As filed with the Securities and Exchange Commission on May 24, 1999
Securities Act File No. 33-56094
Investment Company Act File No. 811-7428
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act Of 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 68 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 70 [ ]
(Check appropriate box or boxes)
PILGRIM MUTUAL FUNDS
(FORMERLY NICHOLAS-APPLEGATE MUTUAL FUNDS)
(Exact Name of Registrant Specified in Charter)
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 551-8643
James M. Hennessy, Esq. With Copies To:
Pilgrim Investments, Inc. Jeffrey S. Puretz, Esq.
40 North Central Avenue, Suite 1200 Dechert Price & Rhoads
Phoenix, AZ 85004 1775 Eye Street, N.W.
(Name and Address of Agent for Service) Washington, D.C. 20006
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It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective
date for a previously filed post-effective amendment.
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<PAGE>
Prospectus
Classes: A, B, C and M
May 24, 1999
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund
Pilgrim LargeCap Leaders Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Value Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth
Fund Pilgrim Bank and Thrift Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim Asia-Pacific Equity Fund
INCOME FUNDS
Pilgrim Government Securities Income Fund
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund
Pilgrim High Yield Fund II
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
This prospectus contains important information about these funds. You should
read it carefully before you invest, and keep it for future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
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Page
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FUNDS AT A GLANCE ............................................. 2
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund .................................... 4
Pilgrim LargeCap Leaders Fund .............................. 6
Pilgrim LargeCap Growth Fund .............................. 8
Pilgrim MidCap Value Fund ................................. 10
Pilgrim MidCap Growth Fund ................................. 12
Pilgrim SmallCap Growth Fund .............................. 14
Pilgrim Bank and Thrift Fund .............................. 16
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund .............................. 18
Pilgrim International Core Growth Fund ..................... 20
Pilgrim International SmallCap Growth Fund ............... 22
Pilgrim Emerging Countries Fund ........................... 24
Pilgrim Asia-Pacific Equity Fund ........................... 26
INCOME FUNDS
Pilgrim Government Securities Income Fund .................. 28
Pilgrim Strategic Income Fund .............................. 30
Pilgrim High Yield Fund .................................... 32
Pilgrim High Yield Fund II ................................. 34
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund .................................... 36
Pilgrim Convertible Fund ................................. 38
FEES AND EXPENSES ............................................. 41
SHAREHOLDER GUIDE
Choosing a Share Class -- Pilgrim Purchase Options(TM) ..... 46
How to Purchase Shares .................................... 49
How to Redeem Shares .................................... 50
Transaction Policies ....................................... 51
Distribution and Shareholder Service Fees ............... 52
MANAGEMENT OF THE FUNDS
Adviser ................................................... 53
Sub-Advisers ............................................. 55
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................... 56
MORE INFORMATION ABOUT RISKS ................................. 57
FINANCIAL HIGHLIGHTS .......................................... 61
</TABLE>
1
<PAGE>
FUNDS
AT A
GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE
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<TABLE>
<CAPTION>
<S> <C> <C>
U.S. EQUITY FUNDS MagnaCap Fund Growth of capital, with dividend
Adviser: Pilgrim Investments, Inc. income as a secondary consideration
LargeCap Leaders Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
LargeCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
MidCap Value Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Cramer Rosenthal McGlynn LLC
MidCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Bank and Thrift Fund Long-term capital appreciation, with
Adviser: Pilgrim Investments, Inc. income as a secondary objective
INTERNATIONAL Worldwide Growth Fund Long-term capital appreciation
EQUITY FUNDS Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Core Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Emerging Countries Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Asia-Pacific Equity Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: HSBC Asset Management
INCOME FUNDS Government Securities Income Fund High current income, consistent with
Adviser: Pilgrim Investments, Inc. liquidity and preservation of capital
Strategic Income Fund Maximum Total Return
Adviser: Pilgrim Investments, Inc.
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
High Yield Fund II High level of current income and
Adviser: Pilgrim Investments, Inc. capital growth
EQUITY & INCOME Balanced Fund Long-term capital appreciation and
FUNDS Adviser: Pilgrim Investments, Inc. current income
Convertible Fund Total return, consisting of capital
Adviser: Pilgrim Investments, Inc. appreciation and current income
Sub-Adviser: Nicholas-Applegate Capital Mgt.
</TABLE>
2
<PAGE>
MAIN INVESTMENTS MAIN RISKS
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<TABLE>
<CAPTION>
<S> <C>
Equity securities that meet Price volatility and other risks that accompany
disciplined selection criteria an investment in equity securities.
Equity securities of large Price volatility and other risks that accompany
U.S. companies believed to be an investment in equity securities.
leaders in their industry
Equity securities of large Price volatility and other risks that accompany an
U.S. companies investment in growth-oriented equity securities.
Equity securities of medium- Price volatility and other risks that accompany an
sized U.S. companies investment in equity securities of medium-sized
companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities of medium- Price volatility and other risks that accompany an
sized U.S. companies investment in equity securities of growth-oriented
and medium-sized companies. Particularly sensitive
to price swings during periods of economic uncertainty.
Equity securities of Price volatility and other risks that accompany an
small-sized U.S. companies investment in equity securities of growth-oriented and
small-sized companies. Particularly sensitive to price
swings during periods of economic uncertainty.
Equity securities of banks and Price volatility and other risks that accompany an
thrifts or their holding or investment in equity securities. Susceptible to risks
parent companies, and savings of decline in the price of securities concentrated
accounts of mutual thrifts in the banking and thrift industries.
Equity securities of issuers Price volatility and other risks that accompany an
located in countries around the investment in growth-oriented foreign equities.
world, which may 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 Price volatility and other risks that accompany an
located in countries outside investment in growth-oriented foreign equities.
the U.S. Sensitive to currency exchange rates, internationa
political and economic conditions and other risks
that affect foreign securities.
Equity securities of small-sized Price volatility, liquidity and other risks that
companies located outside the U.S. accompany an investment in equity securities of
foreign, small-sized companies. Sensitive to currency
exchange rates, international political and economic
conditions and other risks that affect foreign
securities.
Equity securities of issuers Price volatility, liquidity and other risks that
located in countries with accompany an investment in equities from emerging
emerging securities markets countries. Sensitive to currency exchange rates,
international political and economic conditions and
other risks that affect foreign securities.
Equity securities of companies Price volatility and other risks that accompany an
based in the Asia-Pacific region, investment in foreign equities and in securities of
excluding Australia and Japan issuers in a single region. Sensitive to currency
exchange rates, international political and economic
conditions and other risks that affect foreign
securities.
Securities issued or guaranteed Credit, interest rate, prepayment and other risks
by the U.S. Government and certain that accompany an investment in government bonds
of its agencies or instrumentalities and mortgage related investments. Generally has less
credit risk than the other income funds.
Investment grade and high yield Credit, interest rate, prepayment and other risks
debt securities that accompany an investment in debt securities,
including high yield debt securities. May be sensitive
to credit risk during economic downturns.
High yield debt securities Credit, interest rate and other risks that accompany
an investment in lower-quality debt securities.
Particularly sensitive to credit risk during
economic downturns.
High yield debt securities Credit, interest rate and other risks that accompany
an investment in lower-quality debt securities.
Particularly sensitive to credit risk during
economic downturns.
A mix of equity and debt securities Price volatility and other risks that accompany
an investment in equity securities. Credit, interest
rate and other risks that accompany an investment
in debt securities.
Convertible securities of companies Price volatility and other risks that accompany an
of various sizes investment in equity securities. Credit, interest
rate, liquidity and other risks that accompany an
investment in debt securities
</TABLE>
3
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MAGNACAP
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS GROWTH OF CAPITAL, WITH DIVIDEND INCOME AS A SECONDARY
CONSIDERATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund is managed with the philosophy that companies that can best meet the
Fund's objectives have paid increasing dividends or have had the capability to
pay rising dividends from their operations. The Fund normally invests at least
65% of its assets in equity securities of companies that meet the following
disciplined criteria:
CONSISTENT DIVIDENDS -- A company must have paid or had the financial capability
from its operations to pay a dividend in 8 out of the last 10 years.
SUBSTANTIAL DIVIDEND INCREASES -- A company must have increased its dividend or
had the financial capability from its operations to have increased its dividend
at least 100% over the past 10 years.
REINVESTED EARNINGS -- Dividend payout must be less than 65% of current
earnings.
STRONG BALANCE SHEET -- Long term debt should be no more than 25% of the
company's total capitalization or a company's bonds must be rated at least A- or
A-3.
ATTRACTIVE PRICE -- A company's current share price should be in the lower half
of the stock's price/earnings ratio range for the past ten years, or the ratio
of the share price to its anticipated future earnings must be an attractive
value in relation to the average for its industry peer group or that of the
Standard & Poor's 500 Composite Stock Price Index.
The equity securities in which the Fund may invest include common stocks,
convertible securities, and rights or warrants. The remainder of the Fund's
assets may be invested in equity securities that the adviser believes have
growth potential because they represent an attractive value. In selecting
securities for the Fund, preservation of capital is also an important
consideration. Although the Fund normally will be invested as fully as
practicable in equity securities, assets that are not invested in equity
securities may be invested in high quality debt securities. The Fund may invest
up to 5% of its assets, measured at the time of investment, in foreign
securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies.
4
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities that meet the Fund's disciplined investment criteria. Rather, the
market could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
22.46% -3.11% 25.28% 8.02% 9.25% 4.15% 35.22% 18.51% 27.73% 16.09%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Class B and M
1 Year 5 Years 10 Years (7/17/95)
------ ------- -------- ---------
Class A(1) 9.40% 18.46% 15.13% --
Class B(2) 10.26% -- -- 20.73%
Class M(3) 1.56% -- -- 20.31%
S&P 500 Index 28.58% 23.81% 18.95% 27.75%
- ----------
* Class C shares of MagnaCap Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 18.93% (Q4 1998)
Worst quarter for period in bar chart: -15.99% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was 3.80%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
5
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
LEADERS FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to be a large
company, although the Fund may also invest to a limited degree in companies that
have a market capitalization between $1 billion and $5 billion.
The equity securities in which the Fund may invest include common stock,
convertible securities, preferred stock, American Depositary Receipts, and
warrants. The Fund normally invests as fully as practicable (at least 80%) in
equity securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in equity
securities of larger companies, which sometimes have more stable prices than
smaller companies.
6
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.07% 20.15% 20.08%
* Prior to November 1, 1998, the Fund's investment policies were different in
that they emphasized large company value stocks without necessarily
emphasizing industry leaders. Pilgrim Investments has been the Fund's
investment adviser since the Fund commenced operations; however, prior to
November 1, 1997, the Fund was managed by a sub-adviser.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception
1 Year (9/1/95)
------ ---------
Class A(1) 13.16% 18.67%
Class B(2) 14.33% 19.28%
Class C(3) 15.43% 18.93%
S&P 500 Index 28.58% 28.73%
- ----------
* Class C shares of LargeCap Leaders Fund were not offered during the period
ended December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 24.58% (Q4 1998)
Worst quarter for period in bar chart: -12.86% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 5.33%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
7
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in: corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated; U.S. Government securities; and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover signs of "change at the margin" -- positive business
developments which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests primarily in equity securities
of larger companies, which sometimes have more stable prices than smaller
companies.
8
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the U.S., and
foreign controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
59.45%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (7/21/97)
------ ---------
Class A(1) 50.26% 39.24%
Class B(2) 53.68% 40.46%
Class C(3) 57.34% 44.12%
Russell 1000 Growth Index 38.71% 44.57%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 37.87% (Q4 1998)
Worst quarter for period in bar chart: -8.50% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 20.37%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
9
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
VALUE FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
CRAMER ROSENTHAL MCGLYNN LLC
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.
The Fund is managed with the 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 value approach, and seeks to
invest in securities that are less expensive than comparable companies, as
determined by price/earnings ratios, cash flows or other measures.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests in medium-sized
companies, which are more susceptible to price swings than larger companies, but
usually tend to have less volatile price swings than smaller companies. To the
extent the Fund invests in small-cap companies, such securities are more
susceptible to price swings than larger companies because they have fewer
financial resources, limited product and market diversification and many are
dependent on a few key managers.
10
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
value securities 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.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
29.56% 21.87% 4.89%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception
1 Year (9/1/95)
------ ---------
Class A(1) -1.15% 15.53%
Class B(2) -0.75% 16.07%
Class M(3) 0.63% 15.70%
Russell Midcap Index 10.10% 18.85%
Russell Midcap Value Index 5.08% 19.43%
- ----------
* Class C shares of MidCap Value Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 13.87% (Q1 1998)
Worst quarter for period in bar chart: -13.94% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 7.51%
----------
The table at left compares the Fund's performance to that of two broad measures
of market performance -- the Russell Midcap Index, an unmanaged index consisting
of the 800 smallest companies in the Russell 1000 Index, and the Russell MidCap
Value Index, an unmanaged index consisting of companies in the Russell Midcap
Index with lower book-to-price ratios and lower forecasted growth values. Unlike
the bar chart, the table reflects the impact of sales charges. The Indices have
an inherent performance advantage over the Fund since each has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
11
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of medium-sized U.S. companies, and at least 75% of its total
assets in common stocks. It may invest the remainder of its assets in preferred
and convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in medium-sized companies,
which are more susceptible to price swings than larger companies, but usually
tend to have less volatile price swings than smaller companies.
12
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-11.00% 37.64% 15.84% 15.88% 14.14%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 7.60% 12.09% 13.18% --
Class B(2) 8.29% -- -- 18.26%
Class C(3) 12.44% 12.75 13.66 --
Russell Midcap
Growth Index 17.86% 17.34% 17.99% 21.07%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
4. Since inception performance for index is shown from 4/30/93.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 25.23% (Q4 1998)
Worst quarter for period in bar chart: -17.73% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 13.50%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. Unlike the bar chart,
the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
13
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of small U.S. companies, and at least 75% of its total assets
in common stocks. It may invest the remainder in preferred and convertible
securities, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, and securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in foreign
equity or debt securities. The Fund may also use options and futures contracts
involving securities, securities indices, interest rates and foreign currencies
as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small-cap companies, which
are more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and many
are dependent on a few key managers.
14
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-4.03% 34.87% 18.27% 11.24% 3.68%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (12/27/93) (5/31/95)
------ ------- -------- ---------
Class A(1) -2.26% 10.71% 11.38% --
Class B(2) -1.96% -- -- 14.46%
Class C(3) 2.12% 11.37% 12.03% --
Russell 2000
Growth Index 1.23% 10.22% 10.87% 12.72%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 26.90% (Q4 1998)
Worst quarter for period in bar chart: -23.64% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 8.58%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth
orientation. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
15
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
BANK AND
THRIFT FUND
INVESTMENT OBJECTIVE:
THE FUND PRIMARILY SEEKS LONG-TERM CAPITAL APPRECIATION; A SECONDARY OBJECTIVE
IS INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of national and state-chartered banks (other than
money center banks), thrifts, and the holding or parent companies of such
depository institutions, and in savings accounts of mutual thrifts that may
allow the Fund to participate in stock conversions of the mutual thrift. This
policy may only be changed with approval of the shareholders of the Fund. The
equity securities described above include common stocks, convertible securities
(including convertible preferred stock) and warrants, but do not include
non-convertible preferred stocks or adjustable rate preferred stocks.
The Fund may invest up to 35% of its total assets in equity securities,
including preferred stocks or adjustable rate preferred stocks, of other types
of issuers, including money center banks, other financial services companies,
and companies that are not in financial services industries, and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) that are either issued or guaranteed by the
United States Government or an agency thereof or issued by a corporation or
other issuer and rated investment grade or comparable quality by at least one
nationally recognized rating organization. The Fund may invest up to 10% of its
assets in securities of other investment companies.
The adviser emphasizes a value approach, and selects securities that are
undervalued relative to the market and have potential for future growth,
including securities of institutions that the adviser believes are well
positioned to take advantage of investment opportunities in the banking and
thrift industries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- The value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. The Fund invests primarily in small- to
medium-sized companies, which are more susceptible to price swings than larger
companies.
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks or large company stocks, or may not favor equities at
all.
16
<PAGE>
RISKS OF CONCENTRATION -- because the Fund's investments are concentrated in the
banking and thrift industries, the value of the Fund may be subject to greater
volatility than a Fund with a portfolio that is less concentrated. If securities
of banks and thrifts as a group falls out of favor, the Fund could underperform
funds that focus on other types of companies.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.79% -18.14% 49.49% 32.36% 7.79% -1.89% 49.69% 41.10% 64.86% -1.83%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Class B
1 Year 5 Years 10 Years (10/17/97)
------ ------- -------- ----------
Class A(1) -7.48% 25.89% 20.90% --
Class B(2) -7.27% -- -- 4.29%
S&P 500 Index 28.58% 23.81% 18.95% 26.13%
S & P Major Regional
Banks Index 10.42% 23.77% 21.41% 15.84%
NASDAQ 100
Financial Index -1.09% 21.98% N/A 7.92%
- ----------
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 16.43% (Q3 1997)
Worst quarter for period in bar chart: -20.36% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was 5.28%
----------
The table at left compares the Fund's performance to that of three broad
measures of market performance -- the Standard & Poor's 500 Composite Stock
Price Index, an unmanaged index of the stocks of approximately 500
large-capitalization U.S. companies, the S&P Major Regional Banks Index, an
unmanaged index comprised of major regional banks in the S&P 500 Index, and the
NASDAQ 100 Financial Index, an index of the 100 largest financial companies
traded on NASDAQ. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
17
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located 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. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may also invest in small and
medium-sized companies, which may be more susceptible to greater price swings
than larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
18
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks,
or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2.45% 14.74% 17.92% 17.28% 37.34%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 29.43% 16.04% 16.61% --
Class B(2) 31.68% -- -- 21.12%
Class C(3) 35.39% 16.70% 17.09% --
MSCI World Index 22.78% 13.94% 13.62% 16.21%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 26.87% (Q4 1998)
Worst quarter for period in bar chart: -13.43% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 12.88%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. Unlike the
bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
19
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in large companies, which
sometimes have more stable prices than smaller companies.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities at
all.
20
<PAGE>
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.92%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (2/28/97)
------ ---------
Class A(1) 13.93% 16.44%
Class B(2) 15.31% 18.85%
Class C(3) 19.20% 20.47%
MSCI EAFE Index 20.33% 12.97%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 4% respectively for 1
year and since inception returns.
3. Reflects deduction of a deferred sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 17.16% (Q1 1998)
Worst quarter for period in bar chart: -14.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 2.61%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
21
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund considers a company to be
small if it has a market capitalization below $1.5 billion. The Fund emphasizes
companies in the bottom 75% of publicly traded companies as measured by stock
market capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small companies, which may
be more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market diversification
and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could
22
<PAGE>
favor value-oriented stocks or large company stocks, or may not favor equities
at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.51% 17.58% 13.46% 35.57%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year (8/31/94) (5/31/95)
------ -------- ---------
Class A(1) 27.79% 13.00% --
Class B(2) 29.83% -- 18.31%
Class C(3) 33.89% 13.71% --
Salomon EPAC EM Index 14.14% 3.71% 1.67%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 24.53% (Q1 1998)
Worst quarter for period in bar chart: -15.35% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 8.12%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Salomon EPAC Extended Market Index, an unmanaged index
comprised of smaller-capitalization companies in 22 countries excluding Canada
and the United States. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
23
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets -- that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach, and seeks issuers in the
early stages of development, growth companies, cyclical companies, or companies
believed to be undergoing a basic change in operations. It uses a blend of
traditional fundamental research of individual securities, calling on the
expertise of many external analysts in different countries throughout the world,
and a computer intensive ranking system that analyzes and ranks securities. The
Investment Adviser currently selects portfolio securities from an investment
universe of approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than larger
companies because they may have fewer financial resources, limited product and
market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not
24
<PAGE>
favor the growth securities in company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. Investments in emerging markets countries are generally
riskier than other kinds of foreign investments, partly because emerging market
countries may be less politically and economically stable than other countries.
It may also be more difficult to buy and sell securities in emerging market
countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.34% 27.50% 9.44% -22.19%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year (11/28/94) (5/31/95)
------ -------- ---------
Class A(1) -26.67% 0.96% --
Class B(2) -26.05% -- 1.48%
Class C(3) -22.98% 1.45% --
MSCI Emerging Markets
Free Index -27.52% -13.31% -11.89%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 15.01% (Q2 1995)
Worst quarter for period in bar chart: -26.06% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 7.35%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Emerging Markets
Free Index, an unmanaged index comprised of companies representative of the
market structure of 22 emerging market countries in Europe, Latin America and
the Pacific Basin. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
25
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
ASIA-PACIFIC
EQUITY FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
HSBC ASSET MANAGEMENT AMERICAS, INC. AND HSBC ASSET MANAGEMENT HONG KONG
LIMITED
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
listed on stock exchanges in countries in the Asia-Pacific region or issued by
companies based in this region. Asia-Pacific countries in which the Fund invests
include, but are not limited to, China, Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand, but do not include Japan and
Australia. The equity securities in which the Fund may invest include common
stock, convertible securities, preferred stock, warrants, American Depositary
Receipts, European Depositary Receipts and other depositary receipts.
The Fund is managed using the investment philosophy that the sub-adviser, HSBC
Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Limited
(HSBC), uses in managing private Asia-Pacific portfolios. HSBC bases investment
decisions on a disciplined approach that takes into consideration the following
factors: a macroeconomic overview of the region, specific country analysis,
setting target country weightings, evaluation of industry sectors within each
country, and selection of specific stocks. In selecting specific securities, the
sub-adviser emphasize a value approach that seeks growth at a reasonable price.
This approach involves include analysis of such fundamental factors as absolute
rates of change of earnings growth, earnings growth relative to the market and
industry, quality of earnings and stability of earnings growth, quality of
management and product line, interest rate sensitivity and liquidity of the
stock.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: the country in which the issuer was organized; the
country in which the principal securities market for that issuer is located; the
country in which the issuer derives at least 50% of its revenues or profits from
goods produced or sold, investments made, or services performed; or the country
in which at least 50% of the issuer's assets are located.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on
26
<PAGE>
investment. To the extent the Fund invests in emerging markets countries, the
risks may be greater, partly because emerging market countries may be less
politically and economically stable than other countries. It may also be more
difficult to buy and sell securities in emerging market countries.
RISKS OF THE ASIA-PACIFIC REGION -- the Asia-Pacific region includes countries
in various stages of economic development, including emerging market countries.
In 1997 and 1998, securities markets in Asian countries suffered significant
downturns and volatility, and currencies lost value in relation to the U.S.
dollar. Currency devaluation in any one country may have a significant effect on
the entire region. Increased political or social unrest in some or all Asian
countries could cause further economic and market uncertainty.
RISKS OF CONCENTRATION -- because the Fund concentrates on a single region of
the world, the Fund's performance may be more volatile than that of a Fund that
invests globally. If Asia-Pacific securities fall out of favor, it may cause the
Fund to underperform funds that focus on other types of stocks.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.46% -43.73% -15.51%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (9/1/95)
------ --------
Class A(1) -20.37% -19.55%
Class B(2) -20.57% -19.51%
Class M(3) -19.26% -19.47%
MSCI Far East ex-Japan Index -4.82% 7.80%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 3.5%.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 23.32% (Q4 1998)
Worst quarter for period in bar chart: -33.22% (Q4 1997)
The Fund's year-to-date total return as of March 31, 1999 was 0.78%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Far East Free
ex-Japan Index, an unmanaged index of Far East markets excluding Japan. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
27
<PAGE>
INCOME
FUNDS
PILGRIM
GOVERNMENT
SECURITIES
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS HIGH CURRENT INCOME, CONSISTENT WITH LIQUIDITY AND PRESERVATION
OF CAPITAL.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 70% of its total assets in securities issued
or guaranteed by the U.S. Government and the following agencies or
instrumentalities of the U.S. Government: the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct
obligations of the U.S. Treasury and mortgage-backed securities. The Fund may
fall below the 70% threshold due to changes in the value of the Fund's holdings
or the sale of securities to meet redemptions, in which case the Fund will
purchase only U.S. Government securities until the 70% level is restored. The
remainder of the Fund's assets may be invested in securities issued by other
agencies and instrumentalities of the U.S. Government and in instruments
collateralized by securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The foregoing policies are fundamental and may
not be changed without shareholder approval.
The Fund may invest in securities of any maturity; however, the Fund is expected
to have a dollar-weighted average duration within a range of 20% above or below
that of the Lehman Intermediate Treasury Index. As of March 31, 1999, the
dollar-weighted average duration of the Lehman Intermediate Treasury Index was
3.08 years. The adviser determines the composition of the Fund's portfolio on
the basis of its judgment of existing market conditions, such as the general
direction of interest rates, trends in creditworthiness, expected inflation,
supply and demand of fixed income securities, and other factors. The Fund may
enter into reverse repurchase agreements, dollar roll transactions or pairing
off transactions. The Fund does not invest in highly leveraged derivatives, such
as swaps, interest-only or principal-only stripped mortgage-backed securities,
or interest rate futures contracts.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities. You
could lose money on an investment in the Fund. The Fund may be affected by the
following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. This Fund may be particularly sensitive to interest rates
because it primarily invests in U.S. government securities and may invest in
securities with long terms to maturity. Debt securities with longer durations
tend to be more sensitive to changes in interest rates, usually making them more
volatile than debt securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is subject
to less credit risk than the other income funds because it principally invests
in debt securities issued or guaranteed by the U.S. government, its agencies and
government sponsored enterprises.
28
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.92% 8.03% 11.90% 7.46%(1) 4.71% -3.61% 14.51% 2.56% 7.85% 5.61%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Classes B and M
1 Year 5 Years 10 Years(4) (7/17/95)
------ ------- -------- ----------
Class A(1) 0.63% 4.20% 6.56% --
Class B(2) -0.15% -- -- 4.42%
Class M(3) 1.66% -- -- 4.50%
Lehman Gov't/Mortgage 8.62% 6.45% 8.34% 7.20%
Lehman Interm.
Treasury** 6.98% 5.98% 7.38% 7.24%
- ----------
* Class C shares of Government Securities Income Fund were not offered during
the period ended December 31, 1998.
** Information on the Lehman Intermediate Treasury Index is presented because
effective May 24, 1999, the Fund seeks an average portfolio duration within
+/- 20% of the duration of that Index. Previously, the Fund's average
portfolio maturity was generally longer.
1. Reflects deduction of sales charge of 4.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a sales charge of 3.25%.
4. The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would have
been had the Fund adhered to its borrowing restriction.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 7.76% (Q2 1989)
Worst quarter for period in bar chart: -2.66% (Q1 1994)
The Fund's year-to-date total return as of March 31, 1999 was 0.44%
----------
The table at left compares the Fund's performance to that of two broad measures
of market performance -- the Lehman Brothers/Mortgage Government Index and the
Lehman Brothers Intermediate Treasury Index. Unlike the bar chart, the table
reflects the impact of sales charges. The Index has an inherent performance
advantage over the Fund since it has no cash in its portfolio, imposes no sales
charges and incurs no operating expenses. An investor cannot invest directly in
an index.
29
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. There is no minimum credit rating for high yield
debt securities in which the Fund may invest.
The Fund may invest in debt securities of any maturity; however, the average
portfolio duration of the Fund will generally range from two to eight years. The
Fund may invest up to 30% of its total assets in securities payable in foreign
currencies. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The Fund does not invest in interest-only or principal-only
stripped mortgage-backed securities.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund may
be subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the
30
<PAGE>
Fund will be forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.77% 9.04% 7.94%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Insitutional Class
shares of the Fund, which is no longer offered, for prior periods, restated
to reflect Class A operating expenses, Class A, Class B and Class C shares
after adjustment for class expenses, would have had substantially similar
returns because institutional Class shares were invested in the same
portfolio of securities. Also, prior to May 24, 1999 a different adviser
managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (8/31/95)
------ --------
Class A* 2.78% 6.61%
Lehman Aggregate Bond Index 8.67% 8.20%
- ----------
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class A expenses, including
deduction of a sales charge of 4.75%, because Classes A, B and C of the Fund
did not have a full year's performance as of December 31, 1998. See the
footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
Best quarter for period in bar chart: 3.84% (Q4 1996)
Worst quarter for period in bar chart: -0.72% (Q1 1996)
The Fund's year-to-date total return as of March 31, 1999 was -0.06%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
31
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME, WITH CAPITAL APPRECIATION AS A
SECONDARY OBJECTIVE.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. There is no minimum credit rating for high yield securities in which the
Fund may invest. The Fund may invest in debt securities of any maturity. In
selecting securities for the Fund, preservation of capital is a consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage-related securities and
participation interests and assignments in floating rate loans and notes. The
Fund may also invest up to 10% of its assets in foreign debt securities of any
rating. The Fund reserves the right to also invest in financial futures and
related options to attempt to hedge risk, although the Fund has not invested in
such instruments since Pilgrim Investments, Inc. became the adviser in 1995
through the date of this prospectus.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
32
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since
Inception of
Classes B and M
1 Year 5 Years 10 Years (7/17/95)
------ ------- -------- ----------
Class A(1) -7.60% 7.36% 8.88% --
Class B(2) -8.02% -- -- 7.75%
Class M(3) -6.58% -- -- 7.69%
Lehman High Yield Index 1.87% 8.57% 10.55% 8.91%(4)
- ----------
* Class C shares of High Yield Fund were not offered during the period ended
December 31, 1998.
1. Reflects deduction of sales charge of 4.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of a sales charge of 3.25%.
4. Since inception performances for index is shown from 7/31/95.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 1.15%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
33
<PAGE>
INCOME
FUNDS
HIGH
YIELD
FUND II
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME AND CAPITAL GROWTH.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies. The Fund is not restricted to investments in
companies of any particular size, but currently intends to invest principally in
companies with market capitalization above $100 million at the time of purchase.
The Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
The Board of Trustees of the Fund has approved, subject to the approval of the
shareholders of High Yield Fund II, a proposed reorganization of the Fund into
Pilgrim High Yield Fund. If shareholder approval is obtained, it is expected
that the reorganization will take place in the summer of 1999.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long term
maturities. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the owners of the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
34
<PAGE>
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
Security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign banks or
securities depositories than those in the U.S., and foreign controls on
investment.
RISK OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.05% 4.69%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Insitutional Class
shares of the Fund, which is no longer offered, for prior periods, restated
to reflect Class A operating expenses, Class A, Class B and Class C shares
after adjustment for class expenses, would have had substantially similar
returns because institutional Class shares were invested in the same
portfolio of securities. Also, prior to May 24, 1999 a different adviser
managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception
1 Year (7/31/96)
------ --------
Class A* -0.32% 12.92%
First Boston High Yield Index .58% 8.43%
- ----------
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class A expenses, including
deduction of a sales charge of 4.75%, because Classes A, B and C of the Fund
did not have a full year's performance as of December 31, 1998. See the
footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
Best quarter for period in bar chart: 8.30% (Q3 1997)
Worst quarter for period in bar chart: -7.14% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 2.74%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart, the table reflects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
35
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
BALANCED
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A BALANCE OF LONG-TERM CAPITAL APPRECIATION AND CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions.
The remainder of the Fund's assets will be invested in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization of over $5 billion is
considered to be a large company, although the Fund may also invest to a limited
degree in companies that have a market capitalization between $1 billion and $5
billion.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit quality for the high yield debt securities in which the Fund may
invest. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
CHANGES IN INTEREST RATES -- the value of the debt securities held by the Fund
may fall when interest rates rise. The Fund may be sensitive to changes in
interest rates because it may invest in debt securities with intermediate and
long terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
debt securities with shorter durations. Zero coupon securities are particularly
sensitive to changes in interest rates.
36
<PAGE>
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may invest
in high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-6.29% 23.44% 16.39% 20.50% 23.34%
* Prior to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 16.26% 13.52% 14.25% --
Class B(2) 17.80% -- -- 26.42%
Class C(3) 21.52% 14.14% 14.75% --
Composite Index 20.93% 17.34% 15.27% 20.48%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 14.44% (Q3 1997)
Worst quarter for period in bar chart: -5.88% (Q2 1994)
The Fund's year-to-date total return as of March 31, 1999 was 4.46%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- a composite index consisting of 60% Standard & Poor's 500
Composite Stock Price Index and 40% Lehman Brothers Government/Corporate Bond
Index. Unlike the bar chart, the table reflects the impact of sales charges. The
Indices have an inherent performance advantage over the Fund since each has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
37
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
CONVERTIBLE
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN, CONSISTING OF CAPITAL APPRECIATION AND
CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. Convertible securities are generally preferred stock or
other securities, including debt securities, that are convertible into common
stock. The Fund emphasizes companies with market capitalizations above $500
million. Through investments in convertible securities, the Fund seeks to
capture the upside performance of the underlying equities with less downside
exposure. The Fund may invest the remainder of its assets in common and
preferred stocks, debt securities of any maturity, and securities issued by the
U.S. Government and its agencies and instrumentalities. The Fund may also use
options and futures contracts involving securities, securities indices, interest
rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit rating for high yield securities in which the Fund may invest.
The Fund also may invest up to 35% of its net assets in zero coupon securities.
PRINCIPAL RISKS
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" -- positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, issuer and other risks, and their values may go up or down, sometimes
rapidly and unpredictably. Market risk is the risk that securities may decline
in value due to factors affecting securities markets generally or particular
industries. Issuer risk is the risk that the value of a security may decline for
reasons relating to the issuer, such as changes in the financial condition of
the issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility. The Fund may
invest in small and medium-sized companies, which may be more susceptible to
greater price swings than larger companies because they may have fewer financial
resources, limited product and market diversification and many are dependent on
a few key managers.
CHANGES IN INTEREST RATES -- the value of the convertible and debt securities
held by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in securities with intermediate
and long terms to maturity. Securities with longer
38
<PAGE>
durations tend to be more sensitive to changes in interest rates, usually making
them more volatile than securities with shorter durations. Zero coupon
securities are particularly sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a convertible or debt
security is unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic downturns.
This Fund may be subject to more credit risk than the other bond funds, because
the convertible securities and debt securities in which it invests may be
lower-rated securities.
Inability to sell securities -- lower rated securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
Risks of using derivatives -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivatives instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
(CLASS A)*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-8.23% 21.67% 20.29% 22.58% 20.86%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since
Inception Since
of Classes Inception of
A and C Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- -------- ---------
Class A(1) 13.93% 13.41% 15.74% --
Class B(2) 15.31% -- -- 20.61%
Class C(3) 19.12% 14.03% 16.19% --
First Boston Convertible Index 6.55% 10.82% 11.42%(4) 13.48%
- ----------
1. Reflects deduction of sales charge of 5.75%.
2. Reflects deduction of deferred sales charge of 5% and 3% respectively for 1
year and since inception returns.
3. Reflects deduction of sales charge of 1% for the 1 year return.
4. Since inception performance for the index is shown from 4/30/93.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
Best quarter for period in bar chart: 19.73% (Q4 1998)
Worst quarter for period in bar chart: -9.08% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 6.84%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
39
<PAGE>
- --------------------------------------------------------------------------------
THIS PAGE INTENTIONALLY LEFT BLANK
- --------------------------------------------------------------------------------
40
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Fees
(fees paid directly from your investment)
- -----------------------------------------------------------------------------------------------
Class A Class B Class C1 Class M2
------- ------- -------- --------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)
Equity Funds and Equity & Income Funds 5.75%(3) None None 3.50%(3)
Income Funds 4.75%(3) None None 3.25%(3)
- -----------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or redemption proceeds)
Equity Funds and Equity & Income Funds None(4) 5.00%(5) 1.00%(6) None
Income Funds None(4) 5.00%(5) 1.00%(6) None
- -----------------------------------------------------------------------------------------------
</TABLE>
1 Bank and Thrift Fund and Asia-Pacific Equity Fund do not offer Class C
shares.
2 Class M shares are offered only by MagnaCap Fund, LargeCap Leaders Fund,
MidCap Value Fund, Asia-Pacific Equity Fund, Government Securities Income
Fund and High Yield Fund.
3 Reduced for purchases of $50,000 and over. See Shareholder Guide.
4 A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See Shareholder
Guide.
5 Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
6 Imposed upon redemption within 1 year from purchase.
41
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)(1)
CLASS A
Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 0.30% 0.35% 1.37% -- 1.37%
LargeCap Leaders 1.00 0.25 1.03 2.28 (0.53)% 1.75
LargeCap Growth 0.75 0.35 0.88 1.98 (0.38) 1.60
MidCap Value 1.00 0.25 0.53 1.78 (0.03) 1.75
MidCap Growth 0.75 0.35 0.42 1.52 -- 1.52
SmallCap Growth 1.00 0.35 0.49 1.84 -- 1.84
Bank and Thrift 0.72 0.25 0.23 1.20 -- 1.20
Worldwide Growth 1.00 0.35 0.54 1.89 (0.04) 1.85
International Core Growth 1.00 0.35 0.64 1.99 (0.04) 1.95
International SmallCap Growth 1.00 0.35 0.59 1.94 -- 1.94
Emerging Countries 1.25 0.35 0.84 2.44 (0.19) 2.25
Asia-Pacific Equity 1.25 0.25 1.30 2.80 (0.80) 2.00
Government Securities Income 0.50 0.25 0.83 1.58 (0.08) 1.50
Strategic Income 0.45 0.35 0.98 1.78 (0.83) 0.95
High Yield 0.60 0.25 0.32 1.17 (0.17) 1.00
High Yield II 0.60 0.25 0.54 1.39 (0.39) 1.00
Balanced 0.75 0.35 0.65 1.75 (0.15) 1.60
Convertible 0.75 0.35 0.42 1.52 -- 1.52
CLASS B
Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- -------- ---------- --------
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
LargeCap Growth 0.75 1.00 0.88 2.63 (0.38) 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
MidCap Growth 0.75 1.00 0.42 2.17 -- 2.17
SmallCap Growth 1.00 1.00 0.55 2.55 -- 2.55
Bank and Thrift 0.72 1.00 0.23 1.95 -- 1.95
Worldwide Growth 1.00 1.00 0.54 2.54 (0.04) 2.50
International Core Growth 1.00 1.00 0.63 2.63 (0.03) 2.60
International SmallCap Growth 1.00 1.00 0.59 2.59 -- 2.59
Emerging Countries 1.25 1.00 0.83 3.08 (0.18) 2.90
Asia-Pacific Equity 1.25 1.00 1.30 3.55 (0.80) 2.75
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 0.75 1.02 2.22 (0.87) 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
High Yield II 0.60 1.00 0.44 2.04 (0.29) 1.75
Balanced 0.75 1.00 0.65 2.40 (0.15) 2.25
Convertible 0.75 1.00 0.42 2.17 -- 2.17
</TABLE>
42
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deduced from Fund asset)(1)
<TABLE>
<CAPTION>
CLASS C3 Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ----- ---------- -------------- ----------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
LargeCap Growth 0.75 1.00 0.89 2.64 (0.39) 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
MidCap Growth 0.75 1.00 0.43 2.18 -- 2.18
SmallCap Growth 1.00 1.00 0.49 2.49 -- 2.49
Worldwide Growth 1.00 1.00 0.54 2.54 (0.04) 2.50
International Core Growth 1.00 1.00 0.65 2.65 (0.05) 2.60
International SmallCap Growth 1.00 1.00 0.59 2.59 -- 2.59
Emerging Countries 1.25 1.00 0.82 3.07 (0.17) 2.90
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 0.75 1.01 2.21 (0.86) 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
High Yield II 0.60 1.00 0.44 2.04 (0.29) 1.75
Balanced 0.75 1.00 0.64 2.39 (0.14) 2.25
Convertible 0.75 1.00 0.42 2.17 -- 2.17
CLASS M Total Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses Expenses Adviser2 Expenses
- ---- ---------- ------------ -------- ------------ ----------- --------
MagnaCap 0.72% 0.75% 0.35% 1.82% -- 1.82%
LargeCap Leaders 1.00 0.75 1.03 2.78 (0.53)% 2.25
MidCap Value 1.00 0.75 0.53 2.28 (0.03) 2.25
Asia-Pacific Equity 1.25 0.75 1.30 3.30 (0.80) 2.50
Government Securities Income 0.50 0.75 0.83 2.08 (0.08) 2.00
High Yield 0.60 0.75 0.32 1.67 (0.17) 1.50
</TABLE>
1 These tables show the estimated operating expenses for each Fund by class
as a ratio of expenses to average daily net assets. These estimates are
based on each Fund's actual operating expenses for its most recent complete
fiscal year and fee waivers to which the Adviser has agreed.
