank and
Thrift, Asia-Pacific Equity, Government
Securities Income and High Yield Funds 0.00% 0.25%
Large Cap Growth, Mid Cap Growth, Small
Cap Growth, Convertible, International
Core Growth, Worldwide Growth, International
Small Cap Growth, Emerging Countries,
Strategic Income and Balanced Funds 0.10% 0.25%
CLASS B 0.75% 0.25%
CLASS C 0.75% 0.25%
CLASS M 0.50% 0.25%
MANAGEMENT OF THE FUNDS
ADVISER
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of ________, 1999,
Pilgrim Investments managed over $__ billion in assets. Pilgrim Investments
acquired certain assets of the previous adviser to the Funds in a transaction
that closed on April 7, 1995. Pilgrim Investments is an indirect, wholly owned
subsidiary of Pilgrim America Capital Corporation (NYSE: PFX). Through its
subsidiaries, Pilgrim America Capital Corporation engages in the financial
services business, focusing on providing investment advisory, administrative and
distribution services to open-end and closed-end investment companies and
private accounts.
51
<PAGE>
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year as a percentage of that Fund's average daily net
assets:
FUND ADVISORY FEE
---- ------------
MagnaCap 0.72%
LargeCap Leaders 1.00
Large Cap Growth 0.751
MidCap Value 1.00
Mid Cap Growth 0.75
Small Cap Growth 1.00
Bank and Thrift 0.72
Worldwide Growth 1.00
International Core Growth 1.00
International Small Cap Growth 1.00
Emerging Countries 1.25
Asia-Pacific Equity 1.25
Government Securities Income 0.50
Strategic Income 0.452
High Yield 0.60
Balanced 0.75
Convertible 0.75
(1) Large Cap Growth Fund has not had a full year of operations. The advisory
fee for this Fund is 0.75% on the first $500 million of the Fund's average
net assets, 0.675% on the next $500 million of average net assets, and
0.65% on average net assets in excess of $1 billion.
(2) Strategic Income Fund has not had a full year of operations. The advisory
fee for this Fund is 0.45% on the first $500 million of the Fund's average
net assets, 0.40% on the next $250 million of average net assets, and 0.35%
on average net assets in excess of $750 million.
Pilgrim Investments directly manages the portfolios of the following Funds:
MAGNACAP FUND
This Fund is managed by a team led by Howard N. Kornblue, Senior Vice President
and Senior Portfolio Manager for Pilgrim Investments. Mr. Kornblue has served as
a Portfolio Manager of MagnaCap Fund since 1989. The other individuals on the
team are G. David Underwood, Anuradha Sahai and Robert M. Kloss.
LARGECAP LEADERS FUND
This Fund is managed by a team led by G. David Underwood, Vice President and
Senior Portfolio Manager for Pilgrim Investments. Mr. Underwood is the Lead
Portfolio Manager of LargeCap Leaders Fund. Prior to joining Pilgrim Investments
in December, 1996, Mr. Underwood served as Director of Funds Management for
First Interstate Capital Management. Mr. Underwood's prior experience includes a
10 year association with Integra Trust Company of Pittsburgh where he served as
Director of Research and Senior Portfolio Manager. The other individuals on the
team are Anuradha Sahai and Robert M. Kloss.
52
<PAGE>
BANK AND THRIFT FUND
Carl Dorf, Senior Vice President and Senior Portfolio Manager of Bank and Thrift
Fund has been managing the Fund's portfolio since January 1991, when he joined
Pilgrim Investments' predecessor. Mr. Dorf is also a Senior Vice President of
Pilgrim Investments.
STRATEGIC INCOME FUND
Robert K. Kinsey, [Title] of Pilgrim Investments, has served as a Portfolio
Manager of Strategic Income Fund since ______, 1999. Mr. Kinsey manages
Strategic Income Fund's assets that are invested in assets other than high yield
debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was a Vice
President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
______, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
GOVERNMENT SECURITIES INCOME FUND
Robert K. Kinsey, whose background is described above, has served as Senior
Portfolio Manager of Government Securities Income Fund since ______, 1999.
Charles G. Ullerich, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Government Securities Income Fund since September 1996 and
served as Assistant Portfolio Manager of that Fund from August 1995 to September
1996. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President of
Treasury Services for First Liberty Bank of Macon, GA since 1991, where he was
Portfolio Manager for a mortgage and treasury securities portfolio.
HIGH YIELD FUND
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund since June 1995.
BALANCED FUND
Robert K. Kinsey, whose background is described above, has served as Portfolio
Manager of the portion of Balanced Fund's assets that are invested in assets
other than high yield debt securities and equity securities since ______, 1999.
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of the high-yield debt portion of Balanced Fund's assets since ______,
1999. The equity portion of Balanced Fund has been managed by the team that
manages LargeCap Leaders Fund, which is described above, since _____, 1999.
SUB-ADVISERS
For the following Funds, Pilgrim Investments has engaged Sub-Advisers to provide
the day-to-day management of the Fund's portfolio. The Sub-Advisers are among
the most respected institutional investment advisers in the world, and have been
selected primarily on the basis of their successful application of a consistent,
well-defined, long-term investment approach over a period of several market
cycles.
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<PAGE>
LARGE CAP GROWTH FUND, MID CAP GROWTH FUND, SMALL CAP GROWTH FUND, INTERNATIONAL
CORE GROWTH FUND, WORLDWIDE GROWTH FUND, INTERNATIONAL SMALL CAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$30 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
MIDCAP VALUE FUND
CRAMER ROSENTHAL MCGLYNN, LLC. (CRM). CRM's predecessor was founded in 1973 to
manage portfolios for a select number of high net worth individuals and their
related foundations, endowment funds, pension plans and other entities, and CRM
currently manages approximately $4 billion for more than 200 individual and
institutional clients. The three founding principals of CRM have each spent over
35 years in the investment business. The firm has managed investments in small
and middle capitalization companies for 25 years. Accounts managed by Cramer
Rosenthal own in the aggregate approximately 17% of the outstanding voting
securities of Pilgrim.
Gerald B. Cramer, Chairman of CRM, Edward D. Rosenthal, Vice Chairman of CRM,
Ronald H. McGlynn, Manager, President and Chief Executive Officer of CRM, Jay B.
Abramson, Executive Vice President and Director of Research of CRM, and Michael
Prober, Portfolio Manager and Research Analyst, are primarily responsible for
portfolio management of MidCap Value Fund. Messrs. Cramer, Rosenthal and McGlynn
founded CRM's predecessor in 1973. Mr. Abramson has been with CRM or its
predecessor for 13 years. Mr. Prober has been with CRM for 6 years.
ASIA-PACIFIC EQUITY FUND
HSBC ASSET MANAGEMENT AMERICAS INC. and HSBC ASSET MANAGEMENT HONG KONG LIMITED
(collectively, HSBC) serve jointly as Sub-Adviser to Asia-Pacific Equity Fund.
The firms are part of HSBC Asset Management, the global investment advisory and
fund management business unit of HSBC Holdings plc (founded as the Hong Kong and
Shanghai Banking Corporation in 1865) which, with headquarters in London, is one
of the world's largest banking and financial organizations. HSBC Asset
Management manages over approximately $49 billion of assets worldwide for a wide
variety of institutional, retail and private clients. HSBC Asset Management has
advisory operations in Hong Kong and Singapore, among other locations. Its
parent company has over a century of operations in local economies throughout
the Asia-Pacific region.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
Ian Burden, Chief Investment Officer, HSBC Hong Kong, and Man Wing Chung,
Director, HSBC Hong Kong, are primarily responsible for portfolio management of
Asia-Pacific Equity Fund. Mr. Lutcher joined HSBC in 1997, and has over 20 years
of investment experience. Prior to joining HSBC, Mr. Lutcher was with Merrill
Lynch Asset Management. Mr. Burden has been with HSBC for 17 years, and has 24
years investment experience. Mr. Chung has been with HSBC for 5 years, and has
10 years investment experience.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
ANNUALLY SEMI-ANNUALLY QUARTERLY MONTHLY
- -------- ------------- --------- -------
LargeCap Leaders MagnaCap Balanced Strategic Income Fund
Large Cap Growth Convertible Government Securities Income
MidCap Value High Yield
Mid Cap Growth
Small Cap Growth
Bank and Thrift
International Core
Growth
Worldwide Growth
Asia-Pacific Equity
International Small
Cap Growth
Emerging Countries
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C or M shares of a Fund invested in another Pilgrim Fund
which offers the same class shares. If you are a shareholder of Pilgrim Prime
Rate Trust, whose shares are not held in a broker or nominee account, you may,
upon written request, elect to have all dividends invested into a pre-existing
Class A account of any open-end Pilgrim Fund.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
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<PAGE>
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. Pilgrim Investments is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally.
MORE INFORMATION ABOUT RISKS
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques that may be used by the Funds, see the Statement of Additional
Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
56
<PAGE>
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter in to foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as
zero-coupon or pay-in-kind securities tend to be more volatile. The secondary
market in which high yield securities are traded is generally less liquid than
the market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
57
<PAGE>
OTHER INVESTMENT COMPANIES. When a Fund invests in other investment companies,
you indirectly pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. If a security is illiquid, the Fund might be
unable to sell the security at a time when the adviser might wish to sell, and
the security could have the effect of decreasing the overall level of the Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, which could vary from the amount the
Fund could realize upon disposition. Restricted securities, i.e., securities
subject to legal or contractual restrictions on resale, may be illiquid.
However, some restricted securities may be treated as liquid, although they may
be less liquid than registered securities traded on established secondary
markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk of
nonpayment of principal or interest. Substantial increases in interest rates may
cause an increase in loan defaults. Although the loans will generally be fully
collateralized at the time of acquisition, the collateral may decline in value,
be relatively illiquid, or lose all or substantially all of its value subsequent
to the Fund's investment. Many loans are relatively illiquid, and may be
difficult to value.
INVESTMENT TECHNIQUES
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
58
<PAGE>
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, certain
Funds may lend portfolio securities in an amount up to 33 1/3% of total Fund
assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A Reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for a Fund depends upon the costs of
the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase a Fund's yield; however,
such transactions also increase a Fund's risk to capital and may result in a
shareholder's loss of principal.
SHORT SALES. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the expectation that the market price will drop.
If the price of the security rises, the Fund may have to cover its short
position at a higher price than the short sale price, resulting in a loss.
PAIRING OFF TRANSACTIONS. A pairing-off transaction occurs when a Fund commits
to purchase a security at a future date, and then the Fund `pairs-off' the
purchase with a sale of the same security prior to or on the original settlement
date. Whether a pairing-off transaction on a debt security produces a gain
depends on the movement of interest rates. If interest rates increase, then the
money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.
PERCENTAGE INVESTMENT LIMITATIONS Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
FINANCIAL HIGHLIGHTS
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
59
<PAGE>
Pilgrim MagnaCap Fund
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG LLP, independent auditors. The six
month period ended December 31, 1998 is unaudited. For all periods ending prior
to July 1, 1994, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
Six Months
Ended Year Ended June 30,
December 31, -------------------------------------------------------
1998 (Unaudited) 1998 1997 1996 1995(a) 1994
---------------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.07 $ 15.92 $ 16.69 $ 14.03 $ 12.36 $ 12.05
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 0.04 0.10 0.09 0.12 0.15
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gains on investments 0.84 3.02 4.16 2.87 2.29 0.89
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 0.87 3.06 4.26 2.96 2.41 1.04
- --------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.03 0.04 0.10 0.06 0.14 0.14
- --------------------------------------------------------------------------------------------------------------
In excess of net investment income 0.01 0.02 0.02 -- -- --
- --------------------------------------------------------------------------------------------------------------
Realized gains on investments 0.84 1.85 4.91 0.24 0.60 0.59
- --------------------------------------------------------------------------------------------------------------
In excess of realized gains on
investments 0.78 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total distributions 1.66 1.91 5.03 0.30 0.74 0.73
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.28 $ 17.07 $ 15.92 $ 16.69 $ 14.03 $ 12.36
==============================================================================================================
TOTAL RETURN(c): 5.68% 20.53% 30.82% 21.31% 20.61% 9.13%
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $350,703 $348,759 $290,355 $235,393 $211,330 $190,435
- --------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.34%(d) 1.37% 1.46% 1.68% 1.59% 1.53%
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.36%(d) 0.29% 0.64% 0.54% 0.98% 1.16%
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 31% 53% 77% 15% 6% 7%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized.
60
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ------------------------------------------------------- -----------------------------------------------------
Six Months Year Year July 17, Six Months Year Year July 17,
Ended Ended Ended 1995(b) to Ended Ended Ended 1995(b) to
December 31, June 30, June 30, June 30, December 31, June 30, June 30, June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
---------------- -------- -------- ---------- ---------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.86 $ 15.81 $ 16.59 $ 14.22 $ 16.95 $ 15.87 $16.63 $14.22
- -----------------------------------------------------------------------------------------------------------------
(0.01) (0.04) -- 0.06 -- -- 0.02 0.08
- -----------------------------------------------------------------------------------------------------------------
0.80 2.97 4.13 2.61 0.82 2.98 4.16 2.63
- -----------------------------------------------------------------------------------------------------------------
0.79 2.93 4.13 2.67 0.82 2.98 4.18 2.71
- -----------------------------------------------------------------------------------------------------------------
-- -- -- 0.06 -- -- 0.02 0.06
- -----------------------------------------------------------------------------------------------------------------
-- 0.03 -- -- -- 0.05 0.01 --
- -----------------------------------------------------------------------------------------------------------------
0.80 1.85 4.91 0.24 0.82 1.85 4.91 0.24
- -----------------------------------------------------------------------------------------------------------------
0.82 -- -- -- 0.80 -- -- --
- -----------------------------------------------------------------------------------------------------------------
1.62 1.88 4.91 0.30 1.62 1.90 4.94 0.30
- -----------------------------------------------------------------------------------------------------------------
$ 16.03 $ 16.86 $ 15.81 $ 16.59 $ 16.15 $ 16.95 $15.87 $16.63
=================================================================================================================
5.28% 19.76% 29.92% 18.98% 5.43% 20.00% 30.26% 19.26%
- -----------------------------------------------------------------------------------------------------------------
$94,968 $77,787 $37,427 $10,509 $15,247 $14,675 $6,748 $1,961
- -----------------------------------------------------------------------------------------------------------------
2.04%(d) 2.07% 2.16% 2.38%(d) 1.79%(d) 1.82% 1.91% 2.13%(d)
- -----------------------------------------------------------------------------------------------------------------
(0.34)%(d) (0.41)% (0.04)% 0.07%(d) (0.09)%(d) (0.16)% 0.22% 0.32%(d)
- -----------------------------------------------------------------------------------------------------------------
31% 53% 77% 15% 31% 53% 77% 15%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Pilgrim LargeCap Leaders Fund*
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, ------------------------ June 30,
1998 (Unaudited) 1998 1997 1996 (a)
---------------- ---- ---- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $14.70 $ 14.17 $11.77 $10.00
- ------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) (0.12) 0.01 0.06 0.07
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gains on investments 1.31 2.30 2.63 1.87
- ------------------------------------------------------------------------------------------------
Total from investment operations 1.19 2.31 2.69 1.94
- ------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- 0.07
- ------------------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.05 0.01
- ------------------------------------------------------------------------------------------------
Realized gains on investments 0.10 1.59 0.24 0.09
- ------------------------------------------------------------------------------------------------
In excess of realized gains on
investments -- 0.19 -- --
- ------------------------------------------------------------------------------------------------
Total distributions 0.10 1.78 0.29 0.17
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $15.79 $ 14.70 $14.17 $11.77
================================================================================================
TOTAL RETURN(b): 8.15% 17.71% 23.24% 19.56%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $7,005 $ 7,606 $8,961 $2,530
- ------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 1.75%(d) 1.75% 1.75% 1.75%(d)
- ------------------------------------------------------------------------------------------------
Net investment income (loss) after
expense reimbursement (c) (0.34)%(d) 0.03% 0.41% 0.65%(d)
- ------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 2.26%(d) 2.28% 2.33% 5.44%(d)
- ------------------------------------------------------------------------------------------------
Net investment income (loss) prior to
expense reimbursement (c) (0.82)%(d) (0.50)% (0.18)% (3.04)%(d)
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 70% 78% 86% 59%
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses
to 1.50% for all classes of shares.
(d) Annualized.
* Effective November 1, 1997, Pilgrim Investments, Inc. assumed the
portfolio investment responsibilities of the Fund from ARK Asset
Management Company, Inc.
62
<PAGE>
<TABLE>
<CAPTION>
Class B Class M
- -------------------------------------------------- ------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ---------------------- June 30, December 31, --------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a) 1998 (Unaudited) 1998 1997 1996 (a)
- ---------------- ---- ---- -------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14.44 $ 14.04 $ 11.71 $10.00 $14.55 $ 14.10 $11.73 $10.00
-------------------------------------------------------------------------------------------------
(0.18) (0.10) (0.02) 0.06 (0.17) (0.07) -- 0.06
-------------------------------------------------------------------------------------------------
1.28 2.28 2.59 1.81 1.31 2.30 2.62 1.83
-------------------------------------------------------------------------------------------------
1.10 2.18 2.57 1.87 1.14 2.23 2.62 1.89
-------------------------------------------------------------------------------------------------
-- -- -- 0.06 -- -- -- 0.06
-------------------------------------------------------------------------------------------------
-- -- -- 0.01 -- -- 0.01 0.01
-------------------------------------------------------------------------------------------------
0.10 1.59 0.24 0.09 0.10 1.59 0.24 0.09
-------------------------------------------------------------------------------------------------
-- 0.19 -- -- -- 0.19 -- --
-------------------------------------------------------------------------------------------------
0.10 1.78 0.24 0.16 0.10 1.78 0.25 0.16
-------------------------------------------------------------------------------------------------
$ 15.44 $ 14.44 $ 14.04 $11.71 $15.59 $ 14.55 $14.10 $11.73
=================================================================================================
7.68% 16.91% 22.23% 18.85% 7.90% 17.20% 22.58% 19.06%
-------------------------------------------------------------------------------------------------
$15,660 $15,605 $13,611 $1,424 $5,459 $ 5,533 $4,719 $1,240
-------------------------------------------------------------------------------------------------
2.50%(d) 2.50% 2.50% 2.50%(d) 2.25%(d) 2.25% 2.25% 2.25%(d)
-------------------------------------------------------------------------------------------------
(1.09)%(d) (0.72)% (0.35)% (0.25)%(d) (0.84)%(d) (0.47)% (0.10)% 0.06%(d)
-------------------------------------------------------------------------------------------------
3.01%(d) 3.03% 3.08% 5.79%(d) 2.76%(d) 2.78% 2.83% 5.90%(d)
-------------------------------------------------------------------------------------------------
(1.57)%(d) (1.25)% (0.91)% (3.59)%(d) (1.32)%(d) (1.00)% (0.68)% (3.59)%(d)
-------------------------------------------------------------------------------------------------
70% 78% 86% 59% 70% 78% 86% 59%
-------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
Pilgrim Large Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
-------------------------
Year July 21,
Ended 1997 to
March 31, March 31,
1999 1998
--------- ---------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.50
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)
- ----------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.29
- ----------------------------------------------------------------------------
Total from investment operations $ 3.26
- ----------------------------------------------------------------------------
Less distributions from:
Net investment income --
- ----------------------------------------------------------------------------
Net realized capital gains (0.03)
- ----------------------------------------------------------------------------
Net asset value, end of period $ 15.73
============================================================================
TOTAL RETURN+: 62.35%(a)
- ----------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 4,742
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement++ 1.60%*
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement++ 4.70%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, after expense reimbursement++ (0.87)%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, before expense reimbursement++ (3.96)%*
- ----------------------------------------------------------------------------
Portfolio turnover** 305.78%
- ----------------------------------------------------------------------------
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
(a) Total return has been linked to the inception of the Institutional Class
and adjusted to reflect the difference in expenses. Had the return not
been linked total return for the fiscal year ended March 31, 1998 would
have been 26.11%, 25.38% and 25.62%, respectively, for Class A, B and C
shares.
64
<PAGE>
Class B Class C
- --------------------- ---------------------
Year July 21, Year July 21,
Ended 1997 to Ended 1997 to
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- --------- --------- --------- ---------
$ 12.50 $ 12.50
- ----------------------------------------------
(0.07) (0.05)
- ----------------------------------------------
3.24 3.24
- ----------------------------------------------
$ 3.17 $ 3.19
- ----------------------------------------------
-- --
- ----------------------------------------------
(0.03) (0.06)
- ----------------------------------------------
$ 15.64 $ 15.63
==============================================
61.08%(a) 61.38%(a)
- ----------------------------------------------
$ 3,187 $ 960
- ----------------------------------------------
2.25%* 2.25%*
- ----------------------------------------------
4.78%* 7.79%*
- ----------------------------------------------
(1.36)%* (1.49)%*
- ----------------------------------------------
(3.88)%* (7.03)%*
- ----------------------------------------------
305.78% 305.78%
- ----------------------------------------------
65
<PAGE>
Pilgrim MidCap Value Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998,
which is unaudited.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996(a)
---------------- ---- ---- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.79 $ 14.64 $ 11.99 $10.00
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03) (0.07) (0.02) 0.13
- ------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments (0.54) 2.71 2.85 1.91
- ------------------------------------------------------------------------------------
Total from investment operations (0.57) 2.64 2.83 2.04
- ------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- 0.05
- ------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.07 --
- ------------------------------------------------------------------------------------
Realized gains on investments -- 0.49 0.11 --
- ------------------------------------------------------------------------------------
In excess of realized gains on
investments 1.17 -- -- --
- ------------------------------------------------------------------------------------
Total distributions 1.17 0.49 0.18 0.05
- ------------------------------------------------------------------------------------
Net asset value, end of period $ 15.05 $ 16.79 $ 14.64 $11.99
====================================================================================
TOTAL RETURN(b): (2.92)% 18.40% 23.89% 20.48%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $22,899 $27,485 $16,985 $2,389
- ------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 1.75%(d) 1.75% 1.75% 1.75%(d)
- ------------------------------------------------------------------------------------
Net investment income (loss) after
expense reibursement (c) (0.27)%(d) (0.53)% (0.13)% 2.00%(d)
- ------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 1.86%(d) 1.78% 1.94% 4.91%(d)
- ------------------------------------------------------------------------------------
Net investment income (loss) prior
to expense reimbursement (c) (0.38)%(d) (0.57)% (0.32)% (1.17)%(d)
- ------------------------------------------------------------------------------------
Portfolio turnover rate 50% 85% 86% 60%
- ------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses
to 1.50% for all classes of shares.
(d) Annualized.
66
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ------------------------------------------------- ------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ----------------------- June 30, December 31, ------------------- June 30,
998 (Unaudited) 1998 1997 1996(a) 1998 (Unaudited) 1998 1997 1996(a)
- --------------- ---- ---- ------- ---------------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.47 $ 14.49 $ 11.94 $10.00 $ 16.52 $ 14.49 $11.93 $ 10.00
- ----------------------------------------------------------------------------------------------------
(0.07) (0.18) (0.05) 0.07 (0.05) (0.15) (0.03) 0.06
- ----------------------------------------------------------------------------------------------------
(0.55) 2.65 2.76 1.90 (0.55) 2.67 2.76 1.91
- ----------------------------------------------------------------------------------------------------
(0.62) 2.47 2.71 1.97 (0.60) 2.52 2.73 1.97
- ----------------------------------------------------------------------------------------------------
-- -- -- 0.03 -- -- -- 0.04
- ----------------------------------------------------------------------------------------------------
-- -- 0.05 -- -- -- 0.06 --
- ----------------------------------------------------------------------------------------------------
-- 0.49 0.11 -- -- 0.49 0.11 --
- ----------------------------------------------------------------------------------------------------
1.17 -- -- -- 1.17 -- -- --
- ----------------------------------------------------------------------------------------------------
1.17 0.49 0.16 0.03 1.17 0.49 0.17 0.04
- ----------------------------------------------------------------------------------------------------
$ 14.68 $ 16.47 $ 14.49 $11.94 $ 14.75 $ 16.52 14.49 11.93
====================================================================================================
(3.28)% 17.40% 22.95% 19.80% (3.15)% 17.76% 23.21% 19.82%
- ----------------------------------------------------------------------------------------------------
$37,168 $40,575 $23,258 $2,123 $12,198 $13,232 $8,378 $ 1,731
- ----------------------------------------------------------------------------------------------------
2.50%(d) 2.50% 2.50% 2.50%(d) 2.25%(d) 2.25% 2.25% 2.25%(d)
- ----------------------------------------------------------------------------------------------------
(1.02)%(d) (1.28)% (0.90)% 1.27%(d) (0.77)%(d) (1.03)% (0.63)% (1.16)%(d)
- ----------------------------------------------------------------------------------------------------
2.61%(d) 2.53% 2.69% 5.32%(d) 2.36%(d) 2.28% 2.44% 4.72%(d)
- ----------------------------------------------------------------------------------------------------
(1.13)%(d) (1.31)% (1.11)% (1.56)%(d) (0.88)%(d) (1.07)% (0.84)% (1.32)%(d)
- ----------------------------------------------------------------------------------------------------
50% 85% 86% 60% 50% 85% 86% 60%
- ----------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
Pilgrim Mid Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year Ended March 31,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.80 $ 18.37 $ 13.61 $ 13.25
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.14) (0.17) (0.18) (0.10)
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.50 0.57 4.94 0.46
- ------------------------------------------------------------------------------------------
Total from investment operations 6.36 0.40 4.76 0.36
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------------------
Realized capital gains (4.53) (1.97) -- --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.63 $ 16.80 $ 18.37 $ 13.61
==========================================================================================
TOTAL RETURN+: 41.81% 1.09% 35.07% 2.72%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $90,619 $76,108 $77,275 $65,292
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.57% 1.60% 1.58% 1.59%
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.66% 1.56% 1.56% 1.63%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.33)% (1.05)% (0.91)% (0.66)%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.41)% (1.01)% (0.89)% (0.70)%
- ------------------------------------------------------------------------------------------
Portfolio turnover** 199.54% 153.20% 114.48% 98.09%
- ------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
68
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------- ----------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- --------------------------- March 31, ----------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.33 $ 16.25 $ 12.50 $ 16.48 $ 18.06 $ 13.45 $ 13.18
- ------------------------------------------------------------------------------------------
(0.25) (0.17) (0.09) (0.28) (0.32) (0.27) (0.17)
- ------------------------------------------------------------------------------------------
6.74 0.25 3.84 6.26 0.62 4.88 0.44
- ------------------------------------------------------------------------------------------
6.49 0.08 3.75 5.98 0.30 4.61 0.27
- ------------------------------------------------------------------------------------------
-- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------
(1.27) -- -- (5.31) (1.88) -- --
- ------------------------------------------------------------------------------------------
$ 21.55 $ 16.33 $ 16.25 $ 17.15 $ 16.48 $ 18.06 $ 13.45
==========================================================================================
40.84% (0.49)% 30.00% 40.95% 0.56% 34.28% 2.05%
- ------------------------------------------------------------------------------------------
$46,806 $29,002 $11,186 $166,849 $157,501 $177,461 $143,390
- ------------------------------------------------------------------------------------------
2.22% 2.25% 2.22%* 2.27% 2.14% 2.14% 2.24%
- ------------------------------------------------------------------------------------------
2.21% 2.66% 3.39%* 2.33% 2.17% 2.14% 2.24%
- ------------------------------------------------------------------------------------------
(1.99)% (1.69)% (1.61)%* (2.01)% (1.59)% (1.47)% (1.30)%
- ------------------------------------------------------------------------------------------
(1.98)% (2.10)% (2.77)%* (2.07)% (1.62)% (1.47)% (1.30)%
- ------------------------------------------------------------------------------------------
199.54% 153.20% 114.48% 199.54% 153.20% 114.48% 98.09%
- ------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
Pilgrim Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
------------------------------------------------
Year Ended March 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.15 $ 17.93 $ 13.06 $ 12.10
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.08) (0.22) (0.20) (0.16)
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.91 (0.66) 5.09 1.12
- ---------------------------------------------------------------------------------------------
Total from investment operations 6.83 (0.88) 4.89 0.96
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- ---------------------------------------------------------------------------------------------
Realized capital gains (2.23) (1.90) (0.02) --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.75 $ 15.15 $ 17.93 $ 13.06
=============================================================================================
TOTAL RETURN+: 46.32% (6.26)% 37.48% 7.93%
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $201,943 $121,742 $138,155 $106,725
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.89% 1.72% 1.74% 1.86%
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.90% 1.72% 1.74% 1.84%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.85)% (1.26)% (1.20)% (1.27)%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.86)% (1.26)% (1.20)% (1.25)%
- ---------------------------------------------------------------------------------------------
Portfolio turnover** 91.66% 112.90% 129.59% 100.46%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
70
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- -------------------------------------- ----------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- -------------------------- March 31, ----------------------------------------
1999 1998 1997 1996 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.51 $ 16.69 $ 12.50 $ 14.69 $ 17.62 $ 12.96 $ 12.07
- ---------------------------------------------------------------------------------
(0.27) (0.21) (0.14) (0.38) (0.31) (0.29) (0.22)
- ---------------------------------------------------------------------------------
7.29 (0.97) 4.33 6.84 (0.63) 5.03 1.11
- ---------------------------------------------------------------------------------
7.02 (1.18) 4.19 6.46 (0.94) 4.74 0.89
- ---------------------------------------------------------------------------------
-- -- -- -- -- -- --
- ---------------------------------------------------------------------------------
-- -- -- (2.53) (1.99) (0.08) --
- ---------------------------------------------------------------------------------
$ 22.53 $ 15.51 $ 16.69 $ 18.62 $ 14.69 $ 17.62 $ 12.96
=================================================================================
45.26% (7.07)% 33.52% 45.40% (6.81)% 37.18% 7.37%
- ---------------------------------------------------------------------------------
$55,215 $28,030 $13,626 $225,025 $182,907 $207,332 $157,292
- ---------------------------------------------------------------------------------
2.62% 2.61% 2.58%* 2.57% 2.35% 2.35% 2.44%
- ---------------------------------------------------------------------------------
2.63% 2.73% 3.26%* 2.59% 2.35% 2.35% 2.44%
- ---------------------------------------------------------------------------------
(2.59)% (2.13)% (2.09)%* (2.53)% (1.89)% (1.81)% (1.85)%
- ---------------------------------------------------------------------------------
(2.60)% (2.25)% (2.76)%* (2.55)% (1.89)% (1.81)% (1.85)%
- ---------------------------------------------------------------------------------
91.66% 112.90% 129.59% 91.66% 112.90% 129.59% 100.46%
- ---------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
Pilgrim Bank and Thrift Fund
For the six-month period ended June 30, 1998 and the years ended December 31,
1997, 1996, and 1995, the information in the table below, with the exception of
the information in the row labeled "Total Investment Return at Net Asset Value"
for periods prior to January 1, 1997, have been audited by KPMG LLP, independent
auditors. The six month period ended December 31, 1998 is unaudited. For all
periods ending prior to December 31, 1995, the financial information, with the
exception of the information in the row
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Six Months Ended
------------------------- Year Ended December 31,
December 31, June 30, --------------------------------
1998 (Unaudited) 1998* 1997 1996 1995(b) 1994
---------------- ----- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $27.52 $25.87 $ 17.84 $ 14.83 $ 10.73 $11.87
- ----------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.15 0.11 0.34 0.32 0.31 0.26
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments (2.31) 1.54 10.83 5.18 4.78 (0.53)
- ----------------------------------------------------------------------------------------------------
Total from investment operations (2.16) 1.65 11.17 5.50 5.09 (0.27)
- ----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.15 -- 0.31 0.32 0.31 0.22
- ----------------------------------------------------------------------------------------------------
In excess of net investment income 0.03 -- -- 0.03 0.03 --
- ----------------------------------------------------------------------------------------------------
Realized capital gains -- -- 2.65 2.14 0.65 0.65
- ----------------------------------------------------------------------------------------------------
In excess of net realized
capital gains 0.56 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Tax return of capital -- -- 0.18 -- -- --
- ----------------------------------------------------------------------------------------------------
Total distributions 0.74 0.00 3.14 2.49 0.99 0.87
- ----------------------------------------------------------------------------------------------------
Net asset value, end of year $24.62 $27.52 $ 25.87 $ 17.84 $ 14.83 $10.73
====================================================================================================
Closing market price, end of year -- -- -- $ 15.75 $ 12.88 $ 9.13
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) -- -- -- 43.48% 52.81% (8.85)%
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(d) (7.71)% 6.38% 64.86% 41.10% 49.69% (1.89)%
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year ($millions) $ 493 $ 549 $ 383 $ 252 $ 210 $ 152
- ----------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.34%(e) 1.20%(e) 1.10% 1.01% 1.05% 1.28%
- ----------------------------------------------------------------------------------------------------
Net investment income 1.22%(e) 0.94%(e) 1.39% 1.94% 2.37% 2.13%
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 8% 2% 22% 21% 13% 14%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Effective June 30, 1998, Bank and Thrift Fund changed its year end
to June 30.
(a) From the period October 20, 1997 (initial offering of Class B shares)
through December 31, 1997.
(b) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(c) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
72
<PAGE>
labeled "Total Investment Return at Net Asset Value", was audited by
another independent auditor. The information in the row labeled "Total
Investment Return at Net Asset Value" has not been audited for periods
prior to January 1, 1997. Prior to October 17, 1997, the Class A
shares were designated as Common Stock and the Fund operated as a
closed-end investment company.
<TABLE>
<CAPTION>
Class B
- ----------------------------------------
Six Months Ended Year
- ------------------------- Ended
December 31, June 30, December 31,
1998 (Unaudited) 1998* 1997(a)
- ---------------- ----- -------
<S> <C> <C> <C>
$27.40 $25.85 $ 25.25
- -------------------------------------
0.06 0.01 0.04
- -------------------------------------
(2.31) 1.54 2.92
- -------------------------------------
(2.25) 1.55 2.96
- -------------------------------------
0.05 -- 0.04
- -------------------------------------
-- -- --
- -------------------------------------
-- -- 2.04
- -------------------------------------
0.56 -- --
- -------------------------------------
-- -- 0.28
- -------------------------------------
0.61 0.00 2.36
- -------------------------------------
$24.54 $27.40 $ 25.85
=====================================
-- -- --
- -------------------------------------
-- -- --
- -------------------------------------
(8.04)% 6.00% 11.88%
- -------------------------------------
$ 396 $ 360 $ 76
- -------------------------------------
2.09%(e) 1.95%(e) 1.89%(e)
- -------------------------------------
0.47%(e) 0.19%(e) 0.99%(e)
- -------------------------------------
8% 2% 22%
- -------------------------------------
</TABLE>
(d) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(e) Annualized.
73
<PAGE>
Pilgrim Worldwide Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Year Ended March 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.88 $ 16.57 $ 14.29 $ 14.94
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.04 (0.16) (0.07) (0.05)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.33 2.20 2.86 (0.09)
- -------------------------------------------------------------------------------------------
Total from investment operations 5.37 2.04 2.79 (0.14)
- -------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- (0.12) (0.02)
- -------------------------------------------------------------------------------------------
Realized capital gains (2.92) (1.73) (0.39) (0.49)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.33 $ 16.88 $ 16.57 $ 14.29
===========================================================================================
TOTAL RETURN+: 34.55% 12.51% 19.79% (0.90)%
- -------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $38,647 $24,022 $23,481 $22,208
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.86% 1.85% 1.85% 1.85%
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.21% 2.17% 2.17% 2.18%
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (0.69)% (0.93)% (0.35)% (0.42)%
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.04)% (1.18)% (0.61)% (0.75)%
- -------------------------------------------------------------------------------------------
Portfolio turnover** 201.70% 181.81% 132.20% 98.54%
- -------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
74
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ----------------------------------------- ------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- --------------------------- March 31, ------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.02 $ 14.34 $ 12.50 $ 16.92 $ 16.76 $ 14.44 $ 14.86
- ---------------------------------------------------------------------------------------
(0.17) (0.14) (0.05) (0.19) (0.28) (0.21) (0.15)
- ---------------------------------------------------------------------------------------
5.44 1.82 1.89 5.41 2.23 2.92 (0.08)
- ---------------------------------------------------------------------------------------
5.27 1.68 1.84 5.22 1.95 2.71 (0.23)
- ---------------------------------------------------------------------------------------
-- -- -- -- -- (0.01) --
- ---------------------------------------------------------------------------------------
(1.19) -- -- (3.09) (1.79) (0.38) (0.19)
- ---------------------------------------------------------------------------------------
$ 20.10 $ 16.02 $ 14.34 $ 19.05 $ 16.92 $ 16.76 $ 14.44
=======================================================================================
34.03% 11.72% 14.72% 33.72% 11.81% 18.95% (1.49)%
- ---------------------------------------------------------------------------------------
$10,083 $ 5,942 $ 1,972 $84,292 $70,345 $71,155 $71,201
- ---------------------------------------------------------------------------------------
2.51% 2.50% 2.50%* 2.51% 2.50% 2.50% 2.50%
- ---------------------------------------------------------------------------------------
2.70% 4.81% 9.50%* 2.77% 2.61% 2.57% 2.57%
- ---------------------------------------------------------------------------------------
(1.37)% (1.62)% (1.28)%* (1.34)% (1.57)% (0.99)% (1.06)%
- ---------------------------------------------------------------------------------------
(1.57)% (3.87)% (8.12)%* (1.60)% (1.62)% (1.00)% (1.13)%
- ---------------------------------------------------------------------------------------
201.70% 181.81% 132.20% 201.70% 181.81% 132.20% 98.54%
- ---------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
Pilgrim International Core Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
---------------------------------
February 28,
Year Ended March 31, 1997 to
-------------------- March 31,
1999 1998 1997
---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.73 $ 12.50
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02) --
- ---------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.56 0.23
- ---------------------------------------------------------------------------
Total from investment operations 4.54 0.23
- ---------------------------------------------------------------------------
Less distributions from:
Net investment income -- --
- ---------------------------------------------------------------------------
Realized capital gains (0.26) --
- ---------------------------------------------------------------------------
Net assest value, end of period $ 17.01 $ 12.73
===========================================================================
TOTAL RETURN+: 36.10% 1.76%
- ---------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $12,664 $ 2
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.96% 1.95%*
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 3.02% 4,580%*
- ---------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (0.45)% --
- ---------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.51)% (4,577)%*
- ---------------------------------------------------------------------------
Portfolio turnover** 274.21% 75.53%
- ---------------------------------------------------------------------------
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
76
<PAGE>
Class B Class C
- --------------------------------- ---------------------------------
February 28, February 28,
Year Ended March 31, 1997 to Year Ended March 31, 1997 to
- -------------------- March 31, -------------------- March 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
$ 12.68 $ 12.50 $ 12.68 $ 12.50
- ------------------------------------------------------------------
(0.11) -- (0.07) --
- ------------------------------------------------------------------
4.66 0.18 4.55 0.18
- ------------------------------------------------------------------
4.55 0.18 4.48 0.18
- ------------------------------------------------------------------
-- -- -- --
- ------------------------------------------------------------------
(0.13) -- -- --
- ------------------------------------------------------------------
$ 17.10 $ 12.68 $ 17.16 $ 12.68
==================================================================
35.31% 1.44% 35.25% 1.44%
- ------------------------------------------------------------------
$ 7,942 $ 1 $ 3,517 $ 43
- ------------------------------------------------------------------
2.61% 2.59%* 2.61 2.41%*
- ------------------------------------------------------------------
3.04% 16,000%* 5.10% 25.55%*
- ------------------------------------------------------------------
(1.32)% -- (1.27)% (0.07)%*
- ------------------------------------------------------------------
(1.76)% (15,998)%* (3.76)% (291.20)%*
- ------------------------------------------------------------------
274.21% 75.53% 274.21% 75.53%
- ------------------------------------------------------------------
77
<PAGE>
Pilgrim International Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
August 31,
Year Ended March 31, 1994 to
---------------------------------- March 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.92 $ 13.15 $ 11.51 $ 12.50
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.15) 0.04 (0.02) --
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.36 1.88 1.79 (0.98)
- ---------------------------------------------------------------------------------------------
Total from investment operations 5.21 1.92 1.77 (0.98)
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- (0.01) (0.13) (0.01)
- ---------------------------------------------------------------------------------------------
Realized capital gains (0.84) (0.14) -- --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.29 $ 14.92 $ 13.15 $ 11.51
=============================================================================================
TOTAL RETURN+: 36.31% 14.67% 15.46% (7.85)%
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $11,183 $ 5,569 $ 1,056 $ 610
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.96% 1.95% 1.95% 1.95%*
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.75% 3.76% 10.06% 9.77%*
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.56)% (1.05)% (0.27)% (0.07)%*
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (2.35)% (2.82)% (7.75)% (7.89)%*
- ---------------------------------------------------------------------------------------------
Portfolio turnover** 198.37% 206.07% 141.02% 74.88%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
78
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ --------------------------------------------
May 31, August 31,
Year Ended March 31, 1995 to Year Ended March 31, 1994 to
- ------------------------- March 31, ------------------------------- March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.89 $ 13.96 $ 12.50 $ 14.87 $ 13.05 $ 11.32 $ 12.50
- ---------------------------------------------------------------------------------
(0.15) (0.15) (0.02) (0.11) (0.16) 0.01 (0.04)
- ---------------------------------------------------------------------------------
5.56 2.09 1.48 5.09 1.98 1.72 (1.12)
- ---------------------------------------------------------------------------------
5.41 1.94 1.46 4.98 1.82 1.73 (1.16)
- ---------------------------------------------------------------------------------
-- (0.01) -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------
(1.14) -- -- (1.32) -- -- --
- ---------------------------------------------------------------------------------
$ 20.16 $ 15.89 $ 13.96 $ 18.53 $ 14.87 $ 13.05 $ 11.32
=================================================================================
35.73% 13.96% 11.68% 35.63% 13.98% 15.30% (9.25)%
- ---------------------------------------------------------------------------------
$12,033 $ 5,080 $ 1,487 $ 8,014 $ 3,592 $ 933 $ 24
- ---------------------------------------------------------------------------------
2.61% 2.60% 2.60%* 2.61% 2.60% 2.60% 2.61%*
- ---------------------------------------------------------------------------------
2.98% 4.89% 16.15%* 3.38% 3.95% 16.15% 75.37%*
- ---------------------------------------------------------------------------------
(2.20)% (1.66)% (0.64)%* (2.18)% (1.67)% (1.02)% (0.76)%*
- ---------------------------------------------------------------------------------
(2.57)% (3.91)% (13.26)%* (2.95)% (2.99)% (13.95)% (73.52)%*
- ---------------------------------------------------------------------------------
198.37% 206.07% 141.02% 198.37% 206.07% 141.02% 74.88%
- ---------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
Pilgrim Emerging Countries Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
------------------------------------------------
November 28,
Year Ended March 31, 1994 to
--------------------------------- March 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.20 $ 14.03 $ 11.00 $12.50
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 (0.06) (0.04) 0.04
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 1.22 3.51 3.15 (1.54)
- ------------------------------------------------------------------------------------------
Total from investment operations 1.25 3.45 3.11 (1.50)
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- (0.02) --
- ------------------------------------------------------------------------------------------
Realized capital gains (1.06) (0.28) (0.06) --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.39 $ 17.20 $ 14.03 $11.00
==========================================================================================
TOTAL RETURN+: 8.06% 24.79% 28.43% (11.98)%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $71,014 $38,688 $ 4,718 $1,197
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 2.26% 2.25% 2.25% 2.25%*
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.48% 3.08% 6.72% 6.15%*
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 0.55% (1.14)% (0.35)% 1.09%*
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 0.33% (2.00)% (3.61)% (4.99)%*
- ------------------------------------------------------------------------------------------
Portfolio turnover** 243.47% 176.20% 118.21% 60.79%
- ------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
80
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ ----------------------------------------------
May 31, November 28,
Year Ended March 31, 1995 to Year Ended March 31, 1994 to
----------------------- March 31, -------------------------------- March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 17.29 $ 14.02 $ 12.50 $ 16.81 $ 13.71 $ 10.79 $ 12.50
- ---------------------------------------------------------------------------------
(0.07) (0.11) (0.04) (0.12) (0.10) (0.05) --
- ---------------------------------------------------------------------------------
1.26 3.47 1.56 1.26 3.37 2.97 (1.70)
- ---------------------------------------------------------------------------------
1.19 3.36 1.52 1.14 3.27 2.92 (1.70)
- ---------------------------------------------------------------------------------
-- -- -- -- -- -- (0.01)
- ---------------------------------------------------------------------------------
(0.84) (0.09) -- (0.97) (0.17) -- --
- ---------------------------------------------------------------------------------
$ 17.64 $ 17.29 $ 14.02 $ 16.98 $ 16.81 $ 13.71 $ 10.79
=================================================================================
7.47% 24.00% 12.16% 7.47% 23.94% 27.30% (13.64)%
- ---------------------------------------------------------------------------------
$38,796 $24,558 $ 3,557 $36,986 $29,376 $ 4,345 $ 59
- ---------------------------------------------------------------------------------
2.91% 2.90% 2.90%* 2.91% 2.90% 2.90% 2.90%*
- ---------------------------------------------------------------------------------
3.06% 3.66% 7.58%* 3.09% 3.12% 6.23% 242.59%*
- ---------------------------------------------------------------------------------
(0.20)% (1.77)% (1.05)%* (0.26)% (1.75)% (1.06)% (0.04)%*
- ---------------------------------------------------------------------------------
(0.35)% (2.55)% (5.44)%* (0.45)% (1.99)% (4.15)% (239.73)%*
- ---------------------------------------------------------------------------------
243.47% 176.20% 118.21% 243.47% 176.20% 118.21% 60.79%
- ---------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
Pilgrim Asia-Pacific Equity Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, ------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a)
---------------- ---- ---- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 4.46 $ 10.93 $ 10.35 $ 10.00
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01 0.03 0.02 0.03
- -------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments and
foreign currency transactions 0.65 (6.50) 0.58 0.34
- -------------------------------------------------------------------------------------
Total from investment operations 0.66 (6.47) 0.60 0.37
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- -------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.02 --
- -------------------------------------------------------------------------------------
Tax return of capital -- 0.02 -- --
- -------------------------------------------------------------------------------------
Total distributions -- 0.02 0.02 --
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 5.12 $ 4.46 $ 10.93 $ 10.35
=====================================================================================
TOTAL RETURN(b): 14.80% (59.29)% 5.78% 3.76%
- -------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $9,692 $11,796 $32,485 $18,371
- -------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 2.00%(d) 2.00% 2.00% 2.00%(d)
- -------------------------------------------------------------------------------------
Net investment income (loss) after
expense reimbursement (c) 0.11%(d) 0.38% 0.00% 0.33%(d)
- -------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 3.47%(d) 2.80% 2.54% 3.47%(d)
- -------------------------------------------------------------------------------------
Net investment income (loss) prior
to expense reimbursement (c) (1.36)%(d) (0.42)% (0.53)% (1.14)%(d)
- -------------------------------------------------------------------------------------
Portfolio turnover rate 51% 81% 38% 15%
- -------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding fees,
interest, taxes, brokerage and extraordinary expenses to 1.75% for all
classes of shares.