2 Pilgrim Investments has entered into expense limitation agreements with
each Fund except MagnaCap Fund, Bank and Thrift Fund and Government
Securities Income Fund, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." For the
LargeCap Leaders, MidCap Value and Asia-Pacific Equity Funds, the expense
limits will continue until at least June 30, 2000. For High Yield Fund, the
current limits will continue through December 31, 1999, at which time they
will change to 1.10% for Class A, 1.85% for Classes B and C and 1.60% for
Class M through at least June 30, 2001. For each remaining Fund except
Government Securities Income Fund, the expense limit will continue through
at least May 24, 2001. Nicholas-Applegate Capital Management bears 50% of
the cost of maintaining the expense limit for Funds for which it serves as
sub-adviser. Pilgrim Investments has separately agreed to reimburse
Government Securities Income Fund to the extent that total Fund operating
expenses, excluding interest, taxes, brokerage commissions, extraordinary
expenses, and distribution fees in excess of 0.25%, exceed 1.50% of the
Fund's average daily net asset on the first $40 million in net assets and
1.00% of average daily net assets in excess of $40 million. The expense
limit for Government Securities Income Fund will terminate only with
termination of the advisory contract with Pilgrim Investments.
3 Because Class C shares are new for the MagnaCap, LargeCap Leaders, MidCap
Value, Government Securities Income and High Yield Funds, their expenses
are based on Class B expenses.
4 Except for the MagnaCap, LargeCap Leaders, MidCap Value, Bank and Thrift,
Asia-Pacific Equity, Government Securities Income and High Yield Funds,
other expenses have been restated to reflect the elimination of certain
administrative fees effective May 24, 1999.
43
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
EXAMPLES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. Each Example assumes
that you invest $10,000 in the Fund for the time period indicated. Each Example
also assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
CLASS A ------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $706 $ 984 $1,282 $2,127 $706 $ 984 $1,282 $2,127
LargeCap Leaders 743 1,199 1,680 3,001 743 1,199 1,680 3,001
LargeCap Growth 728 1,089 1,513 2,689 728 1,089 1,513 2,689
MidCap Value 743 1,100 1,481 2,547 743 1,100 1,481 2,547
MidCap Growth 721 1,028 1,356 2,283 721 1.028 1,356 2,283
SmallCap Growth 751 1,120 1,513 2,609 751 1,120 1,513 2,609
Bank and Thrift 690 934 1,197 1,946 690 934 1,197 1,946
Worldwide Growth 752 1,127 1,530 2,653 752 1,127 1,530 2,653
International Core Growth 762 1,156 1,579 2,752 762 1,156 1,579 2,752
International SmallCap Growth 761 1,149 1,562 2,709 761 1,149 1,562 2,709
Emerging Countries 790 1,257 1,768 3,164 790 1,257 1,768 3,164
Asia-Pacific Equity 766 1,322 1,902 3,469 766 1,322 1,902 3,469
Government Securities Income 620 927 1,255 2,180 620 927 1,255 2,180
Strategic Income 567 850 1,241 2,335 567 850 1,241 2,335
High Yield 582 815 1,075 1,815 582 815 1,075 1,815
High Yield II 572 819 1,127 1,998 572 819 1,127 1,998
Balanced 728 1,066 1,442 2,495 728 1,066 1,442 2,495
Convertible 721 1,028 1,356 2,283 721 1,028 1,356 2,283
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
CLASS B ------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $710 $ 949 $1,314 $2,221 $210 $ 649 $1,114 $2,221
LargeCap Leaders 753 1,187 1,745 3,133 253 887 1,545 3,133
LargeCap Growth 728 1,043 1,525 2,747 228 743 1,325 2,747
MidCap Value 753 1,085 1,543 2,680 253 785 1,343 2,680
MidCap Growth 720 979 1,364 2,339 220 679 1,164 2,339
SmallCap Growth 758 1,094 1,555 2,712 258 794 1,355 2,712
Bank and Thrift 698 912 1,252 2,080 198 612 1,052 2,080
Worldwide Growth 753 1,083 1,543 2,710 253 783 1,343 2,710
International Core Growth 763 1,112 1,590 2,804 263 812 1,390 2,804
International SmallCap Growth 762 1,105 1,575 2,767 262 805 1,375 2,767
Emerging Countries 793 1,216 1,784 3,218 293 916 1,584 3,218
Asia-Pacific Equity 778 1,315 1,973 3,599 278 1,015 1,773 3,599
Government Securities Income 728 1,003 1,405 2,396 228 703 1,205 2,396
Strategic Income 637 822 1,226 2,301 137 522 1,026 2,301
High Yield 688 889 1,223 2,035 188 589 1,023 2,035
High Yield II 678 882 1,243 2,153 178 582 1,043 2,153
Balanced 728 1,019 1,453 2,551 228 719 1,253 2,551
Convertible 720 979 1,364 2,339 220 679 1,164 2,339
</TABLE>
44
<PAGE>
EXAMPLES
<TABLE>
<CAPTION>
CLASS C
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $310 $649 $1,114 $2,400 $210 $649 $1,114 $2,400
LargeCap Leaders 353 887 1,545 3,309 253 887 1,545 3,309
LargeCap Growth 328 744 1,329 2,914 228 744 1,329 2,914
MidCap Value 353 785 1,343 2,863 253 785 1,343 2,863
MidCap Growth 321 682 1,169 2,513 221 682 1,169 2,513
SmallCap Growth 352 776 1,326 2,826 252 776 1,326 2,826
Worldwide Growth 353 783 1,343 2,869 253 783 1,343 2,869
International Core Growth 363 814 1,396 2,976 263 814 1,396 2,976
International SmallCap Growth 362 805 1,375 2,925 262 805 1,375 2,925
Emerging Countries 393 915 1,580 3,359 293 915 1,580 3,359
Government Securities Income 328 703 1,205 2,585 228 703 1,205 2,585
Strategic Income 237 521 1,023 2,405 137 521 1,023 2,405
High Yield 288 589 1,023 2,230 188 589 1,023 2,230
High Yield II 278 582 1,043 2,321 178 582 1,043 2,321
Balanced 328 718 1,250 2,704 228 718 1,250 2,704
Convertible 320 679 1,164 2,503 220 679 1,164 2,503
CLASS M
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
------------------------------------- -------------------------------------
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $528 $ 902 $1,301 $2,412 $528 $ 902 $1,301 $2,412
LargeCap Leaders 570 1,134 1,723 3,313 570 1,134 1,723 3,313
MidCap Value 570 1,035 1,525 2,872 570 1,035 1,525 2,872
Asia-Pacific Equity 594 1,258 1,945 3,767 594 1,258 1,945 3,767
Government Securities Income 521 932 1,368 2,577 521 932 1,368 2,577
High Yield 482 821 1,189 2,224 482 821 1,189 2,224
</TABLE>
45
<PAGE>
SHAREHOLDER
GUIDE
CHOOSING A SHARE CLASS
- --------------------------------------------------------------------------------
PILGRIM PURCHASE OPTIONS (TM)
Depending upon the Fund, you may select from up to four separate classes of
shares: Class A, Class B, Class C and Class M.
CLASS A
* Front-end sales charge, as described on the next page.
* Distribution and service (12b-1) fees of 0.25% to 0.35%.
CLASS B
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1.00% (0.75% for Strategic Income
Fund)
* A contingent deferred sales charge, as described on the next page.
* Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses. Class B shares acquired initially through Funds that
were part of the Nicholas-Applegate Mutual Funds at the time of purchase will
convert after seven years from the date of original purchase.
CLASS C
* No front-end sales charge; all your money goes to work for you right away.
* Distribution and service (12b-1) fees of 1.00% (0.75% for Strategic Income
Fund)
* A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
* No automatic conversion to Class A shares, so annual expenses continue at the
Class C level throughout the life of your investment.
* Not offered by Bank and Thrift Fund and Asia-Pacific Equity Fund.
CLASS M
* Lower front-end sales charge than Class A, as described on the next page.
* Distribution and service (12b-1) fees of 0.75%.
* No automatic conversion to Class A shares, so annual expenses continue at the
Class M level throughout the life of your investment.
* Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield
Fund.
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the initial sales charge or the contingent deferred sales
charge. The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Higher distribution
fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A or Class M shares.
Orders for Class B shares and Class M shares in excess of $250,000 and
$1,000,000, respectively, will be accepted as orders for Class A shares or
declined. You should discuss which Class of shares is right for you with your
investment professional.
46
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE CALCULATION
CLASS A
Class A shares of the funds are sold subject to the following sales charge.
Equity Funds,
Balanced Fund and
Convertible Fund Income Funds
-------------------------- --------------------------
As a % As a %
of the As a % of of the As a % of
offering net offering net
Your investment price asset value price asset value
- ---------------------- --------- ------------- ---------- -------------
Less than $50,000 5.75% 6.10% 4.75% 4.99%
$50,000 - $99,999 4.50% 4.71% 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63% 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56% 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04% 2.00% 2.04%
$1,000,000 and over See below See below
INVESTMENTS OF $1 MILLION OR MORE. There is no front-end sales charge if you
purchase Class A shares in an amount of $1 million or more. However, the shares
will be subject to a contingent deferred sales charge if they are redeemed
within one or two years of purchase, depending on the amount of the purchase, as
follows:
Period during which
Your investment CDSC CDSC applies
- -------------------------- ------- ---------------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares that were purchased in an amount of $1 million or more
through Funds that were part of the Nicholas-Applegate Mutual Funds at the time
of purchase will be subject to a contingent deferred sales charge of 1% within
one year from the date of purchase.
CLASS B AND CLASS C
Class B and Class C shares are offered at their net asset value per share
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares that you sell within a certain period of
time after you bought them. The amount of the CDSC is based on the lesser of the
net asset value of the shares at the time of purchase or redemption. There is no
CDSC on shares acquired through the reinvestment of dividends and capital gains
distributions. The CDSCs are as follows:
CLASS B DEFERRED SALES CHARGE
CDSC on shares
Years after purchase being sold
- -------------------- --------------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6th year none
CLASS C DEFERRED SALES CHARGE
CDSC on shares
Years after purchase being sold
- -------------------- --------------
1st year 1%
After 1st year none
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Funds will first redeem shares in your account that are not subject
to a CDSC, and then will sell shares that have the lowest CDSC.
CLASS M
Class M shares of the funds are sold subject to the following sales charge.
MagnaCap,
LargeCap Leaders, Government
MidCap Value, Securities
and Income and
Asia-Pacific High Yield
Equity Funds Funds
--------------------- ---------------------
As a % As a % As a % As a %
of the of net of the of net
offering asset offering asset
Your investment price value price value
- ------------------- -------- ------- -------- -------
Less than $50,000 3.50% 3.63% 3.25% 3.36%
$50,000 - $99,999 2.50% 2.56% 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52% 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01% 1.00% 1.01%
$500,000 and over none none none none
47
<PAGE>
SHAREHOLDER
GUIDE
CHOOSING A SHARE CLASS
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCED SALES CHARGES. You may reduce the initial sales charge on a purchase of
Class A or Class M shares of the funds by combining multiple purchases to take
advantage of the breakpoints in the sales charge schedules. You may do this by:
LETTER OF INTENT -- lets you purchase shares over a 13 month period and pay the
same sales charge as if the shares had all been purchased at once.
RIGHTS OF ACCUMULATION -- lets you add the value of shares of any open-end
Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of
your next purchase for purposes of calculating the sales charge.
COMBINATION PRIVILEGE -- shares held by investors in the Pilgrim Funds which
impose a CDSC may be combined with Class A or Class M shares for a reduced sales
charge.
See the Account Application or the Statement of Additional Information for
details, or contact your financial representative or the Shareholder Servicing
Agent for more information.
CDSC WAIVERS. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
* redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of death
or initial determination of permanent disability.
* for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan, up
to a maximum of 12% per year of a shareholder's account value based on the
value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
* mandatory distributions from a tax-deferred retirement plan or an IRA.
However, if you purchased shares that were part of the Nicholas-Applegate
Mutual Funds, you may be eligible for a CDSC waiver prior to the mandatory
distribution age.
* If you think you may be eligible for a CDSC waiver, contact your financial
representative or the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. This
privilege can be used only once per calendar year. If you want to use the
Reinstatement Privilege, contact your financial representative or the
Shareholder Servicing Agent. Consult the SAI for more information.
SALES CHARGE WAIVERS. Class A or Class M shares may be purchased without a sales
charge by certain individuals and institutions. For additional information,
contact the Shareholder Servicing Agent, or see the Statement of Additional
Information.
48
<PAGE>
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
The minimum initial investment amounts for the Pilgrim Funds are as follows:
* Non-retirement accounts: $1,000
* Retirement accounts: $250
* Pre-Authorized Investment Plan: $100 to open; you must invest at least $100 a
month
The minimum additional investment is $100
Make your investment using the table on the right.
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Funds reserve the right to liquidate sufficient shares to recover
annual transfer agent fees should you fail to maintain your account value at a
minimum of $1,000.00 ($250.00 for IRA's).
RETIREMENT PLANS. The Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (`IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment
Your Investment professional with an
Professional authorized firm
can help you establish
and maintain your
account.
By Mail Visit or consult an Visit or consult an
investment investment
professional. professional.
Make your check Fill out the Account
payable to the Pilgrim Additions form
Funds and mail it, included on the bottom
along with a completed of your account
Application. Please statement along with
indicate your your check payable to
investment professional the Fund and mail
on the New Account them to the address on
Application the account statement.
Remember to write your account
number on the check.
By Wire Call the Pilgrim Wire the funds in the
Operations Department same manner described
at (800) 336-3436 to under "Initial
obtain an account Investment."
number and indicate
your investment
professional on the
account.
Instruct your bank to
wire funds to the Fund
in the care of:
Investors Fiduciary
Trust Co. ABA
#101003621 Kansas
City, MO credit to:
------------------------
(the Fund) A/C #751-8315;
for further credit to:
Shareholder A/C
#________________ (A/C #
you received over the
telephone)
Shareholder Name:
------------------------
(Your Name Here)
After wiring funds you
must complete the
Account Application
and send it to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO
64141-6368
49
<PAGE>
SHAREHOLDER
GUIDE
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem shares using the table on the right:
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account on a regular basis.
* Your account must have a current value of at least $10,000.
* Minimum withdrawal amount is $100.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge
for their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in which
the account is registered, and the dollar value or
number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification is
provided on the Account Application. A signature
guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check the
box on the Account Application which signifies that
you do not wish to use telephone redemptions. To
redeem by telephone, call the Shareholder Servicing
Agent at (800) 992-0180.
Receiving Proceeds By Check:
You may have redemption proceeds (up to a maximum of
$100,000) mailed to an address which has been on
record with Pilgrim Funds for at least 30 days.
Receiving Proceeds By Wire: You may have redemption
proceeds (subject to a minimum of $5,000) wired to
your pre-designated bank account. You will not be
able to receive redemption proceeds by wire unless
you check the box on the Account Application which
signifies that you wish to receive redemption
proceeds by wire and attach a voided check. Under
normal circumstances, proceeds will be transmitted to
your bank on the business day following receipt of
your instructions, provided redemptions may be made.
In the event that share certificates have been
issued, you may not request a wire redemption by
telephone.
50
<PAGE>
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
NET ASSET VALUE. The net asset value (NAV) per share for each Fund and class is
determined each business day as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per share of
each class of each Fund is calculated by taking the value of the Fund's assets
attributable to that class, subtracting the Fund's liabilities attributable to
that class, and dividing by the number of shares of that class that are
outstanding. Because foreign securities may trade on days when the Funds do not
price shares, the net asset value of a Fund that invests in foreign securities
may change on days when shareholders will not be able to purchase or redeem the
Fund's shares.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith by the Board of Directors or Trustees, although the actual calculations
will be made by persons acting under the supervision of the Board. Valuing
securities at fair value involves greater reliance on judgment than securities
that have readily available market quotations.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable sales
charge. When you sell shares, you receive the NAV minus any applicable deferred
sales charge. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
EXCHANGES. You may exchange shares of a Fund for shares of the same class of any
other Pilgrim Fund, without paying any additional sales charge. Shares subject
to a CDSC will continue to age from the date that the original shares were
purchased. If you exchange shares of a Fund that at the time you acquired the
shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the
exchange will be subject to the current CDSC structure and conversion rights of
the Fund being acquired, although the shares will continue to age for CDSC and
conversion purposes from the date the original shares were acquired.
51
<PAGE>
SHAREHOLDER
GUIDE
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Funds are intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice, restrict the
frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege. A
Fund may change or cancel its exchange policies at any time, upon 60 days
written notice to shareholders.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the Funds reserve the right upon 30 days written notice to redeem, at NAV, the
shares of any shareholder whose account (except for IRAs) has a value of less
than $1,000, other than as a result of a decline in the NAV per share.
DISTRIBUTION AND
SHAREHOLDER SERVICE FEES
To pay for the cost of promoting the Funds and servicing your shareholder
account, each class of each Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
increase your cost of investing and may exceed the cost of paying other types of
sales charges. The following table shows the distribution and service fees
associated with investing in each class of shares.
Distribution Fee Service Fee
---------------- -----------
CLASS A
MagnaCap Fund .......... 0.05% 0.25%
LargeCap Leaders,
MidCap Value, Bank
and Thrift, Asia-Pacific
Equity, Government
Securities Income and
High Yield Funds ...... 0.00% 0.25%
LargeCap Growth,
MidCap Growth,
SmallCap Growth,
Convertible,
International
CoreGrowth,
Worldwide Growth,
International SmallCap
Growth, Emerging
Countries, Strategic
Income, High Yield II
and Balanced Funds .... 0.10% 0.25%
CLASS B .................... 0.75%* 0.25%
CLASS C .................... 0.75%* 0.25%
CLASS M .................... 0.50% 0.25%
* The Class B and Class C distribution fee for Strategic Income Fund is 0.50%.
52
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of May 14, 1999, Pilgrim
Investments managed over $5.8 billion in assets. Pilgrim Investments acquired
certain assets of previous advisers to certain of the Funds in separate
transactions that closed on April 7, 1995 and May 21, 1999. Pilgrim Investments
is an indirect, wholly owned subsidiary of 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 as a percentage of that Fund's average daily net
assets:
Fund Advisory Fee
- ------------------------------- ------------
MagnaCap 0.72%
LargeCap Leaders 1.00
LargeCap Growth 0.75
MidCap Value 1.00
MidCap Growth 0.75
SmallCap Growth 1.00
Bank and Thrift 0.72
Worldwide Growth 1.00
International Core Growth 1.00
International SmallCap Growth 1.00
Emerging Countries 1.25
Asia-Pacific Equity 1.25
Government Securities Income 0.50
Strategic Income 0.45
High Yield 0.60
High Yield II 0.60
Balanced 0.75
Convertible 0.75
PILGRIM INVESTMENTS DIRECTLY MANAGES THE PORTFOLIOS OF THE FOLLOWING FUNDS:
MAGNACAP FUND
This Fund is managed by a team led by Howard N. Kornblue, Senior Vice President
and Senior Portfolio Manager for Pilgrim Investments. Mr. Kornblue has served as
a Portfolio Manager of MagnaCap Fund since 1989. The other individuals on the
team are G. David Underwood, Anuradha Sahai and Robert M. Kloss.
53
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
LARGECAP LEADERS FUND
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.
BANK AND THRIFT FUND
Carl Dorf, Senior Vice President and Senior Portfolio Manager of Bank and Thrift
Fund has been managing the Fund's portfolio since January 1991, when he joined
Pilgrim Investments' predecessor. Mr. Dorf is also a Senior Vice President of
Pilgrim Investments.
STRATEGIC INCOME FUND
The following individuals share responsibility for the day-to-day management of
the Strategic Income Fund.
Robert K. Kinsey, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey
manages Strategic Income Fund's assets that are invested in assets other than
high yield debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was
a Vice President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
GOVERNMENT SECURITIES INCOME FUND
Robert K. Kinsey, whose background is described above, has primary
responsibility for the day-to-day management of Government Securities Income
Fund, and has served as Senior Portfolio Manager of Government Securities Income
Fund since May 24, 1999.
Charles G. Ullerich, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Government Securities Income Fund since September 1996 and
served as Assistant Portfolio Manager of that Fund from August 1995 to September
1996. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President of
Treasury Services for First Liberty Bank of Macon, GA since 1991, where he was
Portfolio Manager for a mortgage and treasury securities portfolio.
HIGH YIELD FUND AND HIGH YIELD FUND II
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund and High Yield Fund II since June 1995 and May, 1999,
respectively.
BALANCED FUND
The following individuals share responsibility for the day-to-day management of
the Balanced Fund:
G. David Underwood, whose background is described above, has served as Senior
Portfolio Manager of the equity portion of the Balanced Fund's assets since May
24, 1999.
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
Robert K. Kinsey, whose background is described above, has also served as a
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
54
<PAGE>
SUB-ADVISERS
- --------------------------------------------------------------------
For the following Funds, Pilgrim Investments has engaged Sub-Advisers to provide
the day-to-day management of the Fund's portfolio. The Sub-Advisers are among
the most respected institutional investment advisers in the world, and have been
selected primarily on the basis of their successful application of a consistent,
well-defined, long-term investment approach over a period of several market
cycles.
LARGECAP GROWTH FUND, MIDCAP GROWTH FUND, SMALLCAP GROWTH FUND, WORLDWIDE GROWTH
FUND, INTERNATIONAL CORE GROWTH FUND, INTERNATIONAL SMALLCAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$22 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
In connection with the acquisition of certain assets relating to certain of the
Funds in 1999, Pilgrim Investments and certain of its affiliates entered into an
agreement with Nicholas-Applegate Capital Management and its affiliates which
provides that Pilgrim Investments (not the Funds) will be obligated to pay to
Nicholas-Applegate Capital Management a specified amount upon termination of the
sub-advisory agreement with Nicholas-Applegate Capital Management.
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.
55
<PAGE>
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
Annually Semi-Annually Quarterly Monthly
- -------- ------------- --------- -------
LargeCap Leaders(1) MagnaCap(1) Balanced(3) Strategic
LargeCap Growth(1) Convertible(3) Income
MidCap Value(1) Fund(2)
MidCap Growth(1) Government
SmallCap Growth(1) Securities
Bank and Thrift(1) Income(2)
International Core High Yield(2)
Growth(3) High
Worldwide Growth(1) Yield II(2)
Asia-Pacific Equity(1)
International
SmallCap Growth(1)
Emerging Countries(1)
(1) Distributions normally expected to consist primarily of capital gains.
(2) Distributions normally expected to consist primarily of ordinary income.
(3) Distributions normally expected to consist of a variable combination of
capital gains and ordinary income.
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C or M shares of a Fund invested in another Pilgrim Fund
which offers the same class shares. If you are a shareholder of Pilgrim Prime
Rate Trust, whose shares are not held in a broker or nominee account, you may,
upon written request, elect to have all dividends invested into a pre-existing
Class A account of any open-end Pilgrim Fund.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
56
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques that may be used by the Funds, see the Statement of Additional
Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter into foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as zero-
coupon or pay-in-kind securities tend to be more volatile. The secondary market
in which high yield securities are traded is generally less liquid than the
57
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
OTHER INVESTMENT COMPANIES. Each Fund (except the MagnaCap, High Yield and
Government Securities Income Funds) may invest up to 10% of its assets in other
investment companies. When a Fund invests in other investment companies, you
indirectly pay a proportionate share of the expenses of that other investment
company (including management fees, administration fees, and custodial fees) in
addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities (except MagnaCap Fund may not invest in restricted
securities). If a security is illiquid, the Fund might be unable to sell the
security at a time when the adviser might wish to sell, and the security could
have the effect of decreasing the overall level of the Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less liquid
than registered securities traded on established secondary markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
58
<PAGE>
- --------------------------------------------------------------------------------
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk of
nonpayment of principal or interest. Substantial increases in interest rates may
cause an increase in loan defaults. Although the loans will generally be fully
collateralized at the time of acquisition, the collateral may decline in value,
be relatively illiquid, or lose all or substantially all of its value subsequent
to the Fund's investment. Many loans are relatively illiquid, and may be
difficult to value.
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund
(except Bank and Thrift Fund) may lend portfolio securities in an amount up to
331|M/3% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for a Fund depends upon the costs of
the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase a Fund's yield; however,
such transactions also increase a Fund's risk to capital and may result in a
shareholder's loss of principal.
SHORT SALES. Each Fund (except the MagnaCap, LargeCap Leaders, Bank and Thrift,
Asia-Pacific Equity, Government Securities Income and High Yield Funds) may make
short sales. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the
59
<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
expectation that the market price will drop. If the price of the security rises,
the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss.
PAIRING OFF TRANSACTIONS. A pairing-off transaction occurs when a Fund commits
to purchase a security at a future date, and then the Fund -- pairs-off' the
purchase with a sale of the same security prior to or on the original settlement
date. Whether a pairing-off transaction on a debt security produces a gain
depends on the movement of interest rates. If interest rates increase, then the
money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure. When a Fund
takes a temporary defensive strategy, it may limit the Fund's ability to achieve
its investment objective.
PORTFOLIO TURNOVER. Each Fund (except the MagnaCap, LargeCap Leaders, MidCap
Value, Bank and Thrift and Asia-Pacific Equity Funds) is generally expected to
engage in frequent and active trading of portfolio securities to achieve its
investment objective. A high portfolio turnover rate involves greater expenses
to a Fund, including brokerage commissions and other transaction costs, and is
likely to generate more taxable short-term gains for shareholders, which may
have an adverse effect on the performance of the Fund.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. Pilgrim Investments is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally. Foreign issuers may be
more susceptible to risks associated with the Year 2000 Problem than domestic
issuers.
60
<PAGE>
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
61
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MAGNACAP
FUND
- --------------------------------------------------------------------------------
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.
62
<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>
63
<PAGE>
U.S. EQUITY
FUNDS
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.
64
<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>
$ 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>
65
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
Class A
-------------------------
Year July 21, 1997
Ended (commenced) to
March 31, March 31,
1999 1998
--------- --------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.73 $ 12.50
------- -------
Income from investment operations:
Net investment income (loss) (0.08) (0.03)
------- -------
Net realized and unrealized gains (losses)
on securities and foreign currency 9.77 3.29
------- -------
Total from investment operations $ 9.69 $ 3.26
------- -------
Less distributions from:
Net investment income -- --
------- -------
Net realized capital gains (0.48) (0.03)
------- -------
Net asset value, end of period $ 24.94 $ 15.73
======= =======
TOTAL RETURN(1): 63.06% 62.35%
------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $12,445 $ 4,742
------- -------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.59% 1.60%*
------- -------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.24% 4.70%*
------- -------
Ratio of net investment income (loss) to
average net assets, after reimbursement(2) (0.65)% (0.87)%*
------- -------
Portfolio turnover 253% 306%
------- -------
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
66
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
-------------------------- --------------------------
Year July 21, 1997 Year July 21, 1997
Ended (commenced) to Ended (commenced) to
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------- -------------- --------- --------------
<S> <C> <C> <C> <C>
$ 15.64 $ 12.50 $ 15.63 $ 12.50
------- ------- ------- -------
(0.08) (0.07) (0.07) (0.05)
------- ------- ------- -------
9.71 3.24 9.65 3.24
------- ------- ------- -------
9.63 $ 3.17 $ 9.58 $ 3.19
------- ------- ------- -------
-- -- -- --
------- ------- ------- -------
(0.23) (0.03) (0.24) (0.06)
------- ------- ------- -------
$ 25.04 $ 15.64 $ 24.97 $ 15.63
======= ======= ======= =======
62.28% 61.08% 61.97% 61.38%
------- ------- ------- -------
$20,039 $ 3,187 $ 8,004 $ 960
------- ------- ------- -------
2.24% 2.25%* 2.25% 2.25%*
------- ------- ------- -------
2.89% 4.78%* 2.90% 7.79%*
------- ------- ------- -------
(1.28)% (1.36)%* (1.26)% (1.49)%*
------- ------- ------- -------
253% 306% 253% 306%
------- ------- ------- -------
</TABLE>
67
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
VALUE
FUND
- --------------------------------------------------------------------------------
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.
68
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS M
-------------------------------------------------- ---------------------------------------------------
Six Months Ten Months Six Months
Ended Year Ended June 30, Ended Ended Year Ended June 30,
December 31, ------------------- June 30, December 31, --------------------------
1998 (Unaudited) 1998 1997 1996(a) 1998 (Unaudited) 1998 1997 1996(a)
----------------- --------- -------- -------- ---------------- --------- -------- -------
<S> <C> <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% 9.82%
------------- -------- -------- -------- ----------- -------- ------- -------
$ 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)% (0.81)% (1.32)%(d)
------------- -------- -------- -------- ----------- -------- ------- -------
50% 85% 86% 60% 50% 85% 86% 60%
------------- -------- -------- -------- ----------- -------- ------- -------
</TABLE>
69
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<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 $ 18.63 $ 16.80 $ 18.37 $ 13.61 $ 13.25
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.50) (0.14) (0.17) (0.18) (0.10)
--------- --------- --------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.17 6.50 0.57 4.94 0.46
--------- --------- --------- --------- ---------
Total from investment operations $ 2.67 $ 6.36 $ 0.40 $ 4.76 $ 0.36
--------- --------- --------- --------- ---------
Less distributions from:
Net investment income -- -- -- -- --
--------- --------- --------- --------- ---------
Realized capital gains (1.37) (4.53) (1.97) -- --
--------- --------- --------- --------- ---------
Net asset value, end of period $ 19.93 $ 18.63 $ 16.80 $ 18.37 $ 13.61
========= ========= ========= ========= =========
TOTAL RETURN(1): 15.36% 41.81% 1.09% 35.07% 2.72%
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 67,550 $ 90,619 $ 76,108 $ 77,275 $ 65,292
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.56% 1.57% 1.60% 1.58% 1.59%
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.64% 1.66% 1.56% 1.56% 1.63%
--------- --------- --------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (1.04)% (1.33)% (1.05)% (0.91)% (0.66)%
--------- --------- --------- --------- ---------
Portfolio turnover 154% 200% 153% 114% 98%
--------- --------- --------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
70
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------------- -----------------------------------------------------------
May 31, 1995
Year Ended March 31, (commenced) 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> <C>
$ 21.55 $ 16.33 $ 16.25 $ 17.15 $ 17.15 $ 16.48 $ 18.06 $ 13.45 $ 13.18
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(0.42) (0.25) (0.17) (0.61) (0.61) (0.28) (0.32) (0.27) (0.17)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
3.42 6.74 0.25 2.97 2.97 6.26 0.62 4.88 0.44
--------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 3.00 $ 6.49 $ 0.08 $ 2.36 $ 2.36 $ 5.98 $ 0.30 $ 4.61 $ 0.27
--------- --------- --------- --------- --------- --------- --------- --------- ---------
-- -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(1.01) (1.27) -- (1.02) (1.02) (5.31) (1.88) -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 23.54 $ 21.55 $ 16.33 $ 16.25 $ 18.49 $ 17.15 $ 16.48 $ 18.06 $ 13.45
========= ========= ========= ========= ========= ========= ========= ========= =========
14.59% 40.84% (0.49)% 30.00)% 14.60% 40.95% 0.56% 34.28% 2.05%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 45,876 $ 46,806 $ 29,002 $ 11,186 $ 141,685 $ 166,849 $ 157,501 $ 177,461 $ 143,390
--------- --------- --------- --------- --------- --------- --------- --------- ---------
2.22% 2.22% 2.25% 2.22% 2.23% 2.27% 2.14% 2.14% 2.24%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
2.29% 2.21% 2.66% 3.39% 2.30% 2.33% 2.17% 2.14% 2.24%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(1.69)% (1.99)% (1.69)% (1.61)% (1.70)% (2.01)% (1.59)% (1.47)% (1.30)%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
154% 200% 153% 114% 154% 200% 153% 114% 98%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
71
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<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 $ 19.75 $ 15.15 $ 17.93 $ 13.06 $ 12.10
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.85) (0.08) (0.22) (0.20) (0.16)
--------- --------- --------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 0.69 6.91 (0.66) 5.09 1.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.16) $ 6.83 $ (0.88) $ 4.89 $ 0.96
--------- --------- --------- --------- ---------
Less distributions from:
Net investment income -- -- -- -- --
--------- --------- --------- --------- ---------
Realized capital gains (2.87) (2.23) (1.90) (0.02) --
--------- --------- --------- --------- ---------
Net asset value, end of period $ 16.72 $ 19.75 $ 15.15 $ 17.93 $ 13.06
========= ========= ========= ========= =========
TOTAL RETURN(1): 0.37% 46.32% (6.26)% 37.48% 7.93%
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 94,428 $ 201,943 $ 121,742 $ 138,155 $ 106,725
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.85% 1.89% 1.72% 1.74% 1.86%
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.95% 1.90% 1.72% 1.74% 1.84%
--------- --------- --------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (1.32)% (1.85)% (1.26)% (1.20)% (1.27)%
--------- --------- --------- --------- ---------
Portfolio turnover 90% 92% 113% 130% 100%
--------- --------- --------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
72
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------ --------------------------------------------------
May 31, 1995
Year Ended March 31, (commenced) to Year Ended March 31,
-------------------------------------- March 31, --------------------------------------------------
1999 1998 1997 1996 1998 1997 1996 1995
--------- --------- --------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22.53 $ 15.51 $ 16.69 $ 12.50 $ 14.69 $ 17.62 $ 12.96 $ 12.07
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
(0.53) (0.27) (0.21) (0.14) (0.38) (0.31) (0.29) (0.22)
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
0.33 7.29 (0.97) 4.33 6.84 (0.63) 5.03 1.11
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
$ (0.20) $ 7.02 $ (1.18) $ 4.19 $ 6.46 $ (0.94) $ 4.74 $ 0.89
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
-- -- -- -- -- -- -- --
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
(1.21) -- -- -- (2.53) (1.99) (0.08) --
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
$ 21.12 $ 22.53 $ 15.51 $ 16.69 $ 18.62 $ 14.69 $ 17.62 $ 12.96
========= ========= ========= =========== ========== ========== ========== ==========
(0.29)% 45.26% (7.07)% 33.52% 45.40% (6.81)% 37.18% 7.37%
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
$ 45,140 $ 55,215 $ 28,030 $ 13,626 $ 225,025 $ 182,907 $ 207,332 $ 157,292
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
2.57% 2.62% 2.61% 2.58%* 2.57% 2.35% 2.35% 2.44%
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
2.66% 2.63% 2.73% 3.26%* 2.59% 2.35% 2.35% 2.44%
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
(2.03)% (2.59)% (2.13)% (2.09)%* (2.53)% (1.89)% (1.81)% (1.85)%
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
90% 92% 113% 130% 92% 113% 130% 100%
--------- --------- --------- ----------- ---------- ---------- ---------- ----------
</TABLE>
73
<PAGE>
U.S. EQUITY
FUNDS
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 labeled "Total Investment Return at Net
Asset Value", was audited by another independent auditor. The information in
<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.
74
<PAGE>
- --------------------------------------------------------------------------------
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.
75
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<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 $ 19.33 $ 16.88 $ 16.57 $ 14.29 $ 14.94
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.02) 0.04 (0.16) (0.07) (0.05)
--------- --------- --------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.78 5.33 2.20 2.86 (0.09)
--------- --------- --------- --------- ---------
Total from investment operations $ 5.76 $ 5.37 $ 2.04 $ 2.79 $ (0.14)
--------- --------- --------- --------- ---------
Less distributions from:
Net investment income (0.06) -- -- (0.12) (0.02)
--------- --------- --------- --------- ---------
Realized capital gains (3.64) (2.92) (1.73) (0.39) (0.49)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 21.39 $ 19.33 $ 16.88 $ 16.57 $ 14.29
========= ========= ========= ========= =========
TOTAL RETURN(1): 33.56% 34.55% 12.51% 19.79% (0.90)%
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 49,134 $ 38,647 $ 24,022 $ 23,481 $ 22,208
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.86% 1.86% 1.85% 1.85% 1.85%
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.02% 2.21% 2.17% 2.17% 2.18%
--------- --------- --------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (0.62)% (0.69)% (0.93)% (0.35)% (0.42)%
--------- --------- --------- --------- ---------
Portfolio turnover 247% 202% 182% 132% 99%
--------- --------- --------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
76
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- --------------------------------------------------------------
May 31, 1995
Year Ended March 31, (commenced) 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> <C>
$ 20.10 $ 16.02 $ 14.34 $ 12.50 $ 19.05 $ 16.92 $ 16.76 $ 14.44 $ 14.86
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
(0.08) (0.17) (0.14) (0.05) (0.20) (0.19) (0.28) (0.21) (0.15)
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
6.25 5.44 1.82 1.89 5.83 5.41 2.23 2.92 (0.08)
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
$ 6.17 $ 5.27 $ 1.68 $ 1.84 $ 5.63 $ 5.22 $ 1.95 $ 2.71 $ (0.23)
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
(0.01) -- -- -- (0.01) -- -- (0.01) --
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
(2.05) (1.19) -- -- (3.15) (3.09) (1.79) (0.38) (0.19)
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
$ 24.21 $ 20.10 $ 16.02 $ 14.34 $ 21.52 $ 19.05 $ 16.92 $ 16.76 $ 14.44
========= ========= ========== =========== ========= ========= ========= ========= =========
32.74% 34.03% 11.72% 14.72% 32.73% 33.72% 11.81% 18.95% (1.49)%
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
$ 18,556 $ 10,083 $ 5,942 $ 1,972 $ 98,470 $ 84,292 $ 70,345 $ 71,155 $ 71,201
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
2.51% 2.51% 2.50% 2.50%* 2.51% 2.51% 2.50% 2.50% 2.50%
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
2.67% 2.70% 4.81% 9.50%* 2.67% 2.77% 2.61% 2.57% 2.57%
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
(1.31)% (1.37)% (1.62)% (1.28)%* (1.28)% (1.34)% (1.57)% (0.99)% (1.06)%
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
247% 202% 182% 132% 247% 202% 182% 132% 99%
--------- --------- ---------- ----------- --------- --------- --------- --------- ---------
</TABLE>
77
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
Class A
--------------------------------------------
February 28, 1997
Year Ended March 31, (commenced) to
------------------------- March 31,
1999 1998 1997
----------- ----------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.01 $ 12.73 $ 12.50
--------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.01) (0.02) --
--------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 1.02 4.56 0.23
--------- --------- ---------
Total from investment operations $ 1.01 $ 4.54 $ 0.23
--------- --------- ---------
Less distributions from:
Net investment income (0.18) -- --
--------- --------- ---------
Realized capital gains (0.13) (0.26) --
--------- --------- ---------
Net assest value, end of period $ 17.71 $ 17.01 $ 12.73
========= ========= =========
TOTAL RETURN(1): 5.90% 36.10% 1.76%
--------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 21,627 $ 12,664 $ 2
--------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.89% 1.96% 1.95%*
--------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.13% 3.02% 4,579.78%*
--------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (0.51)% (0.45)% 0.00%
--------- --------- ---------
Portfolio turnover 214% 274% 76%
--------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
78
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------- ---------------------------------------------
February 28, February 28,
Year Ended March 31, 1997 (commenced) to Year Ended March 31, 1997 (commenced) to
------------------------ March 31, ------------------------ March 31,
1999 1998 1997 1999 1998 1997
--------- --------- ------------ --------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ 17.10 $ 12.68 $ 12.50 $ 17.16 $ 12.68 $ 12.50
--------- --------- ------------ --------- --------- ----------
(0.16) (0.11) -- (0.05) (0.07) --
--------- --------- ------------ --------- --------- ----------
1.05 4.66 0.18 0.94 4.55 0.18
--------- --------- ------------ --------- --------- ----------
$ 0.89 $ 4.55 $ 0.18 $ 0.89 $ 4.48 $ 0.18
--------- --------- ------------ --------- --------- ----------
(0.03) -- -- (0.11) -- --
--------- --------- ------------ --------- --------- ----------
(0.07) (0.13) -- -- -- --
--------- --------- ------------ --------- --------- ----------
$ 17.89 $ 17.10 $ 12.68 $ 17.94 $ 17.16 $ 12.68
========= ========= ============ ========= ========= ==========
5.24% 35.31% 1.44% 5.22% 35.25% 1.44%
--------- --------- ------------ --------- --------- ----------
$ 11,033 $ 7,942 $ 1 $ 10,400 $ 3,517 $ 43
--------- --------- ------------ --------- --------- ----------
2.53% 2.61% 2.59%* 2.55% 2.61 2.41%*
--------- --------- ------------ --------- --------- ----------
2.77% 3.04% 16,000.25%* 2.79% 5.10% 25.55%*
--------- --------- ------------ --------- --------- ----------
(1.13)% (1.32)% 0.00% (1.19)% (1.27)% (0.07)%*
--------- --------- ------------ --------- --------- ----------
214% 274% 76% 214% 274% 76%
--------- --------- ------------ --------- --------- ----------
</TABLE>
79
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------
August 31, 1994
Year Ended March 31, (commenced) to
---------------------------------------------- March 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.29 $ 14.92 $ 13.15 $ 11.51 $ 12.50
--------- --------- --------- --------- ----------
Income from investment operations:
Net investment income (loss) 0.02 (0.15) 0.04 (0.02) --
--------- --------- --------- --------- ----------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.21 5.36 1.88 1.79 (0.98)
--------- --------- --------- --------- ----------
Total from investment operations $ 3.23 $ 5.21 $ 1.92 $ 1.77 $ (0.98)
--------- --------- --------- --------- ----------
Less distributions from:
Net investment income -- -- (0.01) (0.13) (0.01)
--------- --------- --------- --------- ----------
Realized capital gains (1.49) (0.84) (0.14) -- --
--------- --------- --------- --------- ----------
Net asset value, end of period $ 21.03 $ 19.29 $ 14.92 $ 13.15 $ 11.51
========= ========= ========= ========= ==========
TOTAL RETURN(1): 17.26% 36.31% 14.67% 15.46% (7.85)%
--------- --------- --------- --------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 25,336 $ 11,183 $ 5,569 $ 1,056 $ 610
--------- --------- --------- --------- ----------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.94% 1.96% 1.95% 1.95% 1.95%*
--------- --------- --------- --------- ----------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.08% 2.75% 3.76% 10.06% 9.77%*
--------- --------- --------- --------- ----------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (0.82)% (1.56)% (1.05)% (0.27)% (0.07)%*
--------- --------- --------- --------- ----------
Portfolio turnover 146% 198% 206% 141% 75%
--------- --------- --------- --------- ----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
80
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------- ------------------------------------------------------------------
May 31, 1995 August 31, 1994
Year Ended March 31, (commenced) to Year Ended March 31, (commenced) to
------------------------------------- March 31, ------------------------------------------------ March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
--------- --------- --------- ----------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20.16 $ 15.89 $ 13.96 $ 12.50 $ 18.53 $ 14.87 $ 13.05 $ 11.32 $ 12.50
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(0.20) (0.15) (0.15) (0.02) (0.10) (0.11) (0.16) 0.01 (0.04)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
3.46 5.56 2.09 1.48 3.09 5.09 1.98 1.72 (1.12)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ 3.26 $ 5.41 $ 1.94 $ 1.46 $ 2.99 $ 4.98 $ 1.82 $ 1.73 $ (1.16)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
-- -- (0.01) -- -- -- -- -- (0.02)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(0.99) (1.14) -- -- (0.92) (1.32) -- -- --
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ 22.43 $ 20.16 $ 15.89 $ 13.96 $ 20.60 $ 18.53 $ 14.87 $ 13.05 $ 11.32
========= ========= ========= =========== ========= ========= ========= ========= ===========
16.55% 35.73% 13.96% 11.68% 16.55% 35.63% 13.98% 15.30% (9.25)%
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ 16,158 $ 12,033 $ 5,080 $ 1,487 $ 13,226 $ 8,014 $ 3,592 $ 933 $ 24
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
2.59% 2.61% 2.60% 2.60%* 2.59% 2.61% 2.60% 2.60% 2.61%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
2.73% 2.98% 4.89% 16.15%* 2.73% 3.38% 3.95% 16.15% 75.37%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(1.45)% (2.20)% (1.66)% (0.64)%* (1.45)% (2.18)% (1.67)% (1.02)% (0.76)%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
146% 198% 206% 141% 146% 198% 206% 141% 75%
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
</TABLE>
81
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------
November 28, 1994
Year Ended March 31, (commenced) to
----------------------------------------------- March 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.39 $ 17.20 $ 14.03 $ 11.00 $ 12.50
--------- -------- --------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.06) 0.03 (0.06) (0.04) 0.04
--------- -------- --------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency (3.81) 1.22 3.51 3.15 (1.54)
--------- -------- --------- --------- ---------
Total from investment operations $ (3.87) $ 1.25 $ 3.45 $ 3.11 $ (1.50)
--------- -------- --------- --------- ---------
Less distributions from:
Net investment income (0.02) -- -- (0.02) --
--------- -------- --------- --------- ---------
Realized capital gains (0.07) (1.06) (0.28) (0.06) --
--------- -------- --------- --------- ---------
Net asset value, end of period $ 13.43 $ 17.39 $ 17.20 $ 14.03 $ 11.00
========= ======== ========= ========= =========
TOTAL RETURN(1): (22.23)% 8.06% 24.79% 28.43% (11.98)%
--------- -------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 47,180 $ 71,014 $ 38,688 $ 4,718 $ 1,197
--------- -------- --------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 2.27% 2.26% 2.25% 2.25% 2.25%*
--------- -------- --------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.56% 2.48% 3.08% 6.72% 6.15%*
--------- -------- --------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) (0.25)% 0.55% (1.14)% (0.35)% 1.09%*
--------- -------- --------- --------- ---------
Portfolio turnover 213% 243% 176% 118% 61%
--------- -------- --------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
82
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------ ---------------------------------------------------------------------
May 31, 1995 November 28, 1994
Year Ended March 31, (commenced) to Year Ended March 31, (commenced) to
-------------------------------------- March 31, -------------------------------------------------- March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
------------ ------------ ------------ -------------- ------------ ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 17.64 $ 17.29 $ 14.02 $ 12.50 $ 16.98 $ 16.81 $ 13.71 $ 10.79 $ 12.50
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(0.22) (0.07) (0.11) (0.04) (0.27) (0.12) (0.10) (0.05) --
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(3.70) 1.26 3.47 1.56 (3.49) 1.26 3.37 2.97 (1.70)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ (3.92) $ 1.19 $ 3.36 $ 1.52 $ (3.76) $ 1.14 $ 3.27 $ 2.92 $ (1.70)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
-- -- -- -- -- -- -- -- (0.01)
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(0.08) (0.84) (0.09) -- (0.08) (0.97) (0.17) -- --
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ 13.64 $ 17.64 $ 17.29 $ 14.02 $ 13.14 $ 16.98 $ 16.81 $ 13.71 $ 10.79
========= ========= ========= =========== ========= ========= ========= ========= ===========
(22.23)% 7.47% 24.00% 12.16% (22.21)% 7.47% 23.94% 27.30% (13.64)%
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
$ 22,338 $ 38,796 $ 24,558 $ 3,557 $ 19,246 $ 36,986 $ 29,376 $ 4,345 $ 59
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
2.91% 2.91% 2.90% 2.90%* 2.90% 2.91% 2.90% 2.90% 2.90%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
3.20% 3.06% 3.66% 7.58%* 3.19% 3.09% 3.12% 6.23% 242.59%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
(0.80)% (0.20)% (1.77)% (1.05)%* (0.77)% (0.26)% (1.75)% (1.06)% (0.04)%*
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
213% 243% 176% 118% 213% 243% 176% 118% 61%
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
</TABLE>
83
<PAGE>
INTERNATIONAL
EQUITY FUNDS
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.
84
<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)% (1.53)%(d)
-------- -------- -------- --------- ---------- -------- -------- --------
51% 81% 38% 15% 51% 81% 38% 15%
-------- -------- -------- --------- ---------- -------- -------- --------
</TABLE>
85
<PAGE>
INCOME
FUNDS
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.
86
<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%(e)
------------ ---------- ---------- ------------- ------------ ---------- --------- -------
5.27%(e) 4.24% 4.92% 4.98%(e) 5.52%(e) 4.29% 5.25% 5.73%(e)
------------ ---------- ---------- ------------- ------------ ---------- --------- -------
-- 2.29% -- 2.41%(e) -- 2.05% -- 2.16%(e)
------------ ---------- ---------- ------------- ------------ ---------- --------- -------
-- 4.20% -- 4.83%(e) -- 4.24% -- 5.58%(e)
------------ ---------- ---------- ------------- ------------ ---------- --------- -------
29% 134% 172% 170% 29% 134% 172% 170%
------------ ---------- ---------- ------------- ------------ ---------- --------- -------
</TABLE>
87
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
Class A
--------------
July 27, 1998
(commenced) to
March 31,
1999
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.08
-------
Income from investment operations:
Net investment income (loss) 0.53
-------
Net realized and unrealized gains (losses) on securities and
foreign currency (0.08)
-------
Total from investment operations $ 0.45
-------
Less distributions from:
Net investment income (0.53)
-------
Realized capital gains (0.11)
-------
Net asset value, end of period $ 12.89
=======
TOTAL RETURN(1): 5.60%
-------
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $ 5,751
-------
Ratio of expenses to average net assets, after expense reimbursement(2) 0.96%*
-------
Ratio of expenses to average net assets, before expense reimbursement(2) 1.98%*
-------
Ratio of net investment income (loss) to average net assets,
after expense reimbursement(2) 5.81%*
-------
Portfolio turnover 274%
-------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
88
<PAGE>
- --------------------------------------------------------------------------------
Class B Class C
---------------- ----------------
July 27, July 27,
1998 (commenced) 1998 (commenced)
to to
March 31, March 31,
1999 1999
---------------- ----------------
$ 12.78 $ 13.27
--------- ---------
0.45 0.48
--------- ---------
(0.05) (0.06)
--------- ---------
$ 0.40 $ 0.42
--------- ---------
(0.46) (0.48)
--------- ---------
(0.11) (0.11)
--------- ---------
$ 12.61 $ 13.10
========= =========
5.17% 5.19%
--------- ---------
$ 6,637 $ 8,128
--------- ---------
1.37%* 1.36%*
--------- ---------
2.42%* 2.41%*
--------- ---------
5.35%* 5.36%*
--------- ---------
274% 274%
--------- ---------
89
<PAGE>
INCOME
FUNDS
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.
90
<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> <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>
91
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH
YIELD
FUND II
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
Class A
-----------------------------
Year March 27, 1998
Ended (commenced) to
March 31, March 31,
1999 1998
---------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.72 $ 12.70
-------- ---------
Income from investment operations:
Net investment income (loss) 1.12 0.01
-------- ---------
Net realized and unrealized gains (losses) on securities and
foreign currency (1.00) 0.01
-------- ---------
Total from investment operations $ 0.12 $ 0.02
-------- ---------
Less distributions from:
Net investment income (1.18) --
-------- ---------
Net realized capital gains -- --
-------- ---------
Net asset value, end of period $ 11.66 $ 12.72
======== =========
TOTAL RETURN(1): 1.13% 0.16%
-------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 17,327 $ 4,690
-------- ---------
Ratio of expenses to average net assets, after expense reimbursement(2) 1.12% 1.06%*
-------- ---------
Ratio of expenses to average net assets, before expense reimbursement(2) 1.53% 1.06%*
-------- ---------
Ratio of net investment income (loss) to average net assets, after expense
reimbursement(2) 9.44% 7.22%*
-------- ---------
Portfolio turnover 242% 484%
-------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
92
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------------- ----------------------------
Year March 27, 1998 Year March 27, 1998
Ended (commenced) to Ended (commenced) to
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
$ 12.71 $ 12.69 $ 12.71 $ 12.69
-------- --------- -------- ---------
1.04 0.01 1.04 0.01
-------- --------- -------- ---------
(0.99) 0.01 (0.99) 0.01
-------- --------- -------- ---------
$ 0.05 $ 0.02 $ 0.05 $ 0.02
-------- --------- -------- ---------
(1.10) -- (1.10) --
-------- --------- -------- ---------
-- -- -- --
-------- --------- -------- ---------
$ 11.66 $ 12.71 $ 11.66 $ 12.71
======== ========= ======== =========
0.55% 0.16% 0.55% 0.16%
-------- --------- -------- ---------
$ 42,960 $ 8,892 $ 21,290 $ 4,815
-------- --------- -------- ---------
1.77% 1.69%* 1.77% 1.66%*
-------- --------- -------- ---------
2.18% 1.69%* 2.18% 1.66%*
-------- --------- -------- ---------
8.84% 6.61%* 8.79% 6.91%*
-------- --------- -------- ---------
242% 484% 242% 484%
-------- --------- -------- ---------
</TABLE>
93
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
BALANCED
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and, with respect to Portfolios A and C, by
another independent auditor with respect to commencement of operation through
March 31, 1995.
<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 $ 19.53 $ 15.54 $ 16.16 $ 13.74 $ 13.52
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss) 0.36 0.26 0.32 0.34 0.21
-------- -------- -------- -------- --------
Net realized and unrealized gains (losses)
on securities and foreign currency 2.58 5.70 0.84 2.42 0.22
-------- -------- -------- -------- --------
Total from investment operations $ 2.94 $ 5.96 $ 1.16 $ 2.76 $ 0.43
-------- -------- -------- -------- --------
Less distributions from:
Net investment income (0.43) (0.27) (0.32) (0.34) (0.21)
-------- -------- -------- -------- --------
Realized capital gains (3.01) (1.70) (1.46) -- --
-------- -------- -------- -------- --------
Net asset value, end of period $ 19.03 $ 19.53 $ 15.54 $ 16.16 $ 13.74
======== ======== ======== ======== ========
Total Return(1): 17.10% 39.34% 6.74% 20.16% 3.22%
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $ 9,519 $ 6,675 $ 4,898 $ 5,902 $ 4,980
-------- -------- -------- -------- --------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.59% 1.61% 1.60% 1.60% 1.60%
-------- -------- -------- -------- --------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.97% 2.56% 3.00% 3.30% 2.78%
-------- -------- -------- -------- --------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) 2.08% 3.58% 1.87% 2.16% 1.44%
-------- -------- -------- -------- --------
Portfolio turnover 165% 260% 213% 197% 110%
-------- -------- -------- -------- --------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
94
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------- ---------------------------------------------------------
May 31, 1995
Year Ended March 31, (commenced) 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> <C>
$ 20.07 $ 14.88 $ 14.18 $ 12.50 $ 19.90 $ 15.59 $ 16.20 $ 13.76 $ 13.54
-------- -------- -------- ---------- -------- -------- -------- -------- --------
0.28 0.15 0.17 0.12 0.26 0.15 0.21 0.24 0.11
-------- -------- -------- ---------- -------- -------- -------- -------- --------
2.74 5.58 0.70 1.68 2.52 5.71 0.85 2.44 0.22
-------- -------- -------- ---------- -------- -------- -------- -------- --------
$ 3.02 $ 5.73 $ 0.87 $ 1.80 $ 2.78 $ 5.86 $ 1.06 $ 2.68 $ 0.33
-------- -------- -------- ---------- -------- -------- -------- -------- --------
(0.31) (0.15) (0.17) (0.12) (0.28) (0.15) (0.21) (0.24) (0.11)
-------- -------- -------- ---------- -------- -------- -------- -------- --------
(2.40) (0.39) -- -- (4.05) (1.40) (1.46) -- --
-------- -------- -------- ---------- -------- -------- -------- -------- --------
$ 20.38 $ 20.07 $ 14.88 $ 14.18 $ 18.35 $ 19.90 $ 15.59 $ 16.20 $ 13.76
======== ======== ======== ========== ======== ======== ======== ======== ========
16.49% 38.79% 6.10% 14.45% 16.34% 38.35% 6.05% 19.58% 2.47%
-------- -------- -------- ---------- -------- -------- -------- -------- --------
$ 6,048 $ 4,254 $ 2,133 $ 673 $ 21,655 $ 20,784 $ 16,990 $ 16,586 $ 16,470
-------- -------- -------- ---------- -------- -------- -------- -------- --------
2.24% 2.26% 2.25% 2.25%* 2.23% 2.26% 2.25% 2.25% 2.25%
-------- -------- -------- ---------- -------- -------- -------- -------- --------
2.62% 2.71% 6.44% 13.05%* 2.61% 2.68% 2.83% 3.01% 2.60%
-------- -------- -------- ---------- -------- -------- -------- -------- --------
1.43% 2.99% 1.25% 1.38%* 1.43% 2.93% 1.23% 1.53% 0.83%
-------- -------- -------- ---------- -------- -------- -------- -------- --------
165% 260% 213% 197% 165% 260% 213% 197% 110%
-------- -------- -------- ---------- -------- -------- -------- -------- --------
</TABLE>
95
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
CONVERTIBLE
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors, with respect to the fiscal year ended March 31, 1999 and
the prior three fiscal years, and by another independent auditor with respect to
commencement of operation through March 31, 1995.
<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 $ 19.12 $ 16.59 $ 15.68 $ 12.86 $ 14.16
-------- -------- -------- -------- ---------
Income from investment operations:
Net investment income (loss) 0.40 0.44 0.47 0.48 0.49
-------- -------- -------- -------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.17 4.49 1.64 2.82 (0.89)
-------- -------- -------- -------- ---------
Total from investment operations $ 3.57 $ 4.93 $ 2.11 $ 3.30 $ (0.40)
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income (0.41) (0.44) (0.48) (0.48) (0.49)
-------- -------- -------- -------- ---------
Realized capital gains (0.36) (1.96) (0.72) -- (0.41)
-------- -------- -------- -------- ---------
Net asset value, end of period $ 21.92 $ 19.12 $ 16.59 $ 15.68 $ 12.86
======== ======== ======== ======== =========
Total Return(1): 19.17% 31.04% 13.73% 26.00% (2.64)%
-------- -------- -------- -------- ---------
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $ 65,742 $ 47,290 $ 32,082 $ 31,712 $ 31,150
-------- -------- -------- -------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.53% 1.57% 1.60% 1.60% 1.60%
-------- -------- -------- -------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.65% 1.74% 1.75% 1.76% 1.76%
-------- -------- -------- -------- ---------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement(2) 2.08% 5.64% 2.83% 3.29% 3.71%
-------- -------- -------- -------- ---------
Portfolio turnover 138% 160% 167% 145% 126%
-------- -------- -------- -------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods of less than one year and do
not reflect the impact of sales charges.
(2) Ratios are annualized for periods less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
96
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------- ---------------------------------------------------------
May 31, 1995
Year Ended March 31, (commenced) 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> <C>
$ 20.56 $ 16.60 $ 14.96 $ 12.50 $ 19.55 $ 17.05 $ 15.89 $ 13.03 $ 14.28
--------- --------- --------- -------- --------- --------- --------- --------- ---------
0.29 0.32 0.31 0.24 0.28 0.34 0.37 0.40 0.41
--------- --------- --------- -------- --------- --------- --------- --------- ---------
3.47 4.65 1.64 2.46 3.25 4.60 1.66 2.86 (0.89)
--------- --------- --------- -------- --------- --------- --------- --------- ---------
$ 3.76 $ 4.97 $ 1.95 $ 2.70 $ 3.53 $ 4.94 $ 2.03 $ 3.26 $ (0.48)
--------- --------- --------- -------- --------- --------- --------- --------- ---------
(0.27) (0.32) (0.31) (0.24) (0.25) (0.34) (0.37) (0.40) (0.41)
--------- --------- --------- -------- --------- --------- --------- --------- ---------
(0.19) (0.69) -- -- (0.43) (2.10) (0.50) -- (0.36)
--------- --------- --------- -------- --------- --------- --------- --------- ---------
$ 23.86 $ 20.56 $ 16.60 $ 14.96 $ 22.40 $ 19.55 $ 17.05 $ 15.89 $ 13.03
========= ========= ========= ======== ========= ========= ========= ========= =========
18.52% 30.51% 13.01% 21.72% 18.45% 30.22% 12.91% 25.24% (3.26)%
--------- --------- --------- -------- --------- --------- --------- --------- ---------
$ 58,736 $ 36,725 $ 12,740 $ 2,125 $ 95,998 $ 81,561 $ 62,143 $ 58,997 $ 61,792
--------- --------- --------- -------- --------- --------- --------- --------- ---------
2.18% 2.22% 2.25% 2.25%* 2.18% 2.22% 2.25% 2.25% 2.25%
--------- --------- --------- -------- --------- --------- --------- --------- ---------
2.30% 2.33% 3.19% 7.08%* 2.30% 2.31% 2.29% 2.28% 2.29%
--------- --------- --------- -------- --------- --------- --------- --------- ---------
1.44% 5.04% 2.29% 2.59%* 1.44% 4.99% 2.18% 2.64% 3.05%
--------- --------- --------- -------- --------- --------- --------- --------- ---------
138% 160% 167% 145% 138% 160% 167% 145% 126%
--------- --------- --------- -------- --------- --------- --------- --------- ---------
</TABLE>
97
<PAGE>
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about each Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by calling or writing the
Funds' Shareholder Servicing Agent at:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
Please contact the Funds' Shareholder Servicing Agent with any questions you may
have about the Funds.
You can also obtain information about the Funds from the SEC's Public Reference
Room (1-800-SEC-0330). Reports and other information about the Funds may be
obtained at the SEC's Internet site at www.sec.gov, and copies of this
information may be obtained, upon payment of a duplication fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
The SEC may charge you a fee for this information.
SEC file numbers: 811-9040 (Pilgrim Advisory Funds, Inc.), 811-4031 (Pilgrim
Government Securities Income Fund, Inc.), 811-1939 (Pilgrim Investment Funds,
Inc.), 811-4504 (Pilgrim Bank and Thrift Fund, Inc.), 811-7428 (Pilgrim Mutual
Funds)
Prospectus
May 24, 1999
<PAGE>
Prospectus
Class: Q
May 24, 1999
U.S. EQUITY FUNDS
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
INCOME FUNDS
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund
Pilgrim High Yield Fund II
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
This prospectus contains important information about these funds. You should
read it carefully before you invest, and keep it for future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page
----
FUNDS AT A GLANCE ............................................. 2
U.S. EQUITY FUNDS
Pilgrim LargeCap Growth Fund .............................. 4
Pilgrim MidCap Growth Fund ................................. 6
Pilgrim SmallCap Growth Fund .............................. 8
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund .............................. 10
Pilgrim International Core Growth Fund ..................... 12
Pilgrim International SmallCap Growth Fund ............... 14
Pilgrim Emerging Countries Fund ........................... 16
INCOME FUNDS
Pilgrim Strategic Income Fund .............................. 18
Pilgrim High Yield Fund .................................... 20
Pilgrim High Yield Fund II ................................. 22
EQUITY & INCOME FUNDS
Pilgrim Balanced Fund .................................... 24
Pilgrim Convertible Fund ................................. 26
FEES AND EXPENSES ............................................. 28
SHAREHOLDER GUIDE
How to Purchase Shares .................................... 30
How to Redeem Shares .................................... 31
Transaction Policies ....................................... 32
Distribution and Shareholder Service Fees ............... 33
MANAGEMENT OF THE FUNDS
Adviser ................................................... 34
Sub-Advisers ............................................. 35
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................... 36
MORE INFORMATION ABOUT RISKS ................................. 37
FINANCIAL HIGHLIGHTS .......................................... 41
1
<PAGE>
FUNDS
AT A
GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
U.S. Equity Funds LargeCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
MidCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Worldwide Growth Fund Long-term capital appreciation
Equity Funds Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International Core Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
International SmallCap Growth Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Emerging Countries Fund Long-term capital appreciation
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt.
Income Funds Strategic Income Fund Maximum Total Return
Adviser: Pilgrim Investments, Inc.
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
High Yield Fund II High level of current income and
Adviser: Pilgrim Investments, Inc. capital growth.
Equity & Income Balanced Fund Long-term capital appreciation and
Funds Adviser: Pilgrim Investments, Inc. current income
Convertible Fund Total return, consisting of capital
Adviser: Pilgrim Investments, Inc. appreciation and current income
Sub-Adviser: Nicholas-Applegate Capital Mgt.
</TABLE>
2
<PAGE>
MAIN INVESTMENTS MAIN RISKS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Equity securities of large Price volatility and other risks that accompany an
U.S. companies investment in growth-oriented equity securities.
Equity securities of medium-sized Price volatility and other risks that
U.S companies accompany an investment in equity securities
of growth-oriented and medium-sized
companies. Particularly sensitive to price
swings during periods of economic
uncertainty.
Equity securities of small-sized Price volatility and other risks that
U.S. companies accompany an investment in equity securities
of growth-oriented and small-sized companies.
Particularly sensitive to price swings during
periods of economic uncertainty.
Equity securities of issuers Price volatility and other risks that
located in countries around the accompany an investment in growth-oriented
world, which may include the U.S. foreign equities. Sensitive to currency
exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Equity securities of issuers Price volatility and other risks that
located in countries outside accompany an investment in growth-oriented
the U.S. foreign equities. Sensitive to currency
exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Equity securities of small-sized Price volatility, liquidity and other risks
companies located outside the U.S. that accompany an investment in equity
securities of foreign, small-sized companies.
Sensitive to currency exchange rates,
international political and economic
conditions and other risks that affect
foreign securities.
Equity securities of issuers Price volatility, liquidity and other risks
located in countries with that accompany an investment in equities from
emerging securities markets emerging countries. Sensitive to currency
exchange rates, international political and
economic conditions and other risks that
affect foreign securities.
Investment grade and high yield Credit, interest rate, prepayment and other
debt securities risks that accompany an investment in debt
securities, including high yield debt
securities. May be sensitive to credit risk
during economic downturns.
High yield debt securities Credit, interest rate and other risks that
accompany an investment in lower-quality debt
securities. Particularly sensitive to credit
risk during economic downturns.
High yield debt securities Credit, interest rate and other risks that
accompany an investment in lower-quality debt
securities. Particularly sensitive to credit
risk during economic downturns.
A mix of equity and debt Price volatility and other risks that
securities accompany an investment in equity
securities. Credit, interest rate and other
risks that accompany an investment in debt
securities.
Convertible securities of Price volatility and other risks that
companies of various sizes accompany an investment in equity securities.
Credit, interest rate, liquidity and other
risks that accompany an investment in debt
securities.
</TABLE>
3
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in; corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated; U.S. Government securities; and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful growing
companies that are managing change advantageously and are poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities. The sub-advisor
seeks to uncover signs of "change at the margin" -- positive business
developments which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests primarily in equity securities
of larger companies, which sometimes have more stable prices than smaller
companies.
4
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the U.S., and
foreign controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
60.02%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (7/21/97)
------ ---------------
Class Q 60.02% 45.28%
Russell 1000 Growth Index 38.71% 44.57%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 37.95% (Q4 1998)
Worst quarter for period in bar chart: -8.44% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 20.48% *
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
5
<PAGE>
U.S. EQUITY
FUND
PILGRIM
MIDCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
equity securities of medium-sized U.S. companies and at least 75% of its total
assets in common stocks. It may invest the remainder of its assets in preferred
and convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques.
The sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in medium-sized companies,
which are more susceptible to price swings than larger companies, but usually
tend to have less volatile price swings than smaller companies.
6
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the mid-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
38.24% 16.06% 16.20% 14.32%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (6/30/94)
------ ---------------
Class Q 14.32% 18.75%
Russell Midcap Growth Index 17.86% 21.46%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 25.24% (Q4 1998)
Worst quarter for period in bar chart: -17.67% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 13.60%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
7
<PAGE>
U.S. EQUITY
FUND
PILGRIM
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions the Fund invests at least 65% of its total assets in
equity securities of small U.S. companies, and at least 75% of its total assets
in common stocks. It may invest the remainder in preferred and convertible
securities, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, and securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in foreign
equity or debt securities. The Fund may also use options and futures contracts
involving securities, securities indices, interest rates and foreign currencies
as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies. It uses a blend
of traditional fundamental research of individual securities and a computer
intensive ranking system that analyzes and ranks securities The sub-adviser
seeks to uncover what it calls "change at the margin" -- positive business
developments which are not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small-cap companies, which
are more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and many
are dependent on a few key managers.
8
<PAGE>
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
19.44% 11.56% 4.26%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 4.26% 11.85%
Russell 2000 Growth Index 1.23% 8.62%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 27.03% (Q4 1998)
Worst quarter for period in bar chart: -23.41% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 8.67%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth
orientation. The Index has an inherent performance advantage over the Fund since
it has no cash in its portfolio and incurs no operating expenses. An investor
cannot invest directly in an index.
9
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located 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. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may also invest in small and
medium-sized companies, which may be more susceptible to greater price swings
than larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
10
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks, or
may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
18.32% 17.64% 37.92%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 37.92% 21.71%
MSCI World Index 22.78% 16.80%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 28.33% (Q4 1998)
Worst quarter for period in bar chart: -13.33% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 12.95%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. The Index has
an inherent performance advantage over the Fund since it has no cash in its
portfolio and incurs no operating expenses. An investor cannot invest directly
in an index.
11
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in large companies, which
sometimes have more stable prices than smaller companies.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities at
all.
12
<PAGE>
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.22%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (2/28/97)
------ ---------------
Class Q 21.22% 21.92%
MSCI EAFE Index 20.33% 12.97%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 17.31% (Q1 1998)
Worst quarter for period in bar chart: -14.85% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 2.68%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. The
Index has an inherent performance advantage over the Fund since it has no cash
in its portfolio and incurs no operating expenses. An investor cannot invest
directly in an index.
13
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund considers a company to be
small if it has a market capitalization below $1.5 billion. The Fund emphasizes
companies in the bottom 75% of publicly traded companies as measured by stock
market capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. The Fund may invest in companies located in
countries with emerging securities markets when the sub-adviser believes they
present attractive investment opportunities.
The Fund's sub-adviser emphasizes a growth approach by searching for successful,
growing companies that are managing change advantageously and poised to exceed
growth expectations. It focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of traditional fundamental research of individual securities,
calling on the expertise of many external analysts in different countries
throughout the world, and a computer intensive ranking system that analyzes and
ranks securities. The sub-adviser seeks to uncover signs of "change at the
margin" -- positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund invests in small companies, which may
be more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market diversification
and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the small-cap
growth securities in which the Fund
14
<PAGE>
invests. Rather, the market could favor value-oriented stocks or large company
stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. To the extent the Fund invests in emerging markets
countries, the risks may be greater, partly because emerging market countries
may be less politically and economically stable than other countries. It may
also be more difficult to buy and sell securities in emerging market countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
17.98% 13.93% 35.96%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 35.96% 20.24%
Salomon EPAC EM Index 14.14% 3.43%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 25.12% (Q1 1998)
Worst quarter for period in bar chart: -15.26% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 8.23%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Salomon EPAC Extended Market Index, an unmanaged index
comprised of smaller-capitalization companies in 22 countries excluding Canada
and the United States. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
15
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM LONG-TERM CAPITAL APPRECIATION.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets -- that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques.
The Fund's sub-adviser emphasizes a growth approach, and seeks issuers in the
early stages of development, growth companies, cyclical companies, or companies
believed to be undergoing a basic change in operations. It uses a blend of
traditional fundamental research of individual securities, calling on the
expertise of many external analysts in different countries throughout the world,
and a computer intensive ranking system that analyzes and ranks securities. The
Investment Adviser currently selects portfolio securities from an investment
universe of approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility. This Fund invests in companies that the
sub-adviser believes have the potential for rapid growth, which may give the
Fund a higher risk of price volatility than a fund that emphasizes other styles,
such as a value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than larger
companies because they may have fewer financial resources, limited product and
market diversification and many are dependent on a few key managers.
MARKET TRENDS -- from time to time, the stock market may not favor the growth
securities in
16
<PAGE>
which the Fund invests. Rather, the market could favor value-oriented stocks or
large company stocks, or may not favor equities at all.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment. Investments in emerging markets countries are generally
riskier than other kinds of foreign investments, partly because emerging market
countries may be less politically and economically stable than other countries.
It may also be more difficult to buy and sell securities in emerging market
countries.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
27.75% 10.00% -21.46%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than the sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q -21.46% 1.42%
MSCI Emerging Markets Free Index -27.52% -12.63%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 15.06% (Q2 1997)
Worst quarter for period in bar chart: -25.99% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 7.56%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Morgan Stanley Capital International Emerging Markets
Free Index, an unmanaged index comprised of companies representative of the
market structure of 22 emerging market countries in Europe, Latin America and
the Pacific Basin. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
17
<PAGE>
INCOME
FUND
PILGRIM
STRATEGIC
INCOME FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. There is no minimum credit rating for high yield
debt securities in which the Fund may invest.
The Fund may invest in debt securities of any maturity; however, the average
portfolio duration of the Fund will generally range from two to eight years. The
Fund may invest up to 30% of its total assets in securities payable in foreign
currencies. The Fund may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The Fund does not invest in interest-only or principal-only
stripped mortgage-backed securities.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is especially
true during periods of economic uncertainty or economic downturns. This Fund may
be subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet interest and
principal payments.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the
18
<PAGE>
Fund will be forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. A security whose credit rating has been lowered may
be particularly difficult to sell. Foreign securities and mortgage-related and
asset-backed debt securities may be less liquid than other debt securities. The
Fund could lose money if it cannot sell a security at the time and price that
would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.77% 8.96% 8.18%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the
Fund, which is no longer offered, for prior periods, restated to reflect
Class Q operating expenses. Class Q shares, after adjustment for class
expenses, would have had substantially similar returns because Institutional
Class shares were invested in the same portfolio of securities. Also, prior
to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998*
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q* 8.18% 8.23%
Lehman Aggregate Bond Index 8.67% 8.20%
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class Q expenses, because
Class Q of the Fund did not have a full year's performance as of December 31,
1998. See the footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year.
Best quarter for period in bar chart: 3.68% (Q2 1997)
Worst quarter for period in bar chart: -3.16% (Q1 1996)
The Fund's year-to-date total return as of March 31, 1999 was -0.08%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. The Index has an inherent performance
advantage over the Fund since it has no cash in its portfolio and incurs no
operating expenses. An investor cannot invest directly in an index.
19
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND
INVESTMENT OBJECTIVE:
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective.