(d) Annualized.
82
<PAGE>
<TABLE>
<CAPTION>
Class B Class M
- -------------------------------------------------- -------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ------------------ June 30, December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a) 1998 (Unaudited) 1998 1997 1996 (a)
- ---------------- ---- ---- -------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 4.37 $ 10.83 $ 10.31 $ 10.00 $ 4.40 $ 10.86 $ 10.32 $10.00
- ----------------------------------------------------------------------------------------------------
(0.03) (0.03) (0.07) (0.01) (0.03) -- (0.05) --
- ----------------------------------------------------------------------------------------------------
0.66 (6.43) 0.59 0.32 0.66 (6.46) 0.59 0.33
- ----------------------------------------------------------------------------------------------------
0.63 (6.46) 0.52 0.31 0.63 (6.46) 0.54 0.33
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 0.01
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 0.01
- ----------------------------------------------------------------------------------------------------
$ 5.00 $ 4.37 $ 10.83 $ 10.31 $ 5.03 $ 4.40 $ 10.86 $10.32
====================================================================================================
14.42% (59.65)% 5.04% 3.19% 14.32% (59.48)% 5.26% 3.32%
- ----------------------------------------------------------------------------------------------------
$9,173 $ 9,084 $30,169 $17,789 $ 3,894 $ 4,265 $11,155 $6,476
- ----------------------------------------------------------------------------------------------------
2.75%(d) 2.75% 2.75% 2.75%(d) 2.50%(d) 2.50% 2.50% 2.50%(d)
- ----------------------------------------------------------------------------------------------------
(0.64)%(d) (0.39)% (0.79)% (0.38)%(d) (0.39)%(d) (0.07)% (0.55)% (0.16)%(d)
- ----------------------------------------------------------------------------------------------------
4.22%(d) 3.55% 3.29% 4.10%(d) 3.97%(d) 3.30% 3.04% 3.88%(d)
- ----------------------------------------------------------------------------------------------------
(2.11)%(d) (1.19)% (1.33)% (1.73)%(d) (1.86)%(d) (0.88)% (1.09)% (1.86)%(d)
- ----------------------------------------------------------------------------------------------------
51% 81% 38% 15% 51% 81% 38% 15%
- ----------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
Pilgrim Government Securities Income Fund
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG LLP, independent auditors. The six
month period ended December 31, 1998 is unaudited. For all periods ended prior
to July 1, 1994, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------------
1998 (Unaudited) 1998 1997 1996 1995(a) 1994
---------------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73 $ 13.96
- --------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.43 0.64 0.69 0.75 0.84 0.84
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments (0.06) 0.30 0.20 (0.32) 0.24 (1.17)
- --------------------------------------------------------------------------------------------------------
Total from investment operations 0.37 0.94 0.89 0.43 1.08 (0.33)
- --------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.39 0.64 0.69 0.75 0.84 0.90
- --------------------------------------------------------------------------------------------------------
In excess of net
investment income -- 0.13 0.04 -- -- --
- --------------------------------------------------------------------------------------------------------
Tax return of capital -- -- 0.04 0.06 -- --
- --------------------------------------------------------------------------------------------------------
Total distributions 0.39 0.77 0.77 0.81 0.84 0.90
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.86 $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73
========================================================================================================
TOTAL RETURN(c): 2.89% 7.63% 7.33% 3.34% 8.96% (2.50)%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $26,944 $23,682 $29,900 $38,753 $43,631 $61,100
- --------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (d) 1.43%(e) 1.50% 1.42% 1.51% 1.40% 1.21%
- --------------------------------------------------------------------------------------------------------
Net investment income after
expense reimbursement (d) 6.02%(e) 5.13% 5.78% 5.64% 6.37% 6.44%
- --------------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (d) -- 1.58% -- 1.57% 1.54% --
- --------------------------------------------------------------------------------------------------------
Net investment income prior to
expense reimbursement (d) -- 5.06% -- 5.74% 6.23% --
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 29% 134% 172% 170% 299% 402%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(d) The manager has agreed to reimburse the Fund for all gross operating costs
and expenses, excluding any interest, taxes, brokerage commissions,
amortization of organizational expenses, extraordinary expenses, and
certain distribution fees which exceed 1.50% on the first $40 million of
average daily net assets and 1.00% on average daily net assets in excess of
$40 million for any one fiscal year.
(e) Annualized.
84
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ----------------------------------------------- ----------------------------------------------
Six Months Year Year July 17, Six Months Year Year July 17,
Ended Ended Ended 1995(b) to Ended Ended Ended 1995(b) to
December 31, June 30, June 30, June 30, December 31, June 30, June 30, June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
- ---------------- ---- ---- ---- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.84 $12.68 $12.59 $12.95 $12.88 $12.72 $12.59 $12.95
- ---------------------------------------------------------------------------------------------
0.43 0.60 0.67 0.66 0.43 0.64 0.70 0.68
- ---------------------------------------------------------------------------------------------
(0.11) 0.24 0.11 (0.37) (0.09) 0.23 0.14 (0.36)
- ---------------------------------------------------------------------------------------------
0.32 0.84 0.78 0.29 0.34 0.87 0.84 0.32
- ---------------------------------------------------------------------------------------------
0.34 0.60 0.67 0.65 0.36 0.63 0.70 0.68
- ---------------------------------------------------------------------------------------------
-- 0.08 0.02 -- -- 0.08 -- --
- ---------------------------------------------------------------------------------------------
-- -- -- -- -- -- 0.01 --
- ---------------------------------------------------------------------------------------------
0.34 0.68 0.69 0.65 0.36 0.71 0.71 0.68
- ---------------------------------------------------------------------------------------------
$ 12.82 $12.84 $12.68 $12.59 $12.86 $12.88 $12.72 $12.59
=============================================================================================
2.55% 6.78% 6.38% 2.25% 2.67% 7.02% 6.88% 2.52%
- ---------------------------------------------------------------------------------------------
$16,120 $3,220 $1,534 $ 73 $1,487 $ 224 $ 61 $ 24
- ---------------------------------------------------------------------------------------------
2.18%(e) 2.25% 2.17% 2.26%(e) 1.93%(e) 2.00% 1.92% 2.01%(f)
- ---------------------------------------------------------------------------------------------
5.27%(e) 4.24% 4.92% 4.98%(e) 5.52%(e) 4.29% 5.25% 5.73%(f)
- ---------------------------------------------------------------------------------------------
-- 2.29% -- 2.41%(e) -- 2.05% -- 2.16%(f)
- ---------------------------------------------------------------------------------------------
-- 4.20% -- 4.83%(e) -- 4.24% -- 5.58%(f)
- ---------------------------------------------------------------------------------------------
29% 134% 172% 170% 29% 134% 172% 170%
- ---------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
Pilgrim Strategic Income Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
-------
July 24,
1998
to
March 31,
1999
----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period
- -------------------------------------------------------------
Income from investment operations:
Net investment income (loss)
- -------------------------------------------------------------
Net realized and unrealized gains (losses) on
securities and foreign currency
- -------------------------------------------------------------
Total from investment operations
- -------------------------------------------------------------
Less distributions from:
Net investment income
- -------------------------------------------------------------
Realized capital gains
- -------------------------------------------------------------
Net asset value, end of period
=============================================================
TOTAL RETURN(a):
- -------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period
- -------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement
- -------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement
- -------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, after expense reimbursement
- -------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, before expense reimbursement
- -------------------------------------------------------------
Portfolio turnover
- -------------------------------------------------------------
* Annualized
(a) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return for less than one year is not annualized.
86
<PAGE>
Class B Class C
------- -------
July 24, July 24,
1998 1998
to to
March 31, March 31,
1999 1999
---- ----
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
=============================================================
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
87
<PAGE>
Pilgrim High Yield Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
Six Eight
Months Months Year
Ended Year Ended June 30, Ended Ended
December 31, ------------------------ June 30, October 31,
1998 (Unaudited) 1998 1997 1996 1995(a)(b) 1994
---------------- ---- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 6.94 $ 6.80 $ 6.36 $ 6.15 $ 5.95 $ 6.47
- ----------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.29 0.61 0.61 0.59 0.35 0.54
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments (0.74) 0.16 0.43 0.16 0.21 (0.51)
- ----------------------------------------------------------------------------------------------------------
Total from investment operation (0.45) 0.77 1.04 0.75 0.56 0.03
- ----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.29 0.63 0.60 0.54 0.36 0.55
- ----------------------------------------------------------------------------------------------------------
In excess of net
investment income 0.03 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions 0.32 0.63 0.60 0.54 0.36 0.55
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.17 $ 6.94 $ 6.80 $ 6.36 $ 6.15 $ 5.95
==========================================================================================================
TOTAL RETURN(d): (6.48)% 11.71% 17.14% 12.72% 9.77% 0.47%
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $127,392 $102,424 $35,940 $18,691 $ 15,950 $16,046
- ----------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (e) 1.00%(f) 1.00% 1.00% 1.00% 2.25%(f) 2.00%
- ----------------------------------------------------------------------------------------------------------
Net investment income after
expense reimbursement (e) 9.28%(f) 9.05% 9.54% 9.46% 8.84%(f) 8.73%
- ----------------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (e) 1.12%(f) 1.17% 1.42% 2.19% 2.35%(f) 2.07%
- ----------------------------------------------------------------------------------------------------------
Net investment income prior to
expense reimbursement (e) 9.16%(f) 8.88% 9.09% 8.27% 8.74%(f) 8.66%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 70% 209% 394% 399% 166% 192%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Effective November 1, 1994, High Yield Fund changed its year end to June
30.
(c) Commencement of offering of shares.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(e) Effective July 1, 1995, the Manager voluntarily agreed to waive all or a
portion of its fees and reimburse operating expenses of the Fund, excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses,
so that total operating expenses do not exceed 0.75% for all share classes.
(f) Annualized.
88
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- -------------------------------------------------- ------------------------------------------------
Six Six
Months July 17, Months July 17,
Ended Year Ended June 30, 1995(c) to Ended Year Ended June 30, 1995(c)
December 31, ------------------- June 30, December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
- ---------------- ---- ---- ---- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.92 $ 6.78 $ 6.36 $ 6.20 $ 6.92 $ 6.78 $ 6.36 $ 6.20
-------------------------------------------------------------------------------------------------
0.23 0.58 0.57 0.48 0.28 0.59 0.58 0.50
-------------------------------------------------------------------------------------------------
(0.74) 0.14 0.41 0.14 (0.74) 0.14 0.41 0.14
-------------------------------------------------------------------------------------------------
(0.51) 0.72 0.98 0.62 (0.46) 0.73 0.99 0.64
-------------------------------------------------------------------------------------------------
0.23 0.58 0.56 0.46 0.28 0.59 0.57 0.48
-------------------------------------------------------------------------------------------------
0.02 -- -- -- 0.02 -- -- --
-------------------------------------------------------------------------------------------------
0.25 0.58 0.56 0.46 0.30 0.59 0.57 0.48
-------------------------------------------------------------------------------------------------
$ 6.16 $ 6.92 $ 6.78 $ 6.36 $ 6.16 $ 6.92 $ 6.78 $ 6.36
=================================================================================================
(6.76)% 10.90% 16.04% 10.37% (6.64)% 11.16% 16.29% 10.69%
-------------------------------------------------------------------------------------------------
$233,916 $154,303 $40,225 $ 2,374 $24,140 $19,785 $ 8,848 $ 1,243
-------------------------------------------------------------------------------------------------
1.75%(f) 1.75% 1.75% 1.75%(f) 1.50%(f) 1.50% 1.50% 1.50%(f)
-------------------------------------------------------------------------------------------------
8.53%(f) 8.30% 8.64% 9.02%(f) 8.78%(f) 8.55% 8.93% 9.41%(f)
-------------------------------------------------------------------------------------------------
1.87%(f) 1.92% 2.17% 2.94%(f) 1.62%(f) 1.67% 1.92% 2.69%(f)
-------------------------------------------------------------------------------------------------
8.41%(f) 8.13% 8.18% 8.05%(f) 8.66%(f) 8.38% 8.47% 8.51%(f)
-------------------------------------------------------------------------------------------------
70% 209% 394% 339% 70% 209% 394% 339%
-------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
Pilgrim Balanced Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
--------------------------------------------
Year Ended March 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.54 $ 16.16 $ 13.74 $ 13.52
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.26 0.32 0.34 0.21
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.70 0.84 2.42 0.22
- ------------------------------------------------------------------------------------------
Total from investment operations 5.96 1.16 2.76 0.43
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.32) (0.34) (0.21)
- ------------------------------------------------------------------------------------------
Realized capital gains (1.70) (1.46) -- --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.53 $ 15.54 $ 16.16 $ 13.74
==========================================================================================
TOTAL RETURN+: 39.34% 6.74% 20.16% 3.22%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 6,675 $ 4,898 $ 5,902 $ 4,980
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.61% 1.60% 1.60% 1.60%
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.56% 3.00% 3.30% 2.78%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 3.58% 1.87% 2.16% 1.44%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 2.63% 0.73% 0.88% 0.26%
- ------------------------------------------------------------------------------------------
Portfolio turnover** 260.03% 212.95% 197.19% 110.40%
- ------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
90
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ ------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- ----------------------- March 31, -------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14.88 $ 14.18 $ 12.50 $ 15.59 $ 16.20 $ 13.76 $ 13.54
- ----------------------------------------------------------------------------------
0.15 0.17 0.12 0.15 0.21 0.24 0.11
- ----------------------------------------------------------------------------------
5.58 0.70 1.68 5.71 0.85 2.44 0.22
- ----------------------------------------------------------------------------------
5.73 0.87 1.80 5.86 1.06 2.68 0.33
- ----------------------------------------------------------------------------------
(0.15) (0.17) (0.12) (0.15) (0.21) (0.24) (0.11)
- ----------------------------------------------------------------------------------
(0.39) -- -- (1.40) (1.46) -- --
- ----------------------------------------------------------------------------------
$ 20.07 $ 14.88 $ 14.18 $ 19.90 $ 15.59 $ 16.20 $ 13.76
==================================================================================
38.79% 6.10% 14.45% 38.35% 6.05% 19.58% 2.47%
- ----------------------------------------------------------------------------------
$ 4,254 $ 2,133 $ 673 $20,784 $16,990 $16,586 $16,470
- ----------------------------------------------------------------------------------
2.26% 2.25% 2.25%* 2.26% 2.25% 2.25% 2.25%
- ----------------------------------------------------------------------------------
2.71% 6.44% 13.05%* 2.68% 2.83% 3.01% 2.60%
- ----------------------------------------------------------------------------------
2.99% 1.25% 1.38%* 2.93% 1.23% 1.53% 0.83%
- ----------------------------------------------------------------------------------
2.54% (2.67)% (8.86)%* 2.51% 0.91% 1.19% 0.48%
- ----------------------------------------------------------------------------------
260.03% 212.95% 197.19% 260.03% 212.95% 197.19% 110.40%
- ----------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
Pilgrim Convertible Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
-----------------------------------------
Year Ended March 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.59 $ 15.68 $ 12.86 $ 14.16
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.44 0.47 0.48 0.49
- -----------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.49 1.64 2.82 (0.89)
- -----------------------------------------------------------------------------------------
Total from investment operations 4.93 2.11 3.30 (0.40)
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.44) (0.48) (0.48) (0.49)
- -----------------------------------------------------------------------------------------
Realized capital gains (1.96) (0.72) -- (0.41)
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 19.12 $ 16.59 $ 15.68 $ 12.86
=========================================================================================
TOTAL RETURN+: 31.04% 13.73% 26.00% (2.64)%
- -----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $47,290 $32,082 $31,712 $31,150
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.57% 1.60% 1.60% 1.60%
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.74% 1.75% 1.76% 1.76%
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 5.64% 2.83% 3.29% 3.71%
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 5.48% 2.66% 3.12% 3.55%
- -----------------------------------------------------------------------------------------
Portfolio turnover** 159.59% 166.84% 144.97% 125.51%
- -----------------------------------------------------------------------------------------
</TABLE>
- ----------
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
92
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------- -------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- ------------------------ March 31, -------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.60 $ 14.96 $ 12.50 $ 17.05 $ 15.89 $ 13.03 $ 14.28
- -----------------------------------------------------------------------------------
0.32 0.31 0.24 0.34 0.37 0.40 0.41
- -----------------------------------------------------------------------------------
4.65 1.64 2.46 4.60 1.66 2.86 (0.89)
- -----------------------------------------------------------------------------------
4.97 1.95 2.70 4.94 2.03 3.26 (0.48)
- -----------------------------------------------------------------------------------
(0.32) (0.31) (0.24) (0.34) (0.37) (0.40) (0.41)
- -----------------------------------------------------------------------------------
(0.69) -- -- (2.10) (0.50) -- (0.36)
- -----------------------------------------------------------------------------------
$ 20.56 $ 16.60 $ 14.96 $ 19.55 $ 17.05 $ 15.89 $ 13.03
===================================================================================
30.51% 13.01% 21.72% 30.22% 12.91% 25.24% (3.26)%
- -----------------------------------------------------------------------------------
$36,725 $12,740 $ 2,125 $81,561 $62,143 $58,997 $61,792
- -----------------------------------------------------------------------------------
2.22% 2.25% 2.25% 2.22% 2.25% 2.25% 2.25%
- -----------------------------------------------------------------------------------
2.33% 3.19% 7.08%* 2.31% 2.29% 2.28% 2.29%
- -----------------------------------------------------------------------------------
5.04% 2.29% 2.59%* 4.99% 2.18% 2.64% 3.05%
- -----------------------------------------------------------------------------------
4.93% 1.32% (2.22)%* 4.91% 2.11% 2.61% 3.01%
- -----------------------------------------------------------------------------------
159.59% 166.84% 144.97% 159.59% 166.84% 144.97% 125.51%
- -----------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
[BACK COVER]
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about each Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by:
CALLING OR WRITING THE FUNDS' SHAREHOLDER SERVICING AGENT AT:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
CONTACTING THE SECURITIES AND EXCHANGE COMMISSION:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
The SEC may charge you a fee for this information.
SEC file numbers: 811-9040, 811-4031, 811-1939, 811-4504, 811-7428
<PAGE>
Pilgrim
THE VALUE OF INVESTING
CLASS Q
This prospectus contains important
information about these funds. You should
read it carefully before you invest, and keep
it for future reference.
U.S. EQUITY FUNDS
Pilgrim Large Cap Growth Fund
Pilgrim Mid Cap Growth Fund
Pilgrim Small Cap Growth Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim Emerging Countries Fund
INCOME FUNDS
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund
OTHER FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
The Securities and Exchange Commission has
not approved or disapproved these securities,
or determined if this prospectus is truthful
or complete. Any representation to the
contrary is a criminal offense.
Prospectus
May 24, 1999
<PAGE>
FUNDS AT A GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page __.
<TABLE>
<CAPTION>
Fund Investment Objective
---- --------------------
<S> <C> <C>
U.S. EQUITY FUNDS Large Cap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Mid Cap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Small Cap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
INTERNATIONAL EQUITY Worldwide Growth Fund Long-term capital appreciation
FUNDS Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Core Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Small Cap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Emerging Countries Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
INCOME FUNDS Strategic Income Fund Maximum Total Return
Adviser: Pilgrim Investments, Inc.
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
OTHER FUNDS Balanced Fund Long-term capital appreciation and
Adviser: Pilgrim Investments, Inc. current income
Convertible Fund Total return, consisting of capital
Adviser: Pilgrim Investments, Inc. appreciation and current income
Sub-adviser: Nicholas-Applegate Capital Mgt.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Main Investments Main Risks
- ---------------- ----------
<S> <C>
Equity securities of large U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented equity securities.
Equity securities of medium-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and medium-sized
companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities of small-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and small-sized
companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries around the world, which may investment in growth-oriented foreign equities.
include the U.S. Sensitive to currency exchange rates, international
political and economic conditions and other risks
that affect foreign securities.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries outside the U.S. investment in growth-oriented foreign equities.
Sensitive to currency exchange rates, international
political and economic conditions and other risks
that affect foreign securities.
Equity securities of small-sized Price volatility, liquidity and other risks that
companies located outside the U.S. accompany an investment in foreign, small-sized
companies. Sensitive to currency exchange rates,
international political and economic conditions and
other risks that affect foreign securities.
Equity securities of issuers located in Price volatility, liquidity and other risks that
countries with emerging securities markets accompany an investment in emerging countries.
Sensitive to currency exchange rates, international
political and economic conditions and other risks
that affect foreign securities.
Investment grade and high yield debt Credit, interest rate, prepayment and other risks
securities that accompany an investment in debt securities,
including high yield debt securities. May be
sensitive to credit risk during economic downturns.
High yield debt securities Credit, interest rate and other risks that
accompany an investment in lower-quality debt
securities. Particularly sensitive to credit risk
during economic downturns.
A mix of equity and debt securities Price volatility and other risks that accompany an
investment in equity securities. Credit, interest
rate and other risks that accompany an investment
in debt securities.
Convertible securities of companies of Price volatility and other risks that accompany an
various sizes investment in equity securities. Credit, interest
rate, liquidity and other risks that accompany an
investment in debt securities
</TABLE>
<PAGE>
LARGE CAP GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated, U.S. Government securities, and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
When the sub-adviser anticipates unusual market or other conditions, the Fund
may temporarily depart from its principal investment strategies as a defensive
measure.
The sub-adviser searches for companies it believes are successful and growing
that are managing change advantageously and are poised to exceed growth
expectations. It focuses on a "bottom-up" analysis that evaluates the financial
condition and competitiveness of individual companies. It uses a blend of both
traditional fundamental research and computer intensive systematic disciplines
to uncover signs of "change at the margin"-- positive business developments
which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests primarily in equity securities of
larger companies, which sometimes have more stable prices than smaller
companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
3
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the
U.S., and foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- -- -- --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (7/21/97)
------ -----------------
Class Q __% __%
Russell 1000 Growth Index __% __%
4
<PAGE>
MID CAP GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of medium-sized U.S. companies.
Under normal conditions, the Fund invests at least 75% of its total assets in
common stocks. It may invest the remainder of its assets in preferred and
convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies that are managing change advantageously and poised
to exceed growth expectations. It focuses on a "bottom-up" analysis that
evaluates the financial condition and competitiveness of individual companies.
It uses a blend of both traditional fundamental research and computer intensive
systematic disciplines to uncover what it calls "change at the margin"--positive
business developments which are not yet fully reflected in the company's stock
price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in medium-sized companies, which are
more susceptible to price swings than larger companies, but usually tend to
have less volatile price swings than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
mid-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
5
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- --% --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR CLASS Q (6/30/94)
------ -----------------
Class Q ___% ___%
Russell Midcap Growth Index ___% ___%
6
<PAGE>
SMALL CAP GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of small U.S. companies. Under
normal conditions, the Fund invests at least 75% of its total assets in common
stocks. It may invest the remainder in preferred and convertible securities,
debt securities of any maturity which are rated investment grade by a nationally
recognized statistical rating agency, or of comparable quality if unrated, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may invest up to 20% of its total assets in foreign securities. The
Fund may also use options and futures contracts involving securities, securities
indices, interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser searches for successful, growing companies that are
managing change advantageously and poised to exceed growth expectations. It
focuses on a "bottom-up" analysis that evaluates the financial condition and
competitiveness of individual companies. It uses a blend of both traditional
fundamental research and computer intensive systematic disciplines to uncover
what it calls "change at the margin"--positive business developments which are
not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small-cap companies, which are
more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and
many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
7
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS* Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth
orientation. The Index has an inherent performance advantage over the Fund since
it has no cash in its portfolio and incurs no operating expenses. An investor
cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ____% ___%
Russell 2000 Growth Index -2.60% ___%
8
<PAGE>
WORLDWIDE GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located around the world, which may include the U.S. The
Fund may invest up to 50% of its total assets in U.S. issuers.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities, which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may also invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks, or may not favor equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
9
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. The Index has
an inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ____% ___%
MSCI World Index 24.30% ___%
10
<PAGE>
INTERNATIONAL CORE GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser searches for successful, growing companies managing
change advantageously and poised to exceed growth expectations. It focuses on a
"bottom-up" analysis that evaluates the financial conditions and competitiveness
of individual companies worldwide. It uses a blend of both traditional
fundamental research, calling on the expertise of many external analysts in
different countries throughout the world, and computer intensive systematic
disciplines to uncover signs of "change at the margin"--positive business
developments which are not yet fully reflected in a company's stock price. It
gathers financial data on 20,000 companies in over 50 countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in large companies, which sometimes
have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities
at all.
11
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. The
Index has an inherent performance advantage over the Fund since it has no cash
in its portfolio and incurs no operating expenses. An investor cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (2/28/97)
------ -----------------
Class Q ____% ___%
MSCI EAFE Index 20.33% ___%
12
<PAGE>
INTERNATIONAL SMALL CAP GROWTH FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund emphasizes companies in the
bottom 75% of publicly traded companies as measured by stock market
capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small companies, which may be
more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
13
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Salomon EPAC Extended Market Index, an unmanaged
index comprised of smaller-capitalization companies in 22 countries excluding
Canada and the United States. The Index has an inherent performance advantage
over the Fund since it has no cash in its portfolio and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ____% ____%
Salomon EPAC EM Index ____% ____%
14
<PAGE>
EMERGING COUNTRIES FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets--that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, seeks issuers in
the early stages of development, growth companies, cyclical companies, or
companies believed to be undergoing a basic change in operations. The Investment
Adviser currently selects portfolio securities from an investment universe of
approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at
all.
15
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. Investments in emerging markets countries
are generally riskier than other kinds of foreign investments, partly
because emerging market countries may be less politically and economically
stable than other countries. It may also be more difficult to buy and sell
securities in emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Emerging
Markets Free Index, an unmanaged index comprised of companies representative of
the market structure of 22 emerging market countries in Europe, Latin America
and the Pacific Basin. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ____% ___%
MSCI Emerging Markets Free Index -25.30% ___%
16
<PAGE>
STRATEGIC INCOME FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks maximum total return.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. The Fund may also invest in participation
interests and assignments in secured floating rate loans and notes, and may
invest up to 10% of its assets in other investment companies, including up to 5%
in Pilgrim Prime Rate Trust, a closed-end investment company that invests in
secured floating rate loans.
The average portfolio duration of the Fund will range from two to eight years.
The Fund may invest up to 30% of its total assets in securities payable in
foreign currencies. The Fund may also use options, futures contracts and
interest rate and currency swaps as hedging techniques. The Fund does not invest
in highly leveraged derivatives, such as swaps, interest-only or principal-only
stripped mortgage-backed securities, or interest rate futures contracts. When
the adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other
income funds, because it may invest in high yield debt securities, which
are considered predominantly speculative with respect to the issuer's
continuing ability to meet interest and principal payments.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If int erest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. A security whose credit rating has been
lowered may be particularly difficult to sell. Foreign securities and
mortgage-related and asset-backed debt securities may be less liquid than
other debt securities. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
17
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options, futures contracts
and interest rate and currency swaps to help it achieve its investment
objective. There's always a risk that these techniques could reduce returns
or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the Fund
for prior periods, restated to reflect Class Q expenses. Class Q shares, after
adjustment for share class expenses, would have had substantially similar
returns because Institutional Class shares were invested in the same portfolio
of securities. Also, prior to May __, 1999, a different adviser managed the
Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. The Index has an inherent performance
advantage over the Fund since it has no cash in its portfolio and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (8/31/95)
------ -------------------------
Institutional Class* ___% ___%
Lehman Aggregate Bond Index ___% ___%
* This table shows performance of the Institutional Class shares of the Fund,
restated to reflect Class Q expenses, because Class Q shares of the Fund did not
have a full year's performance as of December 31, 1998. See the footnote to the
bar chart above.
18
<PAGE>
HIGH YIELD FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective. Preservation of capital is also a consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. In selecting securities for the Fund, preservation of capital is a
consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage related securities,
financial futures and related options, and participation interests and
assignments in floating rate loans and notes. The Fund may also invest up to 10%
of its assets in foreign debt securities of any rating. When the adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in
high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
19
<PAGE>
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund. A security whose credit rating has been lowered may be particularly
difficult to sell.
+ RISKS OF USING DERIVATIVES - this Fund may use options and financial
futures to help it achieve its investment objective. There's always a risk
that these techniques could reduce returns or increase the Fund's
volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class Q shares are first being offered in 1999, the returns in the bar
chart are based upon the performance of Class A shares of the Fund for prior
periods, restated to reflect Class Q expenses. Class Q shares, after adjustment
for share class expenses, would have had substantially similar returns because
Class A shares were invested in the same portfolio of securities.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Class A ___% ____% ____%
Lehman High Yield Index 1.87% 8.57% 10.55%
* This table shows performance of the Class A shares of the Fund, restated to
reflect Class Q expenses, because Class Q shares of the Fund did not have a full
year's performance as of December 31, 1998. See the footnote to the bar chart
above.
20
<PAGE>
BALANCED FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a balance of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions. The
remainder will be invested in equity securities, which will be managed in
accordance with the principal investment strategies of the Pilgrim LargeCap
Leaders Fund, which invests primarily in equity securities of large companies
that the adviser believes are leaders in their industries.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also invest in participation interests and assignments in secured floating rate
loans and notes, and may invest up to 10% of its assets in other investment
companies, including up to 5% in Pilgrim Prime Rate Trust, a closed-end
investment company that invests in secured floating rate loans. The Fund may
invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities. When the adviser anticipates unusual market or other
conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
+ CHANGES IN INTEREST RATES - the value of the debt securities held by the
Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer
durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
21
<PAGE>
speculative with respect to the issuer's continuing ability to meet
interest and principal payments. This is especially true during periods of
economic uncertainty or economic downturns.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options to help it achieve
its investment objective. There's always a risk that these techniques could
reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - a composite index consisting of 60% Standard & Poor's
500 Composite Stock Price Index and 40% Lehman Brothers Government/Corporate
Bond Index. The Indices have an inherent performance advantage over the Fund
since each has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ___% --
Composite Index ___% ___%
22
<PAGE>
CONVERTIBLE FUND Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital
Management
INVESTMENT OBJECTIVE
The Fund seeks maximum total return, consisting of capital appreciation and
current income.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. The Fund emphasizes companies with market
capitalizations above $500 million. Through investments in convertible
securities, the Fund seeks to capture the upside performance of the underlying
equities with less downside exposure. The Fund may invest the remainder of its
assets in common and preferred stocks, debt securities of any maturity, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in debt
securities rated below investment grade by a nationally recognized statistical
rating agency, or of comparable quality if unrated. The Fund also may invest up
to 35% of its net assets in zero coupon securities. When the adviser anticipates
unusual market or other conditions, the Fund may temporarily depart from its
principal investment strategies as a defensive measure.
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" - positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, financial and other risks, and their values may go up or down,
sometimes rapidly and unpredictably. While equities may offer the potential
for greater long-term growth than most debt securities, they generally have
higher volatility. The Fund may invest in small and medium-sized companies,
which may be more susceptible to greater price swings than larger companies
because they may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ CHANGES IN INTEREST RATES - the value of the convertible and debt
securities held by the Fund may fall when interest rates rise. The Fund may
be sensitive to changes in interest rates because it may invest in
securities with intermediate and long terms to maturity. Securities with
longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than securities with shorter durations.
23
<PAGE>
+ CREDIT RISK - the Fund could lose money if the issuer of a convertible or
debt security is unable to meet its financial obligations or goes bankrupt.
This is especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other bond
funds, because the convertible securities and debt securities in which it
invests may be lower-rated securities.
+ INABILITY TO SELL SECURITIES - lower rated securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- --% --% --%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF
1 YEAR CLASS Q (8/31/95)
------ -----------------
Class Q ____% ____%
First Boston Convertible Index 17.35% ____%
24
<PAGE>
FEES AND EXPENSES
The Funds do not charge you any fees for buying, selling or exchanging shares.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)(1)
<TABLE>
<CAPTION>
TOTAL
ANNUAL
DISTRIBUTION FUND FEE WAIVER
MANAGEMENT AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES ADVISER(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Large Cap Growth 0.75% 0.25% __ __ __ 1.25%
Mid Cap Growth 0.75 0.25 __ __ __ 1.25
Small Cap Growth 1.00 0.25 __ __ __ 1.50
Worldwide Growth 1.00 0.25 __ __ __ 1.60
International Core Growth 1.00 0.25 __ __ __ 1.65
International Small Cap
Growth 1.00 0.25 __ __ __ 1.65
Emerging Countries 1.25 0.25 __ __ __ 1.90
Strategic Income 0.45 0.25 __ __ __ 0.95
High Yield Fund(3) 0.60 0.25 0.32 1.17 (0.17) 1.00
Balanced 0.75 0.35 __ __ __ 1.25
Convertible 0.75 0.25 __ __ __ 1.25
</TABLE>
- ----------
(1) Shown as a ratio of expenses to average daily net assets.
(2) Pilgrim Investments has entered into expense limitation agreements with
each of the Funds, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses,
subject to possible reimbursement to Pilgrim Investments within three
years. The expense limit for each such Fund is shown as "Net Expenses."
(3) Because Class Q shares are new for the High Yield Fund, its expenses
are based on Class A expenses of the Fund.
EXAMPLES
The hypothetical examples below show what your expenses would be if you invested
$10,000 over the time frames indicated and redeem all your shares at the end of
each period. The example also assumes a 5% return each year, that you reinvest
all distributions, and that each Fund's operating expenses remain the same. The
example is for comparison only, and does not represent the Funds' actual
expenses and returns, either past or future.
Fund 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- --------
Large Cap Growth
Mid Cap Growth
Small Cap Growth
Worldwide Growth
International Core Growth
International Small Cap Growth
Emerging Countries
Strategic Income
High Yield
Balanced
Convertible
25
<PAGE>
SHAREHOLDER GUIDE
PURCHASE OF SHARES. Class Q Shares are offered at net asset value without a
sales charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time. Certain Funds also offer Class A, B, C and M Shares, which have
different sales charges and other expenses that may affect their performance.
You can obtain more information about these other share Classes by calling (800)
992-0180.
RETIREMENT PLANS. You may invest in each Fund through various retirement plans,
including IRAs, Simplified Employee Plan (SEP) IRAs, Roth IRAs 403(b) plans, 457
plans, and all qualified retirement plans. For further information about any of
the plans, agreements, applications and annual fees, contact the Distributor,
your financial representative or plan sponsor. To determine which retirement
plan is appropriate for you, consult your tax adviser. For further information,
contact the Shareholder Servicing Agent at (800) 992-0180.
26
<PAGE>
PURCHASING SHARES
If you are a participant in a qualified retirement plan, you should make
purchases through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other purchasers may purchase shares by the following methods.
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
------ ------------------ ---------------------
<S> <C> <C>
By contacting + An investment professional with an authorized firm can help you establish and
your investment maintain your account.
professional
By mail + Visit or consult an investment + Visit or consult an investment
professional. professional.
+ Make your check payable to the + Fill out the Account Additions form
Pilgrim Funds and mail it, along included on the bottom of your
with a completed Application. Please account statement along with your
indicate your investment check payable to the Fund and mail
professional on the New Account them to the address on the account
Application statement.
+ Remember to write your account
number on the check.
By wire + Call the Pilgrim Operations + Wire the funds in the same manner
Department at (800) 336-3436 to described under "Initial
obtain an account number and Investment."
indicate your investment
professional on the account.
+ Instruct your bank to wire funds to
the Fund in the care of: Investors
Fiduciary Trust Co. ABA #101003621
Kansas City, MO credit to:
_______________ (the Fund)
A/C #751-8315; for further credit to:
Shareholder A/C
#__________________
(A/C # you received over the telephone)
Shareholder Name:
________________ (Your Name Here)
+ After wiring funds you must complete
the Account Application and send it
to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>
The 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
27
<PAGE>
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 $_________.
HOW TO REDEEM SHARES
If you are a participant in a qualified retirement plan, you should make
redemptions through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other shareholders may redeem Class Q shares by the following methods:
<TABLE>
<CAPTION>
METHOD PROCEDURES
------ ----------
<S> <C>
By contacting Your + You may redeem by contacting your investment professional. Investment
investment professionals may charge for their services in connection with your
professional redemption request, but neither the Fund nor the Distributor imposes any
such charge.
By Mail + Send a written request specifying the Fund name and share class, your
account number, the name(s) in which the account is registered, and the
dollar value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
+ If certificated shares have been issued, the certificate must accompany the
written request.
+ Corporate investors and other associations must have an appropriate
certification on file authorizing redemptions. A suggested form of such
certification is provided on the Account Application.
+ A signature guarantee may be required.
By Telephone -- + You may redeem shares by telephone on all accounts other than retirement
Expedited Redemption accounts, unless you check the box on the Account Application which
signifies that you do not wish to use telephone redemptions. To redeem by
telephone, call the Shareholder Servicing Agent at (800) 992-0180.
+ RECEIVING PROCEEDS BY CHECK:
+ You may have redemption proceeds (up to a maximum of $100,000) mailed to
an address which has been on record with Pilgrim Funds for at least 30
days.
+ RECEIVING PROCEEDS BY WIRE:
+ You may have redemption proceeds (subject to a minimum of $5,000) wired
to your pre-designated bank account.
+ You will NOT be able to receive redemption proceeds by wire unless you
check the box on the Account Application which signifies that you wish
to receive redemption proceeds by wire and attach a voided check.
+ Under normal circumstances, proceeds will be transmitted to your bank on
the business day following receipt of your instructions, provided
redemptions may be made.
+ In the event that share certificates have been issued, you may not
request a wire redemption by telephone.
</TABLE>
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
28
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $_____ to yourself, or to anyone else
you properly designate, as long as the account has a current value of at least
$[250,000]. 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 if the additional purchases are equal to at least one year's
scheduled withdrawals, or $_______, whichever is greater. There are no separate
charges to you under this Plan. 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.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed in a timely fashion, but the Fund will
not release the proceeds until your purchase payment clears. This may take up to
15 days or more. To reduce such delay, purchases should be made by bank wire or
federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
TRANSACTION POLICIES
NET ASSET VALUE. The net asset value (NAV) per share for Class Q shares of each
Fund is determined each business day as of the close of regular trading on the
New York Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per
share of Class Q shares of each Fund is calculated by taking the value of the
Fund's assets attributable to Class Q shares, subtracting the Fund's liabilities
attributable to Class Q shares, and dividing by the number of Class Q shares
that are outstanding.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations and
short-term debt securities. Portfolio securities for which market quotations are
readily available are stated at market value. Short-term debt securities having
a maturity of 60 days or less are valued at amortized cost, unless the amortized
cost does not approximate market value. Securities prices may be obtained from
automated pricing services. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Directors or Trustees,
although the actual calculations will be made by persons acting under the
supervision of the Board.
PRICE OF SHARES. When you buy shares, you pay the NAV. When you sell shares, you
receive the NAV. Exchange orders are effected at NAV.
29
<PAGE>
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
EXCHANGES. You may exchange Class Q shares of a Fund for Class Q shares of any
other Pilgrim Fund that offers Class Q shares. The total value of shares being
exchanged must at least equal the minimum investment requirement for Class Q
shares of the Fund into which they are being exchanged. Exchanges of shares are
sales and may result in a gain or loss for federal and state income tax
purposes. There is no specific limit on exchange frequency; however, the Funds
are intended for long term investment and not as a trading vehicle. The adviser
may prohibit excessive exchanges (more than four per year). The adviser also
may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or
impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. You may elect to have a specified dollar amount
of Class Q shares systematically exchanged, monthly, quarterly, semi-annually or
annually (on or about the 10th of the applicable month), from your account to an
identically registered account in Class Q shares of any other open-end Pilgrim
Fund. This exchange privilege may be modified at any time or terminated upon 60
days written notice to shareholders.
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY). If you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to Fund performance.
DISTRIBUTION AND SHAREHOLDER SERVICE FEES
To pay for the cost of servicing your shareholder account, each Fund has adopted
a Rule 12b-1 plan for Class Q shares which requires fees to be paid out of the
assets of the class. Over time the fees will increase your cost of investing and
30
<PAGE>
may exceed the cost of paying other types of sales charges. Each Fund pays a
service fee at an annual rate of 0.25% of the average daily net assets of the
Class Q shares of the Fund.
MANAGEMENT OF THE FUNDS
ADVISER
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of ________, 1999,
Pilgrim Investments managed over $__ billion in assets. Pilgrim Investments
acquired certain assets of the previous adviser to the Funds in a transaction
that closed on April 7, 1995. Pilgrim Investments is an indirect, wholly owned
subsidiary of Pilgrim America Capital Corporation (NYSE: PFX). Through its
subsidiaries, Pilgrim America Capital Corporation engages in the financial
services business, focusing on providing investment advisory, administrative and
distribution services to open-end and closed-end investment companies and
private accounts.
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year of as a percentage of that Fund's average daily
net assets:
FUND ADVISORY FEE
---- ------------
Large Cap Growth 0.75(1)
Mid Cap Growth 0.75
Small Cap Growth 1.00
Worldwide Growth 1.00
International Core Growth 1.00
International Small Cap Growth 1.00
Emerging Countries 1.25
Strategic Income 0.45(2)
High Yield 0.60
Balanced 0.75
Convertible 0.75
(1) Large Cap Growth Fund has not had a full year of operations. The advisory
fee for this Fund is 0.75% on the first $500 million of the Fund's average
net assets, 0.675% on the next $500 million of average net assets, and
0.65% on average net assets in excess of $1 billion.
(2) Strategic Income Fund has not had a full year of operations. The advisory
fee for this Fund is 0.45% on the first $500 million of the Fund's average
net assets, 0.40% on the next $250 million of average net assets, and 0.35%
on average net assets in excess of $750 million.
Pilgrim Investments directly manages the portfolios of the following Funds:
STRATEGIC INCOME FUND
Robert K. Kinsey, [Title] of Pilgrim Investments, has served as a Portfolio
Manager of Strategic Income Fund since ______, 1999. Mr. Kinsey manages
Strategic Income Fund's assets that are invested in assets other than high yield
31
<PAGE>
debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was a Vice
President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
______, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
HIGH YIELD FUND
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund since June 1995.
BALANCED FUND
Robert K. Kinsey, whose background is described above, has served as Portfolio
Manager of the portion of Balanced Fund's assets that are invested in assets
other than high yield debt securities and equity securities since ______, 1999.
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of the high-yield debt portion of Balanced Fund's assets since ______,
1999.
The equity portion of Balanced Fund has been managed since _______, 1999 by a
team led by G. David Underwood, Vice President and Senior Portfolio Manager for
Pilgrim Investments. Mr. Underwood is the Lead Portfolio Manager of Pilgrim
LargeCap Leaders Fund. Prior to joining Pilgrim Investments in December, 1996,
Mr. Underwood served as Director of Funds Management for First Interstate
Capital Management. Mr. Underwood's prior experience includes a 10 year
association with Integra Trust Company of Pittsburgh where he served as Director
of Research and Senior Portfolio Manager. The other individuals on the team are
Anuradha Sahai and Robert M. Kloss.
SUB-ADVISER
For the following Funds, Pilgrim Investments has engaged a Sub-Adviser to
provide the day-to-day management of the Fund's portfolio. The Sub-Adviser is
among the most respected institutional investment advisers in the world, and has
been selected primarily on the basis of its successful application of a
consistent, well-defined, long-term investment approach over a period of several
market cycles.
LARGE CAP GROWTH FUND, MID CAP GROWTH FUND, SMALL CAP GROWTH FUND, INTERNATIONAL
CORE GROWTH FUND, WORLDWIDE GROWTH FUND, INTERNATIONAL SMALL CAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$30 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
32
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
ANNUALLY QUARTERLY MONTHLY
- -------- --------- -------
Large Cap Growth Balanced Strategic Income
Mid Cap Growth Convertible High Yield
Small Cap Growth
International Core Growth
Worldwide Growth
International Small Cap Growth
Emerging Countries
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class Q shares of a Fund invested in another Pilgrim Fund which offers
the Class Q shares.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
33
<PAGE>
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. Pilgrim Investments is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally.
34
<PAGE>
MORE INFORMATION ABOUT RISKS
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques used by the Funds, see the Statement of Additional Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter in to foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as
zero-coupon or pay-in-kind securities tend to be more volatile. The secondary
market in which high yield securities are traded is generally less liquid than
35
<PAGE>
the market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
OTHER INVESTMENT COMPANIES. When a Fund invests in other investment companies,
you indirectly pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. If a security is illiquid, the Fund might be
unable to sell the security at a time when the adviser might wish to sell, and
the security could have the effect of decreasing the overall level of the Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, which could vary from the amount the
Fund could realize upon disposition. Restricted securities, i.e., securities
subject to legal or contractual restrictions on resale, may be illiquid.
However, some restricted securities may be treated as liquid, although they may
be less liquid than registered securities traded on established secondary
markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
36
<PAGE>
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk of
nonpayment of principal or interest. Substantial increases in interest rates may
cause an increase in loan defaults. Although the loans will generally be fully
collateralized at the time of acquisition, the collateral may decline in value,
be relatively illiquid, or lose all or substantially all of its value subsequent
to the Fund's investment. Many loans are relatively illiquid, and may be
difficult to value.
INVESTMENT TECHNIQUES
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, certain
Funds may lend portfolio securities in an amount up to 33 1/3% of total Fund
assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS. A Reverse repurchase agreement involves the sale
of a security, with an agreement to repurchase the same securities at an agreed
upon price and date. Whether such a transaction produces a gain for a Fund
depends upon the costs of the agreements and the income and gains of the
securities purchased with the proceeds received from the sale of the security.
If the income and gains on the securities purchased fail to exceed the costs,
net asset value will decline faster than otherwise would be the case. Reverse
repurchase agreements, as leveraging techniques, may increase a Fund's yield;
however, such transactions also increase a Fund's risk to capital and may result
in a shareholder's loss of principal.
SHORT SALES. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the expectation that the market price will drop.
If the price of the security rises, the Fund may have to cover its short
position at a higher price than the short sale price, resulting in a loss.
37
<PAGE>
PERCENTAGE INVESTMENT LIMITATIONS Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
FINANCIAL HIGHLIGHTS
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
38
<PAGE>
Pilgrim Large Cap Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
Year July 21,
Ended 1997 to
March 31, March 31,
1999 1998
--------- ---------
Per Share Operating Performance:
Net asset value, beginning of period $ 12.50
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.01)
- ----------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.26
- ----------------------------------------------------------------------------
Total from investment operations 3.25
- ----------------------------------------------------------------------------
Less distributions from:
Net investment income (0.01)
- ----------------------------------------------------------------------------
Realized capital gains (0.08)
- ----------------------------------------------------------------------------
Net asset value, end of period $ 15.66
============================================================================
Total Return: 62.47%
- ----------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 799
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement+ 1.25%*
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement+ 10.45%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, expense reimbursement+ (0.62)%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, before expense reimbursement+ (9.82)%*
- ----------------------------------------------------------------------------
Portfolio turnover** 305.78%
- ----------------------------------------------------------------------------
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
39
<PAGE>
Pilgrim Mid Cap Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. with respect to the fiscal year ended March 31, 1998 and
the prior two fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995. Please read in conjunction
with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
June 30,
Year Ended March 31, 1994 to
----------------------------------------- March 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 18.01 $ 17.99 $ 13.66 $ 12.50
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.21) (0.04) (0.07) (0.02)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 7.48 0.32 4.86 1.18
- ------------------------------------------------------------------------------------------------
Total from investment operations 7.27 0.28 4.79 1.16
- ------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------------------------
Realized capital gains (1.98) (0.26) (0.46) --
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $ 23.30 $ 18.01 $ 17.99 $ 13.66
================================================================================================
Total Return: 42.00% 1.39% 35.37% 9.28%
- ------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $12,204 $13,115 $ 4,274 $ 2,121
- ------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.22% 1.25% 1.23% 1.24%*
- ------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 1.95% 1.84% 2.84% 3.52%*
- ------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ (0.97)% (0.69)% (0.57)% (0.33)%*
- ------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (1.70)% (1.28)% (2.18)% (1.61)%*
- ------------------------------------------------------------------------------------------------
Portfolio turnover** 199.54% 153.20% 114.48% 98.09%
- ------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
40
<PAGE>
Pilgrim Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 1,
Year Ended March 31, 1995 to
--------------------------- March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 13.19 $ 14.16 $ 12.50
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 (0.07) (0.03)
- -------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.16 (0.77) 1.69
- -------------------------------------------------------------------------------------
Total from investment operations 6.19 (0.84) 1.66
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- --
- -------------------------------------------------------------------------------------
Realized capital gains (0.11) (0.13) --
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 19.27 $ 13.19 $ 14.16
=====================================================================================
Total Return: 47.01% (6.03)% 13.28%
- -------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $12,508 $ 1,013 $ 314
- -------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.52% 1.51% 1.49%*
- -------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 2.39% 10.79% 37.86%*
- -------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ (1.52)% (1.02)% (1.05)%*
- -------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (2.39)% (10.31)% (32.41)%*
- -------------------------------------------------------------------------------------
Portfolio turnover** 91.66% 112.90% 129.59%
- -------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
41
<PAGE>
Pilgrim Worldwide Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 31,
Year Ended March 31, 1995 to
------------------------------ March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 15.00 $13.27 $ 12.50
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.11) 0.01 (0.04)
- -----------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.29 1.72 0.81
- -----------------------------------------------------------------------------------------
Total from investment operations 5.18 1.73 0.77
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- --
- -----------------------------------------------------------------------------------------
Realized capital gains (0.55) -- --
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 19.63 $15.00 $ 13.27
=========================================================================================
Total Return: 35.11% 12.87% 6.32%
- -----------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 645 $ 642 $ 1
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.61% 1.61% 1.60%*
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 3.75% 34.99% 3,232.53%*
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ (0.47)% (0.91)% (0.50)%*
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (2.61)% 34.23% (3,231.44)%*
- -----------------------------------------------------------------------------------------
Portfolio turnover** 201.70% 81.81% 132.20%
- -----------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
42
<PAGE>
Pilgrim International Core Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
February 28,
Year Ended March 31, 1997 to
---------------------- March 31,
1999 1998 1997
---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 12.75 $ 12.50
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.04) --
- -----------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.72 0.25
- -----------------------------------------------------------------------------
Total from investment operations 4.68 0.25
- -----------------------------------------------------------------------------
Less distributions from:
Net investment income -- --
- -----------------------------------------------------------------------------
Realized capital gains -- --
- -----------------------------------------------------------------------------
Net asset value, end of period $ 17.43 $ 12.75
=============================================================================
Total Return: 36.63% 2.00%
- -----------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 1,719 $ 1
- -----------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.66% --
- -----------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 3.18% 2,667.07%*
- -----------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ (0.47)% --
- -----------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (1.99)% (2,666.34)%*
- -----------------------------------------------------------------------------
Portfolio turnover** 274.21% 75.53%
- -----------------------------------------------------------------------------
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
43
<PAGE>
Pilgrim International Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 31,
Year Ended March 31, 1995 to
--------------------------------- March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 14.01 $ 13.52 $ 12.50
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05 (0.06) 0.01
- -----------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.12 2.01 1.01
- -----------------------------------------------------------------------------------------
Total from investment operations 5.17 1.95 1.02
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- --
- -----------------------------------------------------------------------------------------
Realized capital gains -- (1.46) --
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 19.18 $ 14.01 $ 13.52
=========================================================================================
Total Return: 36.90% 15.03% 8.16%
- -----------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 8,810 $ 42 $ 19
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.66% 1.66% 1.65%*
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 6.15% 151.33% 531.72%*
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ (0.43)% (0.64)% 0.33%*
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (4.93)% (150.28)% (529.11)%*
- -----------------------------------------------------------------------------------------
Portfolio turnover** 198.37% 206.07% 141.02%
- -----------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
44
<PAGE>
Pilgrim Emerging Countries Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 31,
Year Ended March 31, 1995 to
----------------------------- March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 16.47 $ 13.18 $ 12.50
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.07 (0.04) 0.01
- ----------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 1.33 3.37 0.67
- ----------------------------------------------------------------------------------------
Total from investment operations 1.40 3.33 0.68
- ----------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- --
- ----------------------------------------------------------------------------------------
Realized capital gains (0.11) (0.04) --
- ----------------------------------------------------------------------------------------
Net asset value, end of period $ 17.76 $ 16.47 $ 13.18
========================================================================================
Total Return: 8.60% 25.29% 5.44%
- ----------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $46,711 $ 8,660 $ 350
- ----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.91% 1.91% 1.90%*
- ----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 2.43% 4.20% 44.24%*
- ----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ 1.06% (0.87)% 0.47%*
- ----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ 0.54% (3.20)% (35.33)%*
- ----------------------------------------------------------------------------------------
Portfolio turnover** 243.47% 176.20% 118.21%
- ----------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
45
<PAGE>
Pilgrim Strategic Income Fund
The figures below have been audited by [ ]. Please read in conjunction
with the Trust's 1999 Annual Report.
July 24,
1998 to
March 31,
1999
---------
Per Share Operating Performance:
Net asset value, beginning of period
- ----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)
- ----------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency
- ----------------------------------------------------------------------
Total from investment operations
- ----------------------------------------------------------------------
Less distributions from:
Net investment income
- ----------------------------------------------------------------------
Realized capital gains
- ----------------------------------------------------------------------
Net asset value, end of period
======================================================================
Total Return:
- ----------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period (000's)
- ----------------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement
- ----------------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement
- ----------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets,
after expense reimbursement
- ----------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets,
before expense reimbursement
- ----------------------------------------------------------------------
Portfolio turnover
- ----------------------------------------------------------------------
* Annualized
46
<PAGE>
Pilgrim Balanced Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 1,
Year Ended March 31, 1995 to
-------------------------------- March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Perfomance:
Net asset value, beginning of period $ 13.42 $ 12.69 $ 12.50
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.30 0.24 0.15
- -------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.07 0.73 0.19
- -------------------------------------------------------------------------------------------
Total from investment operations 5.37 0.97 0.34
- -------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.31) (0.24) (0.15)
- -------------------------------------------------------------------------------------------
Realized capital gains -- -- --
- -------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.48 $ 13.42 $ 12.69
===========================================================================================
Total Return: 40.21% 7.60% 2.77%
- -------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 166 $ 73 $ 1
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.26% 1.26% 1.25%*
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 11.28% 126.75% 3,094.48%*
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ 4.09% 2.15% 2.16%*
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ (5.94)% (123.09)% (3,090.46)%*
- -------------------------------------------------------------------------------------------
Portfolio turnover** 260.03% 212.95% 197.19%
- -------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
47
<PAGE>
Pilgrim Convertible Fund
For periods prior to July 24, 1998, the information shown below is based upon
the performance of the predecessor Qualified Portfolio. The figures have been
audited by [ ]. Please read in conjunction with the Trust's 1999 Annual
Report.
<TABLE>
<CAPTION>
August 31,
Year Ended March 31, 1995 to
------------------------------ March 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Perfomance:
Net asset value, beginning of period $ 15.19 $ 13.72 $ 12.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.48 0.42 0.17
- ---------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.19 1.50 1.22
- ---------------------------------------------------------------------------------------
Total from investment operations 4.67 1.92 1.39
- ---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.48) (0.42) (0.17)
- ---------------------------------------------------------------------------------------
Realized capital gains (0.91) (0.03) --
- ---------------------------------------------------------------------------------------
Net asset value, end of period $ 18.47 $ 15.19 $ 13.72
=======================================================================================
Total Return: 31.54% 14.13% 11.13%
- ---------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period ($000's) $ 7,080 $ 4,599 $ 1,085
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement+ 1.22% 1.25% 1.25%*
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement+ 2.35% 2.90% 9.21%*
- ---------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement+ 5.99% 3.29% 3.59%*
- ---------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before
expense reimbursement+ 4.87% 1.61% (4.22)%*
- ---------------------------------------------------------------------------------------
Portfolio turnover** 159.59% 166.84% 144.97%
- ---------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
48
<PAGE>
[BACK COVER]
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about each Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by:
CALLING OR WRITING THE FUNDS' SHAREHOLDER SERVICING AGENT AT:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
CONTACTING THE SECURITIES AND EXCHANGE COMMISSION:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
The SEC may charge you a fee for this information.
SEC file numbers: 811-9040, 811-4031, 811-1939, 811-4504, 811-7428
<PAGE>
SUPPLEMENT DATED MAY __, 1999 TO
THE PROSPECTUS FOR THE PILGRIM FUNDS
CLASSES A, B, C AND M
DATED MAY __, 1999 ("PROSPECTUS")
The cover page of the Prospectus is amended to add Pilgrim High Yield Fund II
under the caption "Income Funds."
"FUNDS AT A GLANCE" IS AMENDED BY ADDING:
<TABLE>
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT MAIN INVESTMENTS
FUND OBJECTIVE MAIN RISKS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Fund II High level of High yield debt Credit, interest rate and other risks
Adviser: Pilgrim Investments, Inc. current income securities. that accompany an investment in
and capital lower-quality debt securities.
growth. Particularly sensitive to credit risk
during economic downturns.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING DESCRIPTION OF PILGRIM HIGH YIELD FUND II IS ADDED:
High Yield Fund II Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income and capital growth.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies. The Fund is not restricted to investments in
companies of any particular size, but currently intends to invest principally in
companies with market capitalization above $100 million at the time of purchase.
The Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in
high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
-1-
<PAGE>
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the owners of underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund
will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund. A security whose credit rating has been lowered may be particularly
difficult to sell.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign
banks or securities depositories than those in the U.S., and foreign
controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and financial
futures to help it achieve its investment objective. There's always a risk
that these techniques could reduce returns or increase the Fund's
volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- -- ---% ---%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Institutional Class
shares of the Fund for prior periods, restated to reflect Class A expenses.
Class A, Class B and Class C shares would have had substantially similar returns
because Institutional Class shares were invested in the same portfolio of
securities. Also, prior to May __, 1999, a different adviser managed the Fund.
-2-
<PAGE>
The following table compares the Fund's performance to that of a broad measure
of market performance the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (7/31/96)
------ -------------------------
Institutional Class* ___% ___%
First Boston High Yield Index ___% ___%
* This table shows performance of the Institutional Class shares of the Fund,
restated to reflect Class A expenses, because Classes A, B and C of the Fund did
not have a full year's performance as of December 31, 1998. See the footnote to
the bar chart above.
"FEES AND EXPENSES" IS AMENDED AS FOLLOWS:
The following is added to the tables under Annual Fund Operating Expenses:
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND
MANAGEMENT AND SERVICE OPERATING FEE WAIVER BY
FUND FEES (12B-1) FEES OTHER EXPENSES EXPENSES ADVISER(2) NET EXPENSES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
High Yield II 0.60 0.35 -- -- -- 1.10
CLASS B
High Yield II 0.60 1.00 -- -- -- 1.75
CLASS C
High Yield II 0.60 1.00 -- -- 74 -- 1.75
</TABLE>
The following is added to the Examples:
CLASS A
<TABLE>
<CAPTION>
ASSUMING YOU REDEEM AT THE
END OF EACH TIME PERIOD. ASSUMING YOU DO NOT REDEEM.
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
High Yield II $___ $___ $___ $___ $___ $___ $___ $___
CLASS B
High Yield II $___ $___ $___ $___ $___ $___ $___ $___
CLASS C
High Yield II $___ $___ $___ $___ $___ $___ $___ $___
</TABLE>
-3-
<PAGE>
"SHAREHOLDER GUIDE" IS AMENDED AS FOLLOWS:
The following is added to the table under "Distribution and Shareholder Service
Fees":
DISTRIBUTION FEE SERVICE FEE
---------------- -----------
CLASS A
High Yield Fund II 0.10% 0.25%
"MANAGEMENT OF THE FUNDS" IS AMENDED AS FOLLOWS:
The following line is added to the table on advisory fees:
FUND ADVISORY FEE
- ---- ------------
High Yield II 0.60
The caption "High Yield Fund" is amended to read "High Yield Fund and High Yield
Fund II."
"DIVIDENDS, DISTRIBUTIONS & TAXES" IS AMENDED AS FOLLOWS:
The table under "Dividends" is revised to add High Yield Fund II to the column
captioned "monthly."
"FINANCIAL HIGHLIGHTS" IS AMENDED BY ADDING:
PILGRIM HIGH YIELD FUND II
The following figures have been audited by [_____________]. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- ---------------------- ----------------------
MARCH 27, MARCH 27, MARCH 27,
YEAR ENDED 1998 TO YEAR ENDED 1998 TO YEAR ENDED 1998 TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ -- $ 12.70 $ -- $ 12.69 $ -- $ 12.69
Income (loss) from
investment operations: -- -- --
Net investment income -- 0.01 -- 0.01 -- 0.01
Net realized and unrealized
gain (loss) on investments -- 0.01 -- 0.01 -- 0.01
---- --------- ---- --------- ---- ---------
Total from investment operation -- 0.02 -- 0.02 -- 0.02
---- --------- ---- --------- ---- ---------
Less distributions from:
Net investment income -- -- -- -- -- --
Distributions in excess of net
investment income -- -- -- -- -- --
---- --------- ---- --------- ---- ---------
Total distributions -- -- -- -- -- --
---- --------- ---- --------- ---- ---------
Net asset value, end of period $ -- $ 12.72 $ -- $ 12.71 $ -- $ 12.71
==== ========= ==== ========= ==== =========
TOTAL RETURN --% 0.16% --% 0.16% --% 0.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ -- $ 4,690 $ -- $ 8,892 $ -- $ 4,815
Ratios to average net assets:
Expenses --% 1.06%* --% 1.69%* --% 1.66%*
Net investment income --% 7.22%* --% 6.61%* --% 6.91%*
Portfolio turnover rate --% 484% --% 484% --% 484%
*Annualized
</TABLE>
-4-
<PAGE>
SUPPLEMENT DATED MAY __, 1999 TO
THE PROSPECTUS FOR THE PILGRIM FUNDS
CLASS Q
DATED MAY __, 1999 ("PROSPECTUS")
The cover page of the Prospectus is amended to add Pilgrim High Yield Fund II
under the caption "Income Funds."
"FUNDS AT A GLANCE" IS AMENDED BY ADDING:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT MAIN INVESTMENTS
FUND OBJECTIVE MAIN RISKS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Fund II High level of High yield debt Credit, interest rate and other risks
Adviser: Pilgrim Investments, Inc. current income securities. that accompany an investment in
and capital lower-quality debt securities.
growth. Particularly sensitive to credit risk
during economic downturns.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING DESCRIPTION OF PILGRIM HIGH YIELD FUND II IS ADDED:
High Yield Fund II Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income and capital growth.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies. The Fund is not restricted to investments in
companies of any particular size, but currently intends to invest principally in
companies with market capitalization above $100 million at the time of purchase.
The Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in
high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
-5-
<PAGE>
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the owners of underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund
will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund. A security whose credit rating has been lowered may be particularly
difficult to sell.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign
banks or securities depositories than those in the U.S., and foreign
controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and financial
futures to help it achieve its investment objective. There's always a risk
that these techniques could reduce returns or increase the Fund's
volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
YEAR-BY-YEAR TOTAL RETURNS*
Plot points for bar chart:
-- -- -- -- -- -- -- -- ---% ---%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the Fund
for prior periods, restated to reflect Class Q expenses. Class Q shares, after
adjustment for class expenses, would have had substantially similar returns
because Institutional Class shares were invested in the same portfolio of
securities. Also, prior to May __, 1999, a different adviser managed the Fund.
-6-
<PAGE>
The following table compares the Fund's performance to that of a broad measure
of market performance the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (7/31/96)
------ -------------------------
Institutional Class* ___% ___%
First Boston High Yield Index ___% ___%
* This table shows performance of the Institutional Class shares of the Fund,
restated to reflect Class Q expenses, because Class Q shares of the Fund did not
have a full year's performance as of December 31, 1998. See the footnote to the
bar chart above.
"FEES AND EXPENSES" IS AMENDED AS FOLLOWS:
The following is added to the tables under Annual Fund Operating Expenses:
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND
AND SERVICE OPERATING FEE WAIVER BY
FUND MANAGEMENT FEES (12B-1) FEES OTHER EXPENSES EXPENSES ADVISER(2) NET EXPENSES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield II 0.60 0.25 -- -- -- 1.00
</TABLE>
The following is added to the Examples:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- ------ ------- ------- --------
High Yield II $___ $___ $___ $___
"MANAGEMENT OF THE FUNDS" IS AMENDED AS FOLLOWS:
The following line is added to the table on advisory fees:
FUND ADVISORY FEE
- ---- ------------
High Yield II 0.60
The caption "High Yield Fund" is amended to read "High Yield Fund and High Yield
Fund II."
"DIVIDENDS, DISTRIBUTIONS & TAXES" IS AMENDED AS FOLLOWS:
The table under "Dividends" is revised to add High Yield Fund II to the column
captioned "monthly."
-7-
<PAGE>
"FINANCIAL HIGHLIGHTS" IS AMENDED BY ADDING:
PILGRIM HIGH YIELD FUND II
The following figures have been audited by [_____________]. Please read in
conjunction with the Trust's 1999 Annual Report.
YEAR ENDED MARCH 27, 1998 TO
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ -- $ 12.70
Income (loss) from
investment operations: --
Net investment income -- 0.01
Net realized and unrealized
gain (loss) on -- 0.01
--------- ---------
investments
Total from investment operation -- 0.02
--------- ---------
Less distributions from:
Net investment income -- --
Distributions in excess of net
investment income -- --
--------- ---------
Total distributions -- --
--------- ---------
Net asset value, end of period $ -- $ 12.72
========= =========
TOTAL RETURN --% 0.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ -- $ 4,690
Ratios to average net assets:
Expenses --% 0.97%*
Net investment income --% 7.53%*
Portfolio turnover rate --% 484%
*Annualized
-8-
<PAGE>
PILGRIM MUTUAL FUNDS
40 North Central Avenue
Phoenix, Arizona 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
May 24, 1999
Pilgrim Mutual Funds (the "Trust") is an open-end management investment company
currently offering a number of separate diversified portfolios. This Statement
of Additional Information contains information regarding the following
portfolios (each a "Fund" and collectively the "Funds"):
Pilgrim International Core Growth Fund (the "International Core Growth Fund");
Pilgrim Worldwide Growth Fund (the "Worldwide Growth Fund"); Pilgrim
International Small Cap Growth Fund (the "International Small Cap Growth Fund");
Pilgrim Emerging Countries Fund (the "Emerging Countries Fund"); Pilgrim Large
Cap Growth Fund (the "Large Cap Growth Fund"); Pilgrim Mid Cap Growth Fund (the
"Mid Cap Growth Fund"); Pilgrim Small Cap Growth Fund (the "Small Cap Growth
Fund"); Pilgrim Convertible Fund (the "Convertible Fund"); Pilgrim Balanced Fund
(the "Balanced Fund"); Pilgrim High Yield Fund II ("High Yield Fund II") and
Pilgrim Strategic Income Fund (the "Strategic Income Fund").
This Statement of Additional Information is not a prospectus, but contains
information in addition to and more detailed than that set forth in the Funds'
Prospectus and should be read in conjunction with the Prospectus. In addition,
the financial statements from the Funds' March 31, 1999 Annual Reports are
incorporated herein by reference. Copies of the Funds' Prospectus and Annual
Reports may be obtained without charge by contacting Pilgrim Funds at the
address and phone number written above.
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION....................................................... B-2
MANAGEMENT OF THE FUNDS................................................... B-2
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................. B-14
INVESTMENT RESTRICTIONS................................................... B-43
PORTFOLIO TRANSACTIONS.................................................... B-45
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ B-48
DETERMINATION OF SHARE PRICE.............................................. B-52
SHAREHOLDER INFORMATION................................................... B-54
SHAREHOLDER SERVICES AND PRIVILEGES....................................... B-54
DISTRIBUTIONS............................................................. B-56
TAX CONSIDERATIONS........................................................ B-57
CALCULATION OF PERFORMANCE DATA........................................... B-63
GENERAL INFORMATION....................................................... B-69
FINANCIAL STATEMENTS...................................................... B-71
<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. Each Fund consists of four classes of
shares, Class A, B, C and Q.
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 was changed as follows:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Nicholas-Applegate International Core Growth Fund Pilgrim International Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund Pilgrim Worldwide Growth Fund
Nicholas-Applegate International Small Cap Growth Fund Pilgrim International Small Cap Growth Fund
Nicholas-Applegate Emerging Countries Fund Pilgrim Emerging Countries Fund
Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund
Nicholas-Applegate Mid Cap Growth Fund Pilgrim Mid Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund Pilgrim Small Cap Growth Fund
Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund
Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund
Nicholas-Applegate High Yield Bond Fund Pilgrim High Yield Fund II
Nicholas-Applegate High Quality Bond Fund Pilgrim Strategic Income Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund II that, if approved by shareholders of High Yield Fund II, will
result in the reorganization of High Yield Fund II into the Pilgrim High Yield
Fund series of Pilgrim Investment Funds, Inc. If the Agreement and Plan of
Reorganization is approved by shareholders, the Reorganization is expected to
occur in or about June, 1999.
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES. The Trust is managed by its Board of Trustees. The Trustees
and Officers of the Trust are listed below. An asterisk (*) has been placed next
to the name of each Trustee who is an "interested person," as that term is
defined in the 1940 Act, by virtue of that person's affiliation with the Trust
or Pilgrim Investments, Inc., the Trust's investment manager ("Pilgrim
Investments" or the "Investment Manager").
Walter E. Auch, 6001 North 62nd Place, Paradise Valley, Arizona. (Age 76).
Trustee. Trustee, Pilgrim Prime Rate Trust; Director, Pilgrim Bank and
Thrift Fund, Inc.; Advisory Officer, Pilgrim Advisory Funds, Inc., Pilgrim
Investment Funds, Inc. and Pilgrim Government Securities Income Fund, Inc.
Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Fort Dearborn Fund (since 1987); Brinson Funds (since
1994), Smith Barney Trak Fund (since 1992), registered investment
companies; Pimco Advisors L.P., an investment manager (since 1994); and
Banyan Realty Fund (since 1987), Banyan Strategic Land Fund (since 1987),
Banyan Strategic Land Fund II (since 1988), and Banyan Mortgage Fund (since
1988), real estate investment trusts. Formerly Chairman and Chief Executive
Officer, Chicago Board Options Exchange (1979 to 1986); Senior Executive
Vice President, Director and Member of the Executive Committee,
B-2
<PAGE>
PaineWebber, Inc. (until 1979). Formerly Trustee, Nicholas-Applegate
Investment Trust (until 1998). [Although Mr. Auch is on the board of a
company a subsidiary of which is a broker-dealer, the Board has determined
pursuant to Rule 2a19-1 that Mr. Auch shall not be considered to be an
"interested person."]
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 59) Trustee. Realtor, Coldwell Banker Success Realty (formerly,
The Prudential Arizona Realty) for more than the last five years. Ms.
Baldwin is also Vice President, United States Olympic Committee (November
1996 - Present), and formerly Treasurer, United States Olympic Committee
(November 1992 - November 1996). Ms. Baldwin is also a director and/or
trustee of each of the funds managed by the Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130. (Age
66) Trustee. Commissioner of Banking, State of Connecticut (January 1995 -
Present). Mr. Burke was formerly President of Bristol Savings Bank (August
1992 - January 1995) and President of Security Savings and Loan (November
1989 - August 1992). Mr. Burke is also a director and/or trustee of each of
the funds managed by the Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 70)
Trustee. President of Al Burton Productions for more than the last five
years; formerly Vice President, First Run Syndication, Castle Rock
Entertainment (July 1992 - November 1994). Mr. Burton is also a director
and/or trustee of each of the funds managed by the Investment Manager.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age
52) Trustee. Private Investor. Director of Artisoft, Inc. Mr. Patton was
formerly President and Co-owner, StockVal, Inc. (April 1993 - June 1997)
and a partner and director of the law firm of Streich, Lang, P.A. (1972 -
1993). Mr. Patton is also a director and/or trustee of each of the funds
managed by the Investment Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ
85004. (Age 49) Chairman, Chief Executive Officer, and President. Chairman,
Chief Executive Officer and President of Pilgrim Group, Inc. ("Pilgrim
Group") (since December 1994); Chairman, Pilgrim Investments, Inc. (since
December 1994); Director, Pilgrim Securities, Inc. ("Pilgrim Securities")
(since December 1994); Chairman, Chief Executive Officer and President of
Pilgrim Bank and Thrift Fund, Inc., Pilgrim Government Securities Income
Fund, Inc. and Pilgrim Investment Funds, Inc. (since April 1995). Chairman
and Chief Executive Officer of Pilgrim Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Pilgrim America Capital Corporation
(formerly, Express America Holdings Corporation) ("Pilgrim Capital") (since
August 1990).
Each Fund pays each Trustee who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $25,000; (ii) $2,500 per quarterly
and special Board meeting; (iii) $500 per committee meeting; (iv) $500 per
special telephonic meeting; and (v) out-of-pocket expenses. The pro rata share
paid by each Fund is based on the Funds' average net assets as a percentage of
the average net assets of all the funds managed by the Investment Manager for
which the Trustees serve in common as directors/trustees.
CHANGE IN TRUSTEES. Except for Mr. Auch, each Trustee became a Trustee of the
Trust on May __, 1999. Prior to that date, the Trustees of the Trust were: Fred
C. Applegate, Dann V. Angeloff, Walter E. Auch, Theodore J. Coburn, Darlene
Deremer, George F. Keane, Arthur B. Laffer and Charles E. Young. Also, prior to
B-3
<PAGE>
that date, each Trustee who was not an interested person an aggregate annual fee
of $14,000 for services rendered as a Trustee of the Trust, and $1,000 for each
meeting attended ($2,000 per Committee meeting for Committee chairmen). Each
Trustee was also reimbursed for out-of-pocket expenses incurred as a Trustee.
COMPENSATION OF TRUSTEES. The following table sets forth information regarding
compensation of Trustees by the Trust and other funds managed by the Fund's
investment adviser for the year ended March 31, 1999. Officers of the Trust and
Trustees who are interested persons of the Trust do not receive any compensation
from the Funds. In the column headed "Total Compensation From Registrant and
Fund Complex Paid to Trustee," the number in parentheses indicates the total
number of boards in the fund complex on which the Trustee served during that
fiscal year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement Estimated Annual from Registrant and
Compensation Benefits Accrued as Benefits Upon Fund Complex Paid to
Name from Trust Part of Trust Expenses Retirement Trustee
- ---- ------------ ---------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Fred C. Applegate* $______ None N/A $______ (__)
Arthur B. Laffer* $______ None N/A $______ (__)
Charles E. Young* $______ None N/A $______ (__)
Dann V. Angeloff* $______ None N/A $______ (__)
Walter E. Auch $______ None N/A $______ (__)
Theodore J. Coburn* $______ None N/A $______ (__)
Darlene Deremer* $______ None N/A $______ (__)
George F. Keane* $______ None N/A $______ (__)
</TABLE>
- ----------
* Resigned as Trustee effective May 21, 1999.
OFFICERS
The following individuals serve as officers for the Trust:
James R. Reis, EXECUTIVE VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41)
Director, Vice Chairman (since December 1994), and Executive Vice President
(since April 1995), Pilgrim Group, Inc. and Pilgrim Investments; Director
(since December 1994), Vice Chairman (since November 1995) and Assistant
Secretary (since January 1995) of Pilgrim Securities; Executive Vice
President and Assistant Secretary of Pilgrim Prime Rate Trust; Chief
Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December
1993), Pilgrim Capital (formerly Express America Holdings Corporation).