Adviser:
Pilgrim Investments, Inc.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. There is no minimum credit rating for high yield debt securities in which
the Fund may invest. The Fund may invest in debt securities of any maturity. In
selecting securities for the Fund, preservation of capital is a consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage-related securities, and
participation interests and assignments in floating rate loans and notes. The
Fund may also invest up to 10% of its assets in foreign debt securities of any
rating. The Fund reserves the right to also invest in financial futures and
related options to attempt to hedge risk, although the Fund has not invested in
such instruments since Pilgrim Investments became the adviser in 1995 through
the date of this prospectus.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long terms to
maturity. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
20
<PAGE>
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off their
mortgages sooner than scheduled. If interest rates are falling, the Fund will be
forced to reinvest this money at lower yields.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
* Because Class Q shares were first offered in 1999, the returns in the bar
chart are based upon the performance of Class A shares of the Fund, for prior
periods. Class Q shares would have had substantially similar returns because
Class A shares invest in the same portfolio of securities and have the same
operating expenses as Class Q shares.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
1 Year 5 Years 10 Years
------ ------- --------
Class Q* -7.60% 7.36% 8.88%
Lehman High Yield Index 1.87% 8.57% 10.55%
* This table shows performance of the Class A shares of the Fund, restated to
reflect the absence of a sales charge, because Class Q of the Fund did not
have a full year's performance as of December 31, 1998. See the footnote to
the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year.
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 1.15%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. The Index has an inherent performance advantage over the
Fund since it has no cash in its portfolio and incurs no operating expenses. An
investor cannot invest directly in an index.
21
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH YIELD
FUND II
INVESTMENT OBJECTIVE:
THE FUND SEEKS A HIGH LEVEL OF CURRENT INCOME AND CAPITAL GROWTH.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
lower rated debt securities, which are commonly referred to as "junk bonds," and
convertible securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
limit on either the portfolio maturity or the acceptable rating of securities
bought by the Fund. Securities may bear rates that are fixed, variable or
floating. The Fund may invest up to 35% of its total assets in equity securities
of U.S. and foreign companies. The Fund is not restricted to investments in
companies of any particular size, but currently intends to invest principally in
companies with market capitalization above $100 million at the time of purchase.
The Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
The Board of Trustees of the Fund has approved, subject to approval of the
shareholders of High Yield Fund II, a proposed reorganization of the Fund into
Pilgrim High Yield Fund. If shareholder approval is obtained, it is expected
that the reorganization will take place in the summer of 1999.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in high
yield debt securities, which are considered predominantly speculative with
respect to the issuer's continuing ability to meet interest and principal
payments. This is especially true during periods of economic uncertainty or
economic downturns.
CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when
interest rates rise. The Fund may be sensitive to changes in interest rates
because it may invest in debt securities with intermediate and long term
maturities. Debt securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations.
PREPAYMENT RISK -- the Fund may invest in mortgage related securities, which can
be paid off early if the owners of underlying mortgages pay off their mortgages
sooner than scheduled. If interest rates are falling, the Fund will be forced to
reinvest this money at lower yields.
22
<PAGE>
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund. A
security whose credit rating has been lowered may be particularly difficult to
sell.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate information,
differences in the way securities markets operate, less secure foreign banks or
securities depositories than those in the U.S., and foreign controls on
investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
21.07% 5.03%
* Because Class Q shares were first offered in 1998, the returns in the bar
chart are based upon the performance of Institutional Class shares of the
Fund, which is no longer offered, for prior periods, restated to reflect
Class Q operating expenses. Class Q shares, after adjustment for class
expenses, would have had substantially similar returns because Institutional
Class shares were invested in the same portfolio of securities. Also, prior
to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (7/31/96)
------ ---------------
Class Q* 5.03% 15.37%
First Boston High Yield Index .58% 8.43%
* This table shows performance of the Institutional Class shares of the Fund,
which is no longer offered, restated to reflect Class Q expenses, because
Class Q of the Fund did not have a full year's performance as of December 31,
1998. See the footnote to the bar chart above.
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year.
Best quarter for period in bar chart: 8.31% (Q3 1997)
Worst quarter for period in bar chart: -7.02% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 2.76%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston High Yield Index, an unmanaged index of
high yield bonds. Unlike the bar chart. the table refects the impact of sales
charges. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
23
<PAGE>
EQUITY &
INCOME
PILGRIM
BALANCED
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS A BALANCE OF LONG-TERM CAPITAL APPRECIATION AND CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions.
The remainder of the Fund's assets will be invested in equity securities, which
will be managed in accordance with the principal investment strategies of the
Pilgrim LargeCap Leaders Fund, which invests primarily in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge.
The adviser emphasizes a value approach, and seeks securities whose prices in
relation to projected earnings are believed to be reasonable in comparison to
the market. A company with a market capitalization of over $5 billion is
considered to be a large company, although the Fund may also invest to a limited
degree in companies that have a market capitalization between $1 billion and $5
billion.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit quality for the high yield debt securities in which the Fund may
invest. The Fund and may invest up to 10% of its assets in other investment
companies that invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund
may invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities. When the adviser anticipates unusual market or other
conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may go up or down, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While equities
may offer the potential for greater long-term growth than most debt securities,
they generally have higher volatility.
MARKET TRENDS -- from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market could
favor growth-oriented stocks or small company stocks, or may not favor equities
at all.
CHANGES IN INTEREST RATES -- the value of the debt securities held by the Fund
may fall when interest rates rise. The Fund may be sensitive to changes in
interest rates because it may invest in debt securities with intermediate and
long terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile than
debt securities with shorter durations. Zero coupon securities are particularly
sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes
24
<PAGE>
bankrupt. This Fund may be subject to more credit risk than the other income
funds, because it may invest in high yield debt securities, which are considered
predominantly speculative with respect to the issuer's continuing ability to
meet interest and principal payments. This is especially true during periods of
economic uncertainty or economic downturns.
INABILITY TO SELL SECURITIES -- high yield securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities--markets operate, less secure
foreign banks or securities depositories than those in the U.S., and foreign
controls on investment.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
16.88% 21.46% 23.52%
* Prior to May 24, 1999, a different adviser managed the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 23.52% 18.17%
Composite Index 20.93% 20.65%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 14.48% (Q4 1998)
Worst quarter for period in bar chart: -5.00% (Q1 1997)
The Fund's year-to-date total return as of March 31, 1999 was 4.65%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- a composite index consisting of 60% Standard & Poor's 500
Composite Stock Price Index and 40% Lehman Brothers Government/Corporate Bond
Index. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio and incurs no operating expenses. An investor
cannot invest directly in an index.
25
<PAGE>
EQUITY &
INCOME
PILGRIM
CONVERTIBLE
FUND
INVESTMENT OBJECTIVE:
THE FUND SEEKS MAXIMUM TOTAL RETURN, CONSISTING OF CAPITAL APPRECIATION AND
CURRENT INCOME.
ADVISER:
PILGRIM INVESTMENTS, INC.
SUB-ADVISER:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. Convertible securities are generally preferred stock or
other securities, including debt securities, that are convertible into common
stock. The Fund emphasizes companies with market capitalizations above $500
million. Through investments in convertible securities, the Fund seeks to
capture the upside performance of the underlying equities with less downside
exposure. The Fund may invest the remainder of its assets in common and
preferred stocks, debt securities of any maturity, and securities issued by the
U.S. Government and its agencies and instrumentalities. The Fund may also use
options and futures contracts involving securities, securities indices, interest
rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There is no
minimum credit rating for high yield securities in which the Fund may invest.
The Fund also may invest up to 35% of its net assets in zero coupon securities.
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" -- positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
PRICE VOLATILITY -- the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, issuer and other risks, and their values may go up or down, sometimes
rapidly and unpredictably. Market risk is the risk that securities may decline
in value due to factors affecting securities markets generally or particular
industries. Issuer risk is the risk that the value of a security may decline for
reasons relating to the issuer, such as changes in the financial condition of
the issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility. The Fund may
invest in small and medium-sized companies, which may be more susceptible to
greater price swings than larger companies because they may have fewer financial
resources, limited product and market diversification and many are dependent on
a few key managers.
CHANGES IN INTEREST RATES -- the value of the convertible and debt securities
held by the Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in securities with intermediate
and long terms to maturity. Securities with longer durations tend to be more
sensitive to changes in interest
26
<PAGE>
rates, usually making them more volatile than securities with shorter durations.
Zero coupon securities are particularly sensitive to changes in interest rates.
CREDIT RISK -- the Fund could lose money if the issuer of a convertible or debt
security is unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic downturns.
This Fund may be subject to more credit risk than the other bond funds, because
the convertible securities and debt securities in which it invests may be
lower-rated securities.
INABILITY TO SELL SECURITIES -- lower rated securities may be less liquid than
higher quality investments. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
RISKS OF USING DERIVATIVES -- derivatives are subject to the risk of changes in
the market price of the security, credit risk with respect to the counterparty
to the derivative instrument, and the risk of loss due to changes in interest
rates. The use of certain derivatives may also have a leveraging effect, which
may increase the volatility of the Fund. The use of derivatives may reduce
returns for the Fund.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS*
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
20.74% 23.04% 21.40%
* Prior to May 24, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
Since Inception
1 Year (8/31/95)
------ ---------------
Class Q 21.40% 20.57%
First Boston Convertible Index 6.55% 11.82%
The bar chart and table at left show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart at left provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class Q shares from
year to year.
Best quarter for period in bar chart: 19.88% (Q4 1998)
Worst quarter for period in bar chart: -9.03% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was 6.94%
----------
The table at left compares the Fund's performance to that of a broad measure of
market performance -- the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio and
incurs no operating expenses. An investor cannot invest directly in an index.
27
<PAGE>
FEES AND
EXPENSES
- --------------------------------------------------------------------------------
The following table describes the fees and expenses that you may pay if you hold
shares of a Fund. The Funds do not charge you any fees for buying, selling or
exchanging Class Q shares.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)(1)
Total
Annual
Distribution Fund Fee Waiver
Management and Service Other Operating by Net
Fund Fees (12b-1) Fees Expenses(4) Expenses Adviser(2) Expenses
- ---- ---------- ------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
LargeCap Growth 0.75% 0.25% 0.72% 1.72 (0.47)% 1.25%
MidCap Growth 0.75 0.25 0.26 1.26 (0.01) 1.25
SmallCap Growth 1.00 0.25 0.34 1.59 (0.09) 1.50
Worldwide Growth 1.00 0.25 0.45 1.70 (0.10) 1.60
International Core Growth 1.00 0.25 0.55 1.80 (0.15) 1.65
International SmallCap Growth 1.00 0.25 0.48 1.73 (0.08) 1.65
Emerging Countries 1.25 0.25 0.68 2.18 (0.28) 1.90
Strategic Income 0.45 0.25 0.91 1.61 (0.76) 0.85
High Yield(3) 0.60 0.25 0.32 1.17 (0.17) 1.00
High Yield II 0.60 0.25 0.36 1.21 (0.21) 1.00
Balanced 0.75 0.25 0.48 1.48 (0.23) 1.25
Convertible 0.75 0.25 0.29 1.29 (0.04) 1.25
</TABLE>
1 This table shows the estimated operating expenses for each Fund by class as
a ratio of expenses to average daily net assets. These estimated are based
on each Fund's actual operating expenses for its most recent complete
fiscal year and fee waivers to which the Adviser has agreed.
2 Pilgrim Investments has entered into expense limitation agreements with
each of the Funds, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." For High Yield
Fund, the current limits will continue through December 31, 1999, at which
time they will change to 1.10% for Class A, 1.85% for Class B and C and
1.60% for Class M through at least June 30, 2001. For each remaining Fund,
the expense limit will continue through at least May 24, 2001.
Nicholas-Applegate Capital Management bears 50% of the cost of maintaining
the expense limit for Funds for which is serves as sub-adviser.
3 Because Class Q shares are new for the High Yield Fund, its expenses are
based on Class A expenses of the Fund.
4 Except for High Yield Fund, other expenses have been restated to reflect
the elimination of certain administrative fees effective May 24, 1999.
28
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. Each Example assumes
that you invest $10,000 in the Fund for the time period indicated and then
redeem all your shares at the end of the time period indicated. Each Example
also assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Fund 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- --------
LargeCap Growth $127 $448 $ 843 $1,950
MidCap Growth 127 398 690 1,521
SmallCap Growth 153 484 848 1,874
Worldwide Growth 163 516 904 1,991
International Core Growth 168 536 946 2,091
International SmallCap Growth 168 529 923 2,027
Emerging Countries 193 627 1,117 2,468
Strategic Income 87 355 728 1,778
High Yield 112 357 630 1,408
High Yield II 102 341 623 1,428
Balanced 127 422 763 1,728
Convertible 127 401 700 1,549
29
<PAGE>
SHAREHOLDER
GUIDE
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES. Class Q Shares are offered at net asset value without a
sales charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time. Certain Funds also offer Class A, B, C and M Shares, which have
different sales charges and other expenses that may affect their performance.
You can obtain more information about these other share Classes by calling (800)
992-0180.
RETIREMENT PLANS. You may invest in each Fund through various retirement plans,
including IRAs, Simplified Employee Plan (SEP) IRAs, Roth IRAs 403(b) plans, 457
plans, and all qualified retirement plans. For further information about any of
the plans, agreements, applications and annual fees, contact the Distributor,
your financial representative or plan sponsor. To determine which retirement
plan is appropriate for you, consult your tax adviser. For further information,
contact the Shareholder Servicing Agent at (800) 992-0180.
If you are a participant in a qualified retirement plan, you should make
purchases through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other purchasers may purchase shares by the methods outlined in the table on
the right.
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Funds reserve the right to liquidate sufficient shares to recover
annual transfer agent fees should you fail to maintain your account value at a
minimum of $250,000.
Initial Additional
Method Investment Investment
------ ---------- ----------
By Contacting An investment
Your Investment professional with an
Professional authorized firm
can help you establish
and maintain your
account.
By Mail Visit or consult an Visit or consult an
investment investment
professional. professional.
Make your check Fill out the Account
payable to the Pilgrim Additions form
Funds and mail it, included on the bottom
along with a completed of your account
Application. Please statement along with
indicate your your check payable to
investment professional the Fund and mail
on the New Account them to the address on
Application the account statement.
Remember to write your account
number on the check.
By Wire Call the Pilgrim Wire the funds in the
Operations Department same manner described
at (800) 336-3436 to under "Initial
obtain an account Investment."
number and indicate
your investment
professional on the
account.
Instruct your bank to
wire funds to the Fund
in the care of:
Investors Fiduciary
Trust Co. ABA
#101003621 Kansas
City, MO credit to:
-----------------------
(the Fund) A/C #751-8315;
for further credit to:
Shareholder A/C
#
-----------------------
(A/C # you received
over the telephone)
Shareholder Name:
------------------------
(Your Name Here)
After wiring funds you
must complete the
Account Application
and send it to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO
64141-6368
30
<PAGE>
How to Redeem Shares
- --------------------------------------------------------------------------------
If you are a participant in a qualified retirement plan, you should make
redemptions through your plan administrator or sponsor, who is responsible for
transmitting orders.
All other shareholders may redeem shares by the methods outlined in the table on
the right.
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account on a regular basis.
* Your account must have a current value of at least $250,000.
* Minimum withdrawal amount is $1,000.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, see the
Account Application or the Statement of Additional Information.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
<TABLE>
<CAPTION>
<S> <C>
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge for
their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in
which the account is registered, and the dollar
value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification
is provided on the Account Application.
A signature guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check
the box on the Account Application which signifies
that you do not wish to use telephone redemptions.
To redeem by telephone, call the Shareholder
Servicing Agent at (800) 992-0180. Receiving
Proceeds By Check: You may have redemption
proceeds (up to a maximum of $100,000) mailed to
an address which has been on record with Pilgrim
Funds for at least 30 days. Receiving Proceeds By
Wire: You may have redemption proceeds (subject to
a minimum of $5,000) wired to your pre-designated
bank account. You will not be able to receive
redemption proceeds by wire unless you check the
box on the Account Application which signifies
that you wish to receive redemption proceeds by
wire and attach a voided check. Under normal
circumstances, proceeds will be transmitted to
your bank on the business day following receipt of
your instructions, provided redemptions may be
made. In the event that share certificates have
been issued, you may not request a wire redemption
by telephone.
</TABLE>
31
<PAGE>
SHAREHOLDER
GUIDE
TRANSACTION POLICIES
- --------------------------------------------------------------------------------
NET ASSET VALUE. The net asset value (NAV) per share for Class Q shares of each
Fund is determined each business day as of the close of regular trading on the
New York Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per
share of Class Q shares of each Fund is calculated by taking the value of the
Fund's assets attributable to Class Q shares, subtracting the Fund's liabilities
attributable to Class Q shares, and dividing by the number of Class Q shares
that are outstanding. Because foreign securities may trade on days when the
Funds do not price shares, the net asset value of a Fund that invests in foreign
securities may change on days when shareholders will not be able to purchase or
redeem the Fund's shares
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith by the Board of Directors or Trustees, although the actual calculations
will be made by persons acting under the supervision of the Board. Valuing
Securities at fair value involves greater reliance on judgment than securities
that have readily available market quotations.
PRICE OF SHARES. When you buy shares, you pay the NAV. When you sell shares, you
receive the NAV. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
EXCHANGES. You may exchange Class Q shares of a Fund for Class Q shares of any
other Pilgrim Fund that offers Class Q shares. The total value of shares being
exchanged must at least equal the minimum investment requirement for Class Q
shares of the Fund into which they are being exchanged. Exchanges of shares are
sales and may result in a gain or loss for federal and state income tax
purposes. There is no specific limit on exchange frequency; however, the Funds
are intended for long term investment and not as a trading vehicle. The adviser
may prohibit excessive exchanges (more than four per year). The adviser also
may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or
impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. You may elect to have a specified dollar amount
of Class Q shares systematically exchanged, monthly, quarterly, semi-annually or
annually (on or about the 10th of the applicable month), from your account to an
identically registered account in Class Q shares of any other open-end Pilgrim
Fund. This exchange privilege may be modified at any time or terminated upon 60
days written notice to shareholders.
32
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY). If you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to Fund performance.
DISTRIBUTION AND
SHAREHOLDER SERVICE FEES
To pay for the cost of servicing your shareholder account, each Fund has adopted
a Rule 12b-1 plan for Class Q shares which requires fees to be paid out of the
assets of the class. Over time the fees will increase your cost of investing and
may exceed the cost of paying other types of sales charges. Each Fund pays a
service fee at an annual rate of 0.25% of the average daily net assets of the
Class Q shares of the Fund.
33
<PAGE>
MANAGEMENT
OF THE
FUNDS
ADVISER
- --------------------------------------------------------------------------------
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of May 14, 1999, Pilgrim
Investments managed over $5.8 billion in assets. Pilgrim Investments acquired
certain assets of previous advisers to the Funds in separate transactions that
closed on April 7, 1995 and May 21, 1999. Pilgrim Investments is an indirect,
wholly owned subsidiary of 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
- ---- ------------
LargeCap Growth 0.75%
MidCap Growth 0.75
SmallCap Growth 1.00
Worldwide Growth 1.00
International Core Growth 1.00
International SmallCap Growth 1.00
Emerging Countries 1.25
Strategic Income 0.45
High Yield 0.60
High Yield II 0.60
Balanced 0.75
Convertible 0.75
PILGRIM INVESTMENTS DIRECTLY MANAGES THE PORTFOLIOS OF THE FOLLOWING FUNDS:
STRATEGIC INCOME FUND
The following individuals share responsibility for the day-to-day management of
the Strategic Income Fund:
Robert K. Kinsey, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey
manages Strategic Income Fund's assets that are invested in assets other than
high yield debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was
a Vice President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
HIGH YIELD FUND AND HIGH YIELD FUND II
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund and High Yield Fund II since June 1995 and May, 1999,
respectively.
34
<PAGE>
- --------------------------------------------------------------------------------
BALANCED FUND
The following individuals share responsibility for the day-to-day management of
the Balanced Fund:
G. David Underwood, Vice President and Senior Portfolio Manager for Pilgrim
Investments, has served as Senior Portfolio Manager of the equity portion of the
Balanced Fund's assets since May 24, 1999. Mr. Underwood is the Lead Portfolio
Manager of Pilgrim LargeCap Leaders Fund. Prior to joining Pilgrim Investments
in December, 1996, Mr. Underwood served as Director of Funds Management for
First Interstate Capital Management. Mr. Underwood's prior experience includes a
10 year association with Integra Trust Company of Pittsburgh where he served as
Director of Research and Senior Portfolio Manager.
Kevin G. Mathews, whose background is described above, has served as Senior
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
Robert K. Kinsey, whose background is described above, has also served as a
Portfolio Manager of the fixed income portion of Balanced Fund's assets since
May 24, 1999.
SUB-ADVISER
For the following Funds, Pilgrim Investments has engaged a Sub-Adviser to
provide the day-to-day management of the Fund's portfolio. The Sub-Adviser is
among the most respected institutional investment advisers in the world, and has
been selected primarily on the basis of its successful application of a
consistent, well-defined, long-term investment approach over a period of several
market cycles.
LARGECAP GROWTH FUND, MIDCAP GROWTH FUND, SMALLCAP GROWTH FUND, INTERNATIONAL
CORE GROWTH FUND, WORLDWIDE GROWTH FUND, INTERNATIONAL SMALLCAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$22 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
In connection with the acquisition of certain assets relating to certain of the
Funds in 1999, Pilgrim Investments and certain of its affiliates entered into an
agreement with Nicholas-Applegate Capital Management and its affiliates which
provides that Pilgrim Investments (not the Funds) will be obligated to pay to
Nicholas-Applegate Capital Management a specified amount upon termination of the
sub-advisory agreement with Nicholas-Applegate Capital Management.
35
<PAGE>
DIVIDENDS,
DISTRIBUTION
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
Annually Quarterly Monthly
- -------- --------- -------
LargeCap Growth(1) Balanced(3) Strategic
MidCap Growth(1) Convertible(3) Income(2)
SmallCap Growth(1) High Yield(2)
International Core High Yield II(2)
Growth(3)
Worldwide Growth(1)
International SmallCap
Growth(1)
Emerging Countries(1)
1 Distributions normally expected to consist primarily of capital gains.
2 Distributions normally expected to consist primarily of ordinary income.
3 Distributions normally expected to consist of a variable combination of
capital gains and ordinary income.
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class Q shares of a Fund invested in another Pilgrim Fund which offers
the Class Q shares.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
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MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques used by the Funds, see the Statement of Additional Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter in to foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as
zero-coupon or pay-in-kind securities tend to be more volatile. The secondary
market in which high yield securities are traded is generally less liquid than
the
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MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
OTHER INVESTMENT COMPANIES. Each Fund (except the High Yield Fund) may invest up
to 10% of its assets in other investment companies. When a Fund invests in other
investment companies, you indirectly pay a proportionate share of the expenses
of that other investment company (including management fees, administration
fees, and custodial fees) in addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and
illiquid securities. If a security is illiquid, the Fund might be unable to sell
the security at a time when the adviser might wish to sell, and the security
could have the effect of decreasing the overall level of the Fund's liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less liquid
than registered securities traded on established secondary markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk
38
<PAGE>
- --------------------------------------------------------------------------------
of nonpayment of principal or interest. Substantial increases in interest rates
may cause an increase in loan defaults. Although the loans will generally be
fully collateralized at the time of acquisition, the collateral may decline in
value, be relatively illiquid, or lose all or substantially all of its value
subsequent to the Fund's investment. Many loans are relatively illiquid, and may
be difficult to value.
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund
may lend portfolio securities in an amount up to 331|M/3% of total Fund assets
to broker-dealers, major banks, or other recognized domestic institutional
borrowers of securities. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the sale
of a security, with an agreement to repurchase the same securities at an agreed
upon price and date. Whether such a transaction produces a gain for a Fund
depends upon the costs of the agreements and the income and gains of the
securities purchased with the proceeds received from the sale of the security.
If the income and gains on the securities purchased fail to exceed the costs,
net asset value will decline faster than otherwise would be the case. Reverse
repurchase agreements, as leveraging techniques, may increase a Fund's yield;
however, such transactions also increase a Fund's risk to capital and may result
in a shareholder's loss of principal.
SHORT SALES. Each Fund (except High Yield Fund) may make short sales. A "short
sale" is the sale by a Fund of a security which has been borrowed from a third
party on the expectation that the market price will drop. If the price of the
security rises, the Fund may have to cover its short position at a higher price
than the short sale price, resulting in a loss.
PERCENTAGE INVESTMENT LIMITATIONS. Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
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<PAGE>
MORE
INFORMATION
ABOUT
RISKS
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure. When a Fund
takes a temporary defensive strategy, it may limit the Fund's ability to achieve
its investment objective.
PORTFOLIO TURNOVER. Each Fund may engage in frequent and active trading of
portfolio securities to achieve its investment objective. A high portfolio
turnover rate involves greater expenses to a Fund, including brokerage
commissions and other transaction costs, and is likely to generate more taxable
short-term gains for shareholders, which may have an adverse effect on the
performance of the Fund.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. Pilgrim Investments is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally. Foreign issuers may be
more susceptible to risks associated with the Year 2000 Problem than domestic
issuers.
40
<PAGE>
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
41
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
LARGECAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
Year July 21, 1997
Ended (commenced)
March 31, to March 31,
1999 1998
--------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.66 $ 12.50
--------- ----------
Income from investment operations:
Net investment income (loss) (0.02) (0.01)
--------- ----------
Net realized and unrealized gains (losses)
on securities and foreign currency 9.87 3.26
--------- ----------
Total from investment operations $ 9.85 $ 3.25
--------- ----------
Less distributions from:
Net investment income -- (0.01)
--------- ----------
Realized capital gains (0.27) (0.08)
--------- ----------
Net asset value, end of period $ 25.24 $ 15.66
========= ==========
TOTAL RETURN(1): 63.76% 62.47%
--------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 4,908 $ 799
--------- ----------
Ratio of expenses to average net assets, after expense reimbursement(2) 1.26% 1.25%*
--------- ----------
Ratio of expenses to average net assets, before expense reimbursement(2) 1.91% 10.45%*
--------- ----------
Ratio of net investment income (loss) to average net assets,
after expense reimbursement(2) (0.28)% (0.62)%*
--------- ----------
Portfolio turnover 253% 306%
--------- ----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
42
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
MIDCAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors, 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.
<TABLE>
<CAPTION>
June 30, 1994
Year Ended March 31, (commenced)
----------------------------------------------------- to March 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 23.30 $ 18.01 $ 17.99 $ 13.66 $ 12.50
--------- --------- --------- --------- -----------
Income from investment operations:
Net investment income (loss) (0.12) (0.21) (0.04) (0.07) (0.02)
--------- --------- --------- --------- -----------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.56 7.48 0.32 4.86 1.18
--------- --------- --------- --------- -----------
Total from investment operations $ 3.49 $ 7.27 $ 0.28 $ 4.79 $ 1.16
--------- --------- --------- --------- -----------
Less distributions from:
Net investment income -- -- -- -- --
--------- --------- --------- --------- -----------
Realized capital gains (1.60) (1.98) (0.26) (0.46) --
--------- --------- --------- --------- -----------
Net asset value, end of period $ 25.14 $ 23.30 $ 18.01 $ 17.99 $ 13.66
========= ========= ========= ========= ===========
TOTAL RETURN(1): 15.77% 42.00% 1.39% 35.37% 9.28%
--------- --------- --------- --------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 14,350 $ 12,204 $ 13,115 $ 4,274 $ 2,121
--------- --------- --------- --------- -----------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.23% 1.22% 1.25% 1.23% 1.24%*
--------- --------- --------- --------- -----------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.31% 1.95% 1.84% 2.84% 3.52%*
--------- --------- --------- --------- -----------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) (0.71)% (0.97)% (0.69)% (0.57)% (0.33)%*
--------- --------- --------- --------- -----------
Portfolio turnover 154% 200% 153% 114% 98%
--------- --------- --------- --------- -----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
43
<PAGE>
U.S. EQUITY
FUNDS
PILGRIM
SMALLCAP
GROWTH
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
August 31, 1995
Year Ended March 31, (commenced)
---------------------------------------- to March 31,
1999 1998 1997 1996
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.27 $ 13.19 $ 14.16 $ 12.50
-------- --------- --------- ----------
Income from investment operations:
Net investment income (loss) (0.15) 0.03 (0.07) (0.03)
-------- --------- --------- ----------
Net realized and unrealized gains (losses)
on securities and foreign currency 0.22 6.16 (0.77) 1.69
-------- --------- --------- ----------
Total from investment operations $ 0.07 $ 6.19 $ (0.84) $ 1.66
-------- --------- --------- ----------
Less distributions from:
Net investment income -- -- -- --
-------- --------- --------- ----------
Realized capital gains (0.78) (0.11) (0.13) --
-------- --------- --------- ----------
Net asset value, end of period $ 18.56 $ 19.27 $ 13.19 $ 14.16
======== ========= ========= ==========
TOTAL RETURN(1): 0.96% 47.01% (6.03)% 13.28%
-------- --------- --------- ----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 9,107 $ 12,508 $ 1,013 $ 314
-------- --------- --------- ----------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.53% 1.52% 1.51% 1.49%*
-------- --------- --------- ----------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.63% 2.39% 10.79% 37.86%*
-------- --------- --------- ----------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) 0.97% (1.52)% (1.02)% (1.05)%*
-------- --------- --------- ----------
Portfolio turnover 90% 92% 113% 130%
-------- --------- --------- ----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
44
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
WORLDWIDE
GROWTH
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
August 31, 1995
Year Ended March 31, (commenced)
------------------------------------------------- to March 31,
1999 1998 1997 1996
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.63 $ 15.00 $ 13.27 $ 12.50
------------ ------------ ------------ ------------
Income from investment operations:
Net investment income (loss) 0.22 (0.11) 0.01 (0.04)
------------ ------------ ------------ ------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.15 5.29 1.72 0.81
------------ ------------ ------------ ------------
Total from investment operations $ 6.37 $ 5.18 $ 1.73 $ 0.77
------------ ------------ ------------ ------------
Less distributions from:
Net investment income (0.15) -- -- --
------------ ------------ ------------ ------------
Realized capital gains (1.26) (0.55) -- --
------------ ------------ ------------ ------------
Net asset value, end of period $ 24.59 $ 19.63 $ 15.00 $ 13.27
============ ============ ============ ============
TOTAL RETURN(1): 33.97% 35.11% 12.87% 6.32%
------------ ------------ ------------ ------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 7,320 $ 645 $ 642 $ 1
------------ ------------ ------------ ------------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.59% 1.61% 1.61% 1.60%*
------------ ------------ ------------ ------------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.76% 3.75% 34.99% 3,232.53%*
------------ ------------ ------------ ------------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) (0.17)% (0.47)% (0.91)% (0.50)%*
------------ ------------ ------------ ------------
Portfolio turnover 247% 202% 182% 132%
------------ ------------ ------------ ------------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
45
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
CORE GROWTH
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
February 28, 1997
Year Ended March 31, (commenced)
--------------------------- to March 31,
1999 1998 1997
----------- ------------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.43 $ 12.75 $ 12.50
--------- --------- -----------
Income from investment operations:
Net investment income (loss) 0.09 (0.04) --
--------- --------- -----------
Net realized and unrealized gains (losses)
on securities and foreign currency 0.97 4.72 0.25
--------- --------- -----------
Total from investment operations $ 1.06 $ 4.68 $ 0.25
--------- --------- -----------
Less distributions from:
Net investment income (0.13) -- --
--------- --------- -----------
Realized capital gains -- -- --
--------- --------- -----------
Net asset value, end of period $ 18.36 $ 17.43 $ 12.75
========= ========= ===========
TOTAL RETURN(1): 6.11% 36.63% 2.00%
--------- --------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 11,268 $ 1,719 $ 1
--------- --------- -----------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.63% 1.66% 0.00%
--------- --------- -----------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.87% 3.18% 2,667.07%*
--------- --------- -----------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) (0.27)% (0.47)% 0.00%
--------- --------- -----------
Portfolio turnover 214% 274% 76%
--------- --------- -----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
46
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
INTERNATIONAL
SMALLCAP
GROWTH FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
August 31, 1995
Year Ended March 31, (commenced)
----------------------------------------- to March 31,
1999 1998 1997 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.18 $ 14.01 $ 13.52 $ 12.50
--------- ---------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.02) 0.05 (0.06) 0.01
--------- ---------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.36 5.12 2.01 1.01
--------- ---------- --------- ---------
Total from investment operations 3.34 5.17 1.95 1.02
--------- ---------- --------- ---------
Less distributions from:
Net investment income (0.09) -- -- --
--------- ---------- --------- ---------
Realized capital gains (0.20) -- (1.46) --
--------- ---------- --------- ---------
Net asset value, end of period $ 22.23 $ 19.18 $ 14.01 $ 13.52
========= ========== ========= =========
TOTAL RETURN(1): 17.61% 36.90% 15.03% 8.16%
--------- ---------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 32,819 $ 8,810 $ 42 $ 19
--------- ---------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.65% 1.66% 1.66% 1.65%*
--------- ---------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.80% 6.15% 151.33% 531.72%*
--------- ---------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) (0.50)% (0.43)% (0.64)% 0.33%*
--------- ---------- --------- ---------
Portfolio turnover 146% 198% 206% 141%
--------- ---------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
47
<PAGE>
INTERNATIONAL
EQUITY FUNDS
PILGRIM
EMERGING
COUNTRIES
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
August 31, 1995
Year Ended March 31, (commenced)
--------------------------------------- to March 31,
1999 1998 1997 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.76 $ 16.47 $ 13.18 $ 12.50
--------- -------- --------- ---------
Income from investment operations:
Net investment income (loss) (0.01) 0.07 (0.04) 0.01
--------- -------- --------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency (3.78) 1.33 3.37 0.67
--------- -------- --------- ---------
Total from investment operations $ (3.79) $ 1.40 $ 3.33 $ 0.68
--------- -------- --------- ---------
Less distributions from:
Net investment income (0.18) -- -- --
--------- -------- --------- ---------
Realized capital gains -- (0.11) (0.04) --
--------- -------- --------- ---------
Net asset value, end of period $ 13.79 $ 17.76 $ 16.47 $ 13.18
========= ======== ========= =========
TOTAL RETURN(1): (21.42)% 8.60% 25.29% 5.44%
--------- -------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 53,125 $ 46,711 $ 8,660 $ 350
--------- -------- --------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.94% 1.91% 1.91% 1.90%*
--------- -------- --------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 2.23% 2.43% 4.20% 44.24%*
--------- -------- --------- ---------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) (0.01)% 1.06% (0.87)% 0.47%*
--------- -------- --------- ---------
Portfolio turnover 213% 243% 176% 118%
--------- -------- --------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
48
<PAGE>
INCOME
FUNDS
PILGRIM
STRATEGIC
INCOME
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
July 27, 1998
(commenced)
to March 31,
1999
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.43
---------
Income from investment operations:
Net investment income (loss) 0.48
---------
Net realized and unrealized gains (losses)
on securities and foreign currency (0.04)
---------
Total from investment operations $ 0.44
---------
Less distributions from:
Net investment income (0.50)
---------
Realized capital gains (0.11)
---------
Net asset value, end of period $ 12.26
=========
TOTAL RETURN(1): 5.78%
---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 314
---------
Ratio of expenses to average net assets, after expense reimbursement(2) 0.69%*
---------
Ratio of expenses to average net assets, before expense reimbursement(2) 1.74%*
---------
Ratio of net investment income (loss) to average net assets,
after expense reimbursement(2) 6.03%*
---------
Portfolio turnover 274%
---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
49
<PAGE>
INCOME
FUNDS
PILGRIM
HIGH
YIELD
FUND II
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
Year March 27, 1998
Ended (commenced)
March 31, to March 31,
1999 1998
--------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.72 $ 12.70
-------- ---------
Income from investment operations:
Net investment income (loss) 1.16 0.01
-------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency (1.01) 0.01
-------- ---------
Total from investment operations $ 0.15 $ 0.02
-------- ---------
Less distributions from:
Net investment income (1.19) --
-------- ---------
Realized capital gains -- --
-------- ---------
Net asset value, end of period $ 11.68 $ 12.72
======== =========
TOTAL RETURN(1): 1.40% 0.16%
-------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 6,502 $ 567
-------- ---------
Ratio of expenses to average net assets, after expense reimbursement(2) 0.87% 0.97%*
-------- ---------
Ratio of expenses to average net assets, before expense reimbursement(2) 1.28% 0.97%*
-------- ---------
Ratio of net investment income (loss) to average net assets,
after expense reimbursement(2) 10.01% 7.53%*
-------- ---------
Portfolio turnover 242% 484%
-------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
50
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
BALANCED
FUND
- --------------------------------------------------------------------------------
The figures in the table below have been audited by Ernst & Young LLP,
independent auditors.
<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 $ 18.48 $ 13.42 $ 12.69 $ 12.50
-------- ---------- -------- -----------
Income from investment operations:
Net investment income (loss) 0.44 0.30 0.24 0.15
-------- ---------- -------- -----------
Net realized and unrealized gains (losses)
on securities and foreign currency 2.50 5.07 0.73 0.19
-------- ---------- -------- -----------
Total from investment operations $ 2.94 $ 5.37 $ 0.97 $ 0.34
-------- ---------- -------- -----------
Less distributions from:
Net investment income (0.50) (0.31) (0.24) (0.15)
-------- ---------- -------- -----------
Realized capital gains (2.07) -- -- --
-------- ---------- -------- -----------
Net asset value, end of period $ 18.85 $ 18.48 $ 13.42 $ 12.69
======== ========== ======== ===========
TOTAL RETURN(1): 17.49% 40.21% 7.60% 2.77%
-------- ---------- -------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 176 $ 166 $ 73 $ 1
-------- ---------- -------- -----------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.25% 1.26% 1.26% 1.25%*
-------- ---------- -------- -----------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.63% 11.28% 126.75% 3,094.48%*
-------- ---------- -------- -----------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) 2.41% 4.09% 2.15% 2.16%*
-------- ---------- -------- -----------
Portfolio turnover 165% 260% 213% 197%
-------- ---------- -------- -----------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
51
<PAGE>
EQUITY &
INCOME
FUNDS
PILGRIM
CONVERTIBLE
FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by Ernst & Young LLP,
independent auditors.