Presently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
B-4
<PAGE>
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48)
Executive Vice President (since August 1996), Pilgrim Group; President and
Chief Executive Officer (since August 1996), Pilgrim Investments; Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of Pilgrim Prime Rate Trust. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer, Pilgrim Group, Pilgrim
Investments, Pilgrim Securities (since June 1998) and Pilgrim Financial
(since August, 1998). He served in same capacity from January, 1995 -
April, 1997. Chief Financial Officer of Endeaver Group (April, 1997 to
June, 1998).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35) Vice
President, Pilgrim Investments (since April 1997) and Pilgrim Group, Inc.
(since February 1997). Vice President and Assistant Secretary of Pilgrim
Prime Rate Trust. Formerly Assistant Vice President, Pilgrim Group, Inc.
(August 1995 - February 1997). Formerly Operations Manager, Pilgrim Group,
Inc. (April 1992 - April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30) Vice
President, Pilgrim Investments (since August 1997) and Pilgrim Financial
(since May 1998), Accounting Manager (since November 1995). Formerly
Assistant Vice President and Accounting Supervisor for PaineWebber (June,
1993 - April, 1995).
PRINCIPAL SHAREHOLDERS. As of _________, 1999, the Trustees and Officers of the
Trust as a group owned less than 1% of any class of the Fund's outstanding
shares. As of _________, 1999, to the knowledge of management, no person owned
beneficially or of record more than 5% of the outstanding shares of any class of
the Funds, except as follows:
[TO BE PROVIDED BY AMENDMENT]
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Funds and has overall responsibility for the management of the Funds. The
Investment Manager serves pursuant to an Investment Management Agreement between
the Investment Manager and the Trust. The Investment Management Agreement
requires the Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Funds.
B-5
<PAGE>
The Investment Manager, which was organized in December 1994, is registered as
an investment adviser with the SEC and serves as investment adviser to
registered investment companies (or series thereof) as well as privately managed
accounts. As of _________, 1999, the Investment Manager had assets under
management of approximately $___ billion. The Investment Manager is a
wholly-owned subsidiary of Pilgrim Group, Inc., which is itself a wholly-owned
subsidiary of Pilgrim America Capital Corporation, a Delaware corporation, the
shares of which are traded on the New York Stock Exchange (NYSE:PFX) and which
is a holding company that through its subsidiaries engages in the financial
services business.
The Investment Management Agreement provides that the Investment Manager, with
the approval of the Trust's Board of Trustees, may select and employ investment
advisers to serve as portfolio manager for any Fund ("Portfolio Manager"), and
shall monitor the Portfolio Manager's investment programs and results, and
coordinate the investment activities of the Portfolio Manager to ensure
compliance with regulatory restrictions.
The Investment Manager employs a Portfolio Manager to provide investment
advisory services to certain Funds. More information regarding the Portfolio
Manager is provided below.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all fees
payable to the Portfolio Managers, executive salaries and expenses of the
Trustees and Officers of the Trust who are employees of the Investment Manager
or its affiliates and office rent of the Trust. The Portfolio Manager pays all
of its expenses arising from the performance of its obligations under the
Portfolio Management Agreement. Subject to the expense reimbursement provisions
described in this Statement of Additional Information, other expenses incurred
in the operation of the Trust are borne by the Funds, including, without
limitation, investment advisory fees; brokerage commissions; interest; legal
fees and expenses of attorneys; fees of independent auditors, transfer agents
and dividend disbursing agents, accounting agents, and custodians; the expense
of obtaining quotations for calculating each Fund's net asset value; taxes, if
any, and the preparation of each Fund's tax returns; cost of stock certificates
and any other expenses (including clerical expenses) of issue, sale, repurchase
or redemption of shares; fees and expenses of registering and maintaining the
registration of shares of the Funds under federal and state laws and
regulations; salaries of personnel involved in placing orders for the execution
of the Fund's portfolio transactions; expenses of printing and distributing
reports, notices and proxy materials to existing shareholders; expenses of
printing and filing reports and other documents filed with governmental
agencies; expenses of annual and special shareholder meetings; expenses of
printing and distributing prospectuses and statements of additional information
to existing shareholders; fees and expenses of Trustees of the Trust who are not
employees of the Investment Manager or any Portfolio Manager, or their
affiliates; membership dues in the Investment Company Institute; insurance
premiums; and extraordinary expenses such as litigation expenses. Expenses
directly attributable to a Fund are charged to that Fund and other expenses are
allocated proportionately among all the Funds in relation to the net assets of
each Fund.
The Investment Management Agreement will continue in effect for two years from
the date it became effective, and from year to year thereafter so long as such
continuance is specifically approved at least annually by (a) the Board of
Trustees or (b) the vote of a "majority" (as defined in the 1940 Act) of the
Fund's outstanding shares voting as a single class; provided, that in either
event the continuance is also approved by at least a majority of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Investment Manager by vote cast in person at a meeting called for the purpose of
voting on such approval.
The Investment Management Agreement is terminable without penalty with not less
than 60 days' notice by the Board of Trustees or by a vote of the holders of a
majority of the Fund's outstanding shares voting as a single class, or upon not
B-6
<PAGE>
less than 60 days' notice by the Investment Manager. The Investment Management
Agreement will terminate automatically in the event of its "assignment" (as
defined in the 1940 Act).
The Investment Manager bears the expense of providing its services, and pays the
fees of the Portfolio Manager. For its services, each Fund pays the Investment
Manager a monthly fee in arrears equal to the following as a percentage of the
Fund's average daily net assets during the month:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
Small Cap Growth Fund 1.00% of the Fund's average net assets
Mid Cap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Large Cap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of
the average net assets in excess of $1 billion
Balanced Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250
million of average net assets, and 0.35% of the
average net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the
Fund's average net assets, 0.90% of the next
$500 million of average net assets, and 0.85% of
the average net assets in excess of $1 billion
International Small Cap 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund $1 billion 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
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:
B-7
<PAGE>
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $_______ $ 308,562 $_______
Worldwide Growth Fund _______ 1,251,181 _______
International Small Cap Growth Fund _______ 658,893 _______
Emerging Countries Fund _______ 2,790,216 _______
Large Cap Growth Fund _______ 32,530 _______
Mid Cap Growth Fund _______ 3,422,148 _______
Small Cap Growth Fund _______ 6,613,874 _______
Convertible Fund _______ 1,427,198 _______
Balanced Fund _______ 220,025 _______
Strategic Income Fund 1/ _______ 94,359 _______
High Yield Fund II _______ 36,505 _______
1/ Includes the advisory fees, fee reductions and expense reimbursements of the
Government Income Fund, the assets and liabilities of which were assigned to and
assumed by the Strategic Income Fund pursuant to the Reorganization.
The Investment Manager has entered into an expense limitation agreement with
the Trust, pursuant to which the Investment Manager has agreed to waive or limit
its fees and to assume other expenses so that the total annual ordinary
operating expenses of the Funds (which excludes interest, taxes, brokerage
commissions, extraordinary expenses such as litigation, other expenses not
incurred in the ordinary course of each Fund's business, and expenses of any
counsel or other persons or services retained by the Trust's trustees who are
not "interested persons," as defined in the 1940 Act, of the Investment Manager)
do not exceed the following for each Class:
FUND CLASS A CLASS B CLASS C CLASS Q
- ----- ------- ------- ------- -------
Small Cap Growth Fund 1.95% 2.60% 2.60% 1.50%
Mid Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Large Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Convertible Fund 1.60% 2.25% 2.25% 1.25%
Balanced Fund 1.60% 2.25% 2.25% 1.25%
Strategic Income Fund 0.95% 1.35% 1.35% 0.85%
High Yield Fund II 1.10% 1.75% 1.75% 1.00%
Emerging Countries Fund 2.25% 2.90% 2.90% 1.90%
Worldwide Growth Fund 1.85% 2.50% 2.50% 1.60%
International Small Cap Growth Fund 1.95% 2.60% 2.60% 1.65%
International Core Growth Fund 1.95% 2.60% 2.60% 1.65%
The expense limitation agreement provides that these expense limitations shall
continue until [June 30,] 2001. The Investment Manager may extend, but may not
shorten, the period of these limitations without the consent of the Funds, so
long as the extension is at the same expense limitation amount discussed above.
Each Fund will at a later date reimburse the Investment Manager for management
fees waived and other expenses assumed by the Investment Manager during the
previous 36 months, but only if, after such reimbursement, the Fund's expense
ratio does not exceed the percentage described above. The Investment Manager
will only be reimbursed for fees waived or expenses assumed after the effective
date of the expense limitation agreements. Each expense limitation agreement
will terminate automatically upon termination of the respective investment
management agreement with the Investment Manager, and may be terminated by the
Investment Manager or the Fund upon 90 days written notice.
Prior to the expense limitation agreement described above, the Funds 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
B-8
<PAGE>
ended March 31, 1999, 1998 and 1997, the voluntary fee reduction resulted in a
waiver of the following expenses for each Fund (or predecessor portfolios
thereof):
FUND 1999 1998 1997
- ----- ---- ---- ----
Small Cap Growth Fund $_______ $ 0 $_______
Mid Cap Growth Fund _______ 9,400 _______
Large Cap Growth Fund _______ 53,872 _______
Convertible Fund _______ 0 _______
Balanced Fund _______ 48,936 _______
Strategic Income Fund _______ -- _______
High Yield Fund II _______ 111,479 _______
Emerging Countries Fund _______ 84,868 _______
Worldwide Growth Fund _______ 111,071 _______
International Small Cap Growth Fund _______ 79,886 _______
International Core Growth Fund _______ 30,669 _______
PORTFOLIO MANAGER. The Investment Manager has entered into a Portfolio
Management Agreement with Nicholas-Applegate Capital Management ("NACM" or the
"Portfolio Manager"), 600 West Broadway, 30th Floor, San Diego, California
92101, to provide investment advisory services to the following Funds:
International Core Growth Fund; Worldwide Growth Fund; International Small Cap
Growth Fund; Emerging Countries Fund; Large Cap Growth Fund; Mid Cap Growth
Fund; Small Cap Growth Fund; and Convertible Fund. NACM, a California limited
partnership, was organized in 1984 to manage discretionary accounts investing
primarily in publicly traded equity securities and securities convertible into
or exercisable for publicly traded equity securities, with the goal of capital
appreciation. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership the general partner of which is
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
owned by Arthur Nicholas.
NACM has discretion to purchase and sell securities for the Funds that it
manages in accordance with each Fund's investment objective, policies and
restrictions. Although NACM is subject to general supervision by the Investment
Manager, the Investment Manager does not evaluate the investment merits of
specific securities transactions.
As compensation for its services to the Funds, the Investment Manager pays NACM
a monthly fee in arrears equal to the following as a percentage of the Fund's
average daily net assets managed during the month:
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Small Cap Growth Fund 0.50% of the Fund's average net assets
Mid Cap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Large Cap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
B-9
<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 Small Cap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International Core Growth 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
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).
ADMINISTRATION. Prior to May __, 1999, the Trust had an Administration Agreement
with Investment Company Administration Corporation ("ICAC"), 4455 East Camelback
Road, Suite 261-E, Phoenix, Arizona 85018. Pursuant to an Administration
Agreement with the Trust, ICAC was responsible for performing all administrative
services required for the daily business operations of the Trust, subject to the
supervision of the Board of Trustees of the Trust. For the fiscal years ended
March 31, 1999 and 1998, ICAC received aggregate compensation of $_________ and
$848,799, respectively, for all of the series of the Trust.
Also, prior to May __, 1999, the Trust had an Administrative Services Agreement
with NACM under which NACM was responsible for providing all administrative
services which are not provided by ICAC or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. For the
fiscal years ended March 31, 1999 and 1998, NACM received aggregate compensation
of $_________ and $_______, respectively, for all of the series of the Trust
pursuant to the Administrative Services Agreement.
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
B-10
<PAGE>
effect for two years and from year to year thereafter only if its continuance is
approved annually by a majority of the Board of Trustees who are not parties to
such agreement or "interested persons" of any such party and must be approved
either by votes of a majority of the Trustees or a majority of the outstanding
voting securities of the Trust. See the Prospectus for information on how to
purchase and sell shares of the Funds, and the charges and expenses associated
with an investment. The sales charge retained by the Distributor and the
commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc., which
is a wholly-owned subsidiary of Pilgrim America Capital Corporation.
Prior to May __, 1999, the distributor of the Funds was Nicholas-Applegate
Securities ("NAS"). The aggregate commissions received by NAS in connection with
sales of shares in the Funds for the fiscal years ended March 31,1999, 1998 and
1997 were $_________, $6,778,277 and $5,766,080, respectively.
RULE 12B-1 PLANS. The Trust has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares offered by each Fund ("Rule
12b-1 Plans"). The Funds intend to operate the Rule 12b-1 Plans in accordance
with their terms and the National Association of Securities Dealers, Inc. rules
concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be
entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C and Class Q shares in amounts
not to exceed the following: with respect to Class A shares at an annual rate of
up to 0.35% of the average daily net assets of the Class A shares of a Fund;
with respect to Class B shares at an annual rate of up to 1.00% of the average
daily net assets of the Class B shares of a Fund; with respect to Class C shares
at an annual rate of up to 1.00% of the average daily net assets of the Class C
shares of a Fund; and with respect to Class Q shares at an annual rate of up to
0.25% of the average daily net assets of the Class Q shares of a Fund. The Board
of Trustees has approved under the Rule 12b-1 Plans payments of the following
amounts to the Distributor each month in connection with the offering, sale, and
shareholder servicing of each Class of shares as follows: (i) with respect to
Class A shares at an annual rate equal to 0.25% of the average daily net assets
of the Class A shares of a Fund; (ii) with respect to Class B shares at an
annual rate equal to 1.00% of the average daily net assets of the class B shares
of a Fund; (iii) with respect to Class C shares at an annual rate of up to 1.00%
of the average daily net assets of the Class shares of a Fund; (iv) with respect
to Class M shares at an annual rate equal to 0.75% of the average daily net
assets of the Class M shares of a Fund; and (v) with respect to Class Q shares
at an annual rate equal to 0.25% of the average daily net assets of the Class Q
shares of a Fund.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C and Class Q shares
of the Funds, including payments to dealers for selling shares of the Funds and
for servicing shareholders of these classes of the Funds. Activities for which
these fees may be used include: promotional activities; preparation and
distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; interest on
accrued distribution expenses; and costs of administering the Rule 12b-1 Plans.
No more than 0.75% per annum of a Fund's average net assets may be used to
finance distribution expenses, exclusive of shareholder servicing payments, and
no Authorized Dealer may receive shareholder servicing payments in excess of
0.25% per annum of a Fund's average net assets held by the Authorized Dealer's
clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis
to Authorized Dealers for both distribution and shareholder servicing at the
annual rate of 0.25%, 0.25%, 1.00%, and 0.25% of a Fund's average daily net
assets of Class A, Class B, Class C, and Class Q shares, respectively, that are
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registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. Rights to these ongoing payments begin to accrue in the 13th month
following a purchase of Class A, B or C shares [and in the 1st month following a
purchase of Class Q shares].
The Distributor will receive payment under a Rule 12b-1 Plan without regard to
actual distribution expenses it incurs. In the event a Rule 12b-1 Plan is
terminated in accordance with its terms, the obligations of a Fund to make
payments to the Distributor pursuant to the Rule 12b-1 Plan will cease and the
Fund will not be required to make any payments for expenses incurred after the
date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plans
also recognize that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers that have sold or may sell
significant amounts of shares during specified periods of time. Such
compensation and incentives may include, but are not limited to, cash,
merchandise, trips and financial assistance to dealers in connection with
pre-approved conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and lodging)
incurred by sales personnel and members of their families, or other invited
guests, to various locations for such seminars or training programs, seminars
for the public, advertising and sales campaigns regarding one or more of the
Funds or other funds managed by the Investment Manager and/or other events
sponsored by dealers. In addition, the Distributor may, at its own expense, pay
concessions in addition to those described above to dealers that satisfy certain
criteria established from time to time by the Distributor. These conditions
relate to increasing sales of shares of the Funds over specified periods and to
certain other factors. These payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to (1) 0.30%
of the value of the Funds' shares sold by the dealer during a particular period,
and (2) 0.10% of the value of the Funds' shares held by the dealer's customers
for more than one year, calculated on an annual basis.
The Rule 12b-1 Plans have been approved by the Board of Trustees of each Fund,
including all of the Trustees who are not interested persons of the Trust as
defined in the 1940 Act, and by each Fund's shareholders. Each Rule 12b-1 Plan
must be renewed annually by the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Rule 12b-1 Plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Trustees be committed to the Trustees who are
not interested persons. Each Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Trustees or by a vote of a majority of the Fund's outstanding shares on 60
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
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material amendments to a Plan or any distribution or service agreement shall be
approved by the Trustees who are not interested persons of the Trust, cast in
person at a meeting called for the purpose of voting on any such amendment.
The Distributor is required to report in writing to the Board of Trustees at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably be
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
Prior to May 24, 1999, the Trust has a Distribution Plan with respect to each
Class of each Fund and a separate Shareholder Service Plan with respect to each
Class of each Fund. Under the Distribution Plan, NAS (the Distributor's
predecessor) was entitled to payment each month in the following amounts: with
respect to Class A shares at an annual rate of up to 0.10% of the average daily
net assets of the Class A shares of a Fund; with respect to Class B shares at an
annual rate of up to 0.75% of the average daily net assets of the Class B shares
of a Fund; and with respect to Class C shares at an annual rate of up to 0.75%
of the average daily net assets of the Class C shares of a Fund. The
Distribution Plan did not apply to Class Q shares. Under the Distribution Plan,
NAS was paid without regard to actual distribution expenses it incurred. The
aggregate amounts earned by NAS pursuant to that Distribution Plan for the
fiscal year ended March 31, 1999, were as follows:
[TO BE PROVIDED BY AMENDMENT]
Under the Shareholder Service Plan, NAS was entitled to payment each month in
the following amounts: with respect to Class A shares at an annual rate of up to
0.25% of the average daily net assets of the Class A shares of a Fund; with
respect to Class B shares at an annual rate of up to 0.25% of the average daily
net assets of the Class B shares of a Fund; with respect to Class C shares at an
annual rate of up to 0.25% of the average daily net assets of the Class C shares
of a Fund; and with respect to Class Q shares at an annual rate of up to 0.25%
of the average daily net assets of the Class Q shares of a Fund. Under the
Shareholder Service Plan, NAS was paid only with respect to expenses actually
incurred. If expenses incurred by NAS exceeded the amount of the shareholder
service fee in a particular month, the excess amount would be carried forward
and recovered in a future period of NAS's actual expenses were less than the
shareholder service fee. However, effective May 24, 1999, the Funds were no
longer responsible for those excess amounts.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
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
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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. There can be no assurance that any of the
Funds will achieve their investment objectives.
TEMPORARY INVESTMENTS
Each Fund 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 may invest in equity securities of domestic and foreign companies, the
earnings and stock prices of which are expected by the Investment Manager or
Portfolio Manager to grow at an above-average rate. Such investments will be
diversified over a cross-section of industries and individual companies. For
Funds other than the Large Cap Growth Fund, some of these companies will be
organizations with market capitalizations of $500 million or less or companies
that have limited product lines, markets and financial resources and are
dependent upon a limited management group. Examples of possible investments
include emerging growth companies employing new technology, cyclical companies,
initial public offerings of companies offering high growth potential, or other
corporations offering good potential for high growth in market value. The
securities of such companies may be subject to more abrupt or erratic market
movements than larger, more established companies both because the securities
typically are traded in lower volume and because the issuers typically are
subject to a greater degree to changes in earnings and prospects.
PREFERRED STOCK
Each Fund may invest in preferred stock. Preferred stock, unlike common stock,
offers a stated dividend rate payable from a corporation's earnings. Such
preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. If interest rates rise, the fixed dividend on preferred stocks may
be less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid before dividends are paid on the
issuer's common stock. Preferred stock also generally has a preference over
common stock on the distribution of a corporation's assets in the event of
liquidation of the corporation, and may be "participating," which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stocks on the distribution of a corporation's assets in
the event of a liquidation are generally subordinate to the rights associated
with a corporation's debt securities.
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CONVERTIBLE SECURITIES AND WARRANTS
Each Fund may invest in convertible securities and warrants. The value of a
convertible security is a function of its "investment value" (determined by its
yield in comparison with the yields of other securities of comparable maturity
and quality that do not have a conversion privilege) and its "conversion value"
(the security's worth, at market value, if converted into the underlying common
stock). The credit standing of the issuer and other factors may also affect the
investment value of a convertible security. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. To the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value.
The market value of convertible debt securities tends to vary inversely with the
level of interest rates. The value of the security declines as interest rates
increase and increases as interest rates decline. Although under normal market
conditions longer term debt securities have greater yields than do shorter term
debt securities of similar quality, they are subject to greater price
fluctuations. A convertible security may be subject to redemption at the option
of the issuer at a price established in the instrument governing the convertible
security. If a convertible security held by a Fund is called for redemption, the
Fund must permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. Rating requirements do not
apply to convertible debt securities purchased by the Funds because the Funds
purchase such securities for their equity characteristics.
As a matter of operating policy, no Fund will invest more than 5% of its net
assets in warrants. A warrant gives the holder a right to purchase at any time
during a specified period a predetermined number of shares of common stock at a
fixed price. Unlike convertible debt securities or preferred stock, warrants do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for resale of the warrants,
potential price fluctuations as a result of speculation or other factors, and
failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised
(in which event the warrant may expire without being exercised, resulting in a
loss of the Fund's entire investment therein).
SYNTHETIC CONVERTIBLE SECURITIES
Each 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.
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EURODOLLAR CONVERTIBLE SECURITIES
Each Fund may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the same
or a different issuer. Interest and dividends on Eurodollar securities are
payable in U.S. dollars outside of the United States. The Funds may invest
without limitation in Eurodollar convertible securities that are convertible
into foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange or the American Stock Exchange or convertible into publicly
traded common stock of U.S. companies. The Funds may also invest up to 15% of
its total assets invested in convertible securities, taken at market value, in
Eurodollar convertible securities that are convertible into foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee Dollar instruments are U.S. dollar denominated bonds issued in
the U.S. by foreign banks and corporations. These investments involve risks that
are different from investments in securities issued by U.S. issuers. See
"Foreign Investment Considerations."
CORPORATE DEBT SECURITIES
Corporate debt securities are subject to the risk of the issuer's inability to
meet principal and interest payments on the obligation (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity (market risk). When interest rates decline, the value
of the Funds' debt securities can be expected to rise, and when interest rates
rise, the value of those securities can be expected to decline. Debt securities
with longer maturities tend to be more sensitive to interest rate movements than
those with shorter maturities.
Debt obligations that are deemed investment grade carry a rating of at least Baa
from Moody's or BBB from Standard and Poor's, or a comparable rating from
another rating agency or, if not rated by an agency, are determined by the
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:
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SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates affect high yield securities differently from other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, a Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Funds'
asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact the Investment Manager's or Portfolio Manager's ability to accurately
value high yield bonds and the Funds' assets and hinder the Funds' ability to
dispose of the bonds. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. The rating of an issuer
is also heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. Also, since credit rating agencies may
fail to timely change the credit ratings to reflect subsequent events, the
Investment Manager or Portfolio Manager must monitor the issuers of high yield
bonds in the Funds' portfolios to determine if the issuers will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the bonds' liquidity so the Funds can meet redemption requests.
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.
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A Fund holding instruments of foreign banks or financial institutions may be
subject to additional investment risks that are different in some respects from
those incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. See "Foreign Investments" below. Domestic banks and foreign banks are
subject to different governmental regulations with respect to the amount and
types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry depends largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of the banking industry.
Federal and state laws and regulations require domestic banks to maintain
specified levels of reserves, limited in the amount which they can loan to a
single borrower, and subject to other regulations designed to promote financial
soundness. However, such laws and regulations do not necessarily apply to
foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances, to
the extent permitted under their respective investment objectives and policies
stated above and in their Prospectuses, the Funds may make interest-bearing time
or other interest-bearing deposits in commercial or savings banks. Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates of deposit
(interest-bearing time deposits) issued by savings banks or savings and loan
associations that have capital, surplus and undivided profits in excess of $100
million, based on latest published reports, or less than $100 million if the
principal amount of such obligations is fully insured by the U.S. Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The Funds
may invest a portion of their assets in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper and short-term notes will normally have maturities of
less than nine months and fixed rates of return, although such instruments may
have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the time
of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Investment Manager or Portfolio
Manager to be of comparable quality. These rating symbols are described in
Appendix A.
Corporate obligations include bonds and notes issued by corporations to finance
longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government obligations. Such
obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law.
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Each Fund may invest in sovereign debt obligations of foreign countries. A
number of factors affect a sovereign debtor's willingness or ability to repay
principal and interest in a timely manner, including its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which it may be subject.
Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
MUNICIPAL SECURITIES
Each Fund 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.
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Securities of issuers of municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
MORAL OBLIGATION SECURITIES. Municipal securities may include "moral obligation"
securities which are usually issued by special purpose public authorities. If
the issuer of moral obligation bonds cannot fulfill its financial
responsibilities from current revenues, it may draw upon a reserve fund, the
restoration of which is moral commitment but not a legal obligation of the state
or municipality which created the issuer.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Funds may invest in
tax-exempt industrial development bonds and pollution control bonds which, in
most cases, are revenue bonds and generally are not payable from the
unrestricted revenues of an issuer. They are issued by or on behalf of public
authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS. The Funds may invest in lease obligations or
installment purchase contract obligations of municipal authorities or entities
("municipal lease obligations"). Although lease obligations do not constitute
general obligations of the municipality for which its taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payment due under the lease obligation. A Fund may
also purchase "certificates of participation," which are securities issued by a
particular municipality or municipal authority to evidence a proportionate
interest in base rental or lease payments relating to a specific project to be
made by the municipality, agency or authority. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
any year unless money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
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 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
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obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They also are usually general obligations of the issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the money
for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal National Mortgage Association or the
Government National Mortgage Association.
SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term (365 days
or less) promissory notes issued by municipalities to supplement their cash
flow.
ZERO COUPON SECURITIES
The Convertible, Balanced and High Yield II Funds may each invest up to 35% of
its net assets in zero coupon securities issued or guaranteed by the U.S.
Government and its agencies and instrumentalities. Zero coupon securities may be
issued by the U.S. Treasury or by a U.S. Government agency, authority or
instrumentality (such as the Student Loan Marketing Association or the
Resolution Funding Corporation). Zero coupon securities are sold at a
substantial discount from face value and redeemed at face value at their
maturity date without interim cash payments of interest and principal. This
discount is amortized over the life of the security and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, such securities may be subject to greater
volatility as a result of changes in prevailing interest rates than interest
paying investments in which the Funds may invest. Because income on such
securities is accrued on a current basis, even though the Funds do not receive
the income currently in cash, the Funds may have to sell other portfolio
investments to obtain cash needed by the Funds to make income distributions.
PARTICIPATION INTERESTS
Each Fund may invest in participation interests, subject to the limitation on
investments by the Funds in illiquid investments. Except for the Strategic
Income and Balanced Funds, no Fund currently intends to invest more than 5% of
its net assets in such interests. Participation interests represent an undivided
interest in or assignment of a loan made by an issuing financial institution. No
more than 5% of a Fund's net assets can be invested in participation interests
of the same issuing borrower. Participation interests are primarily dependent
upon the financial strength of the borrowing corporation, which is obligated to
make payments of principal and interest on the loan, and there is a risk that
such borrowers may have difficulty making payments. In the event the borrower
fails to pay scheduled interest or principal payments, a Fund could experience a
reduction in its income and might experience a decline in the net asset value of
its shares. In the event of a failure by the financial institution to perform
its obligation in connection with the participation, a Fund might incur certain
costs and delays in realizing payment or may suffer a loss of principal and/or
interest.
SENIOR LOANS
The Strategic Income Fund may invest in interests in variable or floating rate
secured loans or notes ("Senior Loans"), which, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
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company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. Strategic Income Fund
invests in Senior Loans that have interest rates that float periodically based
upon a benchmark indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S. dollar-denominated.
Generally, the Senior Loans in which Strategic Income Fund invests are fully
collateralized with assets and/or cash flow that Pilgrim Investments believes
have a market value at the time of acquisition that equals or exceeds the
principal amount of the Senior Loan.
Senior Loans vary from other types of debt in that they generally hold the most
senior position in the capital structure of a borrower. Thus, Senior Loans are
generally repaid before unsecured bank loans, corporate bonds, subordinated
debt, trade creditors, and preferred or common stockholders. Senior Loans that
Strategic Income Fund may acquire include participation interests in lease
financings ("Lease Participations").
Substantial increases in interest rates may cause an increase in loan defaults
as borrowers may lack resources to meet higher debt service requirements. The
value of Strategic Income Fund's assets may also be affected by other
uncertainties such as economic developments affecting the market for Senior
Loans or affecting borrowers generally. Also, a default on a Senior Loan in
which the Fund has invested or a sudden and extreme increase in prevailing
interest rates may cause a decline in the Fund's net asset value.
The maximum period of time of interest rate reset on any Senior Loans in which
Strategic Income Fund may invest is one year. In addition, the Strategic Income
Fund will ordinarily maintain a dollar-weighted average time to next interest
rate adjustment on its Senior Loans of 90 days or less.
Strategic Income Fund also may invest in assignments of or participations in
Senior Loans. With respect to any given Senior Loan, the rights of the Fund when
it acquires a participation may be more limited than the rights of original
lenders or of investors who acquire an assignment. The Fund may assume the
credit risk of both the borrower and the lender selling the participation.
Strategic Income Fund does not impose any minimum standard regarding the rating
of any outstanding debt securities of borrowers.
Senior Loans usually include restrictive covenants which must be maintained by
the borrower. Under certain interests in Senior Loans, Strategic Income Fund may
have an obligation to make additional loans upon demand by the borrower. The
Fund intends to reserve against such contingent obligations by segregating
sufficient assets in high quality short-term liquid investments or borrowing to
cover such obligations.
Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Fund's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
CREDIT RISK. Pilgrim Investments performs its own independent credit analysis of
the borrower. Information about interests in Senior Loans generally will not be
in the public domain, and interests are generally not currently rated by any
nationally recognized rating service.
Senior Loans are subject to the risk of nonpayment of scheduled interest or
principal payments. Issuers of Senior Loans generally have either issued debt
securities that are rated lower than investment grade, or, if they had issued
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debt securities, such debt securities would likely be rated lower than
investment grade. However, unlike other types of debt securities, the Senior
Loans in which the Fund invests are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments on
Senior Loans held by the Fund, the Fund could experience a reduction in its
income, and would experience a decline in the market value of the particular
Senior Loan so affected, and may experience a decline in the NAV of Fund Shares
or the amount of its dividends. In the event of a bankruptcy of the borrower,
the Fund could experience delays or limitations with respect to its ability to
realize the benefits of the collateral securing the Senior Loan.
COLLATERAL. Senior Loans typically will be secured by pledges of collateral from
the borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. Strategic Income Fund may also receive guarantees as
a form of collateral. In some instances, the Fund may invest in Senior Loans
that are secured only by stock of the borrower or its subsidiaries or
affiliates. The value of the collateral may decline below the principal amount
of the Senior Loan subsequent to the Fund's investment in such Senior Loan. In
addition, to the extent that collateral consists of stock of the borrower or its
subsidiaries or affiliates, the Fund will be subject to the risk that this stock
may decline in value, be relatively illiquid, or may lose all or substantially
all of its value, causing the Senior Loan to be undercollateralized.
LIMITED SECONDARY MARKET. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
some or many of the Senior Loans in which the Fund invests will be illiquid. In
addition, Senior Loans in which the Fund invests generally require the consent
of the borrower prior to sale or assignment. These consent requirements may
delay or impede the Fund's ability to sell Senior Loans.
In addition, because the secondary market for Senior Loans may be limited, it
may be difficult to value Senior Loans. Market quotations may not be available
and valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in the valuation, because there is
less reliable, objective data available.
HYBRID LOANS. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans").
Strategic Income Fund may invest in Hybrid Loans that are secured debt of the
borrower, although they may not in all instances be considered senior debt of
the borrower. With Hybrid Loans, the Fund may not possess a senior claim to all
of the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although they may provide a relatively higher yield. Because the lenders in
Hybrid Loans waive or forego certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lenders' interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Fund's security interest in
some of the collateral may be subordinate to other creditors, the risk of
nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. Strategic Income Fund will invest only in
Hybrid Loans which meet credit standards established by Pilgrim Investments with
respect to Hybrid Loans and nonetheless provide certain protections to the
lender such as collateral maintenance or call protection.
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SUBORDINATED AND UNSECURED LOANS. The Strategic Income Fund may invest up to 5%
of its assets in subordinated and unsecured loans. The primary risk arising from
a holder's subordination is the potential loss in the event of default by the
issuer of the loans. Subordinated loans in an insolvency bear an increased
share, relative to senior secured lenders, of the ultimate risk that the
borrower's assets are insufficient to meet its obligations to its creditors.
Unsecured loans are not secured by any specific collateral of the borrower. They
do not enjoy the security associated with collateralization and may pose a
greater risk of nonpayment of interest or loss of principal than do secured
loans. Strategic Income Fund will acquire unsecured loans only where the
Investment Manager believes, at the time of acquisition, that the Fund would
have the right to payment upon default that is not subordinate to any other
creditor.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Credit rating
agencies frequently do not rate such instruments; however, the Investment
Manager or Portfolio Manager will determine what unrated and variable and
floating rate instruments are of comparable quality at the time of the purchase
to rated instruments eligible for purchase by the Fund. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for the Fund to dispose of the variable or floating rate
instrument involved in the event of the issuer of the instrument defaulting on
its payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
Each 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,
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mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Funds may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United
States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders and
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages not insured or guaranteed by
any government agency from a list of approved seller/services which include
state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. FHLMC is a
government-sponsored corporation created to increase availability of mortgage
credit for residential housing and owned entirely by private stockholders. FHLMC
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,
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semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment experience
of the collateral. CMOs provide for a modified form of call protection through a
de facto breakdown of the underlying pool of mortgages according to how quickly
the loans are repaid. Monthly payment of principal and interest received from
the pool of underlying mortgages, including prepayments, is first returned to
the class having the earliest maturity date or highest seniority. Classes that
have longer maturity dates and lower seniority will receive principal only after
the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (e.g., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans.
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds invest
include, but are not limited to, interests in pools of receivables, such as
credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number of
respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities.
"ROLL" TRANSACTIONS
Each 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
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techniques and are considered to be the economic equivalent of borrowings by the
Fund. To avoid leverage, the Fund will establish a segregated account with its
Custodian in which it will maintain liquid assets in an amount sufficient to
meet its payment obligations with respect to these transactions. A Fund will not
enter into roll transactions if, as a result, more than 15% of the Fund's net
assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers that are not publicly
traded in the United States. Each Fund may also invest in depository receipts.
The United States Government from time to time has imposed restrictions, through
taxation or otherwise, on foreign investments by U.S. entities such as the
Funds. If such restrictions should be reinstituted, it might become necessary
for such Funds to invest substantially all of their assets in United States
securities. In such event, the Board of Trustees of the Trust would consider
alternative arrangements, including reevaluation of the Funds' investment
objectives and policies, investment of all of the Funds' assets in another
investment company with different investment objectives and policies than the
Funds, or hiring an investment adviser to manage the Funds' assets. However, a
Fund would adopt any revised investment objective and fundamental policies only
after approval by the shareholders holding a majority (as defined in the
Investment Company Act) of the shares of the Fund.
DEPOSITORY RECEIPTS. Each of the Funds 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 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 may invest in sovereign debt securities
issued by governments of foreign countries. The sovereign debt in which the
Funds may invest may be rated below investment grade. These securities usually
offer higher yields than higher rated securities but are also subject to greater
risk than higher rated securities.
BRADY BONDS. Brady bonds represent a type of sovereign debt. These obligations
were created under a debt restructuring plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady, in which foreign entities issued these
obligations in exchange for their existing commercial bank loans. Brady Bonds
have been issued by Argentina, Brazil, Costa Rica, the Dominican Republic,
Mexico, the Philippines, Uruguay and Venezuela, and may be issued by other
emerging countries.
FOREIGN CURRENCY TRANSACTIONS. Each Fund investing in foreign securities may
enter in to foreign currency transactions either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts in order
to have the necessary currencies to settle transactions. Each such Fund may also
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enter into foreign currency transactions to protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to a Fund.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
Market Characteristics. Settlement practices for transactions in foreign markets
may differ from those in United States markets, and may include delays beyond
periods customary in the United States. Foreign security trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
Transactions in options on securities, futures contracts, futures options and
currency contracts may not be regulated as effectively on foreign exchanges as
similar transactions in the United States, and may not involve clearing
mechanisms and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and procedures
and margin requirements than in the United States. The value of a Fund's
positions may also be adversely impacted by delays in its ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States.
Legal and Regulatory Matters. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
Taxes. The interest payable on certain of the Funds' foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
Costs. The expense ratios of the Funds are likely to be higher than those of
investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign company, the
Investment Manager or Portfolio Manager considers such factors as the
characteristics of the particular company, differences between economic trends
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 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.
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OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each 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 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
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call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option will permit
a Fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. Also, effecting a closing
transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the closing
transaction is less than the premium received from writing the option or if the
proceeds from the closing transaction are more than the premium paid to purchase
the option. A Fund realizes a loss from a closing transaction if the cost of the
closing transaction is more than the premium received from writing the option or
if the proceeds from the closing transaction are less than the premium paid to
purchase the option. However, because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, appreciation of the underlying security owned by the Fund generally
offsets, in whole or in part, any loss to the Fund resulting from the repurchase
of a call option.
STOCK INDEX OPTIONS. Each Fund 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
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be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events. The extent to which
a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign option exchanges do not afford to participants many of the
protections available in United States option exchanges. For example, there may
be no daily price fluctuation limits in such exchanges or markets, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, a Fund as an option writer could lose amounts substantially in excess
of its initial investment, due to the margin and collateral requirements
typically associated with such option writing. See "Dealer Options" below.
LIMITS ON USE OF OPTIONS. A Fund may not purchase or sell options if more than
25% of its net assets would be hedged. The Funds may write covered call options
and secured put options to seek to generate income or lock in gains on up to 25%
of their net assets.
DEALER OPTIONS. Each Fund 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.
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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 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 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 may invest in futures contracts and in options on futures
contracts as a hedge against changes in market conditions or interest rates. As
a general rule, no Fund will purchase or sell futures if, immediately
thereafter, more than 25% of its net assets would be hedged.
The Funds trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). Each such Fund segregates liquid assets in a separate
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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 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 may invest in interest
rate or financial futures contracts. Bond prices are established in both the
cash market and the futures market. In the cash market, bonds are purchased and
sold with payment for the full purchase price of the bond being made in cash,
generally within five business days after the trade. In the futures market, a
contract is made to purchase or sell a bond in the future for a set price on a
certain date. Historically, the prices for bonds established in the futures
markets have generally tended to move in the aggregate in concert with cash
market prices, and the prices have maintained fairly predictable relationships.
The sale of an interest rate or financial futures sale by a Fund obligates the
Fund, as seller, to deliver the specific type of financial instrument called for
in the contract at a specific future time for a specified price. A futures
contract purchased by a Fund obligates the Fund, as purchaser, to take delivery
of the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
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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 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.
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
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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.
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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 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.
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.
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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 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.
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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 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 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.
NON-HEDGING STRATEGIC TRANSACTIONS
Each Fund's options, futures and swap transactions will generally be entered
into for hedging purposes -- to protect against possible changes in the market
values of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
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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 sssets in the shares of other
investment companies. The Funds may invest in money market mutual Funds in
connection with the management of their daily cash positions. The Funds may also
make indirect foreign investments through other investment companies that have
comparable investment objectives and policies as the Funds. In addition to the
advisory and operational fees a Fund bears directly in connection with its own
operation, the Fund would also bear its pro rata portions of each other
investment company's advisory and operational expenses.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Manager or Portfolio Manager, subject to the
seller's agreement to repurchase and the Fund's agreement to resell such
securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry
System or an equivalent foreign system. The seller under a repurchase agreement
will be required to maintain the value of the underlying securities at not less
than 102% of the repurchase price under the agreement. If the seller defaults on
its repurchase obligation, the Fund holding the repurchase agreement will suffer
a loss to the extent that the proceeds from a sale of the underlying securities
is less than the repurchase price under the agreement. Bankruptcy or insolvency
of such a defaulting seller may cause the Fund's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to be
loans under the Investment Company Act.
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.
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WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, a Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash.
The Funds do not intend to engage in these transactions for speculative purposes
but only in furtherance of their investment objectives. Because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described, the Fund's liquidity and the ability of the Investment
Manager or Portfolio Manager to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases the Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. A Fund does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
BORROWING
Each Fund may borrow up to 20% of its total assets for temporary, extraordinary
or emergency purposes. Each Fund may also borrow money through reverse
repurchase agreements, uncovered short sales, and other techniques. All
borrowings by a Fund cannot exceed one-third of a Fund's total assets. Short
sales "not against the box" and roll transactions are considered borrowings for
purposes of the percentage limitations applicable to borrowings.