<TABLE>
<CAPTION>
August 31, 1995
Year Ended March 31, (commenced)
------------------------------------- to March 31,
1999 1998 1997 1996
----------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFOMANCE:
Net asset value, beginning of period $ 18.47 $ 15.19 $ 13.72 $ 12.50
-------- -------- -------- ---------
Income from investment operations:
Net investment income (loss) 0.43 0.48 0.42 0.17
-------- -------- -------- ---------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.09 4.19 1.50 1.22
-------- -------- -------- ---------
Total from investment operations $ 3.52 $ 4.67 $ 1.92 $ 1.39
-------- -------- -------- ---------
Less distributions from:
Net investment income (0.46) (0.48) (0.42) (0.17)
-------- -------- -------- ---------
Realized capital gains (0.31) (0.91) (0.03) --
-------- -------- -------- ---------
Net asset value, end of period $ 21.22 $ 18.47 $ 15.19 $ 13.72
======== ======== ======== =========
TOTAL RETURN(1): 19.66% 31.54% 14.13% 11.13%
-------- -------- -------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 8,741 $ 7,080 $ 4,599 $ 1,085
-------- -------- -------- ---------
Ratio of expenses to average net assets,
after expense reimbursement(2) 1.22% 1.22% 1.25% 1.25%*
-------- -------- -------- ---------
Ratio of expenses to average net assets,
before expense reimbursement(2) 1.35% 2.35% 2.90% 9.21%*
-------- -------- -------- ---------
Ratio of net investment income (loss)
to average net assets, after
expense reimbursement(2) 2.37% 5.99% 3.29% 3.59%*
-------- -------- -------- ---------
Portfolio turnover 138% 160% 167% 145%
-------- -------- -------- ---------
</TABLE>
* Annualized
(1) Total returns are not annualized for periods less than one year.
(2) Ratios are annualized for periods of less than one year. Expense
reimbursements reflect voluntary reductions to total expenses, as discussed
in the notes to the financial statements. Such amounts would decrease net
investment income (loss) ratios had such reductions not occurred.
52
<PAGE>
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about each Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by calling or writing the
Funds' Shareholder Servicing Agent at:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
Please contact the Funds' Shareholder Servicing Agent with any questions you may
have about the Funds.
You can also obtain information about the Funds from the SEC's Public Reference
Room (1-800-SEC-0330). Reports and other information about the Funds may be
obtained at the SEC's Internet site at www.sec.gov, and copies of this
information may be obtained, upon payment of a duplication fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
The SEC may charge you a fee for this information.
SEC file numbers: 811-1939 (Pilgrim Investment Funds, Inc.), 811-7428 (Pilgrim
Mutual Funds)
Prospectus
May 24, 1999
<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 SmallCap Growth Fund (the "International SmallCap Growth Fund");
Pilgrim Emerging Countries Fund (the "Emerging Countries Fund"); Pilgrim
LargeCap Growth Fund (the "LargeCap Growth Fund"); Pilgrim MidCap Growth Fund
(the "MidCap Growth Fund"); Pilgrim SmallCap Growth Fund (the "SmallCap Growth
Fund"); Pilgrim Convertible Fund (the "Convertible Fund"); Pilgrim Balanced Fund
(the "Balanced Fund"); Pilgrim High Yield Fund II ("High Yield Fund II"),
Pilgrim Strategic Income Fund (the "Strategic Income Fund") and Pilgrim Money
Market Fund (the "Money Market Fund"). The Money Market Fund has not commenced
operations as of May 24, 1999. For more information on the offering of shares
of the Money Market Fund, see the prospectus for the Money Market Fund.
This Statement of Additional Information is not a prospectus, but contains
information in addition to and more detailed than that set forth in the Funds'
Prospectus and should be read in conjunction with the Prospectus. In addition,
the financial statements from the Funds' March 31, 1999 Annual Reports are
incorporated herein by reference (excluding the Money Market Fund which is newly
organized). 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-17
Investment Restrictions...................................................B-48
Portfolio Transactions....................................................B-51
Additional Purchase And Redemption Information............................B-52
Determination Of Share Price..............................................B-59
Shareholder Information...................................................B-60
Shareholder Services And Privileges.......................................B-61
Distributions.............................................................B-63
Tax Considerations........................................................B-64
Calculation Of Performance Data...........................................B-70
General Information.......................................................B-75
Financial Statements......................................................B-76
B-1
<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the laws of
Delaware. Information regarding each Fund of the Trust is included in this
Statement of Additional Information. The Money Market Fund is newly organized.
All of the Funds except the Money Market Fund consist of four classes of shares,
Class A, B, C and Q. The Money Market Fund consists of Class B and C Shares.
Prior to a reorganization of the Trust which became effective on July 24, 1998
(the "Reorganization"), the Trust offered shares in a number of separate
diversified portfolios each of which invested all of its assets in a
corresponding master fund of Nicholas-Applegate Investment Trust (the "Master
Trust"). The Reorganization eliminated this two-tiered "master-feeder"
structure.
On March 15, 1999, the name of the Trust was changed from "Nicholas-Applegate
Mutual Funds," and the name of each Fund (except the Money Market Fund, which is
a new fund) was changed as follows:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Nicholas-Applegate International Core Growth Fund Pilgrim International Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund Pilgrim Worldwide Growth Fund
Nicholas-Applegate International Small Cap Growth Fund Pilgrim International Small Cap Growth Fund
Nicholas-Applegate Emerging Countries Fund Pilgrim Emerging Countries Fund
Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund
Nicholas-Applegate Mid Cap Growth Fund Pilgrim Mid Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund Pilgrim Small Cap Growth Fund
Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund
Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund
Nicholas-Applegate High Yield Bond Fund Pilgrim High Yield Fund II
Nicholas-Applegate High Quality Bond Fund Pilgrim Strategic Income Fund
On May 24, 1999, the names of the following Funds were changed as follows:
Old Name New Name
- -------- --------
Pilgrim International Small Cap Growth Fund Pilgrim International SmallCap Growth Fund
Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund
Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund
Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund
</TABLE>
The Trustees have approved an Agreement and Plan of Reorganization for High
Yield Fund II that, if approved by shareholders of High Yield Fund II, will
result in the reorganization of High Yield Fund II into the Pilgrim High Yield
Fund series of Pilgrim Investment Funds, Inc. If the Agreement and Plan of
Reorganization is approved by shareholders, the Reorganization is expected to
occur in the summer of 1999.
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").
B-2
<PAGE>
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,
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).
B-3
<PAGE>
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 24, 1999. Prior to that date, the Trustees of the Trust were: Fred
C. Applegate, Dann V. Angeloff, Walter E. Auch, Theodore J. Coburn, Darlene
Deremer, George F. Keane, Arthur B. Laffer and Charles E. Young. Also, prior to
that date, each Trustee who was not an interested person was paid an aggregate
annual fee of $14,000 for services rendered as a Trustee of the Trust, and
$1,000 for each meeting attended ($2,000 per Committee meeting for Committee
chairmen). Each Trustee was also reimbursed for out-of-pocket expenses incurred
as a Trustee.
COMPENSATION OF TRUSTEES. The following table sets forth information regarding
compensation of Trustees by the Trust and other funds managed by the Fund's
investment adviser for the year ended March 31, 1999. Officers of the Trust and
Trustees who are interested persons of the Trust do not receive any compensation
from the Funds. In the column headed "Total Compensation From Registrant and
Fund Complex Paid to Trustee," the number in parentheses indicates the total
number of boards in the fund complex on which the Trustee served during that
fiscal year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Pension or Retirement Estimated Annual Registrant and Fund
Compensation Benefits Accrued as Benefits Upon Complex Paid to
Name from Trust Part of Trust Expenses Retirement Trustee**
- ---- ---------- ---------------------- ---------- ---------
<S> <C> <C> <C> <C>
Fred C. Applegate* $22,000 None N/A $22,000 (1)
Arthur B. Laffer* $18,000 None N/A $18,000 (1)
Charles E. Young* $23,000 None N/A $23,000 (1)
Dann V. Angeloff* $25,000 None N/A $25,000 (1)
Walter E. Auch $19,000 None N/A $19,000 (1)
Theodore J. Coburn* $24,000 None N/A $24,000 (1)
Darlene Deremer* $21,000 None N/A $21,000 (1)
George F. Keane* $23,000 None N/A $23,000 (1)
</TABLE>
- ----------
* Resigned as Trustee effective May 21, 1999.
** Prior to May 24, 1999, the Trust was part of a different Fund complex.
Effective May 24, 1999, when Pilgrim Investments, Inc. became the investment
adviser to the Funds, the Trust joined the Pilgrim family of funds. Each of the
current Trustees, which are listed above (except for Mr. Auch), also serve on
the Board of Directors/Trustees of Pilgrim Advisory Funds, Inc., Pilgrim Bank
and Thrift Fund, Inc., Pilgrim Government Securities Income Fund, Inc., Pilgrim
Investment Funds, Inc., Pilgrim Prime Rate Trust and Pilgrim Senior Floating
Rate Trust. Mr. Auch only serves on the Board of Directors/Trustees of Pilgrim
Bank and Thrift Fund, Inc. and Pilgrim Prime Rate Trust.
B-4
<PAGE>
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.
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48)
Executive Vice President (since August 1996), Pilgrim Group; President
and Chief Executive Officer (since August 1996), Pilgrim Investments;
Formerly Chief Executive Officer (November 1993 - December 1995) HSBC
Asset Management Americas, Inc., and Chief Executive Officer, and
Actuary (May 1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49)
Executive Vice President and Secretary (since April 1998), Pilgrim
Capital (formerly Express America Holdings Corporation), Pilgrim Group,
Pilgrim Securities and Pilgrim Investments; Executive Vice President
and Secretary of Pilgrim Prime Rate Trust. Formerly Senior Vice
President, Pilgrim Capital (April 1995 - April 1998); Senior Vice
President, Express America Mortgage Corporation (June 1992 - August
1994) and President, Beverly Hills Securities Corp. (January 1990 -
June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments, Pilgrim Securities (since June 1998) and Pilgrim
Financial (since August 1998). He served in the same capacity from
January, 1995 - April, 1997. Chief Financial Officer of Endeaver Group
(April 1997 to June 1998).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35)
Vice President, Pilgrim Investments (since April 1997) and Pilgrim
Group, Inc. (since February 1997). Vice President and Assistant
Secretary of Pilgrim Prime Rate Trust. Formerly Assistant Vice
President, Pilgrim Group, Inc. (August 1995 - February 1997). Formerly
Operations Manager, Pilgrim Group, Inc. (April 1992 -April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30)
Vice President, Pilgrim Investments (since August 1997) and Pilgrim
Financial (since May 1998), Accounting Manager (since November 1995).
Formerly Assistant Vice President and Accounting Supervisor for
PaineWebber (June, 1993 - April, 1995).
B-5
<PAGE>
PRINCIPAL SHAREHOLDERS. As of May 17, 1999, the Trustees and Officers of the
Trust as a group owned less than 1% of any class of the Fund's outstanding
shares. As of May 17, 1999, to the knowledge of management, no person owned
beneficially or of record more than 5% of the outstanding shares of any class of
the Funds, except as follows:
LargeCap Growth Fund: Merrill Lynch Pierce Fenner & Smith for the Sole Benefit
of its Customers, Attn: Fund Administration, 4800 Deer Lake Drive East, 3rd
Floor, Jacksonville, Florida 32246-6484 ("MLFP&S") (28.48%), CNA Trust Corp.
Trustee, FBO Dalby Wendland & Co., P.C., P.O. Box 5024, Costa Mesa, California
92628-5024 (5.33%), Carn & Co., Catawba Rental Co., Retirement Savings Plan,
Attn: Mutual Funds Star, P.O. Box 96211, Washington, D.C. 20090-6211 (14.14%);
Class B - MLFP&S (35.38%); Class C - MLFP&S (48.09%); Class Q - Charles Schwab
(81.03%).
MidCap Growth Fund: Class A - MLFP&S (55.64%); Class B - MLFP&S (30.89%); Class
C - MLFP&S (75.43%); Class Q - Clark & Co., FBO Swedish American Hospital, P.O.
Box 39, Westerville, Ohio 43086-0039 (52.72%), Donald A. Pels, 375 Park Avenue,
Suite 3305, New York, New York 10152-3399 (16.83%).
SmallCap Growth Fund: Class A - MLFP&S (64.87%); Class B - MLFP&S (49.59%);
Class C - MLFP&S (78.90%); Class Q - Charles Schwab & Co., Inc., 101 Montgomery
Street, 11th Floor, San Francisco, California 94104-41122 ("Charles Schwab")
(47.49%), Suntrust Bank Central Florida FBO Akerman Senterfitt & Edison, P.A.
Cash or Deferred PS PL & Trust, c/o Fascorp Recordkeeper, 8515 E. Orchard Road,
Englewood, California 80111-5002 (14.11%), Suntrust Bank Central Florida FBO
Hubbard Construction Company PSP and 401K Plan, c/o Fascorp Recordkeeper, 8515
E. Orchard Road, Englewood, California 80111-5002 (9.76%), Susan S. Rand, P.O.
Box 452, Salisbury, Connecticut 06068-0452 (7.54%).
International Core Growth Fund: Class B - MLFP&S (7.07%); Class C - MLFP&S
(26.37%), PaineWebber for the Benefit of Arnold I. Richman, 218 North Charles
Street, Suite 500, Baltimore, Maryland 21201-4019 (9.32%); Class Q - Charles
Schwab (43.49%).
Worldwide Growth Fund: Class A - MLFP&S (48.66%), Blush & Co., P.O. Box 976, New
York, New York 10268-0976 (6.75%); Class B - MLFP&S (31.09%); Class C - MLFP&S
(78.52%); Class Q - Charles Schwab (36.49%).
International SmallCap Growth Fund: Class A - MLFP&S (19.83%), Donaldson Lufkin
& Jenrette Securities Corporation, Inc., P.O. Box 2052, Jersey City, New Jersey
07303-2052 (5.48%); Class B - MLFP&S (20.06%); Class C - MLFP&S (31.63%); Class
Q - Charles Schwab (66.26%), FTC & Co., Attn: Datalynk #118, P.O. Box 173736,
Denver, Colorado 80217-3736 (6.92%); Capinco, c/o Firstar Bank East, P.O. Box
1787, Milwaukee, Wisconsin 53201-1787 (6.63%).
Emerging Countries Fund: Class A - MLFP&S (8.09%); Class B - MLFP&S (24.05%);
Class C - MLFP&S (43.15%); Class Q -Charles Schwab (45.88%).
Strategic Income Fund: Class A - MLFP&S (56.61%), CAN Trust Corp. Trustee FBO
Dalby Wendland & Co., P.C., P.O. Box 5024, Costa Mesa, California 92628-5024
(5.61%), Eastern Bank & Trust FBO Munksjo Paper 401K, 217 Essex Street, Salem,
B-6
<PAGE>
Massachusetts 01970-3792 (8.01%); Class B - MLFP&S (36.07%); Class C - MLFP&S
(71.33%); Class Q - Charles Schwab (100%).
Convertible Fund: Class A - MLFP&S (31.56%), First Union Bank FBO Atty. Title
Ins. Fund, 1525 West Harris Boulevard, Charlotte, North Carolina 28262-8522;
Class B - MLFP&S (24.47%); Class C - MLFP&S (69.99%); Class Q - Charles Schwab
(36.17%), Dalton L. Knauss Trustee, Elaine V. Knauss Revocable Trust, P.O. Box
1108, Carefree, Arizona 85377-1108 (14.74%), Dalton L. Knauss Trustee, Dalton L.
Knauss Revocable Trust, P.O. Box 1108, Carefree, Arizona 85377-1108 (14.78%),
Knauss Family Partnership, P.O. Box 2173, Carefree, Arizona 85377-2173 (6.09%).
Balanced Fund: Class A - MLFP&S (41.26%); Class B - MLFP&S (18.29%); Class C -
MLFP&S (76.91%); Class Q - Charles Schwab (97.23%).
High Yield Fund II: Class A - Wachovia Securities, P.O. Box 1220, Charlotte,
North Carolina 28201-1220 (5.23%), PaineWebber for the Benefit of Publix Super
Markets Charities, Inc., Attn: Marvin Weathers, P.O. Box 32018, Lakeland,
Florida 33802-2018 (6.01%), PaineWebber for the Benefit of Publix Super Markets,
Inc. Profit Sharing Plan & Trust, Attn: Marvin Weathers, P.O. Box 407, Lakeland,
Florida 33802-2018 (12.15%); Class B - Merrill Lynch Pierce Fenner & Smith,
Mutual Fund Operations, Attn: Bank Reconciliations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484 ("MLFP&S II") (29.81%); Class C - MLFP&S II
(29.23%); Class Q - Charles Schwab (94.71%).
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Funds and has overall responsibility for the management of the Funds. The
Investment Manager serves pursuant to an Investment Management Agreement between
the Investment Manager and the Trust. The Investment Management Agreement
requires the Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Funds.
The Investment Manager, which was organized in December 1994, is registered as
an investment adviser with the SEC and serves as investment adviser to
registered investment companies (or series thereof) as well as privately managed
accounts. As of May 14, 1999, the Investment Manager had assets under management
of approximately $5.8 billion. The Investment Manager is a wholly-owned
subsidiary of Pilgrim Group, Inc., which is itself a wholly-owned subsidiary of
Pilgrim America Capital Corporation, a Delaware corporation, the shares of which
are traded on the New York Stock Exchange (NYSE:PFX) and which is a holding
company that through its subsidiaries engages in the financial services
business.
The Investment Management Agreement provides that the Investment Manager, with
the approval of the Trust's Board of Trustees, may select and employ investment
advisers to serve as portfolio manager for any Fund ("Portfolio Manager"), and
shall monitor the Portfolio Manager's investment programs and results, and
coordinate the investment activities of the Portfolio Manager to ensure
compliance with regulatory restrictions.
The Investment Manager employs a Portfolio Manager to provide investment
advisory services to certain Funds. More information regarding the Portfolio
Manager is provided below.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including all fees
payable to the Portfolio Managers, executive salaries and expenses of the
Trustees and Officers of the Trust who are employees of the Investment Manager
or its affiliates and office rent of the Trust. The Portfolio Manager pays all
of its expenses arising from the performance of its obligations under the
Portfolio Management Agreement. Subject to the expense reimbursement provisions
described in this Statement of Additional Information, other expenses incurred
B-7
<PAGE>
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
less than 60 days' notice by the Investment Manager. The Investment Management
Agreement will terminate automatically in the event of its "assignment" (as
defined in the 1940 Act).
The Investment Manager bears the expense of providing its services, and pays the
fees of the Portfolio Manager. For its services, each Fund pays the Investment
Manager a monthly fee in arrears equal to the following as a percentage of the
Fund's average daily net assets during the month:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE*
- ------ ---------------------------------
SmallCap Growth Fund 1.00% of the Fund's average net assets
MidCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
LargeCap Growth Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
High Yield Fund II 0.60% of the Fund's average net assets
Convertible Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
B-8
<PAGE>
Balanced Fund 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500
million of average net assets, and 0.65% of the
average net assets in excess of $1 billion
Strategic Income Fund 0.45% of the first $500 million of the Fund's
average net assets, 0.40% of the next $250
million of average net assets, and 0.35% of the
average net assets in excess of $750 million
Emerging Countries Fund 1.25% of the Fund's average net assets
Worldwide Growth Fund 1.00% of the first $500 million of the Fund's
average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
International SmallCap 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million average net assets, 0.90% of the next
$500 million of average net assets, and 0.85%
of the average net assets in excess of $1
billion
International Core 1.00% of the first $500 million of the Fund's
Growth Fund average net assets, 0.90% of the next $500
million of average net assets, and 0.85% of the
average net assets in excess of $1 billion
Money Market Fund* 0.15% of average net assets if substantially
all assets are invested in another investment
company or 0.50% of average net assets
- ----------
* The Money Market Fund will also pay advisory fees to Reserve Management
Company, Inc., the investment adviser of The Reserve Fund, the investment
company in which the Money Market Fund invests substantially all of its
assets.
Prior to the Reorganization, the Trust had not engaged the services of an
investment adviser for the Trust's A, B, C and Institutional Portfolios because
these portfolios invested all their assets in master funds of the Master Trust.
Consequently, the amounts of the advisory fees reported below were for services
provided to the master funds of the Master Trust. The amounts of the advisory
fees paid by each Fund for the fiscal years ended March 31, 1999, 1998 and 1997
were:
FUND 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $1,061,288 $ 308,562 $ 5,726
Worldwide Growth Fund 1,472,492 1,251,181 1,028,250
International SmallCap Growth Fund 1,149,529 658,893 477,212
Emerging Countries Fund 3,476,180 2,790,216 915,615
LargeCap Growth Fund 178,627 32,530 2,359
MidCap Growth Fund 3,049,230 3,422,148 3,594,196
SmallCap Growth Fund 5,334,833 6,613,874 5,836,182
Convertible Fund 1,997,038 1,427,198 902,615
Balanced Fund 261,803 220,025 109,321
Strategic Income Fund1/ 124,514 94,359 43,319
High Yield Fund II 466,926 36,505 17,627
- ----------
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.
B-9
<PAGE>
The Investment Manager has entered into an expense limitation agreement with the
Trust, pursuant to which the Investment Manager has agreed to waive or limit its
fees and to assume other expenses so that the total annual ordinary operating
expenses of certain of the Funds (which excludes interest, taxes, brokerage
commissions, extraordinary expenses such as litigation, other expenses not
incurred in the ordinary course of each Fund's business, and expenses of any
counsel or other persons or services retained by the Trust's trustees who are
not "interested persons," as defined in the 1940 Act, of the Investment Manager)
do not exceed the following for each Class:
FUND CLASS A CLASS B CLASS C CLASS Q
- ----- ------- ------- ------- -------
SmallCap Growth Fund 1.95% 2.60% 2.60% 1.50%
MidCap Growth Fund 1.60% 2.25% 2.25% 1.25%
LargeCap Growth Fund 1.60% 2.25% 2.25% 1.25%
Convertible Fund 1.60% 2.25% 2.25% 1.25%
Balanced Fund 1.60% 2.25% 2.25% 1.25%
Strategic Income Fund 0.95% 1.35% 1.35% 0.85%
High Yield Fund II 1.10% 1.75% 1.75% 1.00%
Emerging Countries Fund 2.25% 2.90% 2.90% 1.90%
Worldwide Growth Fund 1.85% 2.50% 2.50% 1.60%
International SmallCap Growth Fund 1.95% 2.60% 2.60% 1.65%
International Core Growth Fund 1.95% 2.60% 2.60% 1.65%
Money Market Fund* N/A 3.00% 3.00% N/A
- ----------
* The Money Market Fund has a separate expense limitation agreement which also
provides that if the Fund's net asset value drops below $1.00 because of
operating expenses the Investment Manager will pay the Fund to make up for
the $1.00 net asset value shortfall.
Each Fund will at a later date recoup 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 recoupment, the Fund's expense ratio does not
exceed the percentage described above. The Investment Manager will only recoup
fees waived or expenses assumed after the effective date of the expense
limitation agreement. Nicholas-Applegate Capital Management will bear 50% of any
fees waived and other expenses assumed pursuant to the expense limitation
agreement with respect to any Fund for which it serves as sub-adviser, and will
receive 50% of any recoupment amount with respect to such Funds.
The expense limitation agreement provides that these expense limitations shall
continue until at least June 30, 2001. Thereafter, the agreement will
automatically renew for one-year terms unless the Investment Manager, or, in the
case of sub-advised funds, the Portfolio Manager, provides written notice of the
termination of the agreement to the Trust at least 30 days prior to the end of
the then-current term. In addition, the agreement will terminate upon
termination of the Investment Management Agreement, or it may be terminated by
the Trust, without payment of any penalty, upon ninety (90) days' prior written
notice to the Investment Manager at its principal place of business.
Prior to the expense limitation agreement described above, the Funds (other than
the Money Market Fund which is a new fund) had an expense limitation agreement
with the predecessor adviser which provided for expense limits at the same
levels as the current agreement. For the fiscal years ended March 31, 1999, 1998
and 1997, the voluntary fee reduction resulted in a waiver of the following
expenses for each Fund (or predecessor portfolios thereof):
B-10
<PAGE>
FUND 1999 1998 1997
- ----- ---- ---- ----
SmallCap Growth Fund $518,164 $675,970 $ 487,625
MidCap Growth Fund 301,613 591,684 652,932
LargeCap Growth Fund 154,098 132,912 5,199
Convertible Fund 318,025 339,803 757,713
Balanced Fund 132,033 182,871 1,122,862
Strategic Income Fund 232,922 419,604 1.148.587
High Yield Fund II 318,323 111,479 15,731
Emerging Countries Fund 816,718 628,044 811,357
Worldwide Growth Fund 242,660 381,568 980,833
International SmallCap Growth Fund 168,199 389,240 851,489
International Core Growth Fund 283,811 204,723 37,345
PORTFOLIO MANAGER. The Investment Manager has entered into a Portfolio
Management Agreement with Nicholas-Applegate Capital Management ("NACM" or the
"Portfolio Manager"), 600 West Broadway, 30th Floor, San Diego, California
92101, to provide investment advisory services to the following Funds:
International Core Growth Fund; Worldwide Growth Fund; International SmallCap
Growth Fund; Emerging Countries Fund; LargeCap Growth Fund; MidCap Growth Fund;
SmallCap Growth Fund; and Convertible Fund. NACM, a California limited
partnership, was organized in 1984 to manage discretionary accounts investing
primarily in publicly traded equity securities and securities convertible into
or exercisable for publicly traded equity securities, with the goal of capital
appreciation. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership the general partner of which is
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
owned by Arthur Nicholas.
NACM has discretion to purchase and sell securities for the Funds that it
manages in accordance with each Fund's investment objective, policies and
restrictions. Although NACM is subject to general supervision by the Investment
Manager, the Investment Manager does not evaluate the investment merits of
specific securities transactions.
As compensation for its services to the Funds, the Investment Manager pays NACM
a monthly fee in arrears equal to the following as a percentage of the Fund's
average daily net assets managed during the month:
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
SmallCap Growth Fund 0.50% of the Fund's average net assets
MidCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in
excess of $1 billion
LargeCap Growth Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in
excess of $1 billion
Convertible Fund 0.375% of the first $500 million of the Fund's
average net assets, 0.3375% of the next $500
million of average net assets, and 0.325% of the
average net assets in excess of $1 billion
Emerging Countries Fund 0.625% of the Fund's average net assets
B-11
<PAGE>
SERIES ANNUAL PORTFOLIO MANAGEMENT FEE
- ------ -------------------------------
Worldwide Growth Fund 0.50% of the first $500 million of the Fund's
average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of the
average net assets in excess of $1 billion
International SmallCap 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of
the average net assets in excess of $1 billion
International Core 0.50% of the first $500 million of the Fund's
Growth Fund average net assets, 0.45% of the next $500
million of average net assets, and 0.425% of
the average net assets in excess of $1 billion
The Portfolio Management Agreement will remain in effect for two years after it
becomes effective, and thereafter will automatically continue for successive
annual periods as long as such continuance is specifically approved at least
annually by (a) the Board of Trustees or (b) the vote of a "majority" (as
defined in the 1940 Act) of a Fund's outstanding shares voting as a single
class; provided, that in either event the continuance is also approved by at
least a majority of the Board of Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Investment Manager or the Portfolio Manager by
vote cast in person at a meeting called for the purpose of voting on such
approval.
The Portfolio Management Agreement is terminable without penalty with not less
than 60 days notice by the Board of Trustees or by a vote of the holders of a
majority of the relevant Fund's outstanding shares voting as a single class, or
upon not less than 60 days notice by the Investment Manager. The Portfolio
Management Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
INVESTMENT ADVISER OF THE PRIMARY FUND. The Money Market Fund invests
substantially all of its assets in the Primary Fund. The Primary Fund is managed
by Reserve Management Company, Inc. Reserve Management Company, Inc. currently
manages assets in excess of $___ billion and has over __ years of investment
experience. The Investment Management Agreement for the Primary Fund provides
that Reserve Investment Management Company, Inc. shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a fund in
connection with the matters to which the Agreement relates, except a loss
resulting from the willful misfeasance, bad faith or gross negligence on the
part of Reserve Management Company, Inc. or from reckless disregard by it of its
duties and obligations thereunder. Reserve Management Company, Inc. may make
such advertising and promotional expenditures, using its own resources, as it
from time to time deems appropriate.
ADMINISTRATION. Prior to May 24, 1999, the Trust had an Administration Agreement
with Investment Company Administration ("ICA"), 4455 East Camelback Road, Suite
261-E, Phoenix, Arizona 85018. Pursuant to an Administration Agreement with the
Trust, ICA was responsible for performing all administrative services required
for the daily business operations of the Trust, subject to the supervision of
the Board of Trustees of the Trust. For the fiscal years ended March 31, 1999
and 1998, ICA received aggregate compensation of $1,059,155 and $848,799,
respectively, for all of the series of the Trust.
Also, prior to May 24, 1999, the Trust had an Administrative Services Agreement
with NACM under which NACM was responsible for providing all administrative
services which are not provided by ICA or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. For the
fiscal years ended March 31, 1999 and 1998, NACM received aggregate compensation
of $1,603,130 and $1,972,037, respectively, for all of the series of the Trust
pursuant to the Administrative Services Agreement.
B-12
<PAGE>
DISTRIBUTOR. Shares of each Fund are distributed by Pilgrim Securities, Inc.
("Pilgrim Securities" or the "Distributor") pursuant to a Distribution Agreement
between the Trust and the Distributor. The Distribution Agreement requires the
Distributor to use its best efforts on a continuing basis to solicit purchases
of shares of the Funds. The Trust and the Distributor have agreed to indemnify
each other against certain liabilities. At the discretion of the Distributor,
all sales charges may at times be reallowed to an authorized dealer ("Authorized
Dealer"). If 90% or more of the sales commission is reallowed, such Authorized
Dealer may be deemed to be an "underwriter" as that term is defined under the
Securities Act of 1933, as amended. Each Distribution Agreement will remain in
effect for two years and from year to year thereafter only if its continuance is
approved annually by a majority of the Board of Trustees who are not parties to
such agreement or "interested persons" of any such party and must be approved
either by votes of a majority of the Trustees or a majority of the outstanding
voting securities of the Trust. See the Prospectus for information on how to
purchase and sell shares of the Funds, and the charges and expenses associated
with an investment. The sales charge retained by the Distributor and the
commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc., which
is a wholly-owned subsidiary of Pilgrim America Capital Corporation.
Prior to May 24, 1999, the distributor of the Funds was Nicholas-Applegate
Securities ("NAS"). The aggregate commissions received by NAS in connection with
sales of shares in the Funds (other than the Money Market Fund which is a new
fund) for the fiscal years ended March 31, 1999, 1998 and 1997 were $1,291,255,
$909,296 and $500,337, respectively.
RULE 12b-1 PLANS. The Trust has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares offered by each Fund ("Rule
12b-1 Plans"). The Funds intend to operate the Rule 12b-1 Plans in accordance
with their terms and the National Association of Securities Dealers, Inc. rules
concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be
entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C and Class Q shares in amounts
not to exceed the following: with respect to Class A shares at an annual rate of
up to 0.35% of the average daily net assets of the Class A shares of a Fund;
with respect to Class B shares at an annual rate of up to 1.00% 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 (0.75% for Strategic Income Fund); (iii) with respect to Class C
shares at an annual rate of up to 1.00% of the average daily net assets of the
Class shares of a Fund (0.75% for Strategic Income Fund); (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.
As applies to the Money Market Fund, under its 12b-1 Plan the Distributor may be
entitled to payment for distribution of Class B and C shares of up to 1.00%
provided, however, that the distribution fee is reduced by that amount, if any,
paid to the Distributor or any affiliate of Distributor from the investment
adviser or distributor of any investment company in which the Pilgrim Money
Market Fund invests.
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These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C and Class Q shares
of the Funds, including payments to dealers for selling shares of the Funds and
for servicing shareholders of these classes of the Funds. Activities for which
these fees may be used include: promotional activities; preparation and
distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; interest on
accrued distribution expenses; and costs of administering the Rule 12b-1 Plans.
No more than 0.75% per annum of a Fund's average net assets (0.50% for Strategic
Income Fund) may be used to finance distribution expenses, exclusive of
shareholder servicing payments, and no Authorized Dealer may receive shareholder
servicing payments in excess of 0.25% per annum of a Fund's average net assets
held by the Authorized Dealer's clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis
to Authorized Dealers for both distribution and shareholder servicing at the
annual rate of 0.25%, 0.25%, 1.00%, and 0.25% of a Fund's average daily net
assets of Class A, Class B, Class C, and Class Q shares, respectively, that are
registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. Rights to these ongoing payments begin to accrue in the 13th month
following a purchase of Class A, B or C shares and in the 1st month following a
purchase of Class Q shares.
The Distributor will receive payment under a Rule 12b-1 Plan without regard to
actual distribution expenses it incurs. In the event a Rule 12b-1 Plan is
terminated in accordance with its terms, the obligations of a Fund to make
payments to the Distributor pursuant to the Rule 12b-1 Plan will cease and the
Fund will not be required to make any payments for expenses incurred after the
date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plans
also recognize that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers that have sold or may sell
significant amounts of shares during specified periods of time. Such
compensation and incentives may include, but are not limited to, cash,
merchandise, trips and financial assistance to dealers in connection with
pre-approved conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and lodging)
incurred by sales personnel and members of their families, or other invited
guests, to various locations for such seminars or training programs, seminars
for the public, advertising and sales campaigns regarding one or more of the
Funds or other funds managed by the Investment Manager and/or other events
sponsored by dealers. In addition, the Distributor may, at its own expense, pay
concessions in addition to those described above to dealers that satisfy certain
criteria established from time to time by the Distributor. These conditions
relate to increasing sales of shares of the Funds over specified periods and to
certain other factors. These payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to (1) 0.30%
of the value of the Funds' shares sold by the dealer during a particular period,
and (2) 0.10% of the value of the Funds' shares held by the dealer's customers
for more than one year, calculated on an annual basis.
The Rule 12b-1 Plans have been approved by the Board of Trustees of each Fund,
including all of the Trustees who are not interested persons of the Trust as
defined in the 1940 Act, and by each Fund's shareholders. Each Rule 12b-1 Plan
must be renewed annually by the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Rule 12b-1 Plan, cast in
person at a meeting called for that purpose. It is also required that the
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selection and nomination of such Trustees be committed to the Trustees who are
not interested persons. Each Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Trustees or by a vote of a majority of the Fund's outstanding shares on 60
days written notice. The Distributor or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Trustees has determined that
differing distribution arrangements in connection with the sale of new shares of
a Fund is necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Trustees, including those Trustees
who are not interested persons of the Trust, concluded that, in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Rule 12b-1 Plans as tailored to each class
of each Fund, will benefit such Funds and their respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement shall be
approved by the Trustees who are not interested persons of the Trust, cast in
person at a meeting called for the purpose of voting on any such amendment.
The Distributor is required to report in writing to the Board of Trustees at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably be
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.
Prior to May 24, 1999, the Trust has a Distribution Plan with respect to each
Class of each Fund (other than the Money Market Fund) and a separate Shareholder
Service Plan with respect to each Class of each Fund (other than the Money
Market Fund). Under the Distribution Plan, NAS (the Distributor's predecessor)
was entitled to payment each month in the following amounts: with respect to
Class A shares at an annual rate of up to 0.10% of the average daily net assets
of the Class A shares of a Fund; with respect to Class B shares at an annual
rate of up to 0.75% of the average daily net assets of the Class B shares of a
Fund; and with respect to Class C shares at an annual rate of up to 0.75% of the
average daily net assets of the Class C shares of a Fund. The Distribution Plan
did not apply to Class Q shares. Under the Distribution Plan, NAS was paid
without regard to actual distribution expenses it incurred. The aggregate
amounts earned by NAS pursuant to that Distribution Plan for the fiscal year
ended March 31, 1999, were as follows:
Fund Name 12b-1 Payments
- --------- --------------
International Core Growth Fund $ 174,064
Worldwide Growth Fund 822,399
International SmallCap Growth Fund 208,084
Emerging Countries Fund 549,129
LargeCap Growth Fund 102,429
MidCap Growth Fund 1,526,263
SmallCap Growth Fund 1,874,462
Convertible Fund 1,108,863
Balanced Fund 210,891
Strategic Income Fund 52,773
High Yield Fund II 411,227
Under the Shareholder Service Plan, NAS was entitled to payment each month in
the following amounts: with respect to Class A shares at an annual rate of up to
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<PAGE>
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
expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, the Rule 12b-1 Plan fees for each class of shares are
charged proportionately only to the outstanding shares of that class.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion describes the various investment policies and
techniques employed by the Funds, except as otherwise noted. There can be no
assurance that any of the Funds will achieve their investment objectives.
References to the Money Market Fund include investments by the Primary Fund in
which it invests.
TEMPORARY INVESTMENTS
Each Fund (other than the Money Market Fund whose investments are typically
short-term) may, from time to time on a temporary basis, invest all of its
assets in short-term instruments to maintain liquidity or when the Investment
Adviser determines that the market conditions call for a temporary defensive
posture. These temporary investments include: notes issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; commercial paper rated in
the highest two rating categories; certificates of deposit; repurchase
agreements and other high grade corporate debt securities.
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EQUITY SECURITIES OF GROWTH COMPANIES
Each Fund (other than the Money Market Fund) may invest in equity securities of
domestic and foreign companies, the earnings and stock prices of which are
expected by the Investment Manager or Portfolio Manager to grow at an
above-average rate. Such investments will be diversified over a cross-section of
industries and individual companies. For Funds other than the LargeCap Growth
Fund, some of these companies will be organizations with market capitalizations
of $500 million or less or companies that have limited product lines, markets
and financial resources and are dependent upon a limited management group.
Examples of possible investments include emerging growth companies employing new
technology, cyclical companies, initial public offerings of companies offering
high growth potential, or other corporations offering good potential for high
growth in market value. The securities of such companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
PREFERRED STOCK
Each Fund (other than the Money Market Fund) may invest in preferred stock.
Preferred stock, unlike common stock, offers a stated dividend rate payable from
a corporation's earnings. Such preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be
"cumulative," requiring all or a portion of prior unpaid dividends to be paid
before dividends are paid on the issuer's common stock. Preferred stock also
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation, and may be
"participating," which means that it may be entitled to a dividend exceeding the
stated dividend in certain cases. The rights of preferred stocks on the
distribution of a corporation's assets in the event of a liquidation are
generally subordinate to the rights associated with a corporation's debt
securities.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund (other than the Money Market Fund) may invest in convertible
securities and warrants. The value of a convertible security is a function of
its "investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The credit
standing of the issuer and other factors may also affect the investment value of
a convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the conversion
value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value.
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.