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.
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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.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank must satisfy the Fund. Any
loan might be secured by any one or more of the three types of collateral. The
terms of the Fund's loans must permit the Fund to reacquire loaned securities on
five days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code.
SHORT SALES
Certain Funds may make short sales of securities they own or have the right to
acquire at no added cost through conversion or exchange of other securities they
own (referred to as short sales "against the box") and short sales of securities
which they do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security which it
does not own, in anticipation of a decline in the market value of the security.
To complete the sale, the Fund must borrow the security generally from the
broker through which the short sale is made) in order to make delivery to the
buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with the
broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by a Fund that are not made "against the box" create opportunities
to increase the Fund's return but, at the same time, involve specific risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share tends to increase more when the
securities it has sold short decrease in value, and to decrease more when the
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.
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If a Fund makes a short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. To secure its obligation to deliver securities sold short, a Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a technique to
hedge against market risks when the Investment Manager or Portfolio Manager
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund's
long position would be reduced by a gain in the short position. The extent to
which such gains or losses in the long position are reduced will depend upon the
amount of securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold short are placed in a segregated
account (not with the broker), or unless the Fund's obligation to deliver the
securities sold short is "covered" by placing in a segregated account (not with
the broker) cash, U.S. Government securities or other liquid debt or equity
securities in an amount equal to the difference between the market value of the
securities sold short at the time of the short sale and any such collateral
required to be deposited with a broker in connection with the sale (not
including the proceeds from the short sale), which difference is adjusted daily
for changes in the value of the securities sold short. The total value of the
cash, U.S. Government securities or other liquid debt or equity securities
deposited with the broker and otherwise segregated may not at any time be less
than the market value of the securities sold short at the time of the short
sale. Each Fund will comply with these requirements. In addition, as a matter of
policy, the Trust's Board of Trustees has determined that no Fund will make
short sales of securities or maintain a short position if to do so could create
liabilities or require collateral deposits and segregation of assets aggregating
more than 25% of the Fund's total assets, taken at market value.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
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.
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In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested in purchasing such securities.
The Emerging Countries Fund may invest in foreign securities that are restricted
against transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly from
the issuer or its underwriter, the Fund treats foreign securities whose
principal market is abroad as not subject to the investment limitation on
securities subject to legal or contractual restrictions on resale.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase or sell securities for delivery at a future date,
generally 15 to 45 days after the commitment is made. The other party's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous. A Fund may not purchase when issued securities or
enter into firm commitments if, as a result, more than 15% of the Fund's net
assets would be segregated to cover such securities.
INVESTMENT TECHNIQUES AND PROCESSES
The Portfolio Manager's investment techniques and processes, which it has used
in managing institutional portfolios for many years, are described generally in
the Funds' prospectus. 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
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surpassing analysts' expectations. It seeks to identify companies poised for
rapid growth. The Portfolio Manager focuses on recognizing successful companies,
regardless of their capitalization or whether they are domestic or foreign
companies.
The Portfolio Manager's techniques and processes include relationships with an
extensive network of brokerage research firms located throughout the world.
These analysts are often located in the same geographic regions as the companies
they follow, have followed those companies for a number of years, and have
developed excellent sources of information about them. The Portfolio Manager
does not employ in-house analysts other than the personnel actually engaged in
managing investments for the Funds and the Portfolio Manager's other clients.
However, information obtained from a brokerage research firm is confirmed with
other research sources or the Portfolio Manager's computer-assisted quantitative
analysis (including "real time" pricing data) of a substantial universe of
potential investments.
DIVERSIFICATION
Each Fund is "diversified" within the meaning of the Investment Company Act. In
order to qualify as diversified, a Fund must diversify its holdings so that at
all times at least 75% of the value of its total assets is represented by cash
and cash items (including receivables), securities issued or guaranteed as to
principal or interest by the United States or its agencies or instrumentalities,
securities of other investment companies, and other securities (for this purpose
other securities of any one issuer are limited to an amount not greater than 5%
of the value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of the issuer).
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Portfolio Manager
in approximately equal amounts, and the Investment Manager or Portfolio Manager
attempts to stay fully invested within the applicable percentage limitations set
forth in the Prospectus. In addition, for each issuer whose securities are added
to an investment portfolio, the Investment Manager or Portfolio Manager sells
the securities of one of the issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Fund (as defined in the Investment
Company Act).
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.
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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.
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.
8. May underwrite securities of other issuers, except insofar as it may be
deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% (10% in the case of the Money Market Fund) of the
value of its net assets in securities that at the time of purchase are
illiquid.
10. May purchase securities on margin, except for initial and variation margin
on options and futures contracts, and except that a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. May engage in short sales (other than the Mid Cap Growth, Small Cap Growth,
Worldwide Growth, International Core Growth, International Small Cap
Growth, Strategic Income and High Yield II Funds), except that a Fund may
use such short-term credits as are necessary for the clearance of
transactions.
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12. May invest in securities of other investment companies, except (a) that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities
laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Fund.
13. May issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Funds from engaging in short sales, options, futures and
foreign currency transactions.
14. May enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest in
stock index, currency and financial futures contracts and related options
in accordance with any rules of the Commodity Futures Trading Commission.
15. May purchase or write options on securities, except for hedging purposes
(except in the case of the Strategic Income Fund, which may do so for
non-hedging purposes) and then only if (i) aggregate premiums on call
options purchased by a Fund do not exceed 5% of its net assets, (ii)
aggregate premiums on put options purchased by a Fund do not exceed 5% of
its net assets, (iii) not more than 25% of a Fund's net assets would be
hedged, and (iv) not more than 25% of a Fund's net assets are used as cover
for options written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board of
Trustees of the Trust, no Fund:
1. May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships,
although a Fund may invest in the securities of companies which invest in
or sponsor such programs.
2. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market
daily.
PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement
authorizes the Investment Manager or Portfolio Manager to select the brokers or
dealers that will execute the purchase and sale of investment securities for
each Fund. In all purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreements and Portfolio
Management Agreements, each Investment Manager or Portfolio Manager determines,
subject to the instructions of and review by the Board of Trustees of the Fund,
which securities are to be purchased and sold by the Funds and which brokers are
to be eligible to execute portfolio transactions of the Fund. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of an Investment Manager
or Portfolio Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
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In placing portfolio transactions, each Investment Manager or Portfolio Manager
will use its best efforts to choose a broker capable of providing the brokerage
services necessary to obtain the most favorable price and execution available.
The full range and quality of brokerage services available will be considered in
making these determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors. The Investment Managers or
Portfolio Manager will seek to obtain the best commission rate available from
brokers that are believed to be capable of providing efficient execution and
handling of the orders. In those instances where it is reasonably determined
that more than one broker can offer the brokerage services needed to obtain the
most favorable price and execution available, consideration may be given to
those brokers that supply research and statistical information to a Fund, the
Investment Manager, and/or the Portfolio Manager, and provide other services in
addition to execution services. Each Investment Manager or Portfolio Manager
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Investment Manager or Portfolio Manager
to be useful in varying degrees, but of indeterminable value. Consistent with
this policy, portfolio transactions may be executed by brokers affiliated with
the Pilgrim Group or any of the Investment Managers or Portfolio Managers, so
long as the commission paid to the affiliated broker is reasonable and fair
compared to the commission that would be charged by an unaffiliated broker in a
comparable transaction. The placement of portfolio brokerage with broker-dealers
who have sold shares of a Fund is subject to rules adopted by the National
Association of Securities Dealers, Inc. ("NASD") Provided the Fund's officers
are satisfied that the Fund is receiving the most favorable price and execution
available, the Fund may also consider the sale of the Fund's shares as a factor
in the selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Funds' general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for a Fund, the Fund may also give weight to the
ability of a broker to furnish brokerage and research services to the Fund, the
Investment Manager or the Portfolio Manager, even if the specific services were
not imputed to the Fund and were useful to the Investment Manager and/or
Portfolio Manager in advising other clients. In negotiating commissions with a
broker, the Fund may therefore pay a higher commission than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission has been determined in good faith by the
Investment Manager or Portfolio Manager to be reasonable in relation to the
value of the brokerage and research services provided by such broker.
Purchases of securities for a Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers which specialize in the types of securities which the
Fund will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate for
other clients served by that Fund's Investment Manager or Portfolio Manager. If
the purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Investment
Manager or Portfolio Manager is considered at or about the same time,
transactions in such securities will be allocated among the Fund and the
Investment Manager's or Portfolio Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager or Portfolio Manager. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by a Investment Manager or Portfolio Manager, and the
results of such allocations, are subject to periodic review by the Board of
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Trustees. To the extent any of Funds seek to acquire the same security at the
same time, one or more of the Funds may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price for
such security. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a specific
Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with the Investment
Manager, except for any sales of portfolio securities that may legally be made
pursuant to a tender offer, in which event the Investment Manager will offset
against its management fee a part of any tender fees that may be legally
received and retained by an affiliated broker-dealer.
Brokerage commissions paid by each Fund (or by the master fund predecessor of
the Fund) for each of the last three fiscal years are as follows:
Year Ended March 31,
---------------------------------------
Fund 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund 464,615 $ 24,643
Worldwide Growth Fund 1,065,153 970,564
International Small Cap Growth Fund 745,259 692,326
Emerging Countries Fund 3,634,338 1,427,861
Large Cap Growth Fund 30,907 4,620
Mid Cap Growth Fund 1,809,755 1,139,938
Small Cap Growth Fund 1,002,867 987,245
Convertible Fund 130,017 114,243
Balanced Fund 43,966 35,105
Strategic Income Fund 1/ 100 0
1/ The Government Income Fund, the assets and liabilities of which were assigned
to and assumed by the Strategic Income Fund paid no brokerage fees in the fiscal
year ended March 31, 1998.
Of the total commissions paid during the fiscal year ended March 31, 1999,
$_________ (____%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
During the fiscal year ended March 31, 1999, the following Funds (or their
predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: [TO BE UPDATED:] Worldwide Growth Fund -- Merrill Lynch & Co.;
International Small Cap Growth Fund -- Merrill Lynch & Co.; Emerging Countries
Fund -- Merrill Lynch & Co.; Large Cap Growth Fund -- Merrill Lynch & Co., J. P.
Morgan & Co.; Mid Cap Growth Fund -- Merrill Lynch & Co., J. P. Morgan & Co.;
Small Cap Growth Fund -- Merrill Lynch & Co.; Convertible Fund -- Salomon Smith
Barney, Merrill Lynch & Co., J. P. Morgan & Co.; Balanced Fund -- Bear Stearns
Co., Morgan Stanley Dean Witter Discover & Co.; High Yield Fund II -- Merrill
Lynch & Co., J. P. Morgan & Co. The holdings of securities of such brokers and
dealers were as follows as of March 31, 1999: Worldwide Growth Fund -- Merrill
Lynch & Co. ($________); Large Cap Growth Fund -- Merrill Lynch & Co.
($________); Mid Cap Growth Fund -- Merrill Lynch & Co. ($________); Convertible
Fund -- Salomon Smith Barney ($________); Balanced Fund -- Bear Stearns Co.
($________), Morgan Stanley Dean Witter Discover & Co. ($________); Strategic
Income Fund -- J. P. Morgan & Co. ($________); High Yield Fund II-- Merrill
Lynch & Co. ($________).
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
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. Authorized dealers
will be paid commissions on shares sold in Classes A, B and C, at net asset
value, which at the time of investment would have been subject to the imposition
of a contingent deferred sales charge if liquidated. The Distributor may, from
time to time, at its discretion, allow the selling dealer to retain 100% of such
sales charge, and such dealer may therefore be deemed an "underwriter" under the
Securities Act of 1933, as amended. The Distributor, at its expense, may also
provide additional promotional incentives to dealers in connection with sales of
shares of the Funds and other funds managed by the Investment Manager. In some
instances, such incentives may be made available only to dealers whose
representatives have sold or are expected to sell significant amounts of such
shares. The incentives may include payment for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives and members of their families to locations within or outside of
the United States, merchandise or other items. Dealers may not use sales of the
Fund's shares to qualify for the incentives to the extent such may be prohibited
by the laws of any state.
Certain investors may purchase shares of the Funds with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Portfolio Manager intends to retain the security in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
Trust reserves the right to amend or terminate this practice at any time.
SPECIAL PURCHASES AT NET ASSET VALUE. Class A shares of the Funds may be
purchased at net asset value, without a sales charge, by persons who have
redeemed their Class A shares of a Fund (or shares of other funds managed by the
Investment Manager in accordance with the terms of such privileges established
for such funds) within the previous 90 days. The amount that may be so
reinvested in the Fund is limited to an amount up to, but not exceeding, the
redemption proceeds (or to the nearest full share if fractional shares are not
purchased). In order to exercise this privilege, a written order for the
purchase of shares must be received by the Transfer Agent, or be postmarked,
within 90 days after the date of redemption. This privilege may only be used
once per calendar year. Payment must accompany the request and the purchase will
be made at the then current net asset value of the Fund. Such purchases may also
be handled by a securities dealer who may charge a shareholder for this service.
If the shareholder has realized a gain on the redemption, the transaction is
taxable and any reinvestment will not alter any applicable Federal capital gains
tax. If there has been a loss on the redemption and a subsequent reinvestment
pursuant to this privilege, some or all of the loss may not be allowed as a tax
deduction depending upon the amount reinvested, although such disallowance is
added to the tax basis of the shares acquired upon the reinvestment.
Any person who can document that Fund shares were purchased with proceeds from
the redemption (within the previous 90 days) of shares from any unaffiliated
mutual fund on which a sales charge was paid or which were subject at any time
to a CDSC, and the Distributor has determined in its discretion that the
unaffiliated fund invests primarily in the same types of securities as the
Pilgrim Fund purchased.
Class A Shares of the Funds may also be purchased at net asset value by any
charitable organization or any state, county, or city, or any instrumentality,
department, authority or agency thereof that has determined that a Fund is a
legally permissible investment and that is prohibited by applicable investment
law from paying a sales charge or commission in connection with the purchase of
shares of any registered management investment company ("an eligible
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<PAGE>
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.
Shareholders of Pilgrim General Money Market Shares who acquired their shares by
using all or a portion of the proceeds from the redemption of Class A shares of
other open-end Pilgrim Funds distributed by the Distributor may reinvest such
amount plus any shares acquired through dividend reinvestment in Class A shares
of a Fund at its current net asset value, without a sales charge.
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 adviser's to make investments on behalf of their
clients at net asset value without any commission or concession.
Class A shares may also be purchased at net asset value by certain fee based
registered investment advisers, trust companies and bank trust departments under
certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another open-end fund managed by the Investment Manager or from
Pilgrim Prime Rate Trust.
Class A or Class M shares may also be purchased without a sales charge by (i)
shareholders who have authorized the automatic transfer of dividends from the
same class of another Pilgrim Fund distributed by the Distributor or from
Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies
and bank trust departments investing in Class A shares on their own behalf or on
behalf of their clients, provided that the aggregate amount invested in any one
or more Funds, during the 13 month period starting with the first investment,
equals at least $1 million; (iii) broker-dealers, who have signed selling group
agreements with the Distributor, and registered representatives and employees of
such broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles, aunts,
siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv)
broker-dealers using third party administrators for qualified retirement plans
who have entered into an agreement with the Pilgrim Funds or an affiliate,
subject to certain operational and minimum size requirements specified from
time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or
broker-dealer charges an account management fee (`wrap accounts'); and (vi) any
registered investment company for which Pilgrim Investments, Inc. serves as
adviser.
The Funds may terminate or amend the terms of these sales charge waivers at any
time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION. An investor may immediately
qualify for a reduced sales charge on a purchase of Class A or Class M shares of
any of the Funds which offers Class A shares or shares with front-end sales
charges, by completing the Letter of Intent section of the Shareholder
Application in the Prospectus (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for
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<PAGE>
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 (excluding Pilgrim General Money Market Shares) acquired within 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
of sales charge until the Letter of Intent is fulfilled. Any redemptions made by
the shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less redemption)
during the period.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application in the Prospectus. A
minimum initial investment equal to 25% of the intended total investment is
required. An amount equal to the maximum sales charge or 5.75% of the total
intended purchase will be held in escrow at Pilgrim 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 at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the redemption of an appropriate number of shares
in escrow to realize such difference will be made. If the proceeds from a total
redemption are inadequate, the investor will be liable to the Distributor for
the difference. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the Investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the Distributor as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the purpose of paying any additional sales charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the proceeds as directed by the Distributor. The investor or the
securities dealer must inform the Transfer Agent or the Distributor that this
Letter is in effect each time a purchase is made.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
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Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other open-end funds
distributed by the Distributor (excluding Pilgrim General Money Market Shares)
can be combined with a current purchase to determine the reduced sales charge
and applicable offering price of the current purchase. The reduced sales charge
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 Pilgrim General
Money Market Shares) purchased and owned of record or beneficially by a
corporation, including employees of a single employer (or affiliates thereof)
including shares held by its employees, under one or more retirement plans, can
be combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase, provided such transactions
are not prohibited by one or more provisions of the Employee Retirement Income
Security Act or the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules applicable to
retirement plans before investing.
REDEMPTIONS. Payment to shareholders for shares redeemed will be made within
seven days after receipt by the Fund's Transfer Agent of the written request in
proper form, except that a Fund may suspend the right of redemption or postpone
the date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, each Trust has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event a Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Trust
reserves the right, upon 30 days written notice, to redeem, at net asset value
(less any applicable deferred sales charge), the shares of any shareholder whose
account has a value of less than $1,000 in the Fund, other than as a result of a
decline in the net asset value per share. Before the Fund redeems such shares
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<PAGE>
and sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares in the account is less than the minimum amount and will
allow the shareholder 30 days to make an additional investment in an amount that
will increase the value of the account to at least $1,000 before the redemption
is processed. This policy will not be implemented where a Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may be
subject to a CDSC. For purchase payments subject to such CDSC, the Distributor
may pay out of its own assets a commission from 0.25% to 1.00% of the amount
invested for Class A purchases over $1 million, 4% of the amount invested for
Class B shares and ___% of the amount invested for Class C shares.
Shareholders will be charged a CDSC if certain of those shares are redeemed
within the applicable time period as stated in the prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares or (iii) were exchanged for
shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services. The shareholder must notify the Fund either directly or through
the Distributor at the time of redemption that the shareholder is entitled to a
waiver of CDSC or redemption fee. The waiver will then be granted subject to
confirmation of the shareholder's entitlement.
The CDSC or redemption fee, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered investment advisors,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. The
amount of any CDSC also will be reinstated. To exercise this privilege, the
written order for the purchase of shares must be received by the Transfer Agent
or be postmarked within 90 days after the date of redemption. This privilege can
be used only once per calendar year. If a loss is incurred on the redemption and
the reinstatement privilege is used, some or all of the loss may not be allowed
as a tax deduction.
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CONVERSION OF CLASS B SHARES. A shareholder's Class B shares will automatically
convert to Class A shares in the Fund on the first business day of the month in
which the eighth anniversary of the issuance of the Class B shares occurs,
together with a pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares. However, Class B
shares of the Funds that were acquired before May __, 1999, and which have not
been exchanged into any other Fund since that date, will convert seven years
after purchase. The conversion of Class B shares into Class A shares is subject
to the continuing availability of an opinion of counsel or an Internal Revenue
Service ("IRS") ruling, if the Investment Manager deems it advisable to obtain
such advice, to the effect that (1) such conversion will not constitute taxable
events for federal tax purposes; and (2) the payment of different dividends on
Class A and Class B shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986. The Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. The conversion will be effected at the
relative net asset values per share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each class
of each Fund's shares will be determined once daily as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during
each day on which that Exchange is open for trading. As of the date of this
Statement of Additional Information, the New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. Portfolio securities underlying traded call options will be
valued at their market price as determined above; however, the current market
value of the option written will be subtracted from net asset value. In cases in
which securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Board of Trustees as
the primary market. Short-term obligations maturing in less than 60 days will
generally be valued at amortized cost. The mortgage securities held in a Fund's
portfolio will be valued at the mean between the most recent bid and asked
prices as obtained from one or more dealers that make markets in the securities
when over-the counter market quotations are readily available. Securities for
which quotations are not readily available and all other assets will be valued
at their respective fair values as determined in good faith by or under the
direction of the Board of Trustees of the Trust. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of a
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of a Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to a Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
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between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Trustees.
In computing a class of a Fund's net asset value, all class-specific liabilities
incurred or accrued are deducted from the class' net assets. The resulting net
assets are divided by the number of shares of the class outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting daily
expense accruals of the higher distribution fees applicable to Class B and Class
C shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.
Orders received by dealers prior to the close of regular trading on the New York
Stock Exchange will be confirmed at the offering price computed as of the close
of regular trading on the Exchange provided the order is received by the
Distributor prior to its close of business that same day (normally 4:00 P.M.
Pacific time). It is the responsibility of the dealer to insure that all orders
are transmitted timely to the Fund. Orders received by dealers after the close
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. The Transfer Agent will maintain an account for each
shareholder upon which the registration and transfer of shares are recorded, and
any transfers shall be reflected by bookkeeping entry, without physical
delivery.
The Transfer Agent will require that a shareholder provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
The Trust reserves the right, if conditions exist that make cash payments
undesirable, to honor any request for redemption or repurchase order with
respect to shares of a Fund by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (redemption-in-kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting theses
securities to cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act as a result of which a Fund is obligated to redeem shares
with respect to any one shareholder during any 90-day period solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds 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.
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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.
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.
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1. Telephone redemption and/or exchange instructions received in good
order before the pricing of a Fund on any day on which the New York
Stock Exchange is open for business (a "Business Day"), but not later
than 4:00 p.m. eastern time, will be processed at that day's closing
net asset value. For each exchange, the shareholder's account may be
charged an exchange fee. There is no fee for telephone redemption;
however, redemptions of Class A and Class B shares may be subject to a
contingent deferred sales charge (See "Redemption of Shares" in the
Prospectus).
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
3. Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
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 (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
5. If the exchange involves the establishment of a new account, the
dollar amount being exchanged must at least equal the minimum
investment requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have
the same account information and options except as stated in the
Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141
and deposited into your account before any transaction may be
processed.
8. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares
of the Pilgrim Fund to be purchased 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.
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9. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Funds' then-current
prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by
the bank upon which it was drawn.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting both
income dividends and capital gains distributions, if any, in additional shares
of a respective class of a Fund at the then current net asset value, with no
sales charge. The Funds' management believes that most investors desire to take
advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
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.
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The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund intends to make
distributions in accordance with the calendar year distribution requirement.
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
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
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taxable income received from the High Yield Fund by its corporate shareholders,
to the extent attributable to such portion of accrued original issue discount,
may be eligible for this deduction for dividends received by corporations.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to
fluctuations in foreign currency exchange rates which occur between the time a
Fund accrues income or other receivable or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
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 an Advisory Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, that Advisory 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 an Advisory Fund, and
will be entitled either to deduct (as an itemized deduction) his pro rata share
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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 Advisory Fund's taxable year whether the
foreign taxes paid by the Advisory Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of an
Advisory Fund's income flows through to its shareholders. With respect to an
Advisory 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 the Funds 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
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entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
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 each Fund's tax status as a regulated investment
company may limit the extent to which a 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
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the reinvesting of dividends and capital gain distributions in a Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
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
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the tax consequences applicable to shareholders. Shareholders are advised to
consult their own tax advisers for details with respect to the particular tax
consequences to them of an investment in a Fund.
CALCULATION OF PERFORMANCE DATA
Each Fund 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:
P(1 + T)n = 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
2[(--- +1)6 -1]
cd
where
a = dividends and interest earned during the period,
b = expenses accrued
for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
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<PAGE>
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 its yield based on a 30-day
or 90-day period ended on a date other than the most recent balance sheet
included in the Fund's Registration Statement, computed in accordance with the
yield formula described above, as adjusted to conform with the differing period
for which the yield computation is based. Any quotation of performance stated in
terms of yield (whether based on a 30-day or 90-day period) will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
A Fund may also publish a distribution rate in sales literature and in investor
communications preceded or accompanied by a copy of the current Prospectus. The
current distribution rate for a Fund is the annualization of the Fund's
distribution per share divided by the maximum offering price per share of a Fund
at the respective month-end. The current distribution rate may differ from
current yield because the distribution rate may contain items of capital gain
and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures
will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load.
For purposes of calculating the historical performance of a Fund, the Trust will
take into account the historical performance of the series of the Trust
corresponding to the Fund prior to the Reorganization of the Trust as well as
the historical performance of that series' corresponding master fund for
periods, if any, prior to the date of inception of the series.
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return will always
show a calculation that includes the effect of the maximum sales charge but may
also show total return without giving effect to that charge. Because these
additional quotations will not reflect the maximum sales charge payable, these
performance quotations will be higher than the performance quotations that
reflect the maximum sales charge.
Total returns 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
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<PAGE>
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results.
Yields for the following Classes of the following Funds for the
thirty-day period ended March 31, 1999 were as follows:
FUND AND CLASS
--------------
Convertible Fund
Class A __%
Class B __%
Class C __%
Class Q __%
Strategic Income Fund
Class A __%
Class B __%
Class C __%
Class Q __%
Balanced Growth
Class A __%
Class B __%
Class C __%
Class Q __%
High Yield Fund II
Class A __%
Class B __%
Class C __%
Class Q __%
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
------ ------ ------- --------------- --------------
International Core Growth
<S> <C> <C> <C> <C> <C>
Class A ___% N/A N/A ___% 2/28/97
Class B ___% N/A N/A ___% 2/28/97
Class C ___% N/A N/A ___% 2/28/97
Class Q ___% N/A N/A ___% 2/28/97
Worldwide Growth
Class A ___% ___% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% ___% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
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<PAGE>
1 Year 5 Year 10 Year Since Inception Inception Date
------ ------ ------- --------------- --------------
International Small Cap Growth
Class A ___% ___% N/A ___% 12/27/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% ___% N/A ___% 12/27/93
Class Q ___% ___% N/A ___% 8/31/95
Emerging Countries
Class A ___% __% N/A ___% 11/28/94
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 11/28/94
Class Q ___% __% N/A ___% 8/31/95
Large Cap Growth
Class A ___% N/A N/A ___% 7/21/97
Class B ___% N/A N/A ___% 7/21/97
Class C ___% N/A N/A ___% 7/21/97
Class Q ___% N/A N/A ___% 8/31/95
Mid Cap Growth
Class A ___% __% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
Small Cap Growth
Class A ___% __% N/A ___% 12/27/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 12/27/93
Class Q ___% ___% N/A ___% 8/31/95
Convertible
Class A ___% __% N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% __% N/A ___% 4/19/93
Class Q ___% __% N/A ___% 8/31/95
Balanced
Class A ___% N/A N/A ___% 4/19/93
Class B ___% N/A N/A ___% 5/31/95
Class C ___% N/A N/A ___% 4/19/93
Class Q ___% N/A N/A ___% 8/31/95
High Yield II
Class A ___% N/A N/A ___% 3/27/98
Class B ___% N/A N/A ___% 3/27/98
Class C ___% N/A N/A ___% 3/27/98
Class Q ___% N/A N/A ___% 3/27/98
Strategic Income
Class A N/A N/A N/A ___% 8/31/95
Class B N/A N/A N/A ___% 8/31/95
Class C N/A N/A N/A ___% 8/31/95
Class Q N/A N/A N/A ___% 8/31/95
</TABLE>
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
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<PAGE>
including but not limited to age characteristics, of various countries and
regions in which a Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of a Fund's portfolio; (v) the major industries located in various
jurisdictions; (vi) the number of shareholders in the Funds or other Pilgrim
Funds and the dollar amount of the assets under management; (vii) descriptions
of investing methods such as dollar-cost averaging, best day/worst day
scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Funds and individual stocks in a Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of a
Fund or other industry specialists, (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Portfolio Manager, Pilgrim Capital,
Pilgrim Group, Inc. or affiliates of the Trust, the Investment Manager, the
Portfolio Manager, Pilgrim Capital or Pilgrim Group, Inc. including (i)
performance rankings of other funds managed by the Investment Manager or a
Portfolio Manager, or the individuals employed by the Investment Manager or a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Fund, including rankings of mutual funds published by Lipper Analytical
Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating
services, companies, publications or other persons who rank mutual funds or
other investment products on overall performance or other criteria; (ii) lists
of clients, the number of clients, or assets under management; (iii) information
regarding the acquisition of Pilgrim Mutual Funds or other Pilgrim Funds by
Pilgrim Capital; (iv) the past performance of Pilgrim Capital and Pilgrim Group,
Inc.; (v) the past performance of other funds managed by the Investment Manager
or the Portfolio Manager; and (vi) information regarding rights offerings
conducted by closed-end funds managed by the Investment Manager.
PRIOR PERFORMANCE OF LARGE CAP FUND AND ITS PREDECESSORS
The following table sets forth historical performance information for the Class
I shares of the Large Cap Growth Fund. It includes historical performance
information for the Institutional Portfolios which preceded the Fund prior to
the reorganization of the Trust in July 1998 and the Portfolio Manager's
composite performance data relating to the historical performance of
institutional private accounts managed by the Portfolio Manager, since the dates
indicated, that have investment objectives, policies, strategies and risks
substantially similar to those of such Funds. The composite data is provided to
illustrate the past performance of the Portfolio Manager in managing
substantially similar accounts as measured against specified market indices and
does not represent the performance of the Fund. Investors should not consider
this performance data as an indication of future performance of the Fund or of
the Portfolio Manager.
The Portfolio Manager has advised the Trust that the net performance results for
the Fund are calculated as set forth above under "Performance Data" All
information set forth in the tables below relies on data supplied by the
Portfolio Manager or from statistical services, reports or other sources
believed by the Portfolio Manager to be reliable. However, except as otherwise
indicated, such information has not been verified and is unaudited.
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<PAGE>
The Portfolio Manager's composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"(1)), retroactively applied to all time periods.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
loses. All returns reflect the deduction of investment advisory fees, brokerage
commissions and execution costs paid by the Portfolio Manager's institutional
private accounts, without provision for federal or state income taxes. Custodial
fees, if any, were not included in the calculation. The Portfolio Manager's
composites include all actual, fee-paying, discretionary institutional private
accounts managed by the Portfolio Manager that have investment objectives,
policies, strategies and risks substantially similar to those of the Large Cap
Growth Fund. Securities transactions are accounted for on the trade date and
accrual accounting is utilized. Cash and equivalents are included in performance
returns. The monthly returns of the Portfolio Manager's composites combine the
individual accounts' returns (calculated on a time-weighted rate of return that
is revalued whenever cash flows exceed $500) by asset-weighing each individual
account's asset value as of the beginning of the month. Quarterly and yearly
returns are calculated by geometrically linking the monthly and quarterly
returns, respectively. The yearly returns are computed by geometrically linking
the returns of each quarter within the calendar year.
The institutional private accounts that are included in the Portfolio Manager's
composites are not subject to the same types of expenses to which the Class A,
B, C and Q shares of the Large Cap Growth Fund are subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Funds by the Investment Company Act or Subchapter M
of the Internal Revenue Code. Consequently, the performance results for the
Portfolio Manager's composites could have been adversely affected if the
institutional private accounts included in the composites had been regulated as
investment companies under the federal securities laws.
The results presented below may not necessarily equate with the return
experienced by any particular investor as a result of the timing of investments
and redemptions. In addition, the effect of taxes on any investor will depend on
such person's tax status, and the results have not been reduced to reflect any
income tax which may have been payable.
The investment results presented below are not intended to predict or suggest
the returns that might be experienced by the Large Cap Growth Fund or an
individual investor investing in such Fund. Investors should also be aware that
the uses of a methodology different form that used below to calculated
performance could result in different performance data.
- --------
1 AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
B-69
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO
MANAGER'S
LARGE CAP RUSSELL 1000
GROWTH GROWTH
YEAR COMPOSITE(1) INDEX(1,2) S&P 500(1,3) A B C Q
- ---- ----------- --------- ----------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 35.38% 25.26% 25.37%
1996 (4) 26.63 23.12 22.96 (6.28%)(5) (6.11%)(5) (2.16%)(5) (1.18%)(5)
1997 33.06 30.48 33.31 37.66 39.16 44.52 ____
1998 ____ ____ ____ ____ ____ ____ ____
1999 ____ ____ ____ ____ ____ ____ ____
Last Year (6) ____ ____ ____ ____ ____ ____ ____
Since Inception (6) ____ ____ ____ ____ ____ ____ ____
</TABLE>
- ----------
1 Annualized.
2 The Russell 1000 Growth Index contains those companies among the Russell
1000 Securities with higher than average price-to-book ratios and
forecasted growth. The Russell 1000 Index contains the top 1,000 securities
of the Russell 3000 Index, which comprises the 3,000 largest U.S.
securities as determined by total market capitalization. The Russell 1000
Growth Index is considered generally representative of the U.S. market for
large cap stocks. The Index reflects the reinvestment of income dividends
and capital gains distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
3 The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarding as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
4 Commencement of investment operations was April 1, 1995.
5 Inception dates are as follows: Large Cap Growth Composite - April 1, 1995;
Large Cap Growth Portfolios A, B, C and Q (predecessor to the Class A, B, C
and Q shares of the Large Cap Growth Fund) -- December 27, 1996.
6 Through March 31, 1999.
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
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additional series (or classes of series) of shares without shareholder approval.
Any series or class of shares may be terminated by a vote of the shareholders of
such series or class entitled to vote or by the Trustees of the Trust by written
notice to shareholders of such series or class. Shareholders may remove Trustees
from office by votes cast at a meeting of shareholders or by written consent.
CUSTODIAN. The cash and securities owned by each Fund are held by Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Trust are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS. [_______________] serves as the independent auditor for
the Trust, and in that capacity examines the annual financial statements of the
Trust.
OTHER INFORMATION. The Trust is registered with the SEC as an open-end
management investment company. Such registration does not involve supervision of
the management or policies of the Trust by any governmental agency. The
Prospectus and this Statement of Additional Information omit certain of the
information contained in each Trust's Registration Statement filed with the SEC
and copies of this information may be obtained from the SEC upon payment of the
prescribed fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statement audited by independent
certified public accountants.
DECLARATION OF TRUST. The Declaration of Trust of the Trust provides that
obligations of the Trust are not binding upon its Trustees, officers, employees
and agents individually and that the Trustees, officers, employees and agents
will not be liable to the trust or its investors for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee, officer,
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.
<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
(27) Form of Amendment No. 22 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)
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<PAGE>
(c) Not Applicable
(d) (1) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital management, with respect to Global Blue
Chip Fund, Emerging Markets Bond Funds, Pacific Rim Fund, Greater
China Fund/Latin American Fund (g)
(2) Form of Subadvisory Agreement Between Registrant and
Nicholas-Applegate Capital Management Hong Kong, with Respect to the
Pacific Rim Fund and Greater China Fund (g)
(3) Form of Subadvisory Agreement Between Registrant and
Nicholas-Applegate Capital Management-Asia, with Respect to the
Pacific Rim Fund and Greater Chine Fund (g)
(4) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding additional funds to the Investment Advisory
Agreement (i)
(5) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding Global Technology Fund to the Investment
Advisory Agreement (j)
(6) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management, adding Large Cap Value Fund to the Investment
Advisory Agreement (k)
(7) Form of Investment Management Agreement between the Trust and Pilgrim
Investments, Inc.
(8) Form of Portfolio Management Agreement between Pilgrim Investments,
Inc. and Nicholas-Applegate Capital Management.
(e) (1) Form of Distribution Agreement between Registrant and
Nicholas-Applegate Securities dated as of April 19, 1993 (b)
(2) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Global Blue Chip Fund, Emerging Market Bond Fund,
Pacific Rim Fund, Greater China Fund and Latin American Fund to
Distribution Agreement (g)
(3) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Classes of Shares to the Distribution Agreement (j)
(4) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Global Technology Fund to the Distribution
Agreement (j)
(5) Form of Letter Agreement between Registrant and Nicholas-Applegate
Securities, adding Large Cap Value Fund to the Distribution Agreement
(k)
(6) Form of Underwriting Agreement between the Trust and Pilgrim
Securities, Inc.
(f) None.
(g) (1) Form of Custodian Service Agreement between Registrant and PNC bank
Dated as of April 1, 1993 (b)
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<PAGE>
(2) Form of Letter Agreement between Registrant and PNC Bank with Respect
to Custodian Services Fees related to the Global Blue Chip Fund and
the Emerging Markets Bond Fund (e)
(3) Form of Letter Agreement between Registrant and PNC Bank, adding
Pacific Rim Fund, Greater China Fund and Latin America Fund to
Custodian Services Agreement (g)
(4) Form of Letter Agreement between Registrant and PNC Bank, adding
Classes of Shares and Global Technology Fund to Custodian Services
Agreement (j)
(5) Form of Letter Agreement between Registrant and PNC Bank, adding
shares of Large Cap Value Fund to Custodian Services Agreement (k)
(6) Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co. dated as of June 1, 1998. (k)
(7) Form of Amendment to Custodian Agreement between Registrant and Brown
Brothers Harriman & Co. (k)
(8) Form of Foreign Custody Manager Delegation Agreement between
Registrant and Brown Brothers Harriman & Co. dated as of June 1, 1998
(k)
(h) (1) Form of Amended Administration Agreement between Registrant and
Investment Company Administration Corporation (b)
(2) Form of Administrative Services Agreement between Registrant and
Nicholas- Applegate Capital Management dated as of November 18, 1996
(b)
(3) Form of Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1, 1993 (b)
(4) Form of Letter Agreement between Registrant and State Street Bank and
Trust Company, adding Global blue Chip Fund and Emerging Markets Bond
Fund to Transfer Agency and Service Agreement (e)
(5) Form of Letter Agreement between Registrant and Stated Street Bank and
Trust Company, adding Pacific Rim Fund, Greater China Fund and Latin
America Fund to Transfer Agency and Service Agreement (g)
(6) Form of Letter Agreement between Registrant and Stated Street
Bank/Trust Company, adding Classes of Shares and Global Technology
Fund to Transfer Agency and Service Agreement (j)
(7) Form of Letter Agreement between Registrant and Stated Street
Bank/Trust Company, adding Large Cap Value Fund to Transfer Agency and
Service Agreement (k)
(8) Form of Amended Shareholder Service Plan between Registrant and
Nicholas- Applegate Securities (l)
(9) Form of License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (b)
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<PAGE>
(10) Form of Accounting Services Agreement between Registrant and PFPC Inc.
dated as of April 1, 1993 (b)
(11) Form of Letter Agreement between Registrant and PFPC Inc., adding
Global Blue Chip Fund and Emerging Markets Bond Fund to Accounting
Services Agreement (e)
(12) Form of Letter Agreement between Registrant and PFPC Inc. with respect
to Accounting services Fees related to the Global blue Chip Fund and
the Emerging Markets Bond Fund (f)
(13) Form of Letter Agreement between Registrant and PFPC Inc. adding the
Pacific Rim Fund, Greater China Fund and Latin America Fund (g)
(14) Form of Letter Agreement between Registrant and PFPC Inc. regarding
fees for additional funds under Accounting Services Agreement (l)
(15) Form of Letter Agreement between Registrant and PFPC Inc. adding
Classes of Shares and Global Technology Fund to Accounting Services
Agreement (j)
(16) Form of Letter Agreement between Registrant and PFPC Inc. adding Large
Cap Value Fund to Accounting Services Agreement (k)
(17) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management regarding expenses reimbursements (j)
(18) Form of Letter Agreement between Registrant and Nicholas-Applegate
Capital Management adding Large Cap Value Fund to Agreement regarding
expense reimbursements (k)
(19) Form of Credit Agreement among Registrant, Chemical Bank and Certain
other Banks dated April 10,1996 (b)
(20) Form of First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, the Chase Manhattan Bank and Certain
Other Banks (e)
(21) Form of Second Amendment Agreement to Credit Agreement among
Registrant, the Chase Manhattan Bank and certain other Banks (g)
(22) Form of Third Amendment Agreement to Credit Agreement among
Registrant, the Chase Manhattan Bank and certain other Banks (k)
(23) Form of Expense Limitation Agreement
(i) Opinion of Counsel (k)
(j) None.
(k) None.
(l) Form of Investment Letter of Initial Investors in Registrant dated April 1,
1993 (b)
(m) (1) Form of Distribution Plan of Registrant (l)
(2) Form of Amended and Restated Service and Distribution Plan for Class A
(3) Form of Amended and Restated Service and Distribution Plan for Class B
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<PAGE>
(4) Form of Amended and Restated Service and Distribution Plan for Class C
(5) Form of Amended and Restated Service Plan for Class Q
(n) Financial Data Schedule*
(o) (1) Form of Multi-Class Plan (k)
(2) Form of Amended and Restated Multi-Class Plan
- ----------
* To be filed by amendment.