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As a matter of operating policy, no Fund will invest more than 5% of its net
assets in warrants. A warrant gives the holder a right to purchase at any time
during a specified period a predetermined number of shares of common stock at a
fixed price. Unlike convertible debt securities or preferred stock, warrants do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for resale of the warrants,
potential price fluctuations as a result of speculation or other factors, and
failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised
(in which event the warrant may expire without being exercised, resulting in a
loss of the Fund's entire investment therein).
SYNTHETIC CONVERTIBLE SECURITIES
Each Fund (other than the Money Market Fund) may invest in "synthetic"
convertible securities, which are derivative positions composed of two or more
different securities whose investment characteristics, taken together, resemble
those of convertible securities. For example, a Fund may purchase a
non-convertible debt security and a warrant or option, which enables the Fund to
have a convertible-like position with respect to a company, group of companies
or stock index. Synthetic convertible securities are typically offered by
financial institutions and investment banks in private placement transactions.
Upon conversion, the Fund generally receives an amount in cash equal to the
difference between the conversion price and the then current value of the
underlying security. Unlike a true convertible security, a synthetic convertible
comprises two or more separate securities, each with its own market value.
Therefore, the market value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertible component. For this reason,
the values of a synthetic convertible and a true convertible security may
respond differently to market fluctuations. A Fund only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
"A" or higher by Moody's or "A" or higher by S&P and will not invest more than
15% of its net assets in such synthetic securities and other illiquid
securities.
EURODOLLAR CONVERTIBLE SECURITIES
Each Fund (other than the Money Market Fund) may invest in Eurodollar
convertible securities, which are fixed-income securities of a U.S. issuer or a
foreign issuer that are issued outside the United States and are convertible
into equity securities of the same or a different issuer. Interest and dividends
on Eurodollar securities are payable in U.S. dollars outside of the United
States. The Funds may invest without limitation in Eurodollar convertible
securities that are convertible into foreign equity securities listed, or
represented by ADRs listed, on the New York Stock Exchange or the American Stock
Exchange or convertible into publicly traded common stock of U.S. companies. The
Funds may also invest up to 15% of its total assets invested in convertible
securities, taken at market value, in Eurodollar convertible securities that are
convertible into foreign equity securities which are not listed, or represented
by ADRs listed, on such exchanges.
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."
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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. The Primary Fund in which the Money Market Fund invests
will invest only in corporate debt securities rated A-1 or above.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred to as
"junk bonds." These bonds are subject to greater market fluctuations and risk of
loss of income and principal than higher rated bonds for a variety of reasons,
including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates affect high yield securities differently from other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, a Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Funds'
asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
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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.
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
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<PAGE>
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.
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.
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MUNICIPAL SECURITIES
Each Fund (other than the Money Market Fund) may invest in debt obligations
issued by state and local governments, territories and possessions of the U.S.,
regional government authorities, and their agencies and instrumentalities
("municipal securities"). Municipal securities include both notes (which have
maturities of less than one year) and bonds (which have maturities of one year
or more) that bear fixed or variable rates of interest.
In general, "municipal securities" debt obligations are issued to obtain funds
for a variety of public purposes, such as the construction, repair, or
improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assistance (although without obligation) to make up deficiencies in the
debt service reserve fund.
The Funds may purchase insured municipal debt in which scheduled payments of
interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
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.
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INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Funds (other than the
Money Market Fund) may invest in tax-exempt industrial development bonds and
pollution control bonds which, in most cases, are revenue bonds and generally
are not payable from the unrestricted revenues of an issuer. They are issued by
or on behalf of public authorities to raise money to finance privately operated
facilities for business, manufacturing, housing, sport complexes, and pollution
control. Consequently, the credit quality of these securities is dependent upon
the ability of the user of the facilities financed by the bonds and any
guarantor to meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS. The Funds (other than the Money Market Fund) may
invest in lease obligations or installment purchase contract obligations of
municipal authorities or entities ("municipal lease obligations"). Although
lease obligations do not constitute general obligations of the municipality for
which its taxing power is pledged, a lease obligation is ordinarily backed by
the municipality's covenant to budget for, appropriate and make the payment due
under the lease obligation. A Fund may also purchase "certificates of
participation," which are securities issued by a particular municipality or
municipal authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality, agency
or authority. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for such
purpose for such year. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
default and foreclosure might prove difficult. In addition, these securities
represent a relatively new type of financing, and certain lease obligations may
therefore be considered to be illiquid securities.
The Funds will attempt to minimize the special risks inherent in municipal lease
obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at least
one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Manager or Portfolio Manager to be critical to
the lessee's ability to deliver essential services; and (4) contain legal
features which the Investment Manager or Portfolio Manager deems appropriate,
such as covenants to make lease payments without the right of offset or
counterclaim, requirements for insurance policies, and adequate debt service
reserve funds.
SHORT-TERM OBLIGATIONS. The Funds (other than the Money Market Fund) may invest
in short-term municipal obligations. These securities include the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
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.
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ZERO COUPON SECURITIES
The Convertible, Balanced and High Yield II Funds may each invest up to 35% of
its net assets in zero coupon securities issued or guaranteed by the U.S.
Government and its agencies and instrumentalities. Zero coupon securities may be
issued by the U.S. Treasury or by a U.S. Government agency, authority or
instrumentality (such as the Student Loan Marketing Association or the
Resolution Funding Corporation). Zero coupon securities are sold at a
substantial discount from face value and redeemed at face value at their
maturity date without interim cash payments of interest and principal. This
discount is amortized over the life of the security and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, such securities may be subject to greater
volatility as a result of changes in prevailing interest rates than interest
paying investments in which the Funds may invest. Because income on such
securities is accrued on a current basis, even though the Funds do not receive
the income currently in cash, the Funds may have to sell other portfolio
investments to obtain cash needed by the Funds to make income distributions.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund (other than the Money Market Fund) may acquire variable and floating
rate instruments. Credit rating agencies frequently do not rate such
instruments; however, the Investment Manager or Portfolio Manager will determine
what unrated and variable and floating rate instruments are of comparable
quality at the time of the purchase to rated instruments eligible for purchase
by the Fund. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by a Fund. The absence of such
an active secondary market could make it difficult for the Fund to dispose of
the variable or floating rate instrument involved in the event of the issuer of
the instrument defaulting on its payment obligation or during periods in which
the Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default. Variable and
floating rate instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
Each Fund (other than the Money Market Fund) may invest in "index-linked" or
"commodity-linked" notes, which are debt securities of companies that call for
interest payments and/or payment at maturity in different terms than the typical
note where the borrower agrees to make fixed interest payments and to pay a
fixed sum at maturity. Principal and/or interest payments on an index-linked
note depend on the performance of one or more market indices, such as the S&P
500 Index or a weighted index of commodity futures such as crude oil, gasoline
and natural gas. The Funds may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the principal amount of an
equity-linked debt security is exchanged for common stock of the issuer or is
payable in an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are short-term or intermediate term
instruments having a value at maturity, and/or an interest rate, determined by
reference to one or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one currency against
another currency, or against an index.
Index and currency-linked securities are derivative instruments which may entail
substantial risks. Such instruments may be subject to significant price
volatility. The company issuing the instrument may fail to pay the amount due on
maturity. The underlying investment or security may not perform as expected by
the Investment Manager or Portfolio Manager. Markets, underlying securities and
indexes may move in a direction that was not anticipated by the Investment
Manager or Portfolio Manager. Performance of the derivatives may be influenced
by interest rate and other market changes in the U.S. and abroad. Certain
derivative instruments may be illiquid. See "Illiquid Securities" below.
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MORTGAGE-RELATED SECURITIES
Each Fund may invest in mortgage-related securities. Mortgage-related securities
are derivative interests in pools of mortgage loans made to U.S. residential
home buyers, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Funds may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United
States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
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.
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COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO in which
the Funds may invest is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment experience
of the collateral. CMOs provide for a modified form of call protection through a
de facto breakdown of the underlying pool of mortgages according to how quickly
the loans are repaid. Monthly payment of principal and interest received from
the pool of underlying mortgages, including prepayments, is first returned to
the class having the earliest maturity date or highest seniority. Classes that
have longer maturity dates and lower seniority will receive principal only after
the higher class has been retired. The Primary Fund in which the Money Market
Fund invests substantially all of its assets will not invest in CMOs.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (e.g., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets may
differ materially from the U.S. mortgage market with respect to matters such as
the sizes of loan pools, pre-payment experience, and maturities of loans. The
Primary Fund in which the Money Market Fund invests substantially all of its
assets will not invest in foreign mortgage-related securities.
ASSET BACKED SECURITIES
The non-mortgage-related asset-backed securities in which certain Funds invest
include, but are not limited to, interests in pools of receivables, such as
credit card and accounts receivables and motor vehicle and other installment
purchase obligations and leases. Interests in these pools are not backed by the
U.S. Government and may or may not be secured.
The credit characteristics of asset-backed securities differs in a number of
respects from those of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities. The Primary Fund in which the Money Market Fund invests
substantially all of its assets will not invest in asset-backed securities.
"ROLL" TRANSACTIONS
Each Fund 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
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the Fund is committed to purchase similar securities. Additionally, in the event
the buyer of securities under a roll transaction files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the transactions may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
A Fund will engage in roll transactions for the purpose of acquiring securities
for its portfolio consistent with its investment objective and policies and not
for investment leverage. Nonetheless, roll transactions are speculative
techniques and are considered to be the economic equivalent of borrowings by the
Fund. To avoid leverage, the Fund will establish a segregated account with its
Custodian in which it will maintain liquid assets in an amount sufficient to
meet its payment obligations with respect to these transactions. A Fund will not
enter into roll transactions if, as a result, more than 15% of the Fund's net
assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund (except the Money Market Fund) may invest in securities of foreign
issuers that are not publicly traded in the United States. Each Fund (except for
the Money Market Fund) may also invest in depository receipts. The United States
Government from time to time has imposed restrictions, through taxation or
otherwise, on foreign investments by U.S. entities such as the Funds. If such
restrictions should be reinstituted, it might become necessary for such Funds to
invest substantially all of their assets in United States securities. In such
event, the Board of Trustees of the Trust would consider alternative
arrangements, including reevaluation of the Funds' investment objectives and
policies, investment of all of the Funds' assets in another investment company
with different investment objectives and policies than the Funds, or hiring an
investment adviser to manage the Funds' assets. However, a Fund would adopt any
revised investment objective and fundamental policies only after approval by the
shareholders holding a majority (as defined in the Investment Company Act) of
the shares of the Fund.
FOREIGN BANK OBLIGATIONS. Through its investment in the Primary Fund, the Money
Market Fund invests in obligations of foreign banks and foreign branches of U.S.
banks. Obligations of foreign banks and foreign branches of U.S. banks involve
somewhat different investment risks from those affecting obligations of U.S.
banks, including the possibilities that liquidity could be impaired because of
future political and economic developments; the obligations may be less
marketable than comparable obligations of U.S. banks; a foreign jurisdiction
might impose withholding taxes on interest income payable on those obligations;
foreign deposits may be seized or nationalized; foreign governmental
restrictions (such as foreign exchange controls) may be adopted which might
adversely affect the payment of principal and interest on those obligations; and
the selectin of those obligations may be more difficult because there may be
less publicly available information concerning foreign banks. In addition, the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
U.S. banks. In that connection, foreign banks are not subject to examination by
any U.S. government agency or instrumentality.
DEPOSITORY RECEIPTS. Each of the Funds (other than the Money Market Fund) may
invest in American Depository Receipts ("ADRs"), which are receipts issued by an
American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuers. ADRs, in registered form, are designed for use in
U.S. securities markets. Such depository receipts may be sponsored by the
foreign issuer or may be unsponsored. The Funds (other than the Money Market
Fund) may also invest in European and Global Depository Receipts ("EDRs" and
"GDRs"), which, in bearer form, are designed for use in European securities
markets, and in other instruments representing securities of foreign companies.
Such depository receipts may be sponsored by the foreign issuer or may be
unsponsored. Unsponsored depository receipts are organized independently and
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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 (other than the Money Market Fund)
investing in foreign securities may enter in to foreign currency transactions
either on a spot or cash basis at prevailing rates or through forward foreign
currency exchange contracts in order to have the necessary currencies to settle
transactions. Each such Fund may also enter into foreign currency transactions
to protect Fund assets against adverse changes in foreign currency exchange
rates. Such efforts could limit potential gains that might result from a
relative increase in the value of such currencies, and might, in certain cases,
result in losses to a Fund.
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
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shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
COSTS. The expense ratios of the Funds are likely to be higher than those of
investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign company, the
Investment Manager or Portfolio Manager considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located. The
extent to which a Fund will be invested in foreign companies and countries and
depository receipts will fluctuate from time to time within the limitations
described in the Prospectus, depending on the Investment Manager's or Portfolio
Manager's assessment of prevailing market, economic and other conditions.
SECURITIES SWAPS
Each Fund (other than the Money Market Fund) may enter into securities swaps, a
technique primarily used to indirectly participate in the securities market of a
country from which a Fund would otherwise be precluded for lack of an
established securities custody and safekeeping system. The Fund deposits an
amount of cash with its custodian (or the broker, if legally permitted) in an
amount equal to the selling price of the underlying security. Thereafter, the
Fund pays or receives cash from the broker equal to the change in the value of
the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund (other than the Money Market Fund) is
authorized to purchase put and call options with respect to securities which are
otherwise eligible for purchase by the Fund and with respect to various stock
indices subject to certain restrictions. Put and call options are derivative
securities traded on United States and foreign exchanges, including the American
Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange,
Pacific Stock Exchange and New York Stock Exchange. Except as indicated in
"Non-Hedging Strategic Transactions," the Funds will engage in trading of such
derivative securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Manager or Portfolio Manager perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it protects
against significant downward price movement while it allows full participation
in any upward movement. If the Fund holds a stock which the Investment Manager
or Portfolio Manager believes has strong fundamentals, but for some reason may
be weak in the near term, the Fund may purchase a put option on such security,
thereby giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, is the
amount by which the Fund hedges against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the premium paid for
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the put option less any amount for which the put may be sold reduces the profit
the Fund realizes on the sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has remaining
value by a purchaser through a "closing sale transaction," which is accomplished
by selling an option of the same series as the option previously purchased. The
Funds generally will purchase only those options for which the Investment
Manager or Portfolio Manager believes there is an active secondary market to
facilitate closing transactions.
WRITING CALL OPTIONS. Each Fund (other than the Money Market Fund) may write
covered call options. A call option is "covered" if a Fund owns the security
underlying the call or has an absolute right to acquire the security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
the Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after it has been notified
of the exercise of an option.
Effecting a closing transaction in the case of a written call option will permit
a Fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. Also, effecting a closing
transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the closing
transaction is less than the premium received from writing the option or if the
proceeds from the closing transaction are more than the premium paid to purchase
the option. A Fund realizes a loss from a closing transaction if the cost of the
closing transaction is more than the premium received from writing the option or
if the proceeds from the closing transaction are less than the premium paid to
purchase the option. However, because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, appreciation of the underlying security owned by the Fund generally
offsets, in whole or in part, any loss to the Fund resulting from the repurchase
of a call option.
STOCK INDEX OPTIONS. Each Fund (other than the Money Market Fund) may also
purchase put and call options with respect to the S&P 500 and other stock
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indices. The Funds may purchase such options as a hedge against changes in the
values of portfolio securities or securities which it intends to purchase or
sell, or to reduce risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain risks
not found in stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Manager's or Portfolio Manager's ability to
predict correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if circumstances disrupt trading of certain stocks
included in the index, such as if trading were halted in a substantial number of
stocks included in the index. If this happens, the Fund could not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, the Fund might be unable to exercise an option it holds, which could
result in substantial losses to the Fund. The Funds purchase put or call options
only with respect to an index which the Investment Manager or Portfolio Manager
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
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.
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LIMITS ON USE OF OPTIONS. A Fund may not purchase or sell options if more than
25% of its net assets would be hedged. The Funds may write covered call options
and secured put options to seek to generate income or lock in gains on up to 25%
of their net assets.
DEALER OPTIONS. Each Fund (other than the Money Market Fund) may engage in
transactions involving dealer options as well as exchange-traded options.
Certain risks are specific to dealer options. While the Funds might look to a
clearing corporation to exercise exchange-traded options, if a Fund purchases a
dealer option it must rely on the selling dealer to perform if the Fund
exercises the option. Failure by the dealer to do so would result in the loss of
the premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while dealer
options may not. Consequently, a Fund can realize the value of a dealer option
it has purchased only by exercising or reselling the option to the issuing
dealer. Similarly, when a Fund writes a dealer option, the Fund can close out
the option prior to its expiration only by entering into a closing purchase
transaction with the dealer. While the Fund seeks to enter into dealer options
only with dealers who will agree to and can enter into closing transactions with
the Fund, no assurance exists that the Fund will at any time be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
Unless the Fund, as a covered dealer call option writer, can effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the inability to enter into
a closing transaction may result in material losses to the Fund. For example,
because a Fund must maintain a secured position with respect to any call option
on a security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option. This
requirement may impair the Fund's ability to sell portfolio securities at a time
when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission") takes the
position that purchased dealer options are illiquid securities. A Fund may treat
the cover used for written dealer options as liquid if the dealer agrees that
the Fund may repurchase the dealer option it has written for a maximum price to
be calculated by a predetermined formula. In such cases, the dealer option would
be considered illiquid only to the extent the maximum purchase price under the
formula exceeds the intrinsic value of the option. With that exception, however,
the Fund will treat dealer options as subject to the Fund's limitation on
illiquid securities. If the Commission changes its position on the liquidity of
dealer options, the Fund will change its treatment of such instruments
accordingly.
FOREIGN CURRENCY OPTIONS
Each Fund (other than the Money Market Fund) may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency gives
the purchaser of the option the right to sell or purchase a foreign currency at
the exercise price until the option expires. The Funds use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Funds to reduce foreign currency risk using such options.
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As with other kinds of option transactions, writing options on foreign currency
constitutes only a partial hedge, up to the amount of the premium received. The
Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
Each Fund (other than the Money Market Fund) may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fix number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds (other than the Money Market Fund) may invest in futures
contracts and in options on futures contracts as a hedge against changes in
market conditions or interest rates. As a general rule, no Fund will purchase or
sell futures if, immediately thereafter, more than 25% of its net assets would
be hedged.
The Funds trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). Each such Fund segregates liquid assets in a separate
account with its Custodian when required to do so by CFTC guidelines in order to
cover its obligation in connection with futures and options transactions.
A Fund does not pay or receive funds upon the purchase or sale of a futures
contract. When it enters into a domestic futures contract, the Fund deposits in
a segregated account with its Custodian liquid assets equal to approximately 5%
of the contract amount. This amount is known as initial margin. The margin
requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions differs from that of margin
in securities transactions. Futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfies all contractual obligations. Subsequent payments
(called variation margin) to and from the broker will be made on a daily basis
as the price of the underlying stock index fluctuates, to reflect movements in
the price of the contract making the long and short positions in the futures
contract more or less valuable. For example, when a Fund purchases a stock index
futures contract and the price of the underlying stock index rises, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment equal to that increase in value. Conversely, when a
Fund purchases a stock index futures contract and the price of the underlying
stock index declines, the position will be less valuable requiring the Fund to
make a variation margin payment to the broker.
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At any time prior to expiration of a futures contract, a Fund may elect to close
the position by taking an opposite position, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is made on closing the position. The Fund either pays or receives cash,
thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. Each Fund (other than the Money Market Fund) may
invest in futures contracts on stock indices. A stock index futures contracts is
a bilateral agreement pursuant to which the parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
contract and the price at which the contract is originally struck. No physical
delivery of the underlying stocks in the index is made. Currently, stock index
futures contracts can be purchased or sold with respect to the S&P 500 Stock
Price Index on the Chicago Mercantile Exchange, the Major Market Index on the
Chicago Board of Trade, the New York Stock Exchange Composite Index on the New
York Futures Exchange and the Value Line Stock Index on the Kansas City Board of
Trade. Foreign financial and stock index futures are traded on foreign exchanges
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. Each Fund (other than the Money
Market Fund) may invest in interest rate or financial futures contracts. Bond
prices are established in both the cash market and the futures market. In the
cash market, bonds are purchased and sold with payment for the full purchase
price of the bond being made in cash, generally within five business days after
the trade. In the futures market, a contract is made to purchase or sell a bond
in the future for a set price on a certain date. Historically, the prices for
bonds established in the futures markets have generally tended to move in the
aggregate in concert with cash market prices, and the prices have maintained
fairly predictable relationships.
The sale of an interest rate or financial futures sale by a Fund obligates the
Fund, as seller, to deliver the specific type of financial instrument called for
in the contract at a specific future time for a specified price. A futures
contract purchased by a Fund obligates the Fund, as purchaser, to take delivery
of the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without delivery of securities. A Fund
closes out a futures contract sale by entering into a futures contract purchase
for the same aggregate amount of the specific type of financial instrument and
the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund receives the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the Fund closes out a futures
contract purchase by entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
Domestic interest rate futures contracts are traded in an auction environment on
the floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. A public market now exists in domestic futures
contracts covering various financial instruments including long-term United
States Treasury bonds and notes; Government National Mortgage Association (GNMA)
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modified pass-through mortgage-backed securities; three-month United States
Treasury bills; and 90-day commercial paper. A Fund may trade in any futures
contract for which there exists a public market, including, without limitation,
the foregoing instruments. International interest rate futures contracts are
traded on the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. Each Fund (other than the Money Market Fund)
may use foreign currency future contracts for hedging purposes. A foreign
currency futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a foreign currency at a specified
price and time. A public market exists in futures contracts covering several
foreign currencies, including the Australian dollar, the Canadian dollar, the
British pound, the German mark, the Japanese yen, the Swiss franc, and certain
multinational currencies such as the European Currency Unit ("ECU"). Other
foreign currency futures contracts are likely to be developed and traded in the
future. The Funds will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks related to
the use of futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures contract and movements
in the price of the securities which are the subject of the hedge. The price of
the future may move more or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an unfavorable direction, a
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund will
experience either a loss or a gain on the future which will not be completely
offset by movements in the price of the securities which are subject to the
hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Manager or Portfolio Manager
believes that over time the value of a diversified portfolio will tend to move
in the same direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the price of
securities before a Fund is able to invest its cash (or cash equivalents) in
securities (or options) in an orderly fashion, it is possible that the market
may decline instead. If the Fund then decides not to invest in securities or
options at that time because of concern as to possible further market decline or
for other reasons, it will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the futures and the securities being
hedged, the price of futures may not correlate perfectly with movement in the
stock index or cash market due to certain market distortions. All participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
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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.
Successful use of futures by a Fund depends on the Investment Manager's or
Portfolio Manager's ability to predict correctly movements in the direction of
the market. For example, if the Fund hedges against the possibility of a decline
in the market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds (other than the Money Market Fund) may
purchase options on the futures contracts they can purchase or sell, as
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder or writer of
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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.
These restrictions, which are derived from current federal and state regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and the Trustees of the Trust may change them if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of a Fund.
The extent to which a Fund may enter into futures and options transactions may
be limited by the Internal Revenue Code requirements for qualification of the
Fund as a regulated investment company. See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
Each Fund (other than the Money Market Fund) may enter into interest rate and
currency swap transactions and purchase or sell interest rate and currency caps
and floors, and may enter into currency swap cap transactions. An interest rate
or currency swap involves an agreement between a Fund and another party to
exchange payments calculated as if they were interest on a specified
("notional") principal amount (e.g., an exchange of floating rate payments by
one party for fixed rate payments by the other). An interest rate cap or floor
entitles the purchaser, in exchange for a premium, to receive payments of
interest on a notional principal amount from the seller of the cap or floor, to
the extent that a specified reference rate exceeds or falls below a
predetermined level.
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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.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the coupon
exchanges over the life of the swap. In contrast to single currency interest
rate swaps, cross-currency swaps involve both interest rate risk and foreign
exchange risk.
SWAP OPTIONS. Each Fund (other than the Money Market Fund) may invest in swap
options. A swap option is a contract that gives a counterparty the right (but
not the obligation) to enter into a new swap agreement or to shorten, extend,
cancel or otherwise change an existing swap agreement, at some designated future
time on specified terms. It is different from a forward swap, which is a
commitment to enter into a swap that starts at some future date with specified
rates. A swap option may be structured European-style (exercisable on the
pre-specified date) or American-style (exercisable during a designated period).
The right pursuant to a swap option must be exercised by the right holder. The
buyer of the right to receive fixed pursuant to a swap option is said to own a
call.
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CAPS AND FLOORS. Each Fund (other than the Money Market Fund) may invest in
interest rate caps and floors and currency swap cap transactions. An interest
rate cap is a right to receive periodic cash payments over the life of the cap
equal to the difference between any higher actual level of interest rates in the
future and a specified strike (or "cap") level. The cap buyer purchases
protection for a floating rate move above the strike. An interest rate floor is
the right to receive periodic cash payments over the life of the floor equal to
the difference between any lower actual level of interest rates in the future
and a specified strike (or "floor") level. The floor buyer purchases protection
for a floating rate move below the strike. The strikes are typically based on
the three-month LIBOR (although other indices are available) and are measured
quarterly. Rights arising pursuant to both caps and floors are exercised
automatically if the strike is in the money. Caps and floors eliminate the risk
that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate and
currency swaps and interest rate caps and floors are similar to those described
above with respect to dealer options. In connection with such transactions, a
Fund relies on the other party to the transaction to perform its obligations
pursuant to the underlying agreement. If there were a default by the other party
to the transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be unable to obtain its expected benefit. In addition,
while each Fund will seek to enter into such transactions only with parties
which are capable of entering into closing transactions with the Fund, there can
be no assurance that a Fund will be able to close out such a transaction with
the other party, or obtain an offsetting position with any other party, at any
time prior to the end of the term of the underlying agreement. This may impair a
Fund's ability to enter into other transactions at a time when doing so might be
advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS
A Fund's options, futures and swap transactions will generally be entered into
for hedging purposes -- to protect against possible changes in the market values
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, currency or interest rate fluctuations, to protect the
Fund's unrealized gains in the values of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchase or sale of particular
securities. However, in addition to the hedging transactions referred to above,
the Strategic Income Fund may enter into options, futures and swap transactions
to enhance potential gain in circumstances where hedging is not involved. Each
Fund's net loss exposure resulting from transactions entered into for each
purposes will not exceed 5% of the Fund's net assets at any one time and, to the
extent necessary, the Fund will close out transactions in order to comply with
this limitation. Such transactions are subject to the limitations described
above under "Options," "Futures Contracts," and "Interest Rate and Currency
Swaps."
INVESTMENT COMPANY SECURITIES
Each Fund may invest up to 10% of its total assets in the shares of other
investment companies. The Funds (except the Money Market Fund) may invest in
money market mutual Funds in connection with the management of their daily cash
positions. The Funds (except the Money Market Fund) may also make indirect
foreign investments through other investment companies that have comparable
investment objectives and policies as the Funds. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Fund would also bear its pro rata portions of each other investment company's
advisory and operational expenses.
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Investment Companies that Invest in Senior Loans. The Funds, and in particular
the Strategic Income and Balanced Funds, may invest in investment companies that
invest primarily in interests in variable or floating rate secured loans or
notes ("Senior Loans"). Senior Loans in most circumstances are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity. Senior Loans vary from other types of debt in
that they generally hold 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.
Substantial increases in interest rates may cause an increase in loan defaults
as borrowers may lack resources to meet higher debt service requirements. The
value of a Fund's assets may also be affected by other uncertainties such as
economic developments affecting the market for Senior Loans or affecting
borrowers generally.
Senior Loans usually include restrictive covenants which must be maintained by
the borrower. Under certain interests in Senior Loans, an investment company
investing in a Senior Loan may have an obligation to make additional loans upon
demand by the borrower. Senior Loans, unlike certain bonds, usually do not have
call protection. This means that interests, while having a stated one to
ten-year term, may be prepaid, often without penalty. The rate of such
prepayments may be affected by, among other things, general business and
economic conditions, as well as the financial status of the borrower. Prepayment
would cause the actual duration of a Senior Loan to be shorter than its stated
maturity.
CREDIT RISK. Information about interests in Senior Loans generally is not be in
the public domain, and interests are generally not currently rated by any
nationally recognized rating service. Senior Loans are subject to the risk of
nonpayment of scheduled interest or principal payments. Issuers of Senior Loans
generally have either issued debt securities that are rated lower than
investment grade, or, if they had issued debt securities, such debt securities
would likely be rated lower than investment grade. However, unlike other types
of debt securities, Senior Loans are generally fully collateralized.
In the event of a failure to pay scheduled interest or principal payments on
Senior Loans, an investment company investing in that Senior Loan could
experience a reduction in its income, and would experience a decline in the
market value of the particular Senior Loan so affected, and may experience a
decline in the NAV or the amount of its dividends. In the event of a bankruptcy
of the borrower, the investment company could experience delays or limitations
with respect to its ability to realize the benefits of the collateral securing
the Senior Loan.
COLLATERAL. Senior Loans typically will be secured by pledges of collateral from
the borrower in the form of tangible assets and intangible assets. In some
instances, an investment company may invest in Senior Loans that are secured
only by stock of the borrower or its subsidiaries or affiliates. The value of
the collateral may decline below the principal amount of the Senior Loan
subsequent to an investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
there is a risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized.
LIMITED SECONDARY MARKET. Although it is growing, the secondary market for
Senior Loans is currently limited. There is no organized exchange or board of
trade on which Senior Loans may be traded; instead, the secondary market for
Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly,
Senior Loans may be illiquid. In addition, Senior Loans generally require the
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consent of the borrower prior to sale or assignment. These consent requirements
may delay or impede a fund's ability to sell Senior Loans. In addition, because
the secondary market for Senior Loans may be limited, it may be difficult to
value Senior Loans. Market quotations may not be available and valuation may
require more research than for liquid securities. In addition, elements of
judgment may play a greater role in the valuation, because there is less
reliable, objective data available.
HYBRID LOANS. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). With
Hybrid Loans, a fund may not possess a senior claim to all of the collateral
securing the Hybrid Loan. Hybrid Loans also may not include covenants that are
typical of Senior Loans, such as covenants requiring the maintenance of minimum
interest coverage ratios. As a result, Hybrid Loans present additional risks
besides those associated with traditional Senior Loans, although they may
provide a relatively higher yield. Because the lenders in Hybrid Loans waive or
forego certain loan covenants, their negotiating power or voting rights in the
event of a default may be diminished. As a result, the lenders' interests may
not be represented as significantly as in the case of a conventional Senior
Loan. In addition, because an investment company's security interest in some of
the collateral may be subordinate to other creditors, the risk of nonpayment of
interest or loss of principal may be greater than would be the case with
conventional Senior Loans.
SUBORDINATED AND UNSECURED LOANS. Certain investment companies may invest in
subordinated and unsecured loans. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Manager or Portfolio Manager, subject to the
seller's agreement to repurchase and the Fund's agreement to resell such
securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry
System or an equivalent foreign system. The seller under a repurchase agreement
will be required to maintain the value of the underlying securities at not less
than 102% (100% for the Money Market Fund) of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund holding
the repurchase agreement will suffer a loss to the extent that the proceeds from
a sale of the underlying securities is less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans under the Investment Company
Act.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the sale
of a security by a Fund and its agreement to repurchase the security (or, in the
case of mortgage-backed securities, substantially similar but not identical
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securities) at a specified time and price. A Fund will maintain in a segregated
account with the Custodian cash, U.S. Government securities or other appropriate
liquid securities in an amount sufficient to cover its obligations under these
agreements with broker-dealers (no such collateral is required on such
agreements with banks). Under the 1940 Act, these agreements are considered
borrowings by the Funds, and are subject to the percentage limitations on
borrowings described below. The agreements are subject to the same types of
risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund (except the Money Market Fund) may purchase securities on a
"when-issued," forward commitment or delayed settlement basis. In this event,
the Custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the Custodian will set
aside portfolio securities to satisfy a purchase commitment. In such a case, a
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for speculative purposes
but only in furtherance of their investment objectives. Because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments in
the manner described, the Fund's liquidity and the ability of the Investment
Manager or Portfolio Manager to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases the Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. A Fund does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
BORROWING
Each Fund may borrow up to 20% (other than the Money Market Fund which is
limited to 5%) of its total assets for temporary, extraordinary or emergency
purposes. Each Fund may also borrow money through reverse repurchase agreements,
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
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obligation resulting from a borrowing remain fixed by the terms of the Fund's
agreement with its lender, the asset value per share of the Fund tends to
increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, the
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when fundamental investment considerations would not favor
such sales.
LENDING FUND SECURITIES
The Funds may lend securities only to financial institutions such as banks,
broker/ dealers and other recognized institutional investors in amounts up to
30% of the Fund's total assets. These loans earn income for the Fund and are
collateralized by cash, securities or letters of credit. The Fund might
experience a loss if the financial institution defaults on the loan. Loans by
the Primary Fund in which the Money Market Fund invests will not exceed 25% of
the Fund's total assets.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank must satisfy the Fund. Any
loan might be secured by any one or more of the three types of collateral. The
terms of the Fund's loans must permit the Fund to reacquire loaned securities on
five days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code.
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
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securities it has sold short decrease in value, and to decrease more when the
securities it has sold short increase in value, than would otherwise be the case
if it had not engaged in such short sales. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Fund may be required to pay in connection with the
short sale. Short sales theoretically involve unlimited loss potential, as the
market price of securities sold short may continually increase, although a Fund
may mitigate such losses by replacing the securities sold short before the
market price has increased significantly. Under adverse market conditions the
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. To secure its obligation to deliver securities sold short, a Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a technique to
hedge against market risks when the Investment Manager or Portfolio Manager
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund's
long position would be reduced by a gain in the short position. The extent to
which such gains or losses in the long position are reduced will depend upon the
amount of securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold short are placed in a segregated
account (not with the broker), or unless the Fund's obligation to deliver the
securities sold short is "covered" by placing in a segregated account (not with
the broker) cash, U.S. Government securities or other liquid debt or equity
securities in an amount equal to the difference between the market value of the
securities sold short at the time of the short sale and any such collateral
required to be deposited with a broker in connection with the sale (not
including the proceeds from the short sale), which difference is adjusted daily
for changes in the value of the securities sold short. The total value of the
cash, U.S. Government securities or other liquid debt or equity securities
deposited with the broker and otherwise segregated may not at any time be less
than the market value of the securities sold short at the time of the short
sale. Each Fund will comply with these requirements. In addition, as a matter of
policy, the Trust's Board of Trustees has determined that no Fund will make
short sales of securities or maintain a short position if to do so could create
liabilities or require collateral deposits and segregation of assets aggregating
more than 25% of the Fund's total assets, taken at market value.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
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ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and the Fund might
be unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemption
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested in purchasing such securities.
The Emerging Countries Fund may invest in foreign securities that are restricted
against transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly from
the issuer or its underwriter, the Fund treats foreign securities whose
principal market is abroad as not subject to the investment limitation on
securities subject to legal or contractual restrictions on resale.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund (other than the Money Market Fund) may purchase or sell securities for
delivery at a future date, generally 15 to 45 days after the commitment is made.
The other party's failure to complete the transaction may cause the Fund to miss
a price or yield considered to be advantageous. A Fund may not purchase when
issued securities or enter into firm commitments if, as a result, more than 15%
of the Fund's net assets would be segregated to cover such securities.
INVESTMENT TECHNIQUES AND PROCESSES
The Portfolio Manager's investment techniques and processes, which it has used
in managing institutional portfolios for many years, are described generally in
the Funds' prospectus of the Funds it manages. In making decisions with respect
to equity securities for the Funds, GROWTH OVER TIME(R) is the Portfolio
Manager's underlying goal. It's how the Portfolio Manager built its reputation.
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Over the past ten years, the Portfolio Manager has built a record as one of the
finest performing investment managers in the United States. It has successfully
delivered growth over time to many institutional investors, pension plans,
foundations, endowments and high net worth individuals. The Portfolio Manager's
methods have proven their ability to achieve growth over time through a variety
of investment vehicles.
The Portfolio Manager emphasizes growth over time through investment in
securities of companies with earnings growth potential. The Portfolio Manager's
style is a "bottom-up" growth approach that focuses on the growth prospects of
individual companies rather than on economic trends. It builds portfolios stock
by stock. The Portfolio Manager's decision-making is guided by three critical
questions: Is there a positive change? Is it sustainable? Is it timely? The
Portfolio Manager uses these three factors because it focuses on discovering
positive developments when they first show up in an issuer's earnings, but
before they are fully reflected in the price of the issuer's securities. The
Portfolio Manager is always looking for companies that are driving change and
surpassing analysts' expectations. It seeks to identify companies poised for
rapid growth. The Portfolio Manager focuses on recognizing successful companies,
regardless of their capitalization or whether they are domestic or foreign
companies.
The Portfolio Manager's techniques and processes include relationships with an
extensive network of brokerage research firms located throughout the world.
These analysts are often located in the same geographic regions as the companies
they follow, have followed those companies for a number of years, and have
developed excellent sources of information about them. The Portfolio Manager
does not employ in-house analysts other than the personnel actually engaged in
managing investments for the Funds and the Portfolio Manager's other clients.
However, information obtained from a brokerage research firm is confirmed with
other research sources or the Portfolio Manager's computer-assisted quantitative
analysis (including "real time" pricing data) of a substantial universe of
potential investments.
DIVERSIFICATION
Each Fund is "diversified" within the meaning of the Investment Company Act. In
order to qualify as diversified, a Fund must diversify its holdings so that at
all times at least 75% of the value of its total assets is represented by cash
and cash items (including receivables), securities issued or guaranteed as to
principal or interest by the United States or its agencies or instrumentalities,
securities of other investment companies, and other securities (for this purpose
other securities of any one issuer are limited to an amount not greater than 5%
of the value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of the issuer).
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Manager or Portfolio Manager
in approximately equal amounts, and the Investment Manager or Portfolio Manager
attempts to stay fully invested within the applicable percentage limitations set
forth in the Prospectus. In addition, for each issuer whose securities are added
to an investment portfolio, the Investment Manager or Portfolio Manager sells
the securities of one of the issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Fund (as defined in the Investment
Company Act).