(a) Filed as an exhibit to Post-Effective Amendment No. 29 to Registrant's Form
N-1A Registration Statement on May 3, 1996 and incorporated herein by
reference
(b) Filed as an exhibit to Post-Effective Amendment No. 30 to the Registrant's
Form N-1A Registration Statement on June 4, 1996 and incorporated herein by
reference
(c) Filed as an exhibit to Post-Effective Amendment No. 38 to Registrants Form
N-1A Registration Statement of January 3, 1997 and incorporated herein by
reference
(d) Filed as an exhibit to Post-Effective Amendment No. 40 to Registrants form
N-1A Registration Statement on May 2, 1997 and incorporated herein by
reference
(e) Filed as an exhibit to Post-Effective Amendment No. 43 to Registrant's Form
N-1A Registration Statement on July 14, 1997 and incorporated herein by
reference
(f) Filed as an exhibit to Post-Effective Amendment No. 45 to Registrant's Form
N-1A Registration Statement on July 28, 1997 and incorporated herein by
reference
(g) Filed as an exhibit to Post-Effective Amendment No. 47 to Registrant's Form
N-1A Registration Statement on September 2, 1997 and incorporated herein by
reference
(h) Filed as an exhibit to Post-Effective Amendment No. 48 to Registrant's Form
N-1A Registration Statement on December 15, 1997 and incorporated herein by
reference
(i) Filed as an exhibit to Post-Effective Amendment No. 60 to Registrant's Form
N-1A Registration Statement on June 15, 1998 and incorporated herein by
reference
(j) Filed as an exhibit to Post-Effective Amendment No. 63 to Registrant's Form
N-1A Registration Statement on July 21, 1998 and incorporated herein by
reference
(k) Filed as an exhibit to Post-Effective Amendment No. 66 to Registrant's Form
N-1A Registration Statement on August 14, 1998 and incorporated herein by
reference
(l) Filed as an exhibit to Registrant's Form N-14 Registration Statement on
December 15, 1997 and incorporated herein by reference
C-5
<PAGE>
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 thepayment by the
registrant of expenses incurred or paid by a trustee, officer orcontrolling
person of the registrant in the successful defense of any action,suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS
Nicholas-Applegate Capital Management is a California limited
partnership, the general partner of which is Nicholas-Applegate Capital
Management, Inc. (The "General Partner"). During the two fiscal years ended
December 31, 1997, Nicholas-Applegate Capital Management has engaged principally
in the business of providing investment services to institutional and other
C-6
<PAGE>
clients. All of the additional information required by this Item 26 with respect
to Nicholas-Applegate Capital Management is set forth in the Form ADV, as
amended, of Nicholas-Applegate Capital Management (File No. 801-21442), which is
incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Nicholas-Applegate Securities does not act as a principal underwriter,
depositor or investment adviser to any investment company other than Registrant.
(b) Nicholas-Applegate Securities, the distributor of the shares of
Registrant's series, is a California limited partnership and its general partner
is Nicholas-Applegate Capital Management Holdings, L.P. (the "General Partner").
Information is furnished below with respect to the officers, partners and
directors of the general partner and Nicholas-Applegate Securities. The
principal business address of such persons is 600 West Broadway, 30th Floor, San
Diego, California 92101, except as otherwise indicated below.
Positions And Positions And
Name And Principal Offices With Principal Offices With
Business Address Underwriter Registrant
---------------- ----------- ----------
Arthur E. Nicholas President President
Peter J. Johnson Vice President Vice President
E. Blake Moore, Jr. Chief Financial Officer Chief Financial Officer
and Secretary and Secretary
Todd Spillane Director Of Compliance None
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(A) of the Investment Company Act of 1940 and the Rules
promulgated thereunder will be maintained either at the offices of the
Registrant (600 West Broadway, 30th Floor, San Diego, California 92101);
the Investment Adviser to the Trust and Master Trust, Nicholas-Applegate
Capital Management (600 West Broadway, 30th Floor, San Diego, California
92101); the primary Administrator for the Trust and Master Trust,
Investment Company Administration Corporation (4455 East Camelback Road,
Suite 261-E, Phoenix, Arizona 85018); the Custodian, PNC Bank (Airport
Business Center, International Court 2, 200 Stevens Drive, Lester,
Pennsylvania 19113); or the Transfer and Dividend Disbursing Agent, State
Street Bank & Trust Company (2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171).
ITEM 29. MANAGEMENT SERVICES
None.
C-7
<PAGE>
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego and State of
California on the 24th day of March, 1999.
PILGRIM MUTUAL FUNDS
By:
------------------------------------
Arthur E. Nicholas*
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
- ---------------------------- Principal Executive Officer March 24, 1999
Arthur E. Nicholas *
/s/ Charles William Maher
- ---------------------------- Principal Financial and March 24, 1999
Charles William Maher Accounting Officer
- ---------------------------- Trustee March 24, 1999
Fred C. Applegate *
- ---------------------------- Trustee March 24, 1999
Dann V. Angeloff *
- ---------------------------- Trustee March 24, 1999
Walter E. Auch *
- ---------------------------- Trustee March 24, 1999
Theodore J. Coburn *
- ---------------------------- Trustee March 24, 1999
Darlene Deremer *
- ---------------------------- Trustee March 24, 1999
George F. Keane *
- ---------------------------- Trustee March 24, 1999
Arthur B. Laffer *
- ---------------------------- Trustee March 24, 1999
Charles E. Young *
* By: /s/ E. Blake Moore, Jr.
-----------------------
E. Blake Moore, Jr.
Attorney-in-Fact**
** Powers of Attorney for the Trustees are incorporated by reference to
Post-Effective Amendment No. 60 to the Registration Statement on Form N-1A
as filed on June 15, 1998, Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A as filed on August 1, 1994 and
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A
as filed on September 26, 1994.
C-9
<PAGE>
EXHIBIT LIST
Exhibit Number Name of Exhibit
- -------------- ---------------
(a)(26) Form of Certificate of Amendment to Certificate of
Trust
(a)(27) Form of Amendment No. 22 to Amended and Restated
Declaration of Trust
(d)(7) Form of Investment Management Agreement with Pilgrim
Investments, Inc.
(d)(8) Form of Portfolio Management Agreement with Nicholas-
Applegate Capital Management
(e)(6) Form of Underwriting Agreement with Pilgrim
Securities, Inc.
(h)(23) Form of Expense Limitation Agreement
(m)(2) Form of Amended and Restated Service and Distribution
Plan for Class A
(m)(3) Form of Amended and Restated Service and Distribution
Plan for Class B
(m)(4) Form of Amended and Restated Service and Distribution
Plan for Class C
(m)(5) Form of Amended and Restated Service Plan for Class Q
(o) Form of Amended and Restated Multi-Class Plan
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF TRUST
OF
NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS CERTIFICATE OF AMENDMENT OF CERTIFICATE OF TRUST of Nicholas-Applegate
Mutual Funds (the "Trust") is being duly executed and filed by Arthur E.
Nicholas, a Trustee of the Trust, under the Delaware Business Trust Act.
1. The name of the Trust is Nicholas-Applegate Mutual Funds.
2. Paragraph 1 of the Certificate of Trust of the Trust is hereby amended
to read in full as follows: "The name of the Delaware business trust is Pilgrim
Mutual Funds."
3. This Certificate of Amendment shall be effective on March 15, 1999.
IN WITNESS THEREOF, the undersigned, being a Trustee of the Trust, has
executed this Certificate of Amendment on February 19, 1999.
/s/ Arthur E. Nicholas
--------------------------------
Arthur E. Nicholas
AMENDMENT NO. 22 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 22 TO THE AMENDED AND RESTATED DECLARATION OF TRUST OF
NIHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 19th day of February, 1999 by
the undersigned, constituting a majority of the Trustees of the Trust.
WHEREAS, the Board of Trustees has authorized the filing of an amendment to
the Certificate of Trust of the Trust changing its name to "Pilgrim Mutual
Funds" effective as of March 15, 1999; and
WHEREAS, effective as of such date, the Board of Trustees wishes to revise
the names of the following series of the Trust to replace the phrase
"Nicholas-Applegate" with the phrase "Pilgrim":
Nicholas-Applegate Mid Cap Growth Fund
Nicholas-Applegate Convertible Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate Small Cap Growth Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate High Quality Bond Fund
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate International Core Growth Fund; and
WHEREAS, effective as of such date, the Board of Trustees wishes to change
the name of the Nicholas-Applegate Balanced Growth Fund series of the Trust to
Pilgrim Balanced Fund", and to change the name of the Nicholas-Applegate High
Yield Bond Fund series of the Trust to "Pilgrim High Yield Fund II";
NOW THEREFORE, the Board of Trustees hereby amends the Amended and Restated
Declaration of Trust of the Trust adopted as of December 17, 1992, as heretofore
amended (the "Declaration of Trust") as set forth below, effective as of March
15, 1999:
1. The first sentence of Section 1.1 of the Declaration of Trust is amended
to change the name of the Trust to "Pilgrim Mutual Funds".
2. The second sentence of Section 8.8 of the Declaration of Trust is
amended to read in full as follows:
<PAGE>
"Without limiting the authority of the Trustees set forth in this Section 8.8 to
establish and designate any further series, the Trustees hereby establish and
designate twenty-three series, as follows:
Pilgrim Mid Cap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim Worldwide Growth Fund
Pilgrim Small Cap Growth Fund
Pilgrim International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Pilgrim Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Pilgrim High Quality Bond Fund
Nicholas-Applegate Mini-Cap Growth Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Fund II
Nicholas-Applegate Strategic Income Fund
Pilgrim Large Cap Growth Fund
Pilgrim International Core Growth Fund
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund"
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
- ----------------------------------- ---------------------------------
Arthur B. Laffer Fred C. Applegate
- ----------------------------------- ---------------------------------
Charles E. Young Dann V. Angeloff
- ----------------------------------- ---------------------------------
Walter E. Auch Theodore J. Coburn
- ----------------------------------- ---------------------------------
Darlene DeRemer George F. Keane
- -----------------------------------
Arthur E. Nicholas
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this 1st day of April, 1999 between [Name of Fund] (the
"Fund"), a Delaware business trust , and Pilgrim Investments, Inc. (the
"Manager"), a Delaware corporation (the "Agreement").
WHEREAS, the Fund is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund is authorized to issue shares of beneficial interest in
separate series with each such series representing interests in a separate
portfolio of securities and other assets;
WHEREAS, the Fund may offer shares of additional series in the future, and
currently intends to offer shares of additional series in the future;
WHEREAS, the Fund desires to avail itself of the services of the Manager
for the provision of advisory and management services for the Fund; and
WHEREAS, the Manager is willing to render such services to the Fund;
NOW, THEREFORE, in consideration of the premises, the promises and mutual
covenants herein contained, it is agreed between the parties as follows:
1. APPOINTMENT. The Fund hereby appoints the Manager, subject to the
direction of the Board of Trustees, for the period and on the terms set forth in
this Agreement, to provide advisory, management, and other services, as
described herein, with respect to each series of the Fund (individually and
collectively referred to herein as "Series"). The Manager accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
In the event the Fund establishes and designates additional series with
respect to which it desires to retain the Manager to render advisory services
hereunder, it shall notify the Manager in writing. If the Manager is willing to
render such services, it shall notify the Fund in writing, whereupon such
additional series shall become a Series hereunder.
2. SERVICES OF THE MANAGER. The Manager represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940
and will maintain such registration for so long as required by applicable law.
Subject to the general supervision of the Board of Trustees of the Fund, the
Manager shall provide the following advisory, management, and other services
with respect to the Series:
(a) Provide general, overall advice and guidance with respect to the Series
and provide advice and guidance to the Fund's Trustees, and oversee the
management of the investments of the Series and the composition of each Series'
portfolio of securities and investments, including cash, and the purchase,
retention and disposition thereof, in accordance with each Series' investment
objective or objectives and policies as stated in the Fund's current
<PAGE>
registration statement, which management may be provided by others selected by
the Manager and approved by the Board of Trustees as provided below or directly
by the Manager as provided in Section 3 of this Agreement;
(b) In the event that the Manager wishes to select others to render
investment management services, the Manager shall analyze, select and recommend
for consideration and approval by the Fund's Board of Trustees investment
advisory firms (however organized) to provide investment advice to one or more
of the Series, and, at the expense of the Manager, engage (which engagement may
also be by the Fund) such investment advisory firms to render investment advice
and manage the investments of such Series and the composition of each such
Series' portfolio of securities and investments, including cash, and the
purchase, retention and disposition thereof, in accordance with the Series'
investment objective or objectives and policies as stated in the Fund's current
registration statement (any such firms approved by the Board of Trustees and
engaged by the Fund and/or the Manager are referred to herein as "Portfolio
Managers");
(c) Periodically monitor and evaluate the performance of the Portfolio
Managers with respect to the investment objectives and policies of the Series;
(d) Monitor the Portfolio Managers for compliance with the investment
objective or objectives, policies and restrictions of each Series, the 1940 Act,
Subchapter M of the Internal Revenue Code, and if applicable, regulations under
such provisions, and other applicable law;
(e) If appropriate, analyze and recommend for consideration by the Fund's
Board of Trustees termination of a contract with a Portfolio Manager under which
the Portfolio Manager provides investment advisory services to one or more of
the Series;
(f) Supervise Portfolio Managers with respect to the services that such
Portfolio Managers provide under respective portfolio management agreements
("Portfolio Management Agreements");
(g) Render to the Board of Trustees of the Fund such periodic and special
reports as the Board may reasonably request; and
(h) Make available its officers and employees to the Board of Trustees and
officers of the Fund for consultation and discussions regarding the
administration and management of the Series and services provided to the Fund
under this Agreement.
3. INVESTMENT MANAGEMENT AUTHORITY. In the event the Manager wishes to
render investment management services directly to a Series, then with respect to
any such Series, the Manager, subject to the supervision of the Fund's Board of
Trustees, will provide a continuous investment program for the Series' portfolio
and determine the composition of the assets of the Series' portfolio, including
determination of the purchase, retention, or sale of the securities, cash, and
other investments contained in the portfolio. The Manager will provide
-2-
<PAGE>
investment research and conduct a continuous program of evaluation, investment,
sales, and reinvestment of the Series' assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Series, when these transactions should be executed, and what
portion of the assets of the Series should be held in the various securities and
other investments in which it may invest, and the Manager is hereby authorized
to execute and perform such services on behalf of the Series. To the extent
permitted by the investment policies of the Series, the Manager shall make
decisions for the Series as to foreign currency matters and make determinations
as to, and execute and perform, foreign currency exchange contracts on behalf of
the Series. The Manager will provide the services under this Agreement in
accordance with the Series' investment objective or objectives, policies, and
restrictions as stated in the Fund's Registration Statement filed with the
Securities and Exchange Commission (the "SEC"), as amended. Furthermore:
(a) The Manager will manage the Series so that each will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code. In
managing the Series in accordance with these requirements, the Manager shall be
entitled to receive and act upon advice of counsel to the Fund or counsel to the
Manager.
(b) The Manager will conform with the 1940 Act and all rules and
regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Fund's Board of
Trustees, and the provisions of the Registration Statement of the Fund under the
Securities Act of 1933 and the 1940 Act, as supplemented or amended.
(c) On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Series as well as any other investment
advisory clients, the Manager may, to the extent permitted by applicable laws
and regulations, but shall not be obligated to, aggregate the securities to be
so sold or purchased with those of its other clients where such aggregation is
not inconsistent with the policies set forth in the Registration Statement. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in a manner
that is fair and equitable in the judgment of the Manager in the exercise of its
fiduciary obligations to the Fund and to such other clients.
(d) In connection with the purchase and sale of securities of the Series,
the Manager will arrange for the transmission to the custodian for the Fund on a
daily basis, of such confirmation, trade tickets, and other documents and
information, including, but not limited to, Cusip, Cedel, or other numbers that
identify securities to be purchased or sold on behalf of the Series, as may be
reasonably necessary to enable the custodian to perform its administrative and
recordkeeping responsibilities with respect to the Series. With respect to
portfolio securities to be purchased or sold through the Depository Trust
Company, the Manager will arrange for the prompt transmission of the
confirmation of such trades to the Fund's custodian.
(e) The Manager will assist the custodian or portfolio accounting agent for
the Fund in determining, consistent with the procedures and policies stated in
the Registration Statement for the Fund, the value of any portfolio securities
or other assets of the Series for which the custodian or portfolio accounting
agent seeks assistance or review from the Manager.
-3-
<PAGE>
(f) The Manager will make available to the Fund, promptly upon request, any
of the Series' investment records and ledgers as are necessary to assist the
Fund to comply with requirements of the 1940 Act, as well as other applicable
laws. The Manager will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services which may
be requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
(g) The Manager will regularly report to the Fund's Board of Trustees on
the investment program for the Series and the issuers and securities represented
in the Series' portfolio, and will furnish the Fund's Board of Trustees with
respect to the Series such periodic and special reports as the Trustees may
reasonably request.
(h) In connection with its responsibilities under this Section 3, the
Manager is responsible for decisions to buy and sell securities and other
investments for the Series' portfolio, broker-dealer selection, and negotiation
of brokerage commission rates. The Manager's primary consideration in effecting
a security transaction will be to obtain the best execution for the Series,
taking into account the factors specified in the Prospectus and/or Statement of
Additional Information for the Fund, which include price (including the
applicable brokerage commission or dollar spread), the size of the order, the
nature of the market for the security, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer involved,
the quality of the service, the difficulty of execution, execution capabilities
and operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. Accordingly, the price to the Series in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified, in the judgment of the Manager in the
exercise of its fiduciary obligations to the Fund, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Trustees may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Series to pay a broker-dealer for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Manager's overall responsibilities with respect to
the Series and to its other clients as to which it exercises investment
discretion. To the extent consistent with these standards and in accordance with
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, the Manager is further authorized to allocate the orders placed by
it on behalf of the Series to the Manager if it is registered as a broker-dealer
with the SEC, to an affiliated broker-dealer, or to such brokers and dealers who
also provide research or statistical material or other services to the Series,
the Manager or an affiliate of the Manager. Such allocation shall be in such
amounts and proportions as the Manager shall determine consistent with the above
standards, and the Manager will report on said allocation regularly to the Board
of Trustees of the Fund indicating the broker-dealers to which such allocations
have been made and the basis therefor.
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<PAGE>
4. CONFORMITY WITH APPLICABLE LAW. The Manager, in the performance of its
duties and obligations under this Agreement, shall act in conformity with the
Registration Statement of the Fund and with the instructions and directions of
the Board of Trustees of the Fund and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws and
regulations.
5. EXCLUSIVITY. The services of the Manager to the Fund under this
Agreement are not to be deemed exclusive, and the Manager, or any affiliate
thereof, shall be free to render similar services to other investment companies
and other clients (whether or not their investment objectives and policies are
similar to those of any of the Series) and to engage in other activities, so
long as its services hereunder are not impaired thereby.
6. DOCUMENTS. The Fund has delivered properly certified or authenticated
copies of each of the following documents to the Manager and will deliver to it
all future amendments and supplements thereto, if any:
(a) certified resolution of the Board of Trustees of the Fund authorizing
the appointment of the Manager and approving the form of this Agreement;
(b) the Registration Statement as filed with the SEC and any amendments
thereto; and (c) exhibits, powers of attorney, certificates and any and all
other documents relating to or filed in connection with the Registration
Statement described above.
7. RECORDS. The Manager agrees to maintain and to preserve for the periods
prescribed under the 1940 Act any such records as are required to be maintained
by the Manager with respect to each Series by the 1940 Act. The Manager further
agrees that all records which it maintains for the Series are the property of
the Fund and it will promptly surrender any of such records upon request.
8. EXPENSES. During the term of this Agreement, the Manager will pay all
expenses incurred by it in connection with its activities under this Agreement,
except such expenses as are assumed by the Fund under this Agreement and such
expenses as are assumed by a Portfolio Manager under its Portfolio Management
Agreement. The Manager further agrees to pay all fees payable to the Portfolio
Managers, executive salaries and expenses of the Trustees of the Fund who are
employees of the Manager or its affiliates, and office rent of the Fund. The
Fund shall be responsible for all of the other expenses of its operations,
including, without limitation, the management fee payable hereunder; brokerage
commissions; interest; legal fees and expenses of attorneys; fees of auditors,
transfer agents and dividend disbursing agents, custodians and shareholder
servicing agents; the expense of obtaining quotations for calculating each
Fund's net asset value; taxes, if any, and the preparation of the Fund's tax
returns; cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase or redemption of shares; expenses of
registering and qualifying shares of the Fund under federal and state laws and
regulations (including the salary of employees of the Manager engaged in the
registering and qualifying of shares of the Fund under federal and state laws
and regulations or a pro-rata portion of the salary of employees to the extent
so engaged); salaries of personnel involved in placing orders for the execution
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<PAGE>
of the Fund's portfolio transactions; expenses of printing and distributing
reports, notices and proxy materials to existing shareholders; expenses of
printing and filing reports and other documents filed with governmental
agencies; expenses in connection with shareholder and trustee meetings; expenses
of printing and distributing prospectuses and statements of additional
information to existing shareholders; fees and expenses of Trustees of the Fund
who are not employees of the Manager or any Portfolio Manager, or their
affiliates; trade association dues; insurance premiums; extraordinary expenses
such as litigation expenses. To the extent the Manager incurs any costs or
performs any services which are an obligation of the Fund, as set forth herein,
the Fund shall promptly reimburse the Manager for such costs and expenses. To
the extent the services for which the Fund is obligated to pay are performed by
the Manager, the Manager shall be entitled to recover from the Fund only to the
extent of its costs for such services.
9. COMPENSATION. For the services provided by the Manager to each Series
pursuant to this Agreement, the Fund will pay to the Manager an annual fee equal
to the amount specified for such Series in Schedule A hereto, payable monthly in
arrears. Payment of the above fees shall be in addition to any amount paid to
the Manager for the salary of its employees for performing services which are an
obligation of the Fund as provided in Section 8. The fee will be appropriately
pro-rated to reflect any portion of a calendar month that this Agreement is not
in effect between us.
10. LIABILITY OF THE MANAGER. The Manager may rely on information
reasonably believed by it to be accurate and reliable. Except as may otherwise
be required by the 1940 Act or the rules thereunder, neither the Manager nor its
stockholders, officers, directors, employees, or agents shall be subject to, and
the Fund will indemnify such persons from and against, any liability for, or any
damages, expenses, or losses incurred in connection with, any act or omission
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Manager's duties, or by reason of reckless disregard of the
Manager's obligations and duties under this Agreement. Except as may otherwise
be required by the 1940 Act or the rules thereunder, neither the Manager nor its
stockholders, officers, directors, employees, or agents shall be subject to, and
the Fund will indemnify such persons from and against, any liability for, or any
damages, expenses, or losses incurred in connection with, any act or omission by
a Portfolio Manager or any of the Portfolio Manager's stockholders or partners,
officers, directors, employees, or agents connected with or arising out of any
services rendered under a Portfolio Management Agreement, except by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Manager's duties under this Agreement, or by reason of reckless disregard of the
Manager's obligations and duties under this Agreement. No trustee, officer,
employee or agent of the Fund shall be subject to any personal liablility
whatsoever, in his or her official capacity, to any person, including the
Portfolio Manager, other than to the Fund or its shareholders, in connection
with Fund property or the affairs of the Fund, save only that arising from his
or her bad faith, willful misfeasance, gross negligence or reckless disregard of
his or her duty to such person; and all such persons shall look solely to the
Fund property for satisfaction of claims of any nature against a trustee,
officer, employee or agent of the Fund arising in connection with the affairs of
the Fund. Moreover, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a Series shall be
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<PAGE>
enforceable against the assets and property of that Series only, and not against
the assets or property of any other series of the Fund.
11. CONTINUATION AND TERMINATION. This Agreement shall become effective on
the date first written above, subject to the condition that the Fund's Board of
Trustees, including a majority of those Trustees who are not interested persons
(as such term is defined in the 1940 Act) of the Manager, and the shareholders
of each Series, shall have approved this Agreement. Unless terminated as
provided herein, the Agreement shall continue in full force and effect for two
(2) years from the effective date of this Agreement, and shall continue from
year to year thereafter with respect to each Series so long as such continuance
is specifically approved at least annually (i) by the vote of a majority of the
Board of Trustees of the Fund, or (ii) by vote of a majority of the outstanding
voting shares of the Series (as defined in the 1940 Act), and provided
continuance is also approved by the vote of a majority of the Board of Trustees
of the Fund who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may not be
amended in any material respect without a majority vote of the outstanding
voting shares (as defined in the 1940 Act).
However, any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of a Series shall be effective
to continue this Agreement with respect to such Series notwithstanding (i) that
this Agreement has not been approved by the holders of a majority of the
outstanding shares of any other Series or (ii) that this Agreement has not been
approved by the vote of a majority of the outstanding shares of the Fund, unless
such approval shall be required by any other applicable law or otherwise. This
Agreement may be terminated by the Fund at any time, without the payment of any
penalty, by vote of a majority of the Board of Trustees of the Fund or by a vote
of a majority of the outstanding voting shares of the Fund, or with respect to a
Series, by vote of a majority of the outstanding voting shares of such Series,
on sixty (60) days' written notice to the Manager, or by the Manager at any
time, without the payment of any penalty, on sixty (60) days' written notice to
the Fund. This Agreement will automatically and immediately terminate in the
event of its "assignment" (as described in the 1940 Act).
12. USE OF NAME. It is understood that the name "Pilgrim Investments, Inc."
or any derivative thereof (including the name "Pilgrim") or logo associated with
that name is the valuable property of the Manager and its affiliates, and that
the Fund and/or the Series have the right to use such name (or derivative or
logo) only so long as this Agreement shall continue with respect to such Fund
and/or Series. Upon termination of this Agreement, the Fund (or Series) shall
forthwith cease to use such name (or derivative or logo) and, in the case of the
Fund, shall promptly amend its Declaration of Trust to change its name (if such
name is included therein).
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
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<PAGE>
14. APPLICABLE LAW.
(a) This Agreement shall be governed by the laws of the State of Arizona,
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, the Investment Advisers Act of 1940, or any rules or order of the
SEC thereunder.
(b) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(c) The captions of this Agreement are included for convenience only and in
no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
[NAME OF FUND]
By:
------------------------
---------------------------
Title
PILGRIM INVESTMENTS, INC.
By:
------------------------
---------------------------
Title
<PAGE>
Schedule A
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
- ------ --------------------------------
Pilgrim Small Cap 1.00% of the Series' average net assets
Growth Fund
Pilgrim Mid Cap 0.75% of the first $500 million of the
Growth Fund Series' average net assets, 0.675% of the
next $500 million of average net assets, and
0.65% of the average net assets in excess of
$1 billion
Pilgrim Large Cap 0.75% of the first $500 million of the Series'
Growth Fund average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Pilgrim Value Fund 0.75% of the Series' average net assets
Pilgrim Convertible Fund 0.75% of the first $500 million of the Series'
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Pilgrim Balanced 0.75% of the first $500 million of the Series'
Growth Fund average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Pilgrim High Quality Fund 0.45% of the first $500 million of the Series'
average net assets, 0.40% of the next $250 million
of average net assets, and 0.35% of the average
net assets in excess of $750 million
Pilgrim Emerging 1.25% of the Series' average net assets
Countries Fund
Pilgrim Worldwide 1.00% of the first $500 million of the Series'
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
Pilgrim International 1.00% of the first $500 million of the Series'
Small Cap 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
Pilgrim International 1.00% of the first $500 million of the Series'
Core 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
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PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this ___ day of _____, 1999 between Pilgrim Investments,
Inc., a Delaware corporation (the "Manager"), and Nicholas-Applegate Capital
Management, a California limited partnership (the "Portfolio Manager").
WHEREAS, [Name of Fund] (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end, management
investment company;
WHEREAS, the Fund is authorized to issue separate series, each series
having its own investment objective or objectives, policies, and limitations;
WHEREAS, the Fund may offer shares of additional series in the future, and
currently intends to offer shares of additional series in the future;
WHEREAS, pursuant to a Management Agreement, dated the date hereof (the
"Management Agreement"), a copy of which has been provided to the Portfolio
Manager, the Fund has retained the Manager to render advisory and management
services with respect to each of the Fund's series; and
WHEREAS, pursuant to authority granted to the Manager in the Management
Agreement, the Manager wishes to retain the Portfolio Manager to furnish
investment advisory services to one or more of the series of the Fund, and the
Portfolio Manager is willing to furnish such services to the Fund and the
Manager;
NOW, THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Manager and the
Portfolio Manager as follows:
1. APPOINTMENT. The Manager hereby appoints the Portfolio Manager to act as
the investment adviser and manager to the series of the Fund set forth on
Schedule A hereto (the "Series") for the periods and on the terms set forth in
this Agreement The Portfolio Manager accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
In the event the Fund designates one or more series (other than the Series)
with respect to which the Manager wishes to retain the Portfolio Manager to
render investment advisory services hereunder, it shall notify the Portfolio
Manager in writing. If the Portfolio Manager is willing to render such services,
it shall notify the Manager in writing, whereupon such series shall become a
Series hereunder, and be subject to this Agreement.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of the Fund's
Board of Trustees and the Manager, the Portfolio Manager will provide a
continuous investment program for each Series' portfolio and determine in its
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<PAGE>
discretion the composition of the assets of each Series' portfolio, including
determination of the purchase, retention, or sale of the securities, cash, and
other investments contained in the portfolio. The Portfolio Manager will provide
investment research and conduct a continuous program of evaluation, investment,
sales, and reinvestment of each Series' assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Series, when these transactions should be executed, and what
portion of the assets of the Series should be held in the various securities and
other investments in which it may invest. To the extent permitted by the
investment policies of each Series, the Portfolio Manager shall make decisions
for the Series as to foreign currency matters and make determinations as to and
execute and perform foreign currency exchange contracts on behalf of the Series.
The Portfolio Manager will provide the services under this Agreement in
accordance with each Series' investment objective or objectives, policies, and
restrictions as stated in the Fund's Registration Statement filed with the
Securities and Exchange Commission ("SEC"), as amended, copies of which shall be
sent to the Portfolio Manager by the Manager prior to the commencement of this
Agreement and promptly following any such amendment. The Portfolio Manager
further agrees as follows:
(a) The Portfolio Manager will conform with the 1940 Act and all rules and
regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Fund's Board of
Trustees of which the Portfolio Manager has been sent a copy, and the provisions
of the Registration Statement of the Fund filed under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Portfolio Manager has received a copy, and with the Manager's portfolio manager
operating policies and procedures as in effect on the date hereof, as such
policies and procedures may be revised or amended by the Manager and agreed to
by the Portfolio Manager.
(b) In connection with the purchase and sale of securities for each Series,
the Portfolio Manager will arrange for the transmission to the custodian and
portfolio accounting agent for the Series on a daily basis, such confirmation,
trade tickets, and other documents and information, including, but not limited
to, Cusip, Cedel, or other numbers that identify securities to be purchased or
sold on behalf of the Series, as may be reasonably necessary to enable the
custodian and portfolio accounting agent to perform its administrative and
recordkeeping responsibilities with respect to the Series. With respect to
portfolio securities to be settled through the Depository Trust Company, the
Portfolio Manager will arrange for the prompt transmission of the confirmation
of such trades to the Fund's custodian and portfolio accounting agent.
(c) The Portfolio Manager will make available to the Fund and the Manager,
promptly upon request, any of the Series' investment records and ledgers
maintained by the Portfolio Manager (which shall not include the records and
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<PAGE>
ledgers maintained by the custodian or portfolio accounting agent for the Fund)
as are necessary to assist the Fund and the Manager to comply with requirements
of the 1940 Act and the Investment Advisers Act of 1940 (the "Advisers Act"), as
well as other applicable laws. The Portfolio Manager will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with such services in respect to the Series which may be requested in
order to ascertain whether the operations of the Fund are being conducted in a
manner consistent with applicable laws and regulations.
(d) The Portfolio Manager will provide reports to the Fund's Board of
Trustees for consideration at meetings of the Board on the investment program
for each Series and the issuers and securities represented in each Series'
portfolio, and will furnish the Fund's Board of Trustees with respect to each
Series such periodic and special reports as the Trustees and the Manager may
reasonably request.
3. BROKER-DEALER SELECTION. The Portfolio Manager is authorized to make
decisions to buy and sell securities and other investments for each Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates in effecting a security transaction. The Portfolio Manager's primary
consideration in effecting a security transaction will be to obtain the best
execution for the Series, taking into account the factors specified in the
prospectus and/or statement of additional information for the Fund, and
determined in consultation with the Manager, which include price (including the
applicable brokerage commission or dollar spread), the size of the order, the
nature of the market for the security, the timing of the transaction, the
reputation, the experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution, and the
execution capabilities and operational facilities of the firm involved, and the
firm's risk in positioning a block of securities. Accordingly, the price to a
Series in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified, in the judgment of the
Portfolio Manager in the exercise of its fiduciary obligations to the Fund, by
other aspects of the portfolio execution services offered. Subject to such
policies as the Fund's Board of Trustees or Manager may determine and consistent
with Section 28(e) of the Securities Exchange Act of 1934, the Portfolio Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having caused a
Series to pay a broker-dealer for effecting a portfolio investment transaction
in excess of the amount of commission another broker-dealer would have charged
for effecting that transaction, if the Portfolio Manager determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer, viewed in
terms of either that particular transaction or the Portfolio Manager's or the
Manager's overall responsibilities with respect to the Series and to their
respective other clients as to which they exercise investment discretion. The
Portfolio Manager will consult with the Manager to the end that portfolio
transactions on behalf of a Series are directed to broker-dealers on the basis
of criteria reasonably considered appropriate by the Manager. To the extent
consistent with these standards, the Portfolio Manager is further authorized to
allocate the orders placed by it on behalf of a Series to the Portfolio Manager
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<PAGE>
if it is registered as a broker-dealer with the SEC, to an affiliated
broker-dealer, or to such brokers and dealers who also provide research or
statistical material, or other services to the Series, the Portfolio Manager, or
an affiliate of the Portfolio Manager. Such allocation shall be in such amounts
and proportions as the Portfolio Manager shall determine consistent with the
above standards, and the Portfolio Manager will report on said allocation
regularly to the Fund's Board of Trustees indicating the broker-dealers to which
such allocations have been made and the basis therefor.
4. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has reviewed
Post -Effective Amendment No. [ ] to the Registration Statement for the Fund
filed with the SEC that contains disclosure about the Portfolio Manager, and
represents and warrants that, with respect to the disclosure about the Portfolio
Manager or information relating, directly or indirectly, to the Portfolio
Manager, such Registration Statement contains, as of the date hereof, no untrue
statement of any material fact and does not omit any statement of a material
fact which was required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. The Portfolio Manager further represents and warrants that it is a
duly registered investment adviser under the Advisers Act and will maintain such
registration so long as this Agreement remains in effect. The Portfolio Manager
will provide the Manager with a copy of the Portfolio Manager's Form ADV, Part
II at the time the Form ADV is filed with the SEC.
5. EXPENSES. During the term of this Agreement, the Portfolio Manager will
pay all expenses incurred by it and its staff and for their activities in
connection with its portfolio management duties under this Agreement. The
Manager or the Fund shall be responsible for all the expenses of the Fund's
operations.
6. COMPENSATION. For the services provided to each Series, the Manager will
pay the Portfolio Manager an annual fee equal to the amount specified for such
Series in Schedule A hereto, payable monthly in arrears. The fee will be
appropriately prorated to reflect any portion of a calendar month that this
Agreement is not in effect among the parties. In accordance with the provisions
of the Management Agreement, the Manager is solely responsible for the payment
of fees to the Portfolio Manager, and the Portfolio Manager agrees to seek
payment of its fees solely from the Manager; provided, however, that if the Fund
fails to pay the Manager all or a portion of the management fee under said
Management Agreement when due, and the amount that was paid is insufficient to
cover the Portfolio Manager's fee under this Agreement for the period in
question, then the Portfolio Manager may enforce against the Fund any rights it
may have as a third-party beneficiary under the Management Agreement and the
Manager will take all steps appropriate under the circumstances to collect the
amount due from the Fund.
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<PAGE>
7. COMPLIANCE.
(a) The Portfolio Manager agrees to use reasonable compliance techniques as
the Manager or the Board of Trustees may adopt, including any written compliance
procedures.
(b) The Portfolio Manager agrees that it shall promptly notify the Manager
and the Fund (1) in the event that the SEC has censured the Portfolio Manager;
placed limitations upon its activities, functions or operations; suspended or
revoked its registration as an investment adviser; or has commenced proceedings
or an investigation that may result in any of these actions, or (2) upon having
a reasonable basis for believing that the Series has ceased to qualify or might
not qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code. The Portfolio Manager further agrees to notify the Manager and the
Fund promptly of any material fact known to the Portfolio Manager respecting or
relating to the Portfolio Manager that is not contained in the Registration
Statement or prospectus for the Fund (which describes the Series), or any
amendment or supplement thereto, or if any statement contained therein that
becomes untrue in any material respect.
(c) The Manager agrees that it shall promptly notify the Portfolio Manager
(1) in the event that the SEC has censured the Manager or the Fund; placed
limitations upon either of their activities, functions, or operations; suspended
or revoked the Manager's registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these actions, or (2)
upon having a reasonable basis for believing that the Series has ceased to
qualify or might not qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code.
8. BOOKS AND RECORDS. The Portfolio Manager hereby agrees that all records
which it maintains for the Series are the property of the Fund and further
agrees to surrender promptly to the Fund any of such records upon the Fund's or
the Manager's request in compliance with the requirements of Rule 31a-3 under
the 1940 Act, although the Portfolio Manager may, at its own expense, make and
retain a copy of such records. The Portfolio Manager further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-l under the 1940 Act.
9. COOPERATION; CONFIDENTIALITY. Each party to this Agreement agrees to
cooperate with the other party and with all appropriate governmental authorities
having the requisite jurisdiction (including, but not limited to, the SEC) in
connection with any investigation or inquiry relating to this Agreement or the
Fund. Subject to the foregoing, the Portfolio Manager shall treat as
confidential all information pertaining to the Fund and actions of the Fund, the
Manager and the Portfolio Manager, and the Manager shall treat as confidential
and use only in connection with the Series all information furnished to the Fund
or the Manager by the Portfolio Manager, in connection with its duties under the
agreement except that the aforesaid information need not be treated as
confidential if required to be disclosed under applicable law, if generally
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<PAGE>
available to the public through means other than by disclosure by the Portfolio
Manager or the Manager, or if available from a source other than the Manager,
Portfolio Manager or this Fund.
10. REPRESENTATIONS RESPECTING PORTFOLIO MANAGER. The Manager agrees that
neither the Manager, nor affiliated persons of the Manager, shall give any
information or make any representations or statements in connection with the
sale of shares of the Series concerning the Portfolio Manager or the Series
other than the information or representations contained in the Registration
Statement, prospectus, or statement of additional information for the Fund's
shares, as they may be amended or supplemented from time to time, or in reports
or proxy statements for the Fund, or in sales literature or other promotional
material approved in advance by the Portfolio Manager, except with the prior
permission of the Portfolio Manager.
11. [Intentionally Omitted]
12. CONTROL. Notwithstanding any other provision of the Agreement, it is
understood and agreed that the Fund shall at all times retain the ultimate
responsibility for and control of all functions performed pursuant to this
Agreement and has reserved the right to reasonably direct any action hereunder
taken on its behalf by the Portfolio Manager.
13. LIABILITY. Except as may otherwise be required by the 1940 Act or the
rules thereunder or other applicable law, the Manager agrees that the Portfolio
Manager, any affiliated person of the Portfolio Manager, and each person, if
any, who, within the meaning of Section 15 of the 1933 Act controls the
Portfolio Manager (1) shall bear no responsibility and shall not be subject to
any liability for any act or omission respecting any series of the Fund that is
not a Series hereunder, and (2) shall not be liable for, or subject to any
damages, expenses, or losses in connection with, any act or omission connected
with or arising out of any services rendered under this Agreement, except by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of the Portfolio Manager's duties, or by reason of reckless disregard of the
Portfolio Manager's obligations and duties under this Agreement.
14. INDEMNIFICATION.
(a) The Manager agrees to indemnify and hold harmless the Portfolio
Manager, any affiliated person of the Portfolio Manager, and each person, if
any, who, within the meaning of Section 15 of the 1933 Act controls
("controlling person") the Portfolio Manager (all of such persons being referred
to as "Portfolio Manager Indemnified Persons") against any and all losses,
claims, damages, liabilities, or litigation (including legal and other expenses)
to which a Portfolio Manager Indemnified Person may become subject under the
1933 Act, the 1940 Act, the Advisers Act, under any other statute, at common law
or otherwise, arising out of the Manager's responsibilities to the Trust which
(1) may be based upon the Manager's willful misfeasance, bad faith, or
negligence in the performance of its duties (which could include a negligent
action or a negligent omission to act), or by reason of the Manager's reckless
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<PAGE>
disregard of its obligations and duties under this Agreement or (2) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or prospectus covering shares of the
Trust or any Series, or any amendment thereof or any supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon information
furnished to the Manager or the Trust or to any affiliated person of the Manager
by a Portfolio Manager Indemnified Person; provided however, that in no case
shall the indemnity in favor of the Portfolio Manager Indemnified Person be
deemed to protect such person against any liability to which any such person
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of obligations and duties under this Agreement.