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All percentage limitations set forth below apply immediately after a purchase or
initial investment, and any subsequent change in any applicable percentage
resulting from market fluctuations will not require elimination of any security
from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In addition, no
Fund:
1. May invest in securities of any one issuer if more than 5% of the market
value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Fund's total assets may be invested
without regard to this restriction and a Fund will be permitted to invest
all or a portion of its assets in another diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund. This restriction also does not apply
to investments by a Fund in securities of the U.S. Government or any of its
agencies and instrumentalities.
2. May purchase more than 10% of the outstanding voting securities, or of any
class of securities, of any one issuer, or purchase the securities of any
issuer for the purpose of exercising control or management, except that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund.
3. May invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that a Fund
will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund. This
restriction does not apply to investments by a Fund in securities of the
U.S. Government or its agencies and instrumentalities or to investments by
the Money Market Fund in obligations of domestic branches of U.S. banks and
U.S. branches of foreign banks which are subject to the same regulation as
U.S. banks.
4. May purchase or sell real estate. However, a Fund may invest in securities
secured by, or issued by companies that invest in, real estate or interests
in real estate.
5. May make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. Each Fund reserves the authority to make loans of
its portfolio securities in an aggregate amount not exceeding 30% of the
value of its total assets. This restriction does not apply to the Money
Market Fund.
6. May borrow money on a secured or unsecured basis, except for temporary,
extraordinary or emergency purposes or for the clearance of transactions in
amounts not exceeding 20% of the value of its total assets at the time of
the borrowing, provided that, pursuant to the Investment Company Act, a
Fund may borrow money if the borrowing is made from a bank or banks and
only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all
borrowings (including proposed borrowings), and provided, further that the
borrowing may be made only for temporary, extraordinary or emergency
purposes or for the clearance of transactions in amounts not exceeding 20%
of the value of the Fund's total assets at the time of the borrowing. If
such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law.
7. May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Funds from
engaging in options, futures and foreign currency transactions, and shall
not apply to the Money Market Fund.
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8. May underwrite securities of other issuers, except insofar as it may be
deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% (10% in the case of the Money Market Fund) of the
value of its net assets in securities that at the time of purchase are
illiquid.*
10. May purchase securities on margin, except for initial and variation margin
on options and futures contracts, and except that a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. May engage in short sales (other than the MidCap Growth, SmallCap Growth,
Worldwide Growth, International Core Growth, International SmallCap Growth,
Strategic Income and High Yield II Funds), except that a Fund may use such
short-term credits as are necessary for the clearance of transactions.
12. May invest in securities of other investment companies, except (a) that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities
laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Fund.
13. May issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Funds from engaging in short sales, options, futures and
foreign currency transactions.
14. May enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest in
stock index, currency and financial futures contracts and related options
in accordance with any rules of the Commodity Futures Trading Commission.
15. May purchase or write options on securities, except for hedging purposes
(except in the case of the Strategic Income Fund, which may do so for
non-hedging purposes) and then only if (i) aggregate premiums on call
options purchased by a Fund do not exceed 5% of its net assets, (ii)
aggregate premiums on put options purchased by a Fund do not exceed 5% of
its net assets, (iii) not more than 25% of a Fund's net assets would be
hedged, and (iv) not more than 25% of a Fund's net assets are used as cover
for options written by the Fund. This restriction does not apply to the
Money Market Fund.
- ----------
* For the LargeCap Growth, MidCap Growth, Worldwide Growth, Emerging
Countries, High Yield II and Balanced Funds, as of the date of this
Statement of Additional Information this investment restriction reads: "May
invest more than 15% of the value of its net assets in securities that at
the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid." At a Meeting of Shareholders on May 21, 1999, a
change to this investment restriction was approved by the shareholders of
all Funds except the LargeCap Growth, MidCap Growth, Worldwide Growth,
Emerging Countries, High Yield II and Balanced Funds. The Meeting has been
adjourned with respect to those Funds, and upon shareholder approval the
investment restriction will be changed as described above.
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OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board of
Trustees of the Trust, no Fund:
1. May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships,
although a Fund may invest in the securities of companies which invest in
or sponsor such programs.
2. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market
daily.
PRIMARY FUND RESTRICTIONS
The following are the fundamental operating restrictions of the Primary Fund in
which the Money Market Fund invests substantially all of its assets:
The Primary Fund cannot:
1. borrow money except as a temporary or emergency measure and not in an
amount to exceed 5% of the market value of its total assets;
2. issue securities senior to its capital stock;
3. act as an underwriter with respect to the securities of others;
4. concentrate investments in any particular industry except to the extent
that its investments are concentrated exclusively in U.S. government
securities and bank obligations or repurchase agreements secured by such
obligations;
5. purchase, sell or otherwise invest in real estate or commodities or
commodity contracts;
6. lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
7. sell any security short or write, sell or purchase any futures contract or
put or call option;
8. invest in voting securities or in companies for the purpose of exercising
control;
9. invest in the securities of other investment companies except in compliance
with the Investment Company Act of 1940 ("1940 Act");
10. make investments on a margin basis;
11. purchase or sell any securities (other than securities of the Primary Fund)
from or to any officer or Trustee of the Primary Fund, the investment
adviser or affiliated person except in compliance with the 1940 Act.
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PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement
authorizes the Investment Manager or Portfolio Manager to select the brokers or
dealers that will execute the purchase and sale of investment securities for
each Fund. In all purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreements and Portfolio
Management Agreements, each Investment Manager or Portfolio Manager determines,
subject to the instructions of and review by the Board of Trustees of the Fund,
which securities are to be purchased and sold by the Funds and which brokers are
to be eligible to execute portfolio transactions of the Fund. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of an Investment Manager
or Portfolio Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, each Investment Manager or Portfolio Manager
will use its best efforts to choose a broker capable of providing the brokerage
services necessary to obtain the most favorable price and execution available.
The full range and quality of brokerage services available will be considered in
making these determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors. The Investment Managers or
Portfolio Manager will seek to obtain the best commission rate available from
brokers that are believed to be capable of providing efficient execution and
handling of the orders. In those instances where it is reasonably determined
that more than one broker can offer the brokerage services needed to obtain the
most favorable price and execution available, consideration may be given to
those brokers that supply research and statistical information to a Fund, the
Investment Manager, and/or the Portfolio Manager, and provide other services in
addition to execution services. Each Investment Manager or Portfolio Manager
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Investment Manager or Portfolio Manager
to be useful in varying degrees, but of indeterminable value. Consistent with
this policy, portfolio transactions may be executed by brokers affiliated with
the Pilgrim Group or any of the Investment Managers or Portfolio Managers, so
long as the commission paid to the affiliated broker is reasonable and fair
compared to the commission that would be charged by an unaffiliated broker in a
comparable transaction. The placement of portfolio brokerage with broker-dealers
who have sold shares of a Fund is subject to rules adopted by the National
Association of Securities Dealers, Inc. ("NASD") Provided the Fund's officers
are satisfied that the Fund is receiving the most favorable price and execution
available, the Fund may also consider the sale of the Fund's shares as a factor
in the selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Funds' general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for a Fund, the Fund may also give weight to the
ability of a broker to furnish brokerage and research services to the Fund, the
Investment Manager or the Portfolio Manager, even if the specific services were
not imputed to the Fund and were useful to the Investment Manager and/or
Portfolio Manager in advising other clients. In negotiating commissions with a
broker, the Fund may therefore pay a higher commission than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission has been determined in good faith by the
Investment Manager or Portfolio Manager to be reasonable in relation to the
value of the brokerage and research services provided by such broker.
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
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purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate for
other clients served by that Fund's Investment Manager or Portfolio Manager. If
the purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Investment
Manager or Portfolio Manager is considered at or about the same time,
transactions in such securities will be allocated among the Fund and the
Investment Manager's or Portfolio Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager or Portfolio Manager. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by a Investment Manager or Portfolio Manager, and the
results of such allocations, are subject to periodic review by the Board of
Trustees. To the extent any of Funds seek to acquire the same security at the
same time, one or more of the Funds may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price for
such security. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a specific
Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with the Investment
Manager, except for any sales of portfolio securities that may legally be made
pursuant to a tender offer, in which event the Investment Manager will offset
against its management fee a part of any tender fees that may be legally
received and retained by an affiliated broker-dealer.
Brokerage commissions paid by each Fund (or by the master fund predecessor of
the Fund) for each of the last three fiscal years are as follows:
Year Ended March 31,
------------------------------------------
Fund 1999 1998 1997
- ---- ---- ---- ----
International Core Growth Fund $1,150,595 $ 464,615 $ 24,643
Worldwide Growth Fund 1,166,321 1,065,153 970,564
International SmallCap Growth Fund 873,671 745,259 692,326
Emerging Countries Fund 3,945,783 3,634,338 1,427,861
LargeCap Growth Fund 115,558 30,907 4,620
MidCap Growth Fund 1,291,517 1,809,755 1,139,938
SmallCap Growth Fund 974,722 1,002,867 987,245
Convertible Fund 158,049 130,017 114,243
Balanced Fund 25,782 43,966 35,105
Strategic Income Fund 1/ 0 100 0
- ----------
1/ The Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the Strategic Income Fund paid no brokerage fees
in the fiscal year ended March 31, 1998.
Of the total commissions paid during the fiscal year ended March 31, 1999,
$1,312,257 (13.53%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
During the fiscal year ended March 31, 1999, the following Funds (or their
predecessor master funds) acquired securities of their regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) or their
parents: International Core Growth Fund -- J. P. Morgan & Co.; Worldwide Growth
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Fund -- J. P. Morgan & Co.; MidCap Growth Fund -- Donaldson Lufkin & Jenrette,
J. P. Morgan & Co.; SmallCap Growth Fund -- J. P. Morgan & Co.; Convertible Fund
- -- J. P. Morgan & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter Discover
Co.; Balanced Fund -- Donaldson Lufkin & Jenrette, Merrill Lynch & Co., Morgan
Stanley Dean Witter Discover & Co.; Strategic Income -- Donaldson Lufkin &
Jenrette, J. P. Morgan & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter
Discover & Co. The holdings of securities of such brokers and dealers were as
follows as of March 31, 1999: Worldwide Growth Fund -- J. P. Morgan & Co.
($45,197,000); Convertible Fund -- J. P. Morgan & Co. ($2,270,000), Merrill
Lynch & Co. ($11,412,487), Morgan Stanley Dean Witter Discover Co. ($9,630,708);
Balanced Fund -- Donaldson Lufkin & Jenrette ($257,563), Merrill Lynch & Co.
($159,099), Morgan Stanley Dean Witter Discover & Co. ($430,516); Strategic
Income -- Donaldson Lufkin & Jenrette ($1,571,920), J. P. Morgan & Co.
($697,763), Merrill Lynch & Co. ($215,567), Morgan Stanley Dean Witter Discover
& Co. ($748,750).
ABOUT THE MONEY MARKET FUND. With respect to the Primary Fund in which the Money
Market Fund invests its assets, Reserve Management Company, Inc. is responsible
for decisions to buy and sell securities, broker-dealer selection and
negotiation of commission rates. As investment securities transactions made by
the Primary Fund are normally principal transactions at net prices, the Primary
Fund does not normally incur brokerage commissions. Purchases of securities from
underwriters involve a commission or concession paid by the issuer to the
underwriter and aftermarket transactions with dealers involve a spread between
the bid and asked prices. The Primary Fund has not paid any brokerage
commissions during the past three fiscal years.
The Primary Fund's policy of investing in debt securities maturing within 13
months results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a material, adverse effect
upon the net asset value ("NAV") or yield of the Primary Fund.
Subject to the overall supervision of the officers of the Primary Fund and the
Board of Trustees, Reserve Management Company, Inc. places all orders for the
purchase and sale of the Primary Fund's investment securities. In general, in
the purchase and sale of investment securities, Reserve Management Company, Inc.
will seek to obtain prompt and reliable execution of orders at the most
favorable prices and yields. In determining best price and execution, Reserve
Management Company, Inc. may take into account a dealer's operational and
financial capabilities, the type of transaction involved, the dealer's general
relationship with Reserve Management Company, Inc., and any statistical,
research, or other services provided by the dealer to Reserve Management
Company, Inc. To the extent such non-price factors are taken into account the
execution price paid may be increased, but only in reasonable relation to the
benefit of such non-price factors to the Primary Fund as determined by Reserve
Management Company, Inc. Brokers or dealers who execute investment securities
transactions may also sell shares of the Primary Fund; however, any such sales
will be neither a qualifying nor disqualifying factor in the selection of
brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Primary Fund and other investment companies
managed by Reserve Management Company, Inc., the transactions are allocated as
to amount in accordance with each order placed for each fund. However, Reserve
Management Company, Inc. may not always be able to purchase or sell the same
security on identical terms for all investment companies affected.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased, redeemed
or exchanged appears in the Prospectus under "Shareholder Guide." Shares of the
Funds are offered at the net asset value next computed following receipt of the
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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
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.
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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 of all Funds with a sales charge may also be purchased
without a sales charge by (i) shareholders who have authorized the automatic
transfer of dividends from the same class of another Pilgrim Fund distributed by
the Distributor or from Pilgrim Prime Rate Trust; (ii) registered investment
advisors, trust companies and bank trust departments investing in Class A shares
on their own behalf or on behalf of their clients, provided that the aggregate
amount invested in any one or more Funds, during the 13 month period starting
with the first investment, equals at least $1 million; (iii) broker-dealers, who
have signed selling group agreements with the Distributor, and registered
representatives and employees of such broker-dealers, for their own accounts or
for members of their families (defined as current spouse, children, parents,
grandparents, uncles, aunts, siblings, nephews, nieces, step relations,
relations-at-law and cousins); (iv) broker-dealers using third party
administrators for qualified retirement plans who have entered into an agreement
with the Pilgrim Funds or an affiliate, subject to certain operational and
minimum size requirements specified from time-to-time by the Pilgrim Funds; (v)
accounts as to which a banker or broker-dealer charges an account management fee
(`wrap accounts'); and (vi) any registered investment company for which Pilgrim
Investments, Inc. serves as adviser.
The Funds may terminate or amend the terms of these sales charge waivers at any
time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION. An investor may immediately
qualify for a reduced sales charge on a purchase of Class A or Class M shares of
any of the Funds which offers Class A shares or shares with front-end sales
charges, by completing the Letter of Intent section of the Shareholder
Application in the Prospectus (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for
the reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one investment in the Pilgrim Funds
will be effective only after notification to the Distributor that the investment
qualifies for a discount. The shareholder's holdings in the Investment Manager's
funds acquired within 90 days before the Letter of Intent is filed will be
counted towards completion of the Letter of Intent but will not be entitled to a
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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
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Fund plus shares of the other open-end funds
distributed by the Distributor (excluding the Money Market Fund) can be combined
with a current purchase to determine the reduced sales charge and applicable
offering price of the current purchase. The reduced sales charge apply to
quantity purchases made at one time or on a cumulative basis over any period of
time by (i) an investor, (ii) the investor's spouse and children under the age
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<PAGE>
of majority, (iii) the investor's custodian accounts for the benefit of a child
under the Uniform gift to Minors Act, (iv) a trustee or other fiduciary of a
single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies' registered investment advisors, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
The reduced sales charge also apply on a non-cumulative basis, to purchases made
at one time by the customers of a single dealer, in excess of $1 million. The
Letter of Intent option may be modified or discontinued at any time.
Shares of the Fund and other open-end Pilgrim Funds (excluding the Money Market
Fund) purchased and owned of record or beneficially by a corporation, including
employees of a single employer (or affiliates thereof) including shares held by
its employees, under one or more retirement plans, can be combined with a
current purchase to determine the reduced sales charge and applicable offering
price of the current purchase, provided such transactions are not prohibited by
one or more provisions of the Employee Retirement Income Security Act or the
Internal Revenue Code. Individuals and employees should consult with their tax
advisors concerning the tax rules applicable to retirement plans before
investing.
REDEMPTIONS. Payment to shareholders for shares redeemed will be made within
seven days after receipt by the Fund's Transfer Agent of the written request in
proper form, except that a Fund may suspend the right of redemption or postpone
the date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, each Trust has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event a Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.
Due to the relatively high cost of handling small investments, the Trust
reserves the right, upon 30 days written notice, to redeem, at net asset value
(less any applicable deferred sales charge), the shares of any shareholder whose
account has a value of less than $1,000 in the Fund, other than as a result of a
decline in the net asset value per share. Before the Fund redeems such shares
and sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares in the account is less than the minimum amount and will
allow the shareholder 30 days to make an additional investment in an amount that
will increase the value of the account to at least $1,000 before the redemption
is processed. This policy will not be implemented where a Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
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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 1% 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.
CONVERSION OF CLASS B SHARES. Except for Class B shares of the Money Market
Fund, a shareholder's Class B shares will automatically convert to Class A
shares in the Fund on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs, together with a pro
rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. However, Class B shares of the
Funds that were acquired before May 24, 1999, and which have not been exchanged
into any other Fund since that date, will convert seven years after purchase.
The conversion of Class B shares into Class A shares is subject to the
continuing availability of an opinion of counsel or an Internal Revenue Service
("IRS") ruling, if the Investment Manager deems it advisable to obtain such
advice, to the effect that (1) such conversion will not constitute taxable
events for federal tax purposes; and (2) the payment of different dividends on
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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 mean between the last reported
bid and asked prices on the valuation day. Portfolio securities underlying
traded call options will be valued at their market price as determined above;
however, the current market value of the option written will be subtracted from
net asset value. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Trustees as the primary market. Short-term obligations
maturing in less than 60 days will generally be valued at amortized cost. Other
debt securities are valued at bid prices obtained from independent pricing
services or from one or more dealers making markets in the securities, with the
exception of Convertible Fund which values at the mean between the bid and ask.
The mortgage securities held in a Fund's portfolio will be valued at the mean
between the most recent bid and asked prices as obtained from one or more
dealers that make markets in the securities when over-the counter market
quotations are readily available. Securities for which quotations are not
readily available and all other assets will be valued at their respective fair
values as determined in good faith by or under the direction of the Board of
Trustees of the Trust. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of a
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of a Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to a Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Trustees.
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In computing a class of a Fund's net asset value, all class-specific liabilities
incurred or accrued are deducted from the class' net assets. The resulting net
assets are divided by the number of shares of the class outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting daily
expense accruals of the higher distribution fees applicable to Class B and Class
C shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.
Orders received by dealers prior to the close of regular trading on the New York
Stock Exchange will be confirmed at the offering price computed as of the close
of regular trading on the Exchange provided the order is received by the
Distributor prior to its close of business that same day (normally 4:00 P.M.
Pacific time). It is the responsibility of the dealer to insure that all orders
are transmitted timely to the Fund. Orders received by dealers after the close
of regular trading on the New York Stock Exchange will be confirmed at the next
computed offering price as described in the Prospectus.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Fund will not normally be
issued to shareholders (and not at all for shares of the Money Market Fund). The
Transfer Agent will maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any transfers shall be
reflected by bookkeeping entry, without physical delivery.
The Transfer Agent will require that a shareholder provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
The Trust reserves the right, if conditions exist that make cash payments
undesirable, to honor any request for redemption or repurchase order with
respect to shares of a Fund by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (redemption-in-kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting theses
securities to cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act as a result of which a Fund is obligated to redeem shares
with respect to any one shareholder during any 90-day period solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds (other than the Money Market Fund)
provide a Pre-Authorized Investment Program for the convenience of investors who
wish to purchase shares of a Fund on a regular basis. Such a Program may be
started with an initial investment ($1,000 minimum) and subsequent voluntary
purchases ($100 minimum) with no obligation to continue. The Program may be
terminated without penalty at any time by the investor or the Funds. The minimum
investment requirements may be waived by the Fund for purchases made pursuant to
(i) employer-administered payroll deduction plans, (ii) profit-sharing, pension,
or individual or any employee retirement plans, or (iii) purchases made in
connection with plans providing for periodic investments in Fund shares.
For investors purchasing shares of a Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of a Fund on a
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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 (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to the
address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the address of
record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a predetermined
bank account is $5,000.
5. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have the
same account information and options except as stated in the Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but must
be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141 and
deposited into your account before any transaction may be processed.
8. If a portion of the shares to be exchanged are held in escrow in connection
with a Letter of Intent, the smallest number of full shares of the Pilgrim
Fund to be purchased on the exchange having the same aggregate net asset
value as the shares being exchanged shall be substituted in the escrow
account. Shares held in escrow may not be redeemed until the Letter of
Intent has expired and/or the appropriate adjustments have been made to the
account.
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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.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $100 ($1,000 in the case of Class Q) to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000 ($250,000 in the case of Class Q). To
establish a systematic cash withdrawal, complete the Systematic Withdrawal Plan
section of the Account Application. To have funds deposited to your bank
account, follow the instructions on the Account Application. You may elect to
have monthly, quarterly, semi-annual or annual payments. Redemptions are
normally processed on the fifth day prior to the end of the month, quarter or
year. Checks are then mailed or proceeds are forwarded to your bank account on
or about the first of the following month. You may change the amount, frequency
and payee, or terminate the plan by giving written notice to the Transfer Agent.
A Systematic Withdrawal Plan may be modified at any time by the Fund or
terminated upon written notice by the relevant Fund.
During the withdrawal period, you may purchase additional shares for deposit to
your account, subject to any applicable sales charge, if the additional
purchases are equal to at least one year's scheduled withdrawals, or $1,200
($12,000 in the case of Class Q), whichever is greater. There are no separate
charges to you under this Plan, although a CDSC may apply if you purchased Class
A, B or C shares. Shareholders who elect to have a systematic cash withdrawal
must have all dividends and capital gains reinvested. As shares of a Fund are
redeemed under the Plan, you may realize a capital gain or loss for income tax
purposes.
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.
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Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each Fund
must, among other things: (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund intends to make
distributions in accordance with the calendar year distribution requirement.
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.
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Distributions by a Fund reduce the net asset value of the Fund shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by a Fund. The price of shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will generally be
taxable to them.
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by a Fund may be
treated as debt securities that were originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount that accrues on a debt security in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code. If the High Yield Fund II
invests in certain high yield original issue discount securities issued by
corporations, a portion of the original issue discount accruing on the
securities may be eligible for the deduction for dividends received by
corporations. In such event, properly designated dividends of investment company
taxable income received from the High Yield Fund II by its corporate
shareholders, to the extent attributable to such portion of accrued original
issue discount, may be eligible for this deduction for dividends received by
corporations.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to
fluctuations in foreign currency exchange rates which occur between the time a
Fund accrues income or other receivable or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
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.
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A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. Alternatively, another
election is available that involves marking to market the Funds' PFIC stock at
the end of each taxable year with the result that unrealized gains are treated
as though they were realized and are reported as ordinary income; any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are reported as ordinary loss to the extent of any net mark-to-market gains
included in income in prior years.
FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign
countries may be subject to withholding and other income or similar taxes
imposed by such countries. If more than 50% of the value of a Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, that Fund will be eligible and intends to elect to "pass through"
to the Fund's shareholders the amount of foreign income and similar taxes paid
by that Fund. Pursuant to this election, a shareholder will be required to
include in gross income (in addition to taxable dividends actually received) his
pro rata share of the foreign taxes paid by a Fund, and will be entitled either
to deduct (as an itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions, but such a shareholder may be eligible to claim the foreign tax
credit (see below). Each shareholder will be notified within 60 days after the
close of the relevant Fund's taxable year whether the foreign taxes paid by the
Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of a
Fund's income flows through to its shareholders. With respect to a Fund, gains
from the sale of securities will be treated as derived from U.S. sources and
certain currency fluctuation gains, including fluctuation gains from foreign
currency denominated debt securities, receivable and payable, will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as 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
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basis of the purchased security and, in the case of a put option, reduces the
amount realized on the underlying security in determining gain or loss.
Certain options and financial contracts in which a Fund may invest are "section
1256 contracts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses ("60/40");
however, foreign currency gains or losses (as discussed below) arising from
certain section 1256 contracts may be treated as ordinary income or loss. Also,
section 1256 contracts held by a Fund at the end of each taxable year (and on
certain other dates as prescribed under the Code) are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, notional principal contract, futures or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options, futures and forward contracts
and short sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-day period ending with the 30th
day after the close of the Fund's taxable year, if certain conditions are met.
Requirements relating to a Fund's tax status as a regulated investment company
may limit the extent to which the Fund will be able to engage in transactions in
options and foreign currency forward contracts.
SHORT SALES AGAINST THE BOX. If a Fund sells short "against the box," unless
certain constructive sale rules (discussed above) apply, it may realize a
capital gain or loss upon the closing of the sale. Such gain or loss generally
will be long- or short-term depending upon the length of time the Fund held the
security which it sold short. In some circumstances, short sales may have the
effect of reducing an otherwise applicable holding period of a security in the
portfolio. Were that to occur, the affected security would again have to be held
for the requisite period before its disposition to avoid treating that security
as having been sold within the first three months of its holding period. The
constructive sale rule, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
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underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully under "Options and Hedging Transactions" above.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future Treasury regulations may apply similar
treatment to other transactions with respect to property that becomes
substantially worthless.
OTHER INVESTMENT COMPANIES. It is possible that by investing in other investment
companies, a Fund may not be able to meet the calendar year distribution
requirement and may be subject to federal income and excise tax. The
diversification and distribution requirements applicable to each Fund may limit
the extent to which each Fund will be able to invest in other investment
companies.
SALE OR OTHER DISPOSITION OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, which generally may be eligible
for reduced Federal tax rates, depending on the shareholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in a Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
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
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treaty rate) upon the gross amount of the dividend. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund, capital gain dividends and amounts retained by the
Fund that are designated as undistributed capital gains. If the income from the
Fund is effectively connected with a U.S. trade or business carried on by a
foreign shareholder, then ordinary income dividends, capital gain dividends and
any gains realized upon the sale of shares of the Fund will be subject to U.S.
federal income tax at the rates applicable to U.S. citizens or domestic
corporations.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund, including the
applicability of foreign taxes.
OTHER TAXES. Distributions also may be subject to state, local and foreign
taxes. U.S. tax rules applicable to foreign investors may differ significantly
from those outlined above. This discussion does not purport to deal with all of
the tax consequences applicable to shareholders. Shareholders are advised to
consult their own tax advisers for details with respect to the particular tax
consequences to them of an investment in a Fund.
CALCULATION OF PERFORMANCE DATA
Each Fund (other than the Money Market Fund) may, from time to time, include
"total return" in advertisements or reports to shareholders or prospective
investors. Quotations of average annual total return will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
a Fund over periods of 1, 5 and 10 years (up to the life of the Fund),
calculated pursuant to the following formula which is prescribed by the SEC:
n
P(1 + T) = ERV
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:
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a-b 6
2[(----- + 1) - 1]
cd
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
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
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the historical performance of that series' corresponding master fund for
periods, if any, prior to the date of inception of the series.
YIELD INFORMATION FOR THE MONEY MARKET FUND. The yield for the Money Market Fund
will be based on yield information from the Primary Fund.
The current yields for the Primary Fund quoted will be the net average
annualized yield for an identified period, usually seven consecutive calendar
days. Yield for the Primary Fund will be computed by assuming that an account
was established with a single share of the Primary Fund (the "Single Share
Account") on the first day of the period. To arrive at the quoted yield, the net
change in the value of that Single Share Account for the period (which would
include dividends accrued with respect to the share, and dividends declared on
shares purchased with dividends accrued and paid, if any, but would not include
realized gains and losses or unrealized appreciation or depreciation) will be
multiplied by 365 and then divided by the number of days in the period, with the
resulting figure carried to the nearest hundredth of 1%. The Primary Fund may
also furnish a quotation of effective yield for the Primary Fund that assumes
the reinvestment of dividends for a 365 day year and a return for the entire
year equal to the average annualized yield for the period, which will be
computed by compounding the unannualized current yield for the period by adding
1 to the number of days in the period, and then subtracting 1 from the result.
Historical yields are not necessarily indicative of future yields. Rates of
return will vary as interest rates and other conditions affecting money market
instruments change. Yields also depend on the quality, length of maturity and
type of instruments in the Primary Fund's portfolio and the Primary Fund's
operating expenses. Quotations of yields will be accompanied by information
concerning the average weighted maturity of the Primary Fund. Comparison of the
quoted yields of various investments is valid only if yields are calculated in
the same manner and for identical limited periods. When comparing the yield for
the Money Market Fund with yields quoted with respect to other investments,
shareholders should consider (a) possible differences in time periods, (b) the
effect of the methods used to calculate quoted yields, (c) the quality and
average-weighted maturity of portfolio investments, expenses, convenience,
liquidity and other important factors, and (d) the taxable or tax-exempt
character of all or part of dividends received.
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return and yields
will always show a calculation that includes the effect of the maximum sales
charge but may also show total return without giving effect to that charge.
Because these additional quotations will not reflect the maximum sales charge
payable, these performance quotations will be higher than the performance
quotations that reflect the maximum sales charge.
Total returns and yields are based on past results and are not necessarily a
prediction of future performance.
PERFORMANCE COMPARISONS. In reports or other communications to shareholders or
in advertising material, a Fund may compare the performance of its Class A,
Class B, Class C and Class Q shares with that of other mutual funds as listed in
the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results.
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Yields for the following Classes of the following Funds for the
thirty-day period ended March 31, 1999 were as follows:
FUND AND CLASS
--------------
Convertible Fund
Class A 1.46%
Class B 0.92%
Class C 0.92%
Class Q 1.83%
Strategic Income Fund
Class A 5.72%
Class B 5.57%
Class C 5.58%
Class Q 6.29%
Balanced
Class A 1.95%
Class B 1.41%
Class C 1.41%
Class Q 2.40%
High Yield Fund II
Class A 9.54%
Class B 9.33%
Class C 9.33%
Class Q 10.29%
The average annual total returns, including sales charges, for each class of
shares of each Fund for the one-five-and ten-year periods ended March 31, 1999,
if applicable, and for classes that have not been in operation for ten years,
the average annual total return for the period from commencement of operations
to March 31, 1999, is as follows:
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception Inception Date
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
International Core Growth
Class A -0.21% N/A N/A 15.75% 2/28/97
Class B 0.24% N/A N/A 17.89% 2/28/97
Class C 4.20% N/A N/A 19.19% 2/28/97
Class Q 6.10% N/A N/A 20.58% 2/28/97
Worldwide Growth
Class A 25.58% 17.74% N/A 18.20% 4/19/93
Class B 27.74% N/A N/A 23.45% 5/31/95
Class C 31.73% 18.39% N/A 18.64% 4/19/93
Class Q 33.97% 19.50% N/A 24.19% 8/31/95
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year Since Inception Inception Date
------ ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
International SmallCap Growth
Class A 10.51% 14.52% N/A 14.21% 12/27/93
Class B 11.57% N/A N/A 19.49% 5/31/95
Class C 15.56% 15.05% N/A 14.85% 12/27/93
Class Q 17.61% 16.06% N/A 21.42% 8/31/95
Emerging Countries
Class A -26.70% N/A N/A 2.57% 11/28/94
Class B -26.10% N/A N/A 3.28% 5/31/95
Class C -22.99% N/A N/A 3.00% 11/28/94
Class Q -21.42% N/A N/A 3.41% 8/31/95
LargeCap Growth
Class A 53.68% N/A N/A 47.95% 7/21/97
Class B 57.28% N/A N/A 48.95% 7/21/97
Class C 60.97% N/A N/A 52.24% 7/21/97
Class Q 63.76% N/A N/A 53.57% 7/21/97
MidCap Growth
Class A 8.71% 16.66% N/A 15.00% 4/19/93
Class B 9.59% N/A N/A 20.93% 5/31/95
Class C 13.60% 17.35% N/A 15.43% 4/19/93
Class Q 15.77% 18.36% N/A 20.92% 6/30/94
SmallCap Growth
Class A -5.38% 13.99% N/A 12.56% 12/27/93
Class B -4.98% N/A N/A 15.96% 5/31/95
Class C -1.13% 14.68% N/A 13.15% 12/27/93
Class Q 0.95% 15.96% N/A 13.63% 8/31/95
Convertible
Class A 12.30% 15.48% N/A 16.31% 4/19/93
Class B 13.52% N/A N/A 21.25% 5/31/95
Class C 17.45% 16.12% N/A 16.71% 4/19/93
Class Q 19.66% 17.29% N/A 21.30% 8/31/95
Balanced
Class A 10.37% 15.29% N/A 14.40% 4/19/93
Class B 11.49% N/A N/A 25.91% 5/31/95
Class C 15.42% 15.90% N/A 14.84% 4/19/93
Class Q 17.49% N/A N/A 18.25% 8/31/95
High Yield II
Class A -3.64% N/A N/A -3.46% 3/27/98
Class B -4.04% N/A N/A -3.26% 3/27/98
Class C -0.37% N/A N/A 0.70% 3/27/98
Class Q 1.40% N/A N/A 1.55% 3/27/98
Strategic Income
Class A N/A N/A N/A -1.21% 8/31/95
Class B N/A N/A N/A -2.66% 8/31/95
Class C N/A N/A N/A 3.25% 8/31/95
Class Q N/A N/A N/A 6.25% 8/31/95
</TABLE>
No performance information is provided for the Money Market Fund because it had
not yet commenced operations as of March 31, 1999.
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<PAGE>
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including but not limited to age characteristics, of various countries and
regions in which a Fund may invest, as compiled by various organizations, and
projections of such information; (ii) the performance of worldwide equity and
debt markets; (iii) the capitalization of U.S. and foreign stock markets
prepared or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization; (iv) the geographic
distribution of a Fund's portfolio; (v) the major industries located in various
jurisdictions; (vi) the number of shareholders in the Funds or other Pilgrim
Funds and the dollar amount of the assets under management; (vii) descriptions
of investing methods such as dollar-cost averaging, best day/worst day
scenarios, etc.; (viii) comparisons of the average price to earnings ratio,
price to book ratio, price to cash flow and relative currency valuations of the
Funds and individual stocks in a Fund's portfolio, appropriate indices and
descriptions of such comparisons; (ix) quotes from the portfolio manager of a
Fund or other industry specialists, (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Portfolio Manager, Pilgrim Capital,
Pilgrim Group, Inc. or affiliates of the Trust, the Investment Manager, the
Portfolio Manager, Pilgrim Capital or Pilgrim Group, Inc. including (i)
performance rankings of other funds managed by the Investment Manager or a
Portfolio Manager, or the individuals employed by the Investment Manager or a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Fund, including rankings of mutual funds published by Lipper Analytical
Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating
services, companies, publications or other persons who rank mutual funds or
other investment products on overall performance or other criteria; (ii) lists
of clients, the number of clients, or assets under management; (iii) information
regarding the acquisition of Pilgrim Mutual Funds or other Pilgrim Funds by
Pilgrim Capital; (iv) the past performance of Pilgrim Capital and Pilgrim Group,
Inc.; (v) the past performance of other funds managed by the Investment Manager
or the Portfolio Manager; and (vi) information regarding rights offerings
conducted by closed-end funds managed by the Investment Manager.
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. The authorized shares of the Trust consists of
an unlimited number of shares of beneficial interest. Holders of shares of the
Funds have one vote for each share held, and a proportionate fraction of a vote
for each fraction of a share held. All shares when issued are fully paid and
non-assessable by the Trust. Shares have no preemptive rights. All shares have
equal voting, dividend and liquidation rights. Shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do so,
and in such event the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Generally, there will not be annual meetings of shareholders.
The Board of Trustees may classify or reclassify any unissued shares into shares
of any series by setting or changing in any one or more respects, from time to
time, prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or
qualifications of such shares. Any such classification or reclassification will
comply with the provisions of the 1940 Act. The Board of Trustees may create
additional series (or classes of series) of shares without shareholder approval.
Any series or class of shares may be terminated by a vote of the shareholders of
such series or class entitled to vote or by the Trustees of the Trust by written
notice to shareholders of such series or class. Shareholders may remove Trustees
from office by votes cast at a meeting of shareholders or by written consent.
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<PAGE>
CUSTODIAN. The cash and securities owned by the International Core Growth,
Worldwide Growth, International SmallCap Growth and Emerging Countries Funds are
held by Brown Brothers Harriman, 40 Water Street, Boston, Massachusetts
02109-3661, as Custodian, which takes no part in the decisions relating to the
purchase or sale of a Fund's portfolio securities. The cash and securities owned
by each other Fund are held by Investors Fiduciary Trust Company, 801
Pennsylvania, Kansas City, Missouri 64105, as Custodian, which takes no part in
the decisions relating to the purchase or sale of a Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for the Trust are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS. Ernst & Young LLP served as the independent auditor for
each Fund for the fiscal year ended March 31, 1999, and in that capacity
examines the annual financial statements of the Trust. KPMG LLP has been
approved as independent auditor for each Fund for the period ended June 30,
1999.
OTHER INFORMATION. The Trust is registered with the SEC as an open-end
management investment company. Such registration does not involve supervision of
the management or policies of the Trust by any governmental agency. The
Prospectus and this Statement of Additional Information omit certain of the
information contained in each Trust's Registration Statement filed with the SEC
and copies of this information may be obtained from the SEC upon payment of the
prescribed fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial 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. There are no financial
statements for the Money Market Fund at this time.
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PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Form of Certificate of Trust of Registrant (b)
(2) Form of Certificate of Amendment of Certificate of Trust (b)
(3) Form of Amended and Restated Declaration of Trust (b)
(4) Form of Establishment of Additional Series (b)
(5) Form of Establishment of Additional Series(b)
(6) Form of Amendment No. 2 to Amended and Restated Declaration
of Trust (b)
(7) Form of Amendment No. 3 to Amended and Restated Declaration
of Trust (b)
(8) Form of Amendment No. 4 to Amended and Restated Declaration
of Trust (b)
(9) Form of Amendment No. 5 to Amended and Restated Declaration
of Trust (b)
(10) Form of Amendment No. 6 to Amended and Restated Declaration
of Trust (b)
(11) Form of Amendment No. 7 to Amended and Restated Declaration
of Trust (b)
(12) Form of Amendment No. 8 to Amended and Restated Declaration
of Trust (b)
(13) Form of Amendment No. 9 to Amended and Restated Declaration
of Trust (b)
(14) Form of Amendment No. 10 to Amended and Restated Declaration
of Trust (a)
(15) Form of Amendment No. 11 to Amended and Restated Declaration
of Trust (c)
(16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust (c)
(17) Form of Amendment No. 13 to Amended and Restated Declaration
of Trust (b)
(18) Form of Amendment No. 14 to Amended and Restated Declaration
of Trust (d)
(19) Form of Amendment No. 15 to Amended and Restated Declaration
of Trust (e)
(20) Form of Amendment No. 16 to Amended and Restated Declaration
of Trust (h)
(21) Form of Amendment No. 17 to Amended and Restated Declaration
of Trust (h)
(22) Form of Amendment No. 18 to Amended and Restated Declaration
of Trust (h)
(23) Form of Amendment No. 19 to Amended and Restated Declaration
of Trust (j)
(24) Form of Amendment No. 20 to Amended and Restated Declaration
of Trust (j)
(25) Form of Amendment No. 21 to Amended and Restated Declaration
of Trust (k)
(26) Form of Certificate of Amendment to Certificate of Trust (m)
(27) Form of Amendment No. 22 to Amended and Restated Declaration
of Trust (m)
(28) Form of Amendment No. 23 to Amended and Restated Declaration
of Trust
(b) (1) Form of Amended Bylaws of Registrant (b)
C-1
<PAGE>
(2) Form of Amendment to Section 2.5 of Bylaws of Registrant (b)
(c) Not Applicable
(d) (1) Form of Investment Management Agreement between the Trust and
Pilgrim Investments, Inc.(m)
(2) Form of Portfolio Management Agreement between Pilgrim
Investments, Inc. and Nicholas-Applegate Capital Management
(m)
(3) Form of Amendment to Investment Management Agreement
relating to Money Market Fund
(e) (1) Form of Underwriting Agreement between the Trust and Pilgrim
Securities, Inc. (m)
(2) Form of Amendment to Underwriting Agreement relating to
Money Market Fund
(f) None.