(b) Notwithstanding Section 13 of this Agreement, the Portfolio Manager
agrees to indemnify and hold harmless the Manager, any affiliated person of the
Manager, and any controlling person of the Manager (all of such persons being
referred to as "Manager Indemnified Persons") against any and all losses,
claims, damages, liabilities, or litigation (including legal and other expenses)
to which a Manager Indemnified Person may become subject under the 1933 Act,
1940 Act, the Advisers Act, under any other statute, at common law or otherwise,
arising out of the Portfolio Manager's responsibilities as Portfolio Manager of
the Series which (1) may be based upon the Portfolio Manager's willful
misfeasance, bad faith, or negligence in the performance of its duties (which
could include a negligent action or a negligent omission to act), or by reason
of the Portfolio Manager's reckless disregard of its obligations and duties
under this Agreement, or (2) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
prospectus covering the shares of the Trust or any Series, or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact known or which should have been known to the Portfolio Manager and
was required to be stated therein or necessary to make the statements therein
not misleading, if such a statement or omission was made in reliance upon
information furnished to the Manager, the Trust, or any affiliated person of the
Manager or Trust by the Portfolio Manager or any affiliated person of the
Portfolio Manager; provided, however, that in no case shall the indemnity in
favor of a Manager Indemnified Person be deemed to protect such person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under this Agreement.
(c) The Manager shall not be liable under Paragraph (a) of this Section 14
with respect to any claim made against a Portfolio Manager Indemnified Person
unless such Portfolio Manager Indemnified Person shall have notified the Manager
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Portfolio Manager Indemnified Person (or after such Portfolio Manager
Indemnified Person shall have received notice of such service on any designated
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<PAGE>
agent), but failure to notify the Manager of any such claim shall not relieve
the Manager from any liability which it may have to the Portfolio Manager
Indemnified Person against whom such action is brought except to the extent the
Manager is prejudiced by the failure or delay in giving such notice. In case any
such action is brought against the Portfolio Manager Indemnified Person, the
Manager will be entitled to participate, at its own expense, in the defense
thereof or, after notice to the Portfolio Manager Indemnified Person, to assume
the defense thereof, with counsel satisfactory to the Portfolio Manager
Indemnified Person. If the Manager assumes the defense of any such action and
the selection of counsel by the Manager to represent the Manager and the
Portfolio Manager Indemnified Person would result in a conflict of interests and
therefore, would not, in the reasonable judgment of the Portfolio Manager
Indemnified Person, adequately represent the interests of the Portfolio Manager
Indemnified Person, the Manager will, at its own expense, assume the defense
with counsel to the Manager and, also at its own expense, with separate counsel
to the Portfolio Manager Indemnified Person, which counsel shall be satisfactory
to the Manager and to the Portfolio Manager Indemnified Person. The Portfolio
Manager Indemnified Person shall bear the fees and expenses of any additional
counsel retained by it, and the Manager shall not be liable to the Portfolio
Manager Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Portfolio Manager Indemnified Person independently
in connection with the defense thereof other than reasonable costs of
investigation. The Manager shall not have the right to compromise on or settle
the litigation without the prior written consent of the Portfolio Manager
Indemnified Person if the compromise or settlement results, or may result in a
finding of wrongdoing on the part of the Portfolio Manager Indemnified Person.
(d) The Portfolio Manager shall not be liable under Paragraph (b) of this
Section 14 with respect to any claim made against a Manager Indemnified Person
unless such Manager Indemnified Person shall have notified the Portfolio Manager
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Manager Indemnified Person (or after such Manager Indemnified Person
shall have received notice of such service on any designated agent), but failure
to notify the Portfolio Manager of any such claim shall not relieve the
Portfolio Manager from any liability which it may have to the Manager
Indemnified Person against whom such action is brought except to the extent the
Portfolio Manager is prejudiced by the failure or delay in giving such notice.
In case any such action is brought against the Manager Indemnified Person, the
Portfolio Manager will be entitled to participate, at its own expense, in the
defense thereof or, after notice to the Manager Indemnified Person, to assume
the defense thereof, with counsel satisfactory to the Manager Indemnified
Person. If the Portfolio Manager assumes the defense of any such action and the
selection of counsel by the Portfolio Manager to represent both the Portfolio
Manager and the Manager Indemnified Person would result in a conflict of
interests and therefore, would not, in the reasonable judgment of the Manager
Indemnified Person, adequately represent the interests of the Manager
Indemnified Person, the Portfolio Manager will, at its own expense, assume the
defense with counsel to the Portfolio Manager and, also at its own expense, with
separate counsel to the Manager Indemnified Person, which counsel shall be
satisfactory to the Portfolio Manager and to the Manager Indemnified Person. The
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<PAGE>
Manager Indemnified Person shall bear the fees and expenses of any additional
counsel retained by it, and the Portfolio Manager shall not be liable to the
Manager Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Manager Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Portfolio Manager shall not have the right to compromise on
or settle the litigation without the prior written consent of the Manager
Indemnified Person if the compromise or settlement results, or may result in a
finding of wrongdoing on the part of the Manager Indemnified Person.
15. DURATION AND TERMINATION.
(a) This Agreement shall become effective on the date first indicated
above, subject to the condition that the Fund's Board of Trustees, including a
majority of those Trustees who are not interested persons (as such term is
defined in the 1940 Act) of the Manager or the Portfolio Manager, and the
shareholders of each Series, shall have approved this Agreement. Unless
terminated as provided herein, this Agreement shall remain in full force and
effect for two years from such date and continue on an annual basis thereafter
with respect to each Series covered by this Agreement; provided that such annual
continuance is specifically approved each year by (a) the Board of Trustees of
the Fund, or by the vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of each Series, and (b) the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons (as such
term is defined in the 1940 Act) of any such party to this Agreement cast in
person at a meeting called for the purpose of voting on such approval. However,
any approval of this Agreement by the holders of a majority of the outstanding
shares (as defined in the 1940 Act) of a Series shall be effective to continue
this Agreement with respect to such Series notwithstanding (i) that this
Agreement has not been approved by the holders of a majority of the outstanding
shares of any other Series or (ii) that this agreement has not been approved by
the vote of a majority of the outstanding shares of the Fund, unless such
approval shall be required by any other applicable law or otherwise.
Notwithstanding the foregoing, this Agreement may be terminated with respect to
any Series covered by this Agreement: (a) by the Manager at any time, upon sixty
(60) days' written notice to the Portfolio Manager and the Fund, (b) at any time
without payment of any penalty by the Fund, by the Fund's Board of Trustees or a
majority of the outstanding voting securities of each Series, upon sixty (60)
days' written notice to the Manager and the Portfolio Manager, or (c) by the
Portfolio Manager upon three (3) months written notice unless the Fund or the
Manager requests additional time to find a replacement for the Portfolio
Manager, in which case the Portfolio Manager shall allow the additional time
requested by the Fund or Manager not to exceed three (3) additional months
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<PAGE>
beyond the initial three-month notice period; provided, however, that the
Portfolio Manager may terminate this Agreement at any time without penalty,
effective upon written notice to the Manager and the Fund, in the event either
the Portfolio Manager (acting in good faith) or the Manager ceases to be
registered as an investment adviser under the Advisers Act or otherwise becomes
legally incapable of providing investment management services pursuant to its
respective contract with the Fund, or in the event the Manager becomes bankrupt
or otherwise incapable of carrying out its obligations under this Agreement, or
in the event that the Portfolio Manager does not receive compensation for its
services from the Manager or the Fund as required by the terms of this
agreement.
In the event of termination for any reason, all records of each Series for
which the Agreement is terminated shall promptly be returned to the Manager or
the Fund, free from any claim or retention of rights in such record by the
Portfolio Manager, although the Portfolio Manager may, at its own expense, make
and retain a copy of such records. This Agreement shall automatically terminate
in the event of its assignment (as such term is described in the 1940 Act). In
the event this Agreement is terminated or is not approved in the manner
described above, the Sections or Paragraphs numbered 2(g), 8, 9, 10, 12, 13 and
14 of this Agreement shall remain in effect, as well as any applicable provision
of this Section numbered 15 and, to the extent that only amounts are owed to the
Portfolio Manager as compensation for services rendered while the agreement was
in effect, Section 6.
(b) NOTICES.
Any notice must be in writing and shall be sufficiently given (1) when
delivered in person, (2) when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by postage prepaid first class air mail
simultaneously dispatched), (3) when sent by internationally recognized
overnight courier service (with receipt confirmed by such overnight courier
service), or (4) when sent by registered or certified mail, to the other party
at the address of such party set forth below or at such other address as such
party may from time to time specify in writing to the other party.
If to the Fund:
Nicholas-Applegate Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Attention: James M. Hennessy
If to the Portfolio Manager:
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, CA 92101
Attention: E. Blake Moore
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<PAGE>
16. AMENDMENTS. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) the holders of a majority of the
outstanding voting securities of the Series, and (ii) the Trustees of the Fund,
including a majority of the Trustees of the Fund who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, if such approval is required by applicable
law.
17. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of the State of
California, , provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act or rules or orders of the SEC
thereunder, and without regard for the conflicts of laws principle thereof. The
term "affiliate" or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The Manager and the Portfolio Manager acknowledge that the Fund enjoys
the rights of a third-party beneficiary under this Agreement, and the Manager
acknowledges that the Portfolio Manager enjoys the rights of a third party
beneficiary under the Management Agreement.
(c) The captions of this Agreement are included for convenience only and in
no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
(d) To the extent permitted under Section 15 of this Agreement, this
Agreement may only be assigned by any party with the prior written consent of
the other parties.
(e) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable.
(f) Nothing herein shall be construed as constituting the Portfolio Manager
as an agent or co-partner of the Manager, or constituting the Manager as an
agent or co-partner of the Portfolio Manager.
(g) This agreement may be executed in counterparts.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first above written.
PILGRIM INVESTMENTS, INC.
By:
------------------------------
---------------------------------
Title
NICHOLAS-APPLEGATE CAPITAL
MANAGEMENT
By:
------------------------------
---------------------------------
Title
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<PAGE>
Schedule A
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Pilgrim Small Cap 0.50% of the Series' average net assets
Growth Fund
Pilgrim Mid Cap 0.375% of the first $500 million of the Series'
Growth Fund average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Pilgrim Large Cap 0.375% of the first $500 million of the Series'
Growth Fund average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Pilgrim Emerging
Countries Fund 0.625% of the Series' average net assets
Pilgrim Worldwide 0.50% of the first $500 million of the Series'
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
Pilgrim International 0.50% of the first $500 million of the Series'
Small Cap 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
Pilgrim International 0.50% of the first $500 million of the Series'
Core 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
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<PAGE>
Exhibit 5.1(a)(2)
PILGRIM INVESTMENTS, INC.
TWO RENAISSANCE SQUARE
PHOENIX, ARIZONA 85004-4424
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
Reference is hereby made to Section 2(a) of the Portfolio Management
Agreement dated as of _______, 1999 between you and us in respect of [Name of
Funds] which provides that in carrying out your duties under such Agreement you
will comply with our portfolio manager operating policies and procedures in
effect on the date of such Agreement. Attached hereto as Annex I is a list of
such policies and procedures. Please sign below to acknowledge your receipt and
acceptance of these policies and procedures.
Very truly yours,
PILGRIM INVESTMENTS, INC.
By: ___________________
Acknowledged and Agreed:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
By: _______________________
<PAGE>
Annex I
PORTFOLIO MANAGER OPERATING POLICIES AND PROCEDURES
In carrying its duties under the Portfolio Management Agreement, the
Portfolio Manager will comply with the following policies and procedures
(capitalized terms used herein shall have the meaning given such terms in the
Portfolio Management Agreement):
(a) The Portfolio Manager will manage each Series so that it meets the
income and asset diversification requirements of Section 851 of the Internal
Revenue Code.
(b) The Portfolio Manager will vote all proxies solicited by or with
respect to the issuers of securities which assets of the Series are invested
consistent with any procedures or guidelines promulgated by the Board or the
Manager, or if none, in the discretion of the Portfolio Manager based upon the
best interests of the Series. The Portfolio Manager will maintain appropriate
records detailing its voting of proxies on behalf of the Fund and will provide
to the Fund at least quarterly a report setting forth the proposals voted on and
how the Series' shares were voted since the prior report, including the name of
the corresponding issuers.
(c) In connection with the purchase and sale of securities for each Series,
the Portfolio Manager will arrange for the transmission to the custodian and
portfolio accounting agent for the Series on a daily basis, such confirmation,
trade tickets, and other documents and information, including, but not limited
to, Cusip, Sedol, or other numbers that identify securities to be purchased or
sold on behalf of the Series, as may be reasonably necessary to enable the
custodian and portfolio accounting agent to perform its administrative and
recordkeeping responsibilities with respect to the Series. With respect to
portfolio securities to be settled through the Depository Trust Company, the
Portfolio Manager will arrange for the prompt transmission of the confirmation
of such trades to the Fund's custodian and portfolio accounting agent.
(d) The Portfolio Manager will assist the custodian and portfolio
accounting agent for the Fund in determining or confirming, consistent with the
procedures and policies stated in the Registration Statement for the Fund or
adopted by the Board of Trustees, the value of any portfolio securities or other
assets of the Series for which the custodian and portfolio accounting agent
seeks assistance from or identifies for review by the Portfolio Manager. The
parties acknowledge that the Portfolio Manager is not a custodian of the Series'
assets and will not take possession or custody of such assets.
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<PAGE>
(e) The Portfolio Manager will provide the Manager, no later than the 20th
day following the end of each of the first three fiscal quarters of each Series
and the 45th day following the end of each Series' fiscal year, a letter to
shareholders (to be subject to review and editing by the Manager) containing a
discussion of those factors referred to in Item 5(a) of 1940 Act Form N-1A in
respect of both the prior quarter and the fiscal year to date.
(f) The Portfolio Manager will complete and deliver to the Manager a
written compliance checklist in a form provided by the Manager for each month by
the 10th day of the following month.
(g) The parties agree that in the event that the Manager or an affiliated
person of the Manager sends sales literature or other promotional material to
the Portfolio Manager for its approval and the Portfolio Manager has not
commented within 10 days, the Manager and its affiliated persons may use and
distribute such sales literature or other promotional material.
-16-
PILGRIM MUTUAL FUNDS
40 N. CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
April 1, 1999
Pilgrim Securities, Inc.
40 N. Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: UNDERWRITING AGREEMENT
Ladies and Gentlemen:
Pilgrim Mutual Funds is a Delaware business trust operating as an open-end
management investment company (hereinafter referred to as the "Trust"). The
Trust is registered as such under the Investment Company Act of 1940, as amended
(the "1940 Act"), and its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"). The Trust consists of eleven separate series:
Pilgrim International Core Growth Fund, Pilgrim Worldwide Growth Fund, Pilgrim
International Small Cap Growth Fund, Pilgrim Emerging Countries Fund, Pilgrim
Large Cap Growth Fund, Pilgrim Mid Cap Growth Fund, Pilgrim Small Cap Growth
Fund, Pilgrim Convertible Fund, Pilgrim Balanced Fund, Pilgrim Strategic Income
Fund and Pilgrim High Yield Fund II (the "Funds"). The Trust on behalf of the
Funds desires to offer and sell the authorized but unissued shares of the Funds
to the public in accordance with applicable federal and state securities laws.
You have informed us that Pilgrim Securities, Inc. is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934 and is
a member in good standing of the National Association of Securities Dealers,
Inc. You have indicated your desire to act as the exclusive selling agent and
principal underwriter for the shares of the Funds. We have been authorized by
the Trust to execute and deliver this Agreement to you by a resolution of our
Board of Trustees (the "Trustees") adopted at a meeting of the Trustees, at
which a majority of Trustees, including a majority of our Trustees who are not
otherwise interested persons of our investment manager or its related
organizations, were present and voted in favor of the said resolution approving
this Underwriting Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for distribution of the shares (other than sales made directly by the
Trust without sales charge) and agree that we will deliver to you such shares as
you may sell. You agree to use your best efforts to promote the sale of the
shares, but you are not obligated to sell any specific number of the shares.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
2
<PAGE>
or power to obligate or bind the Trust or the Funds by your actions, conduct or
contracts, except that you are authorized to accept orders for the purchase or
repurchase of the shares as our agent. You may appoint sub-agents or distribute
the shares through dealers (or otherwise) as you may determine necessary or
desirable from time to time. This Agreement shall not, however, be construed as
authorizing any dealer or other person to accept orders for sale or repurchase
on our behalf or to otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares of the Funds shall be offered at a price
equivalent to their net asset value plus, as appropriate, a variable percentage
of the public offering price as a sales load, as set forth in the Funds'
Prospectus. On each business day on which the New York Stock Exchange is open
for business, we will furnish you with the net asset value of the shares, which
shall be determined and become effective as of the close of business of the New
York Stock Exchange on that day. The net asset value so determined shall apply
to all orders for the purchase of the shares received by dealers prior to such
determination, and you are authorized in your capacity as our agent to accept
orders and confirm sales at such net asset value; PROVIDED THAT, such dealers
notify you of the time when they received the particular order and that the
order is placed with you prior to your close of business on the day on which the
applicable net asset value is determined. To the extent that our Shareholder
Servicing and Transfer Agent (collectively, "Agent") and the Custodian(s) for
any pension, profit-sharing, employer or self-employed plan receive payments on
behalf of the investors, such Agent and Custodian(s) shall be required to record
the time of such receipt with respect to each payment, and the applicable net
asset value shall be that which is next determined and effective after the time
of receipt by them. In all events, you shall forthwith notify all of the dealers
comprising your selling group and the Agent and Custodian(s) of the effective
net asset value as received from us. Should we at any time calculate our net
asset value more frequently than once each business day, you and we will follow
procedures with respect to such additional price or prices comparable to those
set forth above in this Section 3.
4. ORDERS. You shall promptly advise us of all purchase orders for shares
of the Funds received by you. Any order may be rejected by us; provided,
however, that we and the Trust will not arbitrarily or without reasonable cause
refuse to accept or confirm orders for the purchase of shares of a Fund. We or
our agent will confirm orders upon receipt, will make appropriate book entries
and, upon receipt by the Trust (or its agent) of payment therefor, will deliver
deposit receipts for the shares.
5. SALES COMMISSION.
(a) In respect of each Class of Shares other than Class B Shares:
(i) You shall be entitled to receive a sales commission on the
sale of shares of the Funds in the amounts and according to the procedures set
forth in the Funds' Prospectus then in effect under the 1933 Act (including any
supplements or amendments thereto).
(ii) In addition to the payments of the sales commissions to you
provided for in paragraph 5(a)(i), you may also receive reimbursement for
3
<PAGE>
expenses or a maintenance or trail fee as may be required by and described in
the distribution plans adopted by the Funds pursuant to Rule 12b-1 under the
1940 Act (the "Distribution Plans").
(b) In respect of the Class B Shares of each Fund, the following
provisions shall apply:
(i) In consideration of your services as principal underwriter of
the Funds' Class B Shares pursuant to this Underwriting Agreement and our
distribution plan pursuant to Rule 12b-1 under the 1940 Act in respect of such
shares (the "Class B Distribution Plan"), we agree: (I) to pay to you monthly in
arrears your "Allocable Portion" (as hereinafter defined) of a fee (the
"Distribution Fee") which shall accrue daily in an amount equal to the product
of (A) the daily equivalent of 0.75% per annum multiplied by (B) the net asset
value of the Class B Shares of each Fund outstanding on such day, and (II) to
withhold from redemption proceeds your Allocable Portion of the Contingent
Deferred Sales Charges ("CDSCs") and to pay the same over to you or at your
direction.
(ii) The Allocation Schedule attached hereto as Schedule A and
each of the provisions set forth in clauses (I) through (V) of the second
sentence of Section 1(A) of the Class B Distribution Plan as in effect on the
date hereof, together with the related definitions, are hereby incorporated
herein by reference with the same force and effect as if set forth herein in
their entirety.
(iii) In addition to the payments of amounts provided for in
Section 5(b)(i) and (ii), you may also receive reimbursement for expenses or a
maintenance or trail fee as may be required by and described in the Class B
Distribution Plan.
(c) You may allow appointed sub-agents or dealers such commissions or
discounts (not exceeding the total sales commission) as you shall deem
advisable, so long as any such commissions or discounts are set forth in the
Funds' then current Prospectus, to the extent required by the applicable federal
and state securities laws.
6. PAYMENT OF SHARES. At or prior to the time of delivery of any of our
shares you will pay or cause to be paid to the Custodian, for our account, an
amount in cash equal to the net asset value of such shares. In the event that
you pay for shares sold by you prior to your receipt of payment from purchasers,
you are authorized to reimburse yourself for the net asset value of such shares
from the offering price of such shares when received by you.
7. REDEMPTION. (a) We represent that any of the outstanding shares of a
Fund may be tendered for redemption at any time, and we represent that the Trust
will repurchase or redeem the shares so tendered in accordance with the Trust's
Declaration of Trust and Bylaws and the applicable provisions of the respective
Fund's Prospectus. The price to be paid to redeem or repurchase the shares shall
be equal to the net asset value, less any applicable contingent deferred sales
charge, if any, determined as set forth in the applicable Prospectus (the
"redemption price").
8. REGISTRATION OF SHARES. No shares shall be registered on our books until
(i) receipt by us of your written request therefor; (ii) receipt by the
Custodian and Agent of a certificate signed by an officer of the Trust stating
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<PAGE>
the amount to be received therefor; and (iii) receipt of payment of that amount
by the Custodian. We will provide for the recording of all shares purchased in
unissued form in "book accounts", unless a request in writing for certificates
is received by the Agent, in which case certificates for shares in such names
and amounts as is specified in such writing will be delivered by the Agent, as
soon as practicable after registration thereof on the books.
9. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase shares for your
own account for purposes of resale to the public, but you may purchase shares
for your own investment account upon your written assurance that the purchase is
for investment purposes only and that the shares will not be resold except
through redemption by us.
10. SALE OF SHARES TO AFFILIATES. You may sell the Class A and Class C
shares at net asset value, without a sales charge as appropriate, pursuant to a
uniform offer described in the Funds' current Prospectus (i) to our Trustees and
officers, our investment manager or your company or affiliated companies
thereof, (ii) to the bona fide, full time employees or sales representatives of
any of the foregoing who have acted as such for at least ninety (90) days, (iii)
to any trust, pension, profit-sharing, or other benefit plan for such persons,
or (iv) to any other person set forth in the Funds' then current Prospectus;
PROVIDED that such sales are made in accordance with the rules and regulations
under the 1940 Act and that such sales are made upon the written assurance of
the purchaser that the purchases are made for investment purposes only, not for
the purpose of resale to the public and that the shares will not be resold
except through redemption by us.
11. ALLOCATION OF EXPENSES.
(a) We will pay the following expenses in connection with the sales
and distribution of shares of the Funds:
(i) expenses pertaining to the preparation of our audited and
certified financial statements to be included in any amendments ("Amendments")
to our Registration Statement under the 1933 Act, including the Prospectuses and
Statements of Additional Information included therein;
(ii) expenses pertaining to the preparation (including legal
fees) and printing of all Amendments or supplements filed with the Securities
and Exchange Commission, including the copies of the Prospectuses and Statements
of Additional Information included in such Amendments and the first ten (10)
copies of the definitive Prospectuses and Statements of Additional Information
or supplements thereto, other than those necessitated by or related to your
(including your "Parents") activities where such amendments or supplements
result in expenses which we would not otherwise have incurred;
(iii) expenses pertaining to the preparation, printing, and
distribution of any reports or communications, including Prospectuses and
Statements of Additional Information, which are sent to our existing
shareholders;
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(iv) filing and other fees to federal and state securities
regulatory authorities necessary to register and maintain registration of the
shares; and
(v) expenses of the Agent, including all costs and expenses in
connection with the issuance, transfer and registration of the shares, including
but not limited to any taxes and other governmental charges in connection
therewith.
(b) Except to the extent that you are entitled to reimbursement under
the provisions of any of the Distribution Plans for the Funds, you will pay the
following expenses:
(i) expenses of printing additional copies of the Prospectus and
Statement of Additional Information and any amendments or supplements thereto
which are necessary to continue to offer our shares to the public;
(ii) expenses pertaining to the preparation (excluding legal
fees) and printing of all amendments and supplements to our Registration
Statement if the Amendment or supplement arises from or is necessitated by or
related to your (including your "Parent") activities where those expenses would
not otherwise have been incurred by us; and
(iii) expenses pertaining to the printing of additional copies,
for use by you as sales literature, of reports or other communications which
have been prepared for distribution to our existing shareholders or incurred by
you in advertising, promoting and selling our shares to the public. 12.
FURNISHING OF INFORMATION. We will furnish to you such information with respect
to our company and its shares, in such form and signed by such of our officers
as you may reasonably request, and we warrant that the statements therein
contained when so signed will be true and correct. We will also furnish you with
such information and will take such action as you may reasonably request in
order to qualify our shares for sale to the public under the Blue Sky Laws or in
jurisdictions in which you may wish to offer them. We will furnish you at least
annually with audited financial statements of our books and accounts certified
by independent public accountants, and with such additional information
regarding our financial condition, as you may reasonably request from time to
time.
13. CONDUCT OF BUSINESS. Other than the currently effective Prospectus and
Statement of Additional Information, you will not issue any sales material or
statements except literature or advertising which conforms to the requirements
of federal and state securities laws and regulations and which have been filed,
where necessary, with the appropriate regulatory authorities. You will furnish
us with copies of all such material prior to their use and no such material
shall be published if we shall reasonably and promptly object.
You shall comply with the applicable federal and state laws and regulations
where our shares are offered for sale and conduct your affairs with us and with
dealers, brokers or investors in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc.
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14. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If shares are tendered to
us for redemption or are repurchased by us within seven (7) business days after
your acceptance of the original purchase order for such shares, you will
immediately refund to us the full amount of any sales commission (net of
allowances to dealers or brokers) allowed to you on the original sale, and will
promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of
the balance of sales commissions reallowed by you. We shall notify you of such
tender for redemption within ten (10) days of the day on which notice of such
tender for redemption is received by us.
15. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be
deemed to be exclusive, and you may render similar services and act as an
underwriter, distributor or dealer for other investment companies in the
offering of their shares.
16. TERM OF AGREEMENT. This Agreement shall remain in effect until April 1,
2000, and shall continue annually thereafter for successive one (1) year periods
if approved at least annually (i) by a vote of a majority of the outstanding
voting securities of the Funds or by a vote of the Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust who are not interested
persons or parties to this Agreement (other than as Trustees of the Trust), cast
in person at a meeting called for the purpose of voting on this Agreement.
17. TERMINATION. This Agreement: (i) may be terminated at any time without
the payment of any penalty, either by vote of the Trustees of the Trust or by a
vote of a majority of the outstanding voting securities of each Fund, on sixty
(60) days' written notice to you; (ii) shall terminate immediately in the event
of its assignment; and (iii) may be terminated by you on sixty (60) days'
written notice to us.
18. SUSPENSION OF SALES. We reserve the right at all times to suspend or
limit the public offering of the shares upon written notice to you, and to
reject any order in whole or in part.
19. MISCELLANEOUS. This Agreement shall be subject to the laws of the State
of Arizona and shall be interpreted and construed to further and promote the
operation of the Trust as an open-end investment company. As used herein, the
terms "Net Asset Value," "Offering Price," "Investment Company," "Open-End
Investment Company," "Assignment," "Principal Underwriter," "Interested Person,"
"Parents," and "Majority of the Outstanding Voting Securities," shall have the
meanings set forth in the 1933 Act and the 1940 Act, as applicable, and the
rules and regulations promulgated thereunder.
20. LIABILITY. Nothing contained herein shall be deemed to protect you
against any liability to us or to our shareholders to which you would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
21. AMENDMENT. This Agreement may be amended with respect to a Fund by the
parties only if such amendment is specifically approved by (a) the Trustees or
by the vote of a majority of the outstanding voting securities of the Fund, and
(b) by the vote of a majority of the distinerested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
7
<PAGE>
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed counterparts hereof and returning
such counterparts to us, whereupon this shall constitute a binding agreement as
of the date first above written.
Very truly yours,
PILGRIM MUTUAL FUNDS
(on behalf of each series)
By: _____________________________
Title: _____________________________
Agreed to and Accepted:
PILGRIM SECURITIES, INC.
By: ______________________________
Title: ______________________________
8
<PAGE>
SCHEDULE A
to the Underwriting Agreement
UNDERWRITING AGREEMENT ALLOCATION PROCEDURES
CDSCs and Distribution Fees related to Shares of each separate series of
Pilgrim Mutual Funds (each a "Fund") shall be allocated by such Fund among
Pilgrim Securities, Inc. ("PSI") and any replacement principal underwriter for
Shares of such Fund (the "Successor Distributor") in accordance with this
Schedule A.
Defined terms used in this Schedule A and not otherwise defined herein
shall have the meaning assigned to them in the Underwriting Agreement for Shares
of each Fund to which this Schedule A is attached. As used herein the following
terms shall have the meanings indicated.
"COMMISSION SHARE" means, in respect of any Fund, each Share of such Fund
which is issued under circumstances which would normally give rise to an
obligation of the holder of such Share to pay a CDSC upon redemption of such
Share (including, without limitation, any Share of such Fund issued in
connection with a Free Exchange) and any such Share shall continue to be a
Commission Share of such Fund prior to the redemption (including a redemption in
connection with a Free Exchange) or conversion of such Share, even though the
obligation to pay the CDSC may have expired or conditions for waivers thereof
may exist.
"DATE OF ORIGINAL ISSUANCE" means in respect of any Commission Share, the
date with reference to which the amount of the CDSC payable on redemption
thereof, if any, is computed.
"FREE EXCHANGE" means an exchange of a Commission Share of one Fund for a
Commission Share of another Fund under circumstances where the CDSC which would
have been payable in respect of a redemption of the exchanged Commission Share
on the date of such exchange is waived and the Commission Share issued in such
exchange is treated as a continuation of the investment in the Commission Share
exchanged for purposes of determining the CDSC payable if such Commission Share
issued in the exchange is thereafter redeemed.
"FREE SHARE" means, in respect of any Fund, each Share of such Fund, other
than a Commission Share, including, without limitation, any Share issued in
connection with the reinvestment of dividends or capital gains.
"INCEPTION DATE" means, in respect of any Fund, the first date on which
such Fund issued Shares.
"NET ASSET VALUE" means, (i) with respect to any Fund, as of the date any
determination thereof is made, the net asset value of such Fund computed in the
manner such value is required to be computed by such Fund in its reports to its
shareholders, and (ii) with respect to any Share of such Fund as of any date,
the quotient obtained by dividing: (A) the net asset value of such Fund (as
9
<PAGE>
computed in accordance with clause (i) above) allocated to Shares of such Fund
(in accordance with the constituent documents for such Fund) as of such date, by
(B) the number of Shares of such Fund outstanding on such date.
"OMNIBUS SHARE" means, in respect of the Fund, a Commission Share or Free
Share sold by one of the Selling Agents listed on Exhibit I to this Schedule. If
PSI and its Transferees reasonably determine that the Transfer Agent is able to
track all Commission Shares and Free Shares sold by any of the Selling Agents
listed on Exhibit I (taking into account all information provided to the
Transfer Agent by such Selling Agent on a schedule sufficient to enable the
Transfer Agent to Complete all required reports involving such information in a
timely manner), in the same manner as Commission Shares and Free Shares are
currently tracked in respect of Selling Agents not listed on Exhibit I, then
Exhibit I shall be amended to delete such Selling Agent from Exhibit I so that
Commission Shares and Free Shares sold by such Selling Agent will no longer be
treated as Omnibus Shares.
"SHARE" means, in respect of any Fund, each Class B share of such Fund.
PART I: ATTRIBUTION OF SHARES
Shares of each Fund, which are outstanding from time to time, shall be
attributed to PSI and any Successor Distributor in accordance with the following
rules;
(1) COMMISSION SHARES OTHER THAN OMNIBUS SHARES:
(a) Commission Shares (excluding Omnibus Shares) attributed to PSI shall be
Commission Shares (excluding Omnibus Shares) the Date of Original Issuance of
which occurred on or after the Inception Date of such Fund and on or prior to
the last day on which PSI acts as principal underwriter of Shares for such Fund.
(b) Commission Shares (excluding Omnibus Shares) attributable to the
Successor Distributor shall be Commission Shares (excluding Omnibus Shares) the
Date of Original Issuance of which occurs on or after the first day on which
such Successor Distributor acts as principal underwriter of Shares for such Fund
and on or prior to the last day such Successor for Distributor acts as principal
underwriter of Shares for such Fund.
(c) A Commission Share (other than an Omnibus Share) of a particular Fund
(the "ISSUING FUND") issued in consideration of the investment of proceeds of
the redemption of a Commission Share of another Fund (the "REDEEMING FUND") in
connection with a Free Exchange, is deemed to have a Date of Original Issuance
identical to the Date of Original Issuance of the Commission Share of the
Redeeming Fund and any such Commission Share will be attributed to PSI or the
Successor Distributor based upon such Date of Original Issuance in accordance
with Part I(a) and (b) above.
(d) A Commission Share (other than an Omnibus Share) redeemed (other than
in connection with a Free Exchange) or converted to a Class A share is
attributable to PSI or Successor Distributor based upon the Date of Original
Issuance in accordance with Part I(a), (b) and (c) above.
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<PAGE>
(2) FREE SHARES OTHER THAN OMNIBUS SHARES:
Free Shares (excluding Omnibus Shares) of a Fund outstanding on any date
shall be attributed to PSI or a Successor Distributor, as the case may be, in
the same proportion that the Commission Shares (excluding Omnibus Shares) of
such Fund outstanding on such date are attributed to it on such date; PROVIDED
that if PSI reasonably determines that the Transfer Agent or the Selling Agent
is able to produce monthly reports which track the Date of Original Issuance for
the Commission Shares related to such Free Shares, then the Free Shares shall be
allocated pursuant to clause 1(a), (b) and (c) above.
(3) OMNIBUS SHARES:
Omnibus Shares of the Fund outstanding on any date shall be attributed to
PSI or a Successor Distributor, as the case may be, in the same proportion that
the Commission Shares which are not Omnibus Shares of the Fund outstanding on
such date are attributed to it on such date; PROVIDED that if PSI and its
transferees reasonably determine that the Transfer Agent is able to produce
monthly reports which track the Date of Original Issuance for the Omnibus
Shares, then the Omnibus Shares shall be allocated pursuant to clause 1(a), (b)
and (c) above.
PART II: ALLOCATION OF CDSCS
(1) CDSCS RELATED TO THE REDEMPTION OF COMMISSION SHARES OTHER THAN OMNIBUS
SHARES:
CDSCs in respect of the redemption of Commission Shares which are not
Omnibus Shares shall be allocated to PSI or Successor Distributor depending upon
whether the related redeemed Commission Share is attributable to PSI or
Successor Distributor, as the case may be, in accordance with Part I above.
(2) CDSCS RELATED TO THE REDEMPTION OF OMNIBUS SHARES:
CDSCs in respect of the redemption of Omnibus Shares shall be allocated to
PSI or a Successor Distributor in the same proportion that CDSCs related to the
redemption of Commission Shares are allocated to each thereof; PROVIDED, that if
PSI and its transferees reasonably determine that the Transfer Agent is able to
produce monthly reports which track the Date of Original Issuance for the
Omnibus Shares, then the CDSCs in respect of the redemption of Omnibus Shares
shall be allocated among PSI and any Successor Distributors depending on whether
the related redeemed Omnibus Share is attributable to PSI or a Successor
Distributor, as the case may be, in accordance with Part I above.
PART III: ALLOCATION OF DISTRIBUTION FEES
Assuming that the Distribution Fee remains constant over time and among
Funds so that Part IV hereof does not become operative:
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(1) The portion of the aggregate Distribution Fees accrued in respect of
all Shares of all Funds during any calendar month allocable to PSI or a
Successor Distributor is determined by multiplying the total of such
Distribution Fees by the following fraction:
(A + C) /2
(B + D) /2
where:
A = The aggregate net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the beginning of such calendar month
B = the aggregate Net Asset Value of all Shares of all Funds at the beginning
of such calendar month
C = The aggregate Net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the end of such calendar month
D = The aggregate Net Asset Value of all Shares of all Funds at the end of
such calendar month
(2) If PSI reasonably determines that the Fund or its transfer agent is
able to produce automated monthly reports which allocate the average Net Asset
Value of the Commission Shares (or all Shares if available) of all Funds among
PSI and each Successor Distributor in a manner consistent with the methodology
detailed in Part I and Part III(1) above, the portion of the Distribution Fees
accrued in respect of all such Shares of all Funds during a particular calendar
month will be allocated to PSI or each Successor Distributor by multiplying the
total of such Distribution Fees by the following fraction:
(A) / (B)
where:
A = Average Net Asset Value of all such Shares of all Funds for such calendar
month attributed to PSI or such Successor Distributor, as the case may be
B = Total average Net Asset Value of all such Shares of all Funds for such
calendar month
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<PAGE>
PART IV: ADJUSTMENT OF PSI'S SHARE AND SUCCESSOR DISTRIBUTORS' SHARES
If the terms of any Underwriting Agreement, any Plan, any Prospectus,
the Conduct Rules or any other applicable law change the rate at which
Distribution Fees or Service Fees are computed with reference to the Net Asset
Value of Shares of any Fund, these allocation procedures must be revised in
light of such changes in a manner which carries out the intent of these
allocation procedures.
13
<PAGE>
EXHIBIT I
To Schedule A
to the Pilgrim Mutual Funds
Underwriting Agreement
SELLING AGENTS
Merrill Lynch
EXPENSE LIMITATION AGREEMENT
PILGRIM MUTUAL FUNDS
EXPENSE LIMITATION AGREEMENT, effective as of ___________, 1999 by and
between Pilgrim Investments, Inc. (the "Investment Manager"), Nicholas-Applegate
Capital Management (the "Portfolio Manager") and Pilgrim Mutual Funds (the
"Trust"), on behalf of each series of the Trust set forth in SCHEDULE A (each a
"Fund," and collectively, the "Funds").
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 each Fund is a series of the Trust;
and
WHEREAS, the Trust and the Investment Manager have entered into an
Investment Management Agreement dated _____________, 1999 ("Management
Agreement"), pursuant to which the Investment Manager provides investment
management services to each Fund for compensation based on the value of the
average daily net assets of each such Fund; and
WHEREAS, the Investment Manager and the Portfolio Manager have entered into
a Portfolio Management Agreement dated ____________, 1999, pursuant to which the
Portfolio Manager provides investment advisory services to each Fund identified
in SCHEDULE B (the "Sub-Advised Funds") for compensation based on the value of
the average daily net assets of each such Sub-Advised Fund; and
WHEREAS, the Trust, the Investment Manager and the Portfolio Manager have
determined that it is appropriate and in the best interests of each Fund and its
shareholders to maintain the expenses of each Fund at a level below the level to
which each such Fund may normally be subject;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the ordinary operating
expenses incurred by a Fund in any fiscal year, including but not limited to
investment management fees of the Investment Manager, but excluding interest,
taxes, brokerage commissions, other investment-related costs, extraordinary
expenses such as litigation, other expenses not incurred in the ordinary course
of such 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
that term is defined in the 1940 Act, of the Investment Manager ("Fund Operating
Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below,
such excess amount (the "Excess Amount") shall be the liability of the
Investment Manager.
1.2. OPERATING EXPENSE LIMIT. The Operating Expense Limit in any year with
respect to each Fund shall be the amount specified in SCHEDULE A based on a
percentage of the average daily net assets of each Fund.
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<PAGE>
1.3. DURATION OF OPERATING EXPENSE LIMIT. The Operating Expense Limit with
respect to each Fund shall remain in effect until the date specified for that
Fund on SCHEDULE C. Subject to the consent of the Portfolio Manager with respect
to the Sub-Advised Funds, the Investment Manager may extend, but may not during
the term of this Agreement shorten, the duration of the Operating Expense Limit
for any Fund without the consent of the Trust by delivering a revised SCHEDULE C
to the Trust reflecting such extension. Such an extension must continue at the
same Operating Expense Limit amount specified on SCHEDULE A.
1.4. METHOD OF COMPUTATION. To determine the Investment Manager's
obligation with respect to the Excess Amount, each day the Fund Operating
Expenses for each Fund shall be annualized. If the annualized Fund Operating
Expenses for any day of a Fund exceed the Operating Expense Limit of such Fund,
the Investment Manager shall remit to the appropriate Fund or Funds an amount
that, together with the waived or reduced investment management fee, is
sufficient to pay that day's Excess Amount. The Trust may offset amounts owed to
the Funds pursuant to this Agreement against the advisory fee payable to the
Investment Manager.
1.5. 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 investment management fees
waived or reduced and other payments remitted by the Investment Manager to the
Fund or Funds with respect to the previous fiscal year shall equal the Excess
Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If on any day during which the Management Agreement is
in effect, the estimated annualized Fund Operating Expenses of such Fund for
that day are less than the Operating Expense Limit, the Investment Manager shall
be entitled to reimbursement by such Fund of the investment management fees
waived or reduced and other payments remitted by the Investment Manager to such
Fund pursuant to Section 1 hereof (the "Reimbursement Amount") during any of the
previous thirty-six (36) months, to the extent that the Fund's annualized
Operating Expenses plus the amount so reimbursed equals, for such day, the
Operating Expense Limit provided in SCHEDULE A, provided that such amount paid
to the Investment Manager will in no event exceed the total Reimbursement Amount
and will not include any amounts previously reimbursed.
2.2. 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 Fund for
the prior fiscal year (including any reimbursement payments hereunder with
respect to such fiscal year) do not exceed the Operating Expense Limit.
3. ALLOCATION BETWEEN INVESTMENT MANAGER AND PORTFOLIO MANAGER WITH RESPECT TO
SUB-ADVISED FUNDS.
3.1. ALLOCATION OF EXCESS AMOUNT. For so long as the fee payable to the
Portfolio Manager under the Portfolio Management Agreement is equal to 50% of
the advisory fee payable to the Investment Manager by a Sub-Advised Fund, the
Portfolio Manager shall waive or reduce its portfolio management fee and/or
promptly remit to the Investment Manager an amount that is sufficient to pay 50%
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<PAGE>
of any Excess Amount paid to that Sub-Advised Fund by the Investment Manager
pursuant to Section 1 of this Agreement. The Investment Manager may offset
amounts owed to the Investment Manager pursuant to this Section 3.1 against the
portfolio management fee paid to the Portfolio Manager.
3.2. ALLOCATION OF REIMBURSEMENTS. The Investment Manager shall promptly
remit to the Portfolio Manager 50% of any amount reimbursed to the Investment
Manager by any Sub-Advised Fund pursuant to Section 2 of this Agreement.
3.3. ACCOUNTING. The Trust and the Investment Manager will provide to the
Portfolio Manager reasonable access to the books and records of each for
purposes of confirming the amounts contributed and reimbursed under this
Agreement.
4. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall terminate upon termination of the Investment
Management Agreement. The obligations of the Investment Manager and the
Portfolio Manager pursuant to Section 3 of this Agreement shall terminate upon
termination of the Portfolio Management Agreement. This Agreement may be
terminated by the Trust or, after ___________, 2001, by the Investment Manager,
without payment of any penalty, upon ninety (90) days' prior written notice to
the other party at its principal place of business.
5. MISCELLANEOUS.
5.1. 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.
5.2. INTERPRETATION. Nothing herein contained shall be deemed to require
the Trust or the Funds to take any action contrary to the Trust's 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 Funds.
5.3. DEFINITIONS. Any question of interpretation of any term or provision
of this Agreement, including but not limited to the investment management 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 or the 1940 Act, shall have the same meaning as and be
resolved by reference to such Management Agreement or the 1940 Act.
5.4. AMENDMENTS. This Agreement may be amended only by a written agreement
signed by each of the parties hereto.
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<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
EACH OF ITS SERIES
By: _______________________________
Name:
Title:
PILGRIM INVESTMENTS, INC.
By: _______________________________
Name:
Title:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT L.P.
By: _______________________________
Name:
Title:
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<PAGE>
SCHEDULE A
OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
Maximum Operating Expense Limit
NAME OF FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ------------ -------------------------------------------
CLASS A CLASS B CLASS C CLASS Q
------- ------- ------- -------
Pilgrim Small Cap Growth Fund 1.95% 2.60% 2.60% 1.50%
Pilgrim Mid Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Large Cap Growth Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Convertible Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Balanced Growth Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim High Quality Bond Fund 0.95% 1.35% 1.35% 0.85%
Pilgrim Emerging Countries Fund 2.25% 2.90% 2.90% 1.90%
Pilgrim Worldwide Growth Fund 1.85% 2.50% 2.50% 1.60%
Pilgrim International Small Cap
Growth Fund 1.95% 2.60% 2.60% 1.65%
Pilgrim International Core
Growth Fund 1.95% 2.60% 2.60% 1.65%
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SCHEDULE B
SUB-ADVISED FUNDS
Pilgrim Small Cap Growth Fund
Pilgrim Mid Cap Growth Fund
Pilgrim Large Cap Growth Fund
Pilgrim Convertible Fund
Pilgrim Emerging Countries Fund
Pilgrim Worldwide Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim International Core Growth Fund
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<PAGE>
SCHEDULE C
DURATION OF OPERATING EXPENSE LIMITS
The duration of each Operating Expense Limit shall be as follows:
Date on Which Operating
NAME OF FUND Expense Limit Terminates
------------ ------------------------
Pilgrim Small Cap Growth Fund __/__/01
Pilgrim Mid Cap Growth Fund __/__/01
Pilgrim Large Cap Growth Fund __/__/01
Pilgrim Convertible Fund __/__/01
Pilgrim Balanced Growth Fund __/__/01
Pilgrim High Quality Bond Fund __/__/01
Pilgrim Emerging Countries Fund __/__/01
Pilgrim Worldwide Growth Fund __/__/01
Pilgrim International Small Cap Growth Fund __/__/01
Pilgrim International Core Growth Fund __/__/01
-8-
Amended and Restated
Service and Distribution Plan for
NICHOLAS-APPLEGATE MUTUAL FUNDS
(to be renamed Pilgrim Mutual Funds)
Class A Shares
<PAGE>
SERVICE AND DISTRIBUTION PLAN
WHEREAS, Nicholas-Applegate Mutual Funds (to be renamed Pilgrim Mutual
Funds) (the "Trust") engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule signed on behalf of the
Trust and the Distributor;
WHEREAS, shares of beneficial interest of the Funds are divided into
classes of shares, one of which is designated Class A;
WHEREAS, the Trust employs Pilgrim Securities, Inc. (the "Distributor") as
distributor of the securities of which it is the issuer; and
WHEREAS, the Trust and the Distributor have entered into an Underwriting
Agreement pursuant to which the Trust has employed the Distributor in such
capacity during the continuous offering of shares of the Trust; and
WHEREAS, the Trust wishes to amend and restate the Distribution Plan and
the Shareholder Service Plan of the Funds with respect to Class A shares as set
forth hereinafter.
NOW, THEREFORE, the Trust hereby adopts on behalf of the Funds with respect
to its Class A shares, and the Distributor hereby agrees to the terms of the
Plan, in accordance with Rule 12b-l under the Act, on the following terms and
conditions:
1. A. The Funds shall pay to the Distributor, as the distributor of the
Class A shares of the Funds, a fee for distribution of the shares at the rate of
up to 0.10% on an annualized basis of the average daily net assets of the Funds'
Class A shares, provided that, at any time such payment is made, whether or not
this Plan continues in effect, the making thereof will not cause the limitation
upon such payments established by this Plan to be exceeded. Such fee shall be
calculated and accrued daily and paid monthly or at such intervals as the Board
of Trustees shall determine, subject to any applicable restriction imposed by
rules of the National Association of Securities Dealers, Inc.
B. In addition to the amount provided in 1.A. above, the Funds shall pay
to the Distributor, as the distributor of the Class A shares of the Funds, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Funds' Class A shares, provided that, at any time such payment is
made, whether or not this Plan continues in effect, the making thereof will not
cause the limitation upon such payments established by this Plan to be exceeded.
Such fee shall be calculated and accrued daily and paid monthly or at such
intervals as the Board of Trustees shall determine, subject to any applicable
restriction imposed by rules of the National Association of Securities Dealers,
Inc.
2. The amount set forth in paragraph 1.A. of this Plan shall be paid for
the Distributor's services as distributor of the shares of the Funds in
connection with any activities or expenses primarily intended to result in the
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<PAGE>
sale of the Class A shares of the Funds, including, but not limited to, payment
of compensation, including incentive compensation, to securities dealers (which
may include the Distributor itself) and other financial institutions and
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services may include, among other things, processing new shareholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in answering questions concerning the Funds
and their transactions with the Funds. The Distributor is also authorized to
engage in advertising, the preparation and distribution of sales literature and
other promotional activities on behalf of the Funds. In addition, this Plan
hereby authorizes payment by the Fund of the cost of preparing, printing and
distributing Fund Prospectuses and Statements of Additional Information to
prospective investors and of implementing and operating the Plan. Distribution
expenses also include an allocation of overhead of the Distributor and accruals
for interest on the amount of distribution expenses that exceed distribution
fees and contingent deferred sales charges received by the Distributor.
The amount set forth in paragraph 1.B. of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trust's
Board of Trustees and (b) those Trustees of the Trust who are not "interested
persons" of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
4. After approval as set forth in paragraph 3, and any other approvals
required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take
effect at the time specified by the Trust's Board of Trustees. The Plan shall
continue in full force and effect as to the Class A shares of the Funds for so
long as such continuance is specifically approved at least annually in the
manner provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trustees of the Trust, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without payment
of any penalty, by vote of the Trustees of the Trust, by vote of a majority of
the Rule 12b-l Trustees, or by a vote of a majority of the outstanding voting
securities of Class A shares of the Funds on not more than 30 days' written
notice to any other party to the Plan.
-3-
<PAGE>
7. This Plan may not be amended to increase materially the amount of
distribution fee (including any service fee) provided for in paragraph 1 hereof
unless such amendment is approved by a vote of the shareholders of the Class A
shares of each of the Funds, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 6 hereof, for a period of not less
than six years from the date of this Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible place.
10. The provisions of this Plan are severable as to each Fund, and any
action to be taken with respect to this Plan shall be taken separately for each
Fund affected by the matter.
Last revised: ______________, 1999
-4-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CURRENT NAME OF SERIES: TO BE RENAMED:
- ----------------------- --------------
<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 Growth Fund
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
Amended and Restated
Service and Distribution Plan for
NICHOLAS-APPLEGATE MUTUAL FUNDS
(to be renamed Pilgrim Mutual Funds)
Class B Shares
<PAGE>
SERVICE AND DISTRIBUTION PLAN
WHEREAS, Nicholas-Applegate Mutual Funds (to be renamed Pilgrim Mutual
Funds) (the "Trust") engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule signed on behalf of the
Trust and the Distributor;
WHEREAS, shares of common stock of the Funds are divided into classes of
shares, one of which is designated Class B;
WHEREAS, the Trust employs Pilgrim Securities, Inc. as distributor of the
securities of which it is the issuer and may from time to time retain, pursuant
to the terms of a distribution agreement with such person (each, an
"Underwriting Agreement") other persons to so act pursuant to the Plan (each
such person so acting from time to time, the "Distributor");
WHEREAS, the Trust and the Distributor have entered into an Underwriting
Agreement pursuant to which the Trust has employed the Distributor in such
capacity during the continuous offering of shares of the Trust; and
WHEREAS, the Trust wishes to amend and restate the Distribution Plan and
the Shareholder Service Plan of the Funds with respect to Class B shares as set
forth hereinafter.
NOW, THEREFORE, the Trust hereby adopts this Plan on behalf of the Funds
with respect to its Class B shares, in accordance with Rule 12b-l under the Act,
on the following terms and conditions:
1. A. Each Fund shall pay to each Distributor, as compensation for acting
as principal distributor in respect of the Class B Shares (as hereinafter
defined) of the Fund its "Allocable Portion" (as hereinafter defined) of a fee
(the "Distribution Fee"), which shall accrue daily at the rate of 0.75% per
annum of the Fund's average daily net assets attributable to Class B Shares of
the Fund and be payable monthly or at such other intervals as the Trustees shall
determine, subject to any applicable restriction imposed by rules of the
National Association of Securities Dealers, Inc. ("NASD").
The Underwriting Agreement between the Trust and each Distributor relating
to the Class B Shares shall provide that:
(I) the Distributor will be deemed to have performed all services
required to be performed in order to be entitled to receive its
Allocable Portion (as defined below) of the Distribution Fee payable
in respect of the Class B Shares upon the settlement date of each sale
of a "Commission Share" (as defined in the Allocation Schedule
attached to the Underwriting Agreement) taken into account in
determining such Distributor's Allocable Portion of such Distribution
Fee;
<PAGE>
(II) notwithstanding anything to the contrary in this Plan or the
Underwriting Agreement, each Fund's obligation to pay such Distributor
its Allocable Portion of the Distribution Fee payable shall not be
terminated or modified (including, without limitation, by change in
the rules applicable to the conversion of Class B Shares into shares
of another class) for any reason (including a termination of the
Underwriting Agreement between such Distributor and the Fund) except:
(a) to the extent required by a change in the Investment
Company Act of 1940 (the "Act"), the rules and regulations under
the Act, the Conduct Rules of the NASD or other applicable law,
in each case enacted or promulgated after December 10, 1998,
(b) on a basis which does not alter the Distributor's
Allocable Portion of the Distribution Fee computed with reference
to Commission Shares the Date of Original Issuance (as defined in
the Allocation Schedule attached to the Underwriting Agreement)
of which occurs on or prior to the adoption of such termination
or modification and with respect to Free Shares (as defined in
the Allocation Schedule) which would be attributed to such
Distributor under the Allocation Schedule with reference such
Commission Shares,
(c) in connection with a "Complete Termination" (as
hereinafter defined) of the Plan; or
(d) on a basis, determined by the Board of Trustees of the
Trust, including a majority of those who are not "interested
persons" of the Trust (as such term is defined in the Act),
acting in good faith, so long as from and after the effective
date of such modification or termination, neither the Trust or
any Affected Fund (as hereinafter defined) nor Pilgrim
Securities, Inc. or any successor sponsor of the Affected Funds
or any affiliate of any of the foregoing, pay, directly or
indirectly, a fee, trailer fee, or expense reimbursement to any
person for the provision of shareholder services to the holders
of Class B Shares;
(III) the Funds will not take any action to waive or change any
CDSC in respect of the Class B Shares the Date of Original Issuance
(as defined in the Allocation Schedule attached to the Underwriting
Agreement) of which occurs, on or prior to the taking of such action
except as provided in the Funds' prospectus or statement of additional
information on the date such Commission Share was issued, without the
consent of such Distributor and its Transferees;
-2-
<PAGE>
(IV) notwithstanding anything to the contrary in this
Distribution Plan or the Underwriting Agreement, neither the
termination of such Distributor's role as principal distributor of the
Class B Shares, nor the termination of such Underwriting Agreement nor
the termination of this Plan will terminate such Distributor's right
to its Allocable Portion of the CDSCs; and
(V) notwithstanding anything to the contrary in the Distribution
Plan or the Underwriting Agreement, such Distributor may assign, sell
or pledge (collectively, "Transfer") its rights to its Allocable
Portion of the Distribution Fees and CDSCs and, upon receipt of notice
of such Transfer, each Fund shall pay to the assignee, purchaser or
pledgee (collectively with their subsequent transferees,
"Transferees"), as third party beneficiaries of such Underwriting
Agreement, such portion of such Distributor's Allocable Portion of the
Distribution Fees or CDSCs in respect of the Class B Shares so sold or
pledged, and except as provided in (II) above and notwithstanding
anything of the contrary set forth in this Plan or in the Underwriting
Agreement, each Fund's obligation to pay such Distributor's Allocable
Portion of the Distribution Fees and CDSCs payable in respect of the
Class B Shares shall be absolute and unconditional and shall not be
subject to dispute, offset, counterclaim or any defense whatsoever, at
law or equity, including, without limitation, any of the foregoing
based on the insolvency or bankruptcy of such Distributor.
For purposes of this Plan, the term "Allocable Portion" of
Distribution Fees or CDSCs payable in respect of the Class B Shares as applied
to any Distributor shall mean the portion of such Distribution Fees or CDSCs
payable in respect of such Class B Shares allocated to such Distributor in
accordance with the Allocation Schedule (attached to the Underwriting Agreement
as it relates to the Class B Shares). For purposes of this Plan and each
Distribution Agreement, the term "Complete Termination" of the Plan means a
termination of this Plan and every other distribution plan of the Funds for
Class B shares, each successor trust or fund, and each trust or fund acquiring a
substantial portion of the assets of the Funds (collectively, the "Affected
Funds") involving the complete cessation of the payment of Distribution Fees in
respect of all current Class B shares of each Affected Fund and each future
class of shares of each Affected Fund which has substantially similar
characteristics to the shares of the current Class B shares of the Funds,
including the manner of payment and amount of sales charge, contingent deferred
sales charge or other similar charges borne directly or indirectly by the
holders of such shares (all such classes of shares "Class B Shares").
B. In addition to the amount provided in 1.A. above, the Funds shall pay to
the Distributor, as the distributor of the Class B shares of the Funds, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Funds' Class B shares, provided that, at any time such payment is
made, whether or not this Plan continues in effect, the making thereof will not
cause the limitation upon such payments established by this Plan to be exceeded.
-3-
<PAGE>
Such fee shall be calculated and accrued daily and paid monthly or at such
intervals as the Board of Trustees shall determine, subject to any applicable
restriction imposed by rules of the NASD.
2. The amount set forth in paragraph 1.A. of this Plan shall be paid for
the Distributor's services as distributor of the shares of the Funds in
connection with any activities or expenses primarily intended to result in the
sale of the Class B shares of the Funds, including, but not limited to, payment
of compensation, including incentive compensation, to securities dealers (which
may include the Distributor itself) and other financial institutions and
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services may include, among other things, processing new shareholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in providing information and answering
questions concerning the Funds and their transactions with the Funds. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Funds. In addition, this Plan hereby authorizes payment by the Fund's of the
cost of printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Distribution expenses also include an allocation of overhead of the Distributor
and accruals for interest on the amount of distribution expenses that exceed
distribution fees and contingent deferred sales charges received by the
Distributor. Payments under the Plan are not tied exclusively to actual
distribution and service expenses, and the payments may exceed distribution and
service expenses actually incurred.
The amount set forth in paragraph 1.B. of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trust's
Board of Trustees and (b) those Trustees of the Trust who are not "interested
persons" of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
4. After approval as set forth in paragraph 3, and any other approvals
required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take
effect at the time specified by the Trust's Board of Trustees. The Plan shall
continue in full force and effect as to the Class B shares of the Funds for so
long as such continuance is specifically approved at least annually in the
manner provided for approval of this Plan in paragraph 3.
-4-
<PAGE>
5. The Distributor shall provide to the Trustees of the Trust, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without payment
of any penalty, by vote of the Trustees of the Trust, by vote of a majority of
the Rule 12b-l Trustees, or by a vote of a majority of the outstanding voting
securities of Class B shares of the Funds on not more than 30 days' written
notice to any other party to the Plan.
7. This Plan may not be amended to increase materially the amount of
distribution fee (including any service fee) provided for in paragraph 1 hereof
unless such amendment is approved by a vote of the shareholders of the Class B
shares of each of the Funds, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 6 hereof, for a period of not less
than six years from the date of this Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible place.
10. The provisions of this Plan are severable as to each Fund, and any
action to be taken with respect to this Plan shall be taken separately for each
Fund affected by the matter.
Last revised: ______________, 1999
-5-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CURRENT NAME OF SERIES: TO BE RENAMED:
- ----------------------- --------------
<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 Growth Fund
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
-6-
Amended and Restated
Service and Distribution Plan for
NICHOLAS-APPLEGATE MUTUAL FUNDS
(to be renamed Pilgrim Mutual Funds)
Class C Shares
<PAGE>
SERVICE AND DISTRIBUTION PLAN
WHEREAS, Nicholas-Applegate Mutual Funds (to be renamed Pilgrim Mutual
Funds) (the "Trust") engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule signed on behalf of the
Trust and the Distributor;
WHEREAS, shares of common stock of the Funds are divided into classes of
shares, one of which is designated Class C;
WHEREAS, the Trust employs Pilgrim Securities, Inc. (the "Distributor") as
distributor of the securities of which it is the issuer; and
WHEREAS, the Trust and the Distributor have entered into an Underwriting
Agreement pursuant to which the Trust has employed the Distributor in such
capacity during the continuous offering of shares of the Trust; and
WHEREAS, the Trust wishes to amend and restate the Distribution Plan and
the Shareholder Service Plan of the Funds with respect to Class C shares as set
forth hereinafter.
NOW, THEREFORE, the Trust hereby adopts this Plan on behalf of the Funds
with respect to its Class C shares, in accordance with Rule 12b-l under the Act,
on the following terms and conditions:
1. A. Each Fund shall pay to the Distributor, as the distributor of the
Class C shares of the Fund, a fee for distribution of the shares at the rate of
0.75% on an annualized basis of the average daily net assets of the Fund's Class
C shares, provided that, at any time such payment is made, whether or not this
Plan continues in effect, the making thereof will not cause the limitation upon
such payments established by this Plan to be exceeded. Such fee shall be
calculated and accrued daily and paid monthly or at such intervals as the Board
of Trustees shall determine, subject to any applicable restriction imposed by
rules of the National Association of Securities Dealers, Inc.
B. In addition to the amount provided in 1.A. above, the Funds shall pay
to the Distributor, as the distributor of the Class C shares of the Funds, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Funds' Class C shares, provided that, at any time such payment is
made, whether or not this Plan continues in effect, the making thereof will not
cause the limitation upon such payments established by this Plan to be exceeded.
Such fee shall be calculated and accrued daily and paid monthly or at such
intervals as the Board of Trustees shall determine, subject to any applicable
restriction imposed by rules of the NASD.
2. The amount set forth in paragraph 1.A. of this Plan shall be paid for
the Distributor's services as distributor of the shares of the Funds in
connection with any activities or expenses primarily intended to result in the
-8-
<PAGE>
sale of the Class C shares of the Funds, including, but not limited to, payment
of compensation, including incentive compensation, to securities dealers (which
may include the Distributor itself) and other financial institutions and
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services may include, among other things, processing new shareholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in providing information and answering
questions concerning the Funds and their transactions with the Funds. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Funds. In addition, this Plan hereby authorizes payment by the Fund's of the
cost of printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Distribution expenses also include an allocation of overhead of the Distributor
and accruals for interest on the amount of distribution expenses that exceed
distribution fees and contingent deferred sales charges received by the
Distributor. Payments under the Plan are not tied exclusively to actual
distribution and service expenses, and the payments may exceed distribution and
service expenses actually incurred.
The amount set forth in paragraph 1.B. of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trust's
Board of Trustees and (b) those Trustees of the Trust who are not "interested
persons" of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
4. After approval as set forth in paragraph 3, and any other approvals
required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take
effect at the time specified by the Trust's Board of Trustees. The Plan shall
continue in full force and effect as to the Class C shares of the Funds for so
long as such continuance is specifically approved at least annually in the
manner provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trustees of the Trust, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without payment
of any penalty, by vote of the Trustees of the Trust, by vote of a majority of
the Rule 12b-l Trustees, or by a vote of a majority of the outstanding voting
securities of Class C shares of the Funds on not more than 30 days' written
notice to any other party to the Plan.
-9-
<PAGE>
7. This Plan may not be amended to increase materially the amount of
distribution fee (including any service fee) provided for in paragraph 1 hereof
unless such amendment is approved by a vote of the shareholders of the Class C
shares of each of the Funds, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 6 hereof, for a period of not less
than six years from the date of this Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible place.
10. The provisions of this Plan are severable as to each Fund, and any
action to be taken with respect to this Plan shall be taken separately for each
Fund affected by the matter.
Last revised: ______________, 1999
-10-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CURRENT NAME OF SERIES: TO BE RENAMED:
- ----------------------- --------------
<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 Growth Fund
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
Amended and Restated
Shareholder Service Plan for
NICHOLAS-APPLEGATE MUTUAL FUNDS
(to be renamed Pilgrim Mutual Funds)
Class Q Shares
<PAGE>
SHAREHOLDER SERVICE PLAN
WHEREAS, Nicholas-Applegate Mutual Funds (to be renamed Pilgrim Mutual
Funds) (the "Trust") engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule signed on behalf of the
Trust and the Distributor;
WHEREAS, shares of common stock of the Funds are divided into classes of
shares, one of which is designated Class Q;
WHEREAS, the Trust employs Pilgrim Securities, Inc. (the "Distributor") as
distributor of the securities of which it is the issuer;
WHEREAS, the Trust and the Distributor have entered into an Underwriting
Agreement pursuant to which the Trust has employed the Distributor in such
capacity during the continuous offering of shares of the Trust; and
WHEREAS, the Trust wishes to amend and restate the Shareholder Service Plan
of the Funds with respect to Class Q shares as set forth hereinafter.
NOW, THEREFORE, the Trust hereby adopts on behalf of the Funds with respect
to its Class Q shares, and the Distributor hereby agrees to the terms of the
Plan, in accordance with Rule 12b-l under the Act, on the following terms and
conditions:
1. The Funds shall pay to the Distributor, as the distributor of the Class
Q shares of the Funds, a service fee at the rate of 0.25% on an annualized basis
of the average daily net assets of the Funds' Class Q shares, provided that, at
any time such payment is made, whether or not this Plan continues in effect, the
making thereof will not cause the limitation upon such payments established by
this Plan to be exceeded. Such fee shall be calculated and accrued daily and
paid monthly or at such intervals as the Board of Trustees shall determine,
subject to any applicable restriction imposed by rules of the National
Association of Securities Dealers, Inc.
2. The amount set forth in paragraph 1 of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trust's
Board of Trustees and (b) those Trustees of the Trust who are not "interested
persons" of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
-2-
<PAGE>
4. After approval as set forth in paragraph 3, and any other approvals
required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take
effect at the time specified by the Trust's Board or Trustees. The Plan shall
continue in full force and effect as to the Class Q shares of the Funds for so
long as such continuance is specifically approved at least annually in the
manner provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trustees of the Trust, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without payment
of any penalty, by vote of the Trustees of the Trust, by vote of a majority of
the Rule 12b-l Trustees, or by a vote of a majority of the outstanding voting
securities of Class Q shares of the Funds on not more than 30 days' written
notice to any other party to the Plan.
7. This Plan may not be amended to increase materially the amount of
service fee provided for in paragraph 1 hereof unless such amendment is approved
by a vote of the shareholders of the Class Q shares of each of the Funds, and no
material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 6 hereof, for a period of not less
than six years from the date of this Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible place.
10. The provisions of this Plan are severable as to each Fund, and any
action to be taken with respect to this Plan shall be taken separately for each
Fund affected by the matter.
Last revised: ______________, 1999
-3-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CURRENT NAME OF SERIES: TO BE RENAMED:
- ----------------------- --------------
<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 Growth Fund
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
-4-
</TABLE>
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
FOR
NICHOLAS-APPLEGATE MUTUAL FUNDS
(to be renamed Pilgrim Mutual Funds)
WHEREAS, Nicholas-Applegate Mutual Funds (to be renamed Pilgrim Mutual
Funds) (the "Trust") engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule signed on behalf of the
Trust and the Distributor;
WHEREAS, the Trust desires to adopt, on behalf of each of the Funds, a
Multiple Class Plan pursuant to Rule 18f-3 under the Act (the "Plan") with
respect to each of the Funds; and
WHEREAS, pursuant to a Underwriting Agreement dated __________, 1999, the
Trust on behalf of each Fund employs Pilgrim Securities, Inc. ("PSI") as
distributor of the securities of which it is the issuer.
NOW, THEREFORE, the Trust hereby adopts, on behalf of the Funds, the Plan,
in accordance with Rule 18f-3 under the Act on the following terms and
conditions:
1. FEATURES OF THE CLASSES. Each of the Funds issues its shares of
beneficial interest in four classes: "Class A Shares," "Class B Shares," "Class
C Shares" and "Class Q Shares." Shares of each class of a Fund shall represent
an equal pro rata interest in such Fund and, generally, shall have identical
voting, dividend, liquidation, and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(a) each class shall have a different designation; (b) each class of shares
shall bear any Class Expenses, as defined in Section 5 below; and (c) each class
shall have exclusive voting rights on any matter submitted to shareholders that
relates solely to it or its distribution arrangement and each class shall have
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. In
addition, Class A, Class B, Class C and Class Q shares shall have the features
described in Sections 2, 5 and 6 below.
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<PAGE>
2. SALES CHARGE STRUCTURE.
(a) CLASS A SHARES. Class A shares of a Fund shall be offered at the
then-current net asset value plus a front-end sales charge. The front-end sales
charge shall be in such amount as is disclosed in a Fund's current prospectus or
prospectus supplement and shall be subject to reductions for larger purchases
and such waivers or reductions as are determined or approved by the Board of
Trustees. There is no initial front-end sales charge on purchases of an amount
as disclosed in the prospectus. Class A shares generally shall not be subject to
a contingent deferred sales charge provided, however, that such a charge may be
imposed when shares are redeemed within one or two years of purchase and/or in
such other cases as is disclosed in the Fund's current prospectus or supplement
thereto subject to the supervision of the Board of Trustees.
(b) CLASS B SHARES. Class B shares of a Fund shall be offered at the
then-current net asset value without the imposition of a front-end sales charge.
A contingent deferred sales charge in such amount as is described in a Fund's
current prospectus or prospectus supplement shall be imposed on Class B shares,
subject to such waivers or reductions as are described in the Fund's prospectus
or supplement thereto, subject to the supervision of the Fund's Board of
Trustees.
(c) CLASS C SHARES. Class C shares of a Fund shall be offered at the
then-current net asset value without the imposition of a front-end sales charge.
A contingent deferred sales charge in such amount as is described in a Fund's
current prospectus or prospectus supplement shall be imposed on Class C shares,
subject to such waivers or reductions as are described in the Fund's prospectus
or supplement thereto, subject to the supervision of the Fund's Board of
Trustees.
(d) CLASS Q SHARES. Class Q shares of a Fund shall be offered at the
then-current net asset value without the imposition of a front-end sales charge.
Class Q shares shall not be subject to a contingent deferred sales charge
3. SERVICE AND DISTRIBUTION PLANS. Each class of shares of each Fund has
adopted a Rule 12b-1 plan each with the following terms:
(a) CLASS A SHARES. Class A shares of each Fund may pay PSI monthly a
fee at an annual rate of 0.35% of the average daily net assets of the Fund's
Class A shares for distribution or service activities (each as defined in
paragraph (e), below), as designated by PSI. PSI, on behalf of Class A shares of
each Fund, may pay Authorized Dealers quarterly a fee at the annual rate of
0.25% of the average daily net assets of the Fund's Class A shares for
distribution and service activities (as defined in paragraph (e), below)
rendered to Class A Shareholders.
(b) CLASS B SHARES. Class B shares of each Fund may pay PSI monthly a
fee at the annual rate of 1.00% of the average daily net assets of the Fund's
Class B shares for distribution or service activities (as defined in paragraph
(e), below), as designated by PSI. PSI, on behalf of Class B shares of each
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<PAGE>
Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of
the average daily net assets of the Fund's Class B shares for distribution and
service activities (as defined in paragraph (e), below) rendered to Class B
shareholders.
(c) CLASS C SHARES. Class B shares of each Fund may pay PSI monthly a
fee at the annual rate of 1.00% of the average daily net assets of the Fund's
Class C shares for distribution or service activities (as defined in paragraph
(e), below), as designated by PSI. PSI, on behalf of Class C shares of each
Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of
the average daily net assets of the Fund's Class C shares for distribution and
service activities (as defined in paragraph (e), below) rendered to Class C
shareholders.
(d) CLASS Q SHARES. Class Q shares of each Fund may pay PSI monthly a
fee at the annual rate of 0.25% of the average daily net assets of the Fund's
Class Q shares for service activities (as defined in paragraph (e)(ii), below)
as designated by PSI. PSI, on behalf of Class Q shares, may pay Authorized
Dealers quarterly a fee at the annual rate of 0.25% of the average daily net
assets of the Fund's Class Q shares for service activities (as defined in
paragraph (e)(ii), below) rendered to Class Q shareholders.
(e) DISTRIBUTION AND SERVICE ACTIVITIES.
(i) As used herein, the term "distribution services" shall include
services rendered by PSI as distributor of the shares of a Fund in connection
with any activities or expenses primarily intended to result in the sale of
shares of a Fund, including, but not limited to, compensation to registered
representatives or other employees of PSI to other broker-dealers that have
entered into an Authorized Dealer Agreement with PSI, compensation to and
expenses of employees of PSI who engage in or support distribution of the Funds'
shares; telephone expenses; interest expense; printing of prospectuses and
reports for other than existing shareholders; preparation, printing and
distribution of sales literature and advertising materials; and profit and
overhead on the foregoing.
(ii) As used herein, the term "service activities" shall mean
activities in connection with the provision of personal, continuing services to
investors in each Fund, excluding transfer agent and subtransfer agent services
for beneficial owners of shares of a Fund, aggregating and processing purchase
and redemption orders, providing beneficial owners with account statements,
processing dividend payments, providing subaccounting services for Fund shares
held beneficially, forwarding shareholder communications to beneficial owners
and receiving, tabulating and transmitting proxies executed by beneficial
owners; provided, however, that if the National Association of Securities
Dealers Inc. ("NASD") adopts a definition of "service fee" for purposes of
Section 26(d) of the Rules of Fair Practice of the NASD that differs from the
definition of "service activities" hereunder, or if the NASD adopts a related
definition intended to define the same concept, the definition of "service
activities" in this Paragraph shall be automatically amended, without further
action of the Board of Trustees, to conform to such NASD definition. Overhead
and other expenses of PSI related to its "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
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<PAGE>
4. COMPLIANCE STANDARDS. The Trust desires that investors in the Funds
select the Fund that best suits his or her investment objective, and also the
sales financing method that best suits his or her particular financial
situation. In this connection, PSI has established standards which govern sales
of shares of the Funds in order to assist investors in making investment
decisions and to help ensure proper supervision of purchase recommendations. PSI
is requested to share these standards with authorized dealers wherever possible
and practicable.
5. ALLOCATION OF INCOME AND EXPENSES. (a) The gross income of each Fund
shall, generally, be allocated to each class on the basis of net assets. To the
extent practicable, certain expenses (other than Class Expenses as defined below
which shall be allocated more specifically) shall be subtracted from the gross
income on the basis of the net assets of each class of the Fund. These expenses
include:
(1) Expenses incurred by the Trust (for example, fees of Trustees,
auditors and legal counsel) not attributable to a particular Fund or to a
particular class of shares of a Fund ("Trust Level Expenses"); and
(2) Expenses incurred by a Fund not attributable to any particular
class of the Fund's shares (for example, advisory fees, custodial fees, or other
expenses relating to the management of the Fund's assets) ("Fund Expenses").
(b) Expenses attributable to a particular class ("Class Expenses") shall be
limited to: (i) payments made pursuant to a 12b-1 plan; (ii) transfer agent fees
attributable to a specific class; (iii) printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders of a specific class; (iv) Blue Sky
registration fees incurred by a class; (v) SEC registration fees incurred by a
class; (vi) the expense of administrative personnel and services to support the
shareholders of a specific class; (vii) litigation or other legal expenses
relating solely to one class; and (viii) Trustees' fees incurred as a result of
issues relating to one class. Expenses in category (i) above must be allocated
to the class for which such expenses are incurred. All other "Class Expenses"
listed in categories (ii)-(viii) above may be allocated to a class but only if
the President and Chief Financial Officer have determined, subject to Board
approval or ratification, which of such categories of expenses will be treated
as Class Expenses, consistent with applicable legal principles under the Act and
the Internal Revenue Code of 1986, as amended.
Therefore, expenses of a Fund shall be apportioned to each class of shares
depending on the nature of the expense item. Trust Level Expenses and Fund
Expenses will be allocated among the classes of shares based on their relative
net asset values. Approved Class Expenses shall be allocated to the particular
class to which they are attributable. In addition, certain expenses may be
allocated differently if their method of imposition changes. Thus, if a Class
Expense can no longer be attributed to a class, it shall be charged to a Fund
for allocation among classes, as determined by the Board of Trustees. Any
additional Class Expenses not specifically identified above which are
subsequently identified and determined to be properly allocated to one class of
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<PAGE>
shares shall not be so allocated until approved by the Board of Trustees of the
Trust in light of the requirements of the Act and the Internal Revenue Code of
1986, as amended.
6. EXCHANGE PRIVILEGES. Shares of one class of a Fund that have been held
for a minimum of 30 days may be exchanged for shares of that same class of any
other Pilgrim Group mutual fund other than Pilgrim Money Market Shares ("Money
Market"), at NAV without payment of any additional sales charge. However, a
sales charge, equal to the excess, if any, of the sales charge rate applicable
to the shares being acquired over the sales charge rate previously paid, may be
assessed on exchanges from Pilgrim Government Securities Income Fund, Pilgrim
High Yield Fund, [AND PILGRIM HIGH QUALITY BOND FUND]. If a shareholder
exchanges and subsequently redeems his or her shares, any applicable Contingent
Deferred Sales Charge fee will be based on the full period of the share
ownership. Class A Shares of a Fund may be exchanged for shares of Money Market,
and shares of the Money Market may be exchanged for Class A shares of any Fund
upon payment of the excess, if any, of the sales charge applicable to the Class
A shares over the sales charge rate previously paid.
7. CONVERSION FEATURES. 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, [EXCEPT THAT ALL
CLASS B SHARES OF THE FUNDS ISSUED PRIOR TO THE DATE THAT THIS PLAN GOES INTO
EFFECT WILL AUTOMATICALLY CONVERT TO CLASS A SHARES IN THE FUND ON THE FIRST
BUSINESS DAY OF THE MONTH IN WHICH THE SEVENTH ANNIVERSARY OF THE ISSUANCE OF
THE CLASS B SHARES OCCURS, TOGETHER WITH A PRO RATA PORTION OF ALL CLASS B
SHARES REPRESENTING DIVIDENDS AND OTHER DISTRIBUTIONS PAID IN ADDITIONAL CLASS B
SHARES.] The conversion of Class B shares into Class A shares is subject to the
continuing application of an Internal Revenue Service ruling 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.
8. QUARTERLY AND ANNUAL REPORTS. The Trustees shall receive quarterly and
annual statements concerning all allocated Class Expenses and distribution and
servicing expenditures complying with paragraph (b)(3)(ii) of Rule 12b-1, as it
may be amended from time to time. In the statements, only expenditures properly
attributable to the sale or servicing of a particular class of shares will be
used to justify any distribution or servicing fee or other expenses charged to
that class. Expenditures not related to the sale or servicing of a particular
class shall not be presented to the Trustees to justify any fee attributable to
that class. The statements, including the allocations upon which they are based,
shall be subject to the review and approval of the independent Trustees in the
exercise of their fiduciary duties.
9. ACCOUNTING METHODOLOGY. (a) The following procedures shall be
implemented in order to meet the objective of properly allocating income and
expenses among the Funds:
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<PAGE>
(1) On a daily basis, a fund accountant shall calculate the Plan Fee to
be charged to each 12b-1 class of shares by calculating the average daily net
asset value of such shares outstanding and applying the applicable fee rate of
the respective class to the result of that calculation.
(2) The fund accountant will allocate designated Class Expenses, if
any, to the respective classes.
(3) The fund accountant shall allocate income and Trust Level and Fund
Expenses among the respective classes of shares based on the net asset value of
each class in relation to the net asset value of the Fund for Fund Expenses, and
in relation to the net asset value of the Trust for Trust Level Expenses. These
calculations shall be based on net asset values at the beginning of the day.
(4) The fund accountant shall then complete a worksheet, developed for
purposes of complying with this Section of this Plan, using the allocated income
and expense calculations from Paragraph (3) above, and the additional fees
calculated from Paragraphs (1) and (2) above.
(5) The fund accountant shall develop and use appropriate internal
control procedures to assure the accuracy of its calculations and appropriate
allocation of income and expenses in accordance with this Plan.
10. WAIVER OR REIMBURSEMENT OF EXPENSES. Expenses may be waived or
reimbursed by any adviser to the Trust, by the Trust's underwriter or any other
provider of services to the Trust without the prior approval of the Trust's
Board of Trustees.
11. EFFECTIVENESS OF PLAN. This Plan shall not take effect until it has
been approved by votes of a majority of both (a) the Trustees of the Trust and
(b) those Trustees of the Trust who are not "interested persons" of the Trust
(as defined in the Act) and who have no direct or indirect financial interest in
the operation of this Plan, cast in person at a meeting (or meetings) called for
the purpose of voting on this Plan.
12. MATERIAL MODIFICATIONS. This Plan may not be amended to modify
materially its terms unless such amendment is approved in the manner provided
for initial approval in paragraph 10 hereof.
13. LIMITATION OF LIABILITY. The Trustees of the Trust and the shareholders
of each Fund shall not be liable for any obligations of the Trust or any Fund
under this Plan, and PSI or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Funds in settlement of such right or claim, and not to such Trustees or
shareholders.
Last revised: ______________, 1999
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
CURRENT NAME OF SERIES: TO BE RENAMED:
- ----------------------- --------------
<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 Growth Fund
Nicholas-Applegate High Quality Bond Fund Pilgrim High Quality Bond Fund
</TABLE>
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