(g) (1) Form of Custodian Agreement between Registrant and Brown
Brothers Harriman & Co. dated as of June 1, 1998. (k)
(2) Form of Amendment to Custodian Agreement between Registrant
and Brown Brothers Harriman & Co. (k) Form of Foreign
Custody Manager Delegation Agreement between Registrant and
Brown Brothers
(3) Harriman & Co. dated as of June 1, 1998 (k)
(4) Form of Novation Agreement to Custody Agreement with Brown
Brothers Harriman & Co.
(5) Form of Appendix C to Custody Agreement with Brown Brothers
Harriman & Co.
(6) Form of Novation Agreement to Foreign Custody Manager
Delegation Agreement with Brown Brothers Harriman & Co.
(7) Form of Appendix C to Foreign Custody Manager Delegation
Agreement with Brown Brothers Harriman & Co.
(8) Form of Custodian Agreement with Investors Fiduciary Trust
Company
(h) (1) Form of Administration Agreement
(2) Form of Agency Agreement
(3) Form of Shareholder Service Agreement
(4) Form of Expense Limitation Agreement
(5) Form of Recordkeeping Agreement
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors
(k) None.
(l) Form of Investment Letter of Initial Investors in Registrant
dated April 1, 1993 (b)
C-2
<PAGE>
(m) (1) Form of Amended and Restated Service and Distribution Plan
for Class A (m)
(2) Form of Amended and Restated Service and Distribution Plan
for Class B (m)
(3) Form of Amended and Restated Service and Distribution Plan
for Class C (m)
(4) Form of Amended and Restated Service Plan for Class Q (m)
(5) Form of Amendment to Amended and Restated Service and
Distribution Plan for Class B
(6) Form of Amendment to Amended and Restated Service and
Distribution Plan for Class C
(n) Financial Data Schedule
(o) (1) Form of Multiple Class Plan Pursuant to Rule 18f-3
- ----------
(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.
C-3
<PAGE>
(l) Filed as an exhibit to Registrant's Form N-14 Registration Statement on
December 15, 1997 and incorporated herein by reference.
(m) Filed as an exhibit to Post-Effective Amendment No. 67 to the Registrant's
Form N-A Registration Statement of March 25, 1999 and incorporated herein
by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Article 5.2 of the Amended and Restated Declaration of Trust provides
for the indemnification of Registrant's trustees, officers, employees and agents
against liabilities incurred by them in connection with the defense or
disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("disabling conduct").
Section 8 of Registrant's Administration Agreement provides for the
indemnification of Registrant's Administrator against all liabilities incurred
by it in performing its obligations under the agreement, except with respect to
matters involving its disabling conduct. Section 9 of Registrant's Distribution
Agreement provides for the indemnification of Registrant's Distributor against
all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its disabling conduct.
Section 4 of the Shareholder Service Agreement provides for the indemnification
of Registrant's Distributor against all liabilities incurred by it in performing
its obligations under the Agreement, except with respect to matters involving
its disabling conduct.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
C-4
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Investment Manager in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-48282) filed
under the Investment Advisers Act of 1940 and is incorporated herein by
reference thereto.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Pilgrim Investment Funds, Inc.; Pilgrim Government Securities
Income Fund, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim Prime Rate Trust
and Pilgrim Mutual Funds.
(b) Information as to the directors and officers of the Distributor,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Distributor in the last two years, is included in its application for
registration as a broker-dealer on Form BD (File No. 8-48020) filed under the
Securities Exchange Act of 1934 and is incorporated herein by reference thereto.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of (a) the Registrant, (b) Pilgrim
Group, Inc., (c) Pilgrim Investments, Inc., (d) the Portfolio Managers, (e) the
Custodians and (e) the Transfer Agent. The address of each is as follows:
(a) Pilgrim Advisory Funds, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(b) Pilgrim Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(c) Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(d) Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
C-5
<PAGE>
(e) Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105
(f) Brown Brothers Harriman
40 Water Street
Boston, Massachusetts 02109-3661
(g) Investors Fiduciary Trust Company
c/o DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141
ITEM 29. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes that if it is requested by the holders of at least
10% of its outstanding shares to call a meeting of shareholders for the purpose
of voting upon the question of removal of a trustee, it will do so and will
assist in communications with other shareholders as required by Section 16(c) of
the Investment Company Act of 1940.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix and State of
Arizona on the 24th day of May, 1999.
PILGRIM MUTUAL FUNDS
By: /s/ Robert W. Stallings
-------------------------------------
Robert W. Stallings
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Robert W. Stallings Trustee, President and May 24, 1999
- ----------------------------- Chief Executive Officer
Robert W. Stallings (Principal Executive Officer)
- ----------------------------- Trustee May 24, 1999
Mary A. Baldwin *
- ----------------------------- Trustee May 24, 1999
John P. Burke *
- ----------------------------- Trustee May 24, 1999
Al Burton *
- ----------------------------- Trustee May 24, 1999
Jock Patton *
C-7
<PAGE>
- ----------------------------- Principal Financial Officer May 24, 1999
Michael J. Roland *
* By: /s/ Robert W. Stallings
-----------------------------
Robert W. Stallings
Attorney-in-Fact**
** Powers of Attorney for the Trustees are filed herewith
C-8
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
Robert W. Stallings, James R. Reis, James M. Hennessy, Jeffrey S. Puretz,
Jeffrey L. Steele, and Karen L. Anderberg and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him in his name, place and stead, in any and all capacities, to sign the
Trust's registration statement and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ Al Burton
-----------------------------
Al Burton
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
Robert W. Stallings, James R. Reis, James M. Hennessy, Jeffrey S. Puretz,
Jeffrey L. Steele, and Karen L. Anderberg and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him in his name, place and stead, in any and all capacities, to sign the
Trust's registration statement and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ Walter E. Auch
-----------------------------
Walter E. Auch
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
Robert W. Stallings, James R. Reis, James M. Hennessy, Jeffrey S. Puretz,
Jeffrey L. Steele, and Karen L. Anderberg and each of them, her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for her in her name, place and stead, in any and all capacities, to sign the
Trust's registration statement and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as she might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ Mary A. Baldwin
-----------------------------
Mary A. Baldwin
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
James R. Reis, James M. Hennessy, Jeffrey S. Puretz, Jeffrey L. Steele, and
Karen L. Anderberg and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the Trust's registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents, or any of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ Robert W. Stallings
-----------------------------
Robert W. Stallings
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
Robert W. Stallings, James R. Reis, James M. Hennessy, Jeffrey S. Puretz,
Jeffrey L. Steele, and Karen L. Anderberg and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him in his name, place and stead, in any and all capacities, to sign the
Trust's registration statement and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ John P. Burke
-----------------------------
John P. Burke
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim Mutual Funds (the "Trust"), constitutes and appoints
Robert W. Stallings, James R. Reis, James M. Hennessy, Jeffrey S. Puretz,
Jeffrey L. Steele, and Karen L. Anderberg and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him in his name, place and stead, in any and all capacities, to sign the
Trust's registration statement and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May 24, 1999
/s/ Jock Patton
-----------------------------
Jock Patton
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the
duly elected Senior Vice President and Principal Financial Officer of Pilgrim
Mutual Funds (the "Trust"), constitutes and appoints Robert W. Stallings, James
M. Hennessy, Jeffrey S. Puretz, Jeffrey L. Steele, and Karen L. Anderberg and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution for him in his name, place and stead, in any
and all capacities, to sign the Trust's registration statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: May 24, 1999
/s/ Michael J. Roland
-----------------------------
Michael J. Roland
<PAGE>
EXHIBIT LIST
Exhibit Number Name of Exhibit
(a)(23) Form of Amendment No. 23 to Amended and Restated
Declaration of Trust
(d)(3) Form of Amendment to Investment Management Agreement
relating to Money Market Fund
(e)(2) Form of Amendment to Underwriting Agreement relating
to Money Market Fund
(g)(4) Form of Novation Agreement to Custody Agreement with
Brown Brothers Harriman & Co.
(g)(5) Form of Appendix C to Custody Agreement with Brown
Brothers Harriman & Co.
(g)(6) Form of Novation Agreement to Foreign Custody
Manager Delegation Agreement with Brown Brothers
Harriman & Co.
(g)(7) Form of Appendix C to Foreign Custody Manager
Delegation Agreement with Brown Brothers
Harriman & Co.
(g)(8) Form of Custodian Agreement with Investors Fiduciary
Trust Company
(h)(1) Form of Administration Agreement
(h)(2) Form of Agency Agreement
(h)(3) Form of Shareholder Service Agreement with Pilgrim
Group, Inc.
(h)(4) Form of Expense Limitation Agreement
(h)(5) Form of Recordkeeping Agreement
(i) Opinion and Consent of Dechert Price & Rhoads
(j) Consent of Independent Auditors
(m)(5) Form of Amendment to Amended and Restated Service
and Distribution Plan for Class B
(m)(6) Form of Amendment to Amended and Restated Service
and Distribution Plan for Class C
(n) (EDGAR Exhibit 27) Financial Data Schedules
(o) Form of Amended and Restated Multiple Class Plan
Adopted Pursuant to Rule 18f-3
AMENDMENT NO. 23 TO
AMENDED AND RESTATED DECLARATION OF TRUST OF
PILGRIM MUTUAL FUNDS
(FORMERLY NICHOLAS-APPLEGATE MUTUAL FUNDS)
THIS AMENDMENT NO. 23 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the ___ day of May, 1999, by
the undersigned, constituting a majority of the Trustees of the Pilgrim Mutual
Funds (the "Trust").
WHEREAS, the Board of Trustees has authorized the filing of an
amendment to create an additional series of Interests of the Trust to be known
as the Pilgrim Money Market Fund and the change of name of Pilgrim High Quality
Bond Fund to Pilgrim Strategic Income Fund, effective as of May 24, 1999;
NOW, THEREFORE, the Board of Trustees hereby amends the Declaration of
Trust as follows:
1. The second sentence of Section 8.8 of the Declaration of Trust is
hereby amended and restated to read in full as follows:
"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 twelve series, as follows:
Pilgrim MidCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim Worldwide Growth Fund
Pilgrim SmallCap Growth Fund
Pilgrim International SmallCap Growth Fund Pilgrim Money Market Fund
Pilgrim Emerging Countries Fund Pilgrim Strategic Income Fund Pilgrim
LargeCap Growth Fund Pilgrim International Core Growth Fund Pilgrim
High Yield Fund II"
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
- --------------------------------- ------------------------------------
Walter E. Auch Mary A. Baldwin
- --------------------------------- ------------------------------------
John P. Burke Al Burton
- --------------------------------- ------------------------------------
Jock Patton Robert W. Stallings
AMENDMENT NO. 1 TO INVESTMENT MANAGEMENT AGREEMENT
Amendment No. 1 to the Investment Management Agreement dated May __,
1999, between Pilgrim Mutual Funds, a Delaware business trust (the "Fund"), and
Pilgrim Investments, Inc., a Delaware corporation (the "Manager").
Pursuant to the terms of the Agreement, Schedule A of the Agreement is
hereby amended and restated to include the following information concerning the
addition of a new series, the Pilgrim Money Market Fund, to the Fund and the
name changes of Pilgrim High Quality Bond Fund, Pilgrim Small Cap Growth Fund,
Pilgrim Mid Cap Growth Fund and Pilgrim International Small Cap Growth Fund:
SERIES ANNUAL INVESTMENT MANAGEMENT FEE
------ --------------------------------
Pilgrim SmallCap Growth Fund 1.00% of the Series' average net assets
Pilgrim MidCap Growth Fund 0.75%of the first $500 million of the
Series' average net assets, 0.675% of the
net $500 million of average net assets,
and 0.65% of the average net assets in
excess of $1 billion
Pilgrim Convertible Fund 0.75% of the first $500 million of the
Series' average net assets, 0.675% of the
net $500 million of average net assets,
and 0.65% of the average net assets in
excess of $1 billion
Pilgrim Balanced Fund 0.75% of the first $500 million of the
Series' average net assets, 0.675% of the
net $500 million of average net assets,
and 0.65% of the average net assets in
excess of $1 billion
Pilgrim Strategic Income Fund 0.45% of the first $500 million of the
Series' average net assets, 0.40% of the
next $250 million of average net assets,
and 0.35% of the average net assets in
excess of $750 million
Pilgrim Emerging Countries Fund 1.25% of the Series' average net assets
Pilgrim Worldwide Growth Fund 1.00% of the first $500 million of the
Series' average net assets, 0.90% of the
next $500 million of average net assets,
and 0.85% of the average net assets in
excess of $1 billion
<PAGE>
Pilgrim International SmallCap 1.00% of the first $500 million of the
Growth Fund Series' average net assets, 0.90% of the
next $500 million of average net assets,
and 0.85% of the average net assets in
excess of $1 billion
Pilgrim International Core 1.00% of the first $500 million of the
Growth Fund Series' average net assets, 0.90% of the
next $500 million of average net assets,
and 0.85% of the average net assets in
excess of $1 billion
Pilgrim High Yield Fund II 0.60% of the Series' average net assets
Pilgrim Money Market Fund 0.50% of the Series' average net assets,
provided, however, that to the extent the
Pilgrim Money Market Fund invests
substantially all of its assets in
another investment company which pays
investment advisory fees, the investment
advisory fee shall be 0.15% of average
net assets
PILGRIM MUTUAL FUNDS
By
---------------------------------
Title
------------------------------
PILGRIM INVESTMENTS, INC.
By
---------------------------------
Title
------------------------------
Dated: May __, 1999
AMENDMENT NO. 1 TO UNDERWRITING AGREEMENT
Amendment No. 1 to the Underwriting Agreement dated May __, 1999,
between Pilgrim Mutual Funds, a Delaware business trust (the "Fund"), and
Pilgrim Securities, Inc., a Delaware corporation (the "Distributor").
(i) The first introductory paragraph of the Agreement is amended and
restated as follows to add the Pilgrim Money Market Fund, a new series of the
Fund, and to reflect certain name changes to the series of the Fund and the Fund
itself:
"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
SmallCap Growth Fund, Pilgrim Emerging Countries Fund, Pilgrim LargeCap
Growth Fund, Pilgrim MidCap Growth Fund, Pilgrim SmallCap Growth Fund,
Pilgrim Convertible Fund, Pilgrim Balanced Fund, Pilgrim Strategic
Income Fund and Pilgrim Money Market Fund. 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."
(ii) Section 5(b)(i) is amended and restated as follows to reflect the
12b-1 fee paid by Money Market Fund and the reduced fee paid by Pilgrim
Strategic Income Fund:
"(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 (0.50% per annum in the case of Pilgrim Strategic Income Fund)
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;
provided, however, that the Distribution Fee paid by the Pilgrim Money
Market Fund shall be reduced by any amounts received by you or your
affiliates from the investment adviser or distributor of the investment
company in which the Pilgrim Money Market Fund invests substantially
all of its assets."
<PAGE>
PILGRIM MUTUAL FUNDS
By
---------------------------------------
Title
------------------------------------
PILGRIM SECURITIES, INC.
By
---------------------------------------
Title
------------------------------------
Dated: May __, 1999
NOVATION AGREEMENT
Reference is hereby made to the Custodian Agreement currently in full
force and effect between Brown Brothers Harriman & Co., a limited partnership
organized under the laws of the State of New York (the "Custodian"), and the
Nicholas Applegate Mutual Funds, an investment company duly registered with the
United States Securities and Exchange Commission, executed by the parties on or
about June 1, 1998 (as amended)(the "Agreement").
WITNESSETH:
WHEREAS, pursuant to the terms and conditions of the Agreement the
Custodian provides certain custodial services to the Nicholas Applegate Mutual
Funds.
WHEREAS, the Custodian and the Nicholas Applegate Mutual Funds wish to
recognize and memorialize the legal name change from the Nicholas Applegate
Mutual Funds to "Pilgrim Mutual Funds".
NOW THEREFORE, the Custodian and the Pilgrim Mutual Funds hereby agree
by execution of this Novation Agreement that the Agreement shall be binding upon
the Custodian and the Pilgrim Mutual Funds. Accordingly, the Pilgrim Mutual
Funds shall be fully bound by the terms and conditions of the Agreement (as
amended) effective immediately upon execution of this Novation Agreement.
Brown Brothers Harriman & Co.
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
Pilgrim Mutual Funds
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
APPENDIX C
TO
THE CUSTODY AGREEMENT
BETWEEN
PILGRIM MUTUAL FUNDS
and
BROWN BROTHERS HARRIMAN & CO.
Dated as of _______________, 1999
The following is a list of Funds for which the Custodian shall serve under a
Custodian Agreement dated as of June 1, 1998 to provide custodial services to
the Funds (the "Agreement"):
Pilgrim Emerging Countries Fund
Pilgrim International Core Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim Worldwide Growth Fund
IN WITNESS WHEREOF, each of the parties hereto have caused this Appendix to be
executed in its name and on behalf of each such Fund.
Pilgrim Mutual Funds
on behalf of each Fund
listed above BROWN BROTHERS HARRIMAN & CO.
By: By:
---------------------------------- ----------------------------------
Title: Title:
------------------------------- -------------------------------
Date: Date:
-------------------------------- --------------------------------
NOVATION AGREEMENT
Reference is hereby made to the Foreign Custody Manager Delegation
Agreement currently in full force and effect between Brown Brothers Harriman &
Co., a limited partnership organized under the laws of the State of new York
(the "Delegate"), and the Nicholas Applegate Mutual Funds, an investment company
duly registered with the United States Securities and Exchange Commission,
executed by the parties on or about June 1, 1998 (the "Agreement").
WITNESSETH:
WHEREAS, pursuant to the terms and conditions of the Agreement the
Delegate provides certain foreign custody manager services to the Nicholas
Applegate Mutual Funds.
WHEREAS, the Delegate and the Nicholas Applegate Mutual Funds wish to
recognize and memorialize the legal name change from the Nicholas Applegate
Mutual Funds to "Pilgrim Mutual Funds."
NOW, THEREFORE, the Delegate and the Pilgrim Mutual Funds hereby agree
by execution of this Novation Agreement that the Agreement shall be binding upon
the Delegate and the Pilgrim Mutual Funds. Accordingly, the pilgrim Mutual Funds
shall be fully bound by the terms and conditions of the Agreement effective
immediately upon execution of this Novation Agreement.
Brown Brothers Harriman & Co.
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
Pilgrim Mutual Funds
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
APPENDIX "C"
TO
THE FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT
BETWEEN
PILGRIM MUTUAL FUNDS
and
BROWN BROTHERS HARRIMAN & CO.
Dated as of _____________, 1999
The following is a list of Funds for which the Delegate shall act as Foreign
Custody Manager pursuant a Foreign Custody Manager Delegation Agreement dated as
of June 1, 1998 (the "Agreement"):
Pilgrim Emerging Countries Fund
Pilgrim International Core Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim Worldwide Growth Fund
IN WITNESS WHEREOF, each of the parties hereto have caused this Appendix to be
executed in its name and on behalf of each such Fund.
Pilgrim Mutual Funds
on behalf of each Fund
listed above BROWN BROTHERS HARRIMAN & CO.
By: By:
---------------------------------- ----------------------------------
Title: Title:
------------------------------- -------------------------------
Date: Date:
-------------------------------- --------------------------------
CUSTODY AGREEMENT
THIS AGREEMENT is made effective the 24th day of May, 1999, by and
between INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the
laws of the state of Missouri, having its trust office located at 801
Pennsylvania Avenue, Kansas City, Missouri 64105 ("IFTC"), and PILGRIM MUTUAL
FUNDS, a Delaware trust, having its principal office and place of business at
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint IFTC as custodian of the assets of the
Fund's investment portfolio or portfolios (each a "Portfolio", and collectively
the "Portfolios"); and
WHEREAS, IFTC is willing to accept such appointment on the terms and
conditions hereinafter set forth;
NOW THEREFORE, for and in consideration of the mutual promises
contained herein, the parties hereto, intending to be legally bound, mutually
covenant and agree as follows:
1. APPOINTMENT OF CUSTODIAN AND AGENT. Fund hereby constitutes and appoints
IFTC as custodian of the investment securities, interests in loans and
other non-cash investment property, and monies at any time owned by each of
the Portfolios and delivered to IFTC as custodian hereunder ("Assets").
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to IFTC:
1. That it is a trust duly organized and existing and in good
standing under the laws of its state of organization, and that it
is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
2. That it has the requisite power and authority under applicable
law and its declaration of trust) to enter into this Agreement;
it has taken all requisite action necessary to appoint IFTC as
custodian for the Portfolios; this Agreement has been duly
executed and delivered by Fund; and this Agreement constitutes a
legal, valid and binding obligation of Fund, enforceable in
accordance with its terms.
B. IFTC hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in
good standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into and perform this
Agreement; this Agreement has been duly executed and delivered by
IFTC; and this Agreement constitutes a legal, valid and binding
obligation of IFTC, enforceable in accordance with its terms.
<PAGE>
3. DUTIES AND RESPONSIBILITIES OF THE PARTIES.
A. Delivery of Assets. Except as permitted by the 1940 Act, Fund will
deliver or cause to be delivered to IFTC on the effective date hereof,
or as soon thereafter as practicable, and from time to time
thereafter, all Assets acquired by, owned by or from time to time
coming into the possession of each of the Portfolios during the term
hereof. IFTC has no responsibility or liability whatsoever for or on
account of assets not so delivered.
B. Delivery of Accounts and Records. Fund will turn over or cause to be
turned over to IFTC all of each Portfolio's relevant accounts and
records needed by IFTC to perform its duties and responsibilities
hereunder fully and properly . IFTC may rely conclusively on the
completeness and correctness of such accounts and records.
C. Delivery of Assets to Third Parties. IFTC will receive delivery of and
keep safely the Assets ------------------------------------ of each
Portfolio segregated in a separate account. Upon delivery of any such
Assets to a subcustodian appointed pursuant hereto (hereinafter
referred to as "Subcustodian"), IFTC will create and maintain records
identifying such Assets as belonging to the applicable Portfolio. IFTC
is responsible for the safekeeping of the Assets only until they have
been transmitted to and received by other persons as permitted under
the terms hereof, except for Assets transmitted to Subcustodians, for
which IFTC remains responsible to the extent provided herein. IFTC may
participate directly or indirectly through a subcustodian in the
Depository Trust Company (DTC), Treasury/Federal Reserve Book Entry
System (Fed System), Participant Trust Company (PTC) or other
depository approved by Fund (as such entities are defined at 17 CFR
Section 270.17f-4(b)) (each a "Depository" and collectively the
"Depositories"). IFTC will be responsible to Fund for any loss, damage
or expense suffered or incurred by Fund resulting from the actions or
omissions of any Depository only to the same extent such Depository is
responsible to IFTC.
D. Registration. IFTC will at all times hold registered Assets in the
name of IFTC as custodian, the applicable Portfolio, or a nominee of
either of them, unless specifically directed by Instructions, as
hereinafter defined, to hold such registered Assets in so-called
"street name;" provided that, in any event, IFTC will hold all such
Assets in an account of IFTC as custodian containing only Assets of
the applicable Portfolio, or only assets held by IFTC as a fiduciary
or custodian for customers; and provided further, that IFTC's records
at all times will indicate the Portfolio or other customer for which
such Assets are held and the respective interests therein. If,
however, Fund directs IFTC to maintain Assets in "street name",
notwithstanding anything contained herein to the contrary, IFTC will
be obligated only to utilize its best efforts to timely collect income
due the Portfolio on such Assets and to notify the Portfolio of
relevant information, such as maturities and pendency of calls, and
2
<PAGE>
corporate actions including, without limitation, calls for redemption,
tender or exchange offers, declaration, record and payment dates and
amounts of any dividends or income, reorganization, recapitalization,
merger, consolidation, split-up of shares, change of par value, or
conversion ("Corporate Actions"). All Assets and the ownership thereof
by Portfolio will at all times be identifiable on the records of IFTC.
Fund agrees to hold IFTC and its nominee harmless for any liability as
a shareholder of record of securities held in custody.
E. Exchange. Upon receipt of Instructions, IFTC will exchange, or cause
to be exchanged, Assets held for the account of a Portfolio for other
Assets issued or paid in connection with any Corporate Action or
otherwise, and will deposit any such Assets in accordance with the
terms of any such Corporate Action. Without Instructions, IFTC is
authorized to exchange Assets in temporary form for Assets in
definitive form, to effect an exchange of shares when the par value of
stock is changed, and, upon receiving payment therefor, to surrender
bonds or other Assets at maturity or when advised of earlier call for
redemption, except that IFTC will receive Instruction prior to
surrendering any convertible security.
F. Purchases of Investments -- Other Than Options and Futures. On each
business day on which a Portfolio makes a purchase of Assets other
than options and futures, Fund will deliver to IFTC Instructions
specifying with respect to each such purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the Asset;
3. The number of shares and the principal amount purchased, and
accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes
and other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase;
8. The name of the person from whom or the broker or dealer through
whom the purchase was made; and
9. Whether the Asset is to be received in certificated form or via a
specified Depository.
<PAGE>
In accordance with such Instructions, IFTC will pay for out of monies
held for the purchasing Portfolio, but only insofar as such monies are
available for such purpose, and receive the Assets so purchased by or
for the account of such Portfolio, except that IFTC, or a
Subcustodian, may in its sole discretion advance funds to such
Portfolio which may result in an overdraft because the monies held on
behalf of such Portfolio are insufficient to pay the total amount
payable upon such purchase. Except as otherwise instructed by Fund,
IFTC will make such payment only upon receipt of Assets: (a) by IFTC;
(b) by a clearing corporation of a national exchange of which IFTC is
a member; or (c) by a Depository. Notwithstanding the foregoing, (i)
IFTC may release funds to a Depository prior to the receipt of advice
3
<PAGE>
from the Depository that the Assets underlying a repurchase agreement
have been transferred by book-entry into the account maintained with
such Depository by IFTC on behalf of its customers; provided that
IFTC's instructions to the Depository require that the Depository make
payment of such funds only upon transfer by book-entry of the Assets
underlying the repurchase agreement in such account; (ii) IFTC may
make payment for time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures
contracts or options, before receipt of an advice or confirmation
evidencing said deposit or entry into such transaction; and (iii) IFTC
may make, or cause a Subcustodian to make, payment for the purchase of
Assets the settlement of which occurs outside of the United States of
America in accordance with generally accepted local custom and market
practice.
G. Sales and Deliveries of Investments -- Other Than Options and Futures.
On each business day on which a Portfolio makes a sale of Assets other
than options and futures, Fund will deliver to IFTC Instructions
specifying with respect to each such sale:
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the Asset;
3. The number of shares and principal amount sold, and accrued
interest, if any;
4. The date on which the Assets sold were purchased or other
information identifying the Assets sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or
other expenses payable in connection with such sale;
8. The total amount to be received by the Portfolio upon such sale;
and
9. The name and address of the broker or dealer through whom or
person to whom the sale was made.
<PAGE>
IFTC will deliver or cause to be delivered the Assets thus designated
as sold for the account of the selling Portfolio as specified in the
Instructions. Except as otherwise instructed by Fund, IFTC will make
such delivery upon receipt of: (a) payment therefor in such form as is
satisfactory to IFTC; (b) credit to the account of IFTC with a
clearing corporation of a national securities exchange of which IFTC
is a member; or (c) credit to the account maintained by IFTC on behalf
of its customers with a Depository. Notwithstanding the foregoing: (i)
IFTC will deliver Assets held in physical form in accordance with
"street delivery custom" to a broker or its clearing agent; or (ii)
IFTC may make, or cause a Subcustodian to make, delivery of Assets the
settlement of which occurs outside of the United States of America
upon payment therefor in accordance with generally accepted local
custom and market practice.
H. Purchases or Sales of Options and Futures. On each business day on
which a Portfolio makes a purchase or sale of the options and/or
futures listed below, Fund will deliver to IFTC Instructions
specifying with respect to each such purchase or sale:
4
<PAGE>
1. If applicable, the name of the Portfolio making such purchase or
sale;
2. In the case of security options:
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring
or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the
sale or purchase was made.
3. In the case of options on indices:
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising, expiring
or closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom
the sale or purchase was made, or other applicable
settlement instructions.
4. In the case of security index futures contracts:
a. The last trading date specified in the contract and, when
available, the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
Instructions, and if not already in the possession of IFTC,
Fund will deliver a substantially complete and executed
custodial safekeeping account and procedural agreement,
incorporated herein by reference); and
f. The name and address of the futures commission merchant
through whom the sale or purchase was made, or other
applicable settlement instructions.
5
<PAGE>
5. In the case of options on index future contracts:
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening, exercising,
expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Assets Pledged or Loaned. If specifically allowed for in the
prospectus of a Portfolio, and subject to such additional terms
and conditions as IFTC may require:
1. Upon receipt of Instructions, IFTC will release or cause to
be released Assets to the designated pledgee by way of
pledge or hypothecation to secure any loan incurred by a
Portfolio; provided, however, that IFTC will release Assets
only upon payment to IFTC of the monies borrowed, except
that in cases where additional collateral is required to
secure a borrowing already made, further Assets may be
released or caused to be released for that purpose. Upon
receipt of Instructions, IFTC will pay, but only from funds
available for such purpose, any such loan upon redelivery to
it of the Assets pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan.
2. Upon receipt of Instructions, IFTC will release Assets to
the designated borrower; provided, however, that the Assets
will be released only upon deposit with IFTC of full cash
collateral as specified in such Instructions, and that the
lending Portfolio will retain the right to any dividends,
interest or distribution on such loaned Assets. Upon receipt
of Instructions and the loaned Assets, IFTC will release the
cash collateral to the borrower.
J. Routine Matters. IFTC will, in general, attend to all routine and
mechanical matters in connection with the sale, exchange,
substitution, purchase, transfer, or other dealings with the
Assets except as may be otherwise provided herein or upon
Instruction from Fund.
K. Deposit Accounts. IFTC will open and maintain one or more special
purpose deposit accounts for each Portfolio in the name of IFTC
in such banks or trust companies (including, without limitation,
affiliates of IFTC) as may be designated by it or Fund in writing
("Accounts"), subject only to draft or order by IFTC upon receipt
of Instructions. IFTC will deposit all monies received by IFTC
from or for the account of a Portfolio in an Account maintained
for such Portfolio. Subject to Section 5.L hereof, IFTC agrees:
6
<PAGE>
1. To make Fed Funds available to the applicable Portfolio at
9:00 a.m., Kansas City time, on the second business day
after deposit of any check into an Account, in the amount of
the check;
2. To make funds available immediately upon a deposit made by
Federal Reserve wire; and
3. To make funds available on the next business day after
deposit of ACH wires.
L. Income and Other Payments. IFTC will:
1. Collect, claim and receive and deposit for the account of
the applicable Portfolio all income (including income from
the Accounts) and other payments which become due and
payable on or after the effective date hereof with respect
to the Assets, and credit the account of such Portfolio in
accordance with the schedule attached hereto as Exhibit A.
If, for any reason, a Portfolio is credited with income that
is not subsequently collected, IFTC may reverse that
credited amount. If monies are collected after such
reversal, IFTC will credit the Portfolio in that amount;
2. Execute ownership and other certificates and affidavits for
all federal, state and local tax purposes in connection with
the collection of bond and note coupons; and
3. Take such other action as may be necessary or proper in
connection with (a) the collection, receipt and deposit of
such income and other payments, including but not limited to
the presentation for payment of all coupons and other income
items requiring presentation; and all other Assets which may
mature or be called, redeemed, retired or otherwise become
payable and regarding which IFTC has actual knowledge, or
should reasonably be expected to have knowledge; and (b) the
endorsement for collection, in the name of Fund or a
Portfolio, of all checks, drafts or other negotiable
instruments.
IFTC, however, will not be required to institute suit or take other
extraordinary action to enforce collection except upon receipt of
Instructions and upon being indemnified to its satisfaction against
the costs and expenses of such suit or other actions. IFTC will
receive, claim and collect all stock dividends, rights and other
similar items and will deal with the same pursuant to Instructions.
M. Proxies and Notices. IFTC will promptly deliver or mail (or have
delivered or mailed) to Fund all proxies properly signed, all notices
of meetings, all proxy statements and other notices, requests or
announcements affecting or relating to Assets and will, upon receipt
of Instructions, execute and deliver or mail (or cause its nominee to
execute and deliver or mail) such proxies or other authorizations as
may be required. Except as provided herein or pursuant to Instructions
7
<PAGE>
hereafter received by IFTC, neither it nor its nominee will exercise
any power inherent in any such Assets, including any power to vote the
same, or execute any proxy, power of attorney, or other similar
instrument voting any of such Assets, or give any consent, approval or
waiver with respect thereto, or take any other similar action.
N. Disbursements. IFTC will pay or cause to be paid, insofar as funds are
available for the purpose, bills, statements and other obligations of
each Portfolio (including but not limited to obligations in connection
with the conversion, exchange or surrender of Assets, interest
charges, dividend disbursements, taxes, management fees, custodian
fees, legal fees, auditors' fees, transfer agents' fees, brokerage
commissions, compensation to personnel, and other operating expenses
of such Portfolio) pursuant to Instructions setting forth the name of
the person to whom payment is to be made, and the amount and purpose
of the payment.
O. Daily Statement of Accounts. IFTC will, within a reasonable time,
render to Fund a detailed statement of the amounts received or paid
and of Assets received or delivered for the account of each Portfolio
during each business day. IFTC will maintain such books and records as
are necessary to enable it to render, from time to time upon request
by Fund, a detailed statement of the Assets. IFTC will permit, and
upon Instruction will cause any Subcustodian to permit, such persons
as are authorized by Fund, including Fund's independent public
accountants, reasonable access to such records or will provide
reasonable confirmation of the contents of such records, and if
demanded, IFTC will permit, and will cause any Subcustodian to permit,
federal and state regulatory agencies to examine the Assets, books and
records of the Portfolios.
P. Appointment of Subcustodians. Notwithstanding any other provisions
hereof:
1. All or any of the Assets may be held in IFTC's own custody or in
the custody of one or more other banks or trust companies
(including, without limitation, affiliates of IFTC) acting as
Subcustodians as may be selected by IFTC. Any such Subcustodian
selected by IFTC must have the qualifications required for a
custodian under the 1940 Act. IFTC will be responsible to the
applicable Portfolio for any loss, damage or expense suffered or
incurred by such Portfolio resulting from the actions or
omissions of any Subcustodians selected and appointed by IFTC
(except Subcustodians appointed at the request of Fund and as
provided in Subsection 2 below) to the same extent IFTC would be
responsible to Fund hereunder if it committed the act or omission
itself.
2. Upon request of Fund, IFTC will contract with other Subcustodians
reasonably acceptable to IFTC for purposes of (a) effecting
third-party repurchase transactions with banks, brokers, dealers,
or other entities through the use of a common custodian or
subcustodian, or (b) providing depository and clearing agency
services with respect to certain variable rate demand note
securities, or (c) for other reasonable purposes specified by
Fund; provided, however, that IFTC will be responsible to Fund
for any loss, damage or expense suffered or incurred by Fund
8
<PAGE>
resulting from the actions or omissions of any such Subcustodian
only to the same extent such Subcustodian is responsible to IFTC.
Fund may review IFTC's contracts with such Subcustodians.
Q. Foreign Custody Manager.
1. Delegation to IFTC as FCM.The Fund, pursuant to resolution
adopted by its Board of Trustees or Directors (the "Board"),
hereby delegates to IFTC, subject to Section (b) of Rule 17f-5,
the responsibilities set forth in this Section Q with respect to
Foreign Assets held outside the United States, and IFTC hereby
accepts such delegation, as Foreign Custody Manager ("FCM") of
each Portfolio. It is understood and agreed that IFTC will
sub-contract the performance of its responsibilities hereunder
with State Street Bank & Trust Company. IFTC will be responsible
to the applicable Portfolio for any loss, damage or expense
suffered or incurred by such Portfolio resulting from the actions
or omissions of State Street Bank & Trust Company to the same
extent IFTC would be responsible to Fund hereunder if it
committed the act or omission itself. References herein to "FCM"
shall include IFTC and State Street Bank & Trust Company.
2. Definitions. Capitalized terms in this Section Q have the
following meanings:
"Country Risk" means all factors reasonably related to the
systemic risk of holding Foreign Assets in a particular country
including, but not limited to, such country's political
environment; economic and financial infrastructure (including
financial institutions such as any Mandatory Securities
Depositories operating in the country); prevailing or developing
custody and settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held
in custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5, except that the term does not include
Mandatory Securities Depositories.
"Foreign Assets" means any of the Portfolios' investments
(including foreign currencies) for which the primary market is
outside the United States and such cash and cash equivalents in
amounts deemed by Fund to be reasonably necessary to effect the
Portfolios' transactions in such investments.
"Foreign Custody Manager" or "FCM" has the meaning set forth in
section (a)(2) of Rule 17f-5.
"Mandatory Securities Depository" means a foreign securities
depository or clearing agency that, either as a legal or
practical matter, must be used if the Fund determines to place
Foreign Assets in a country outside the United States (i) because
9
<PAGE>
required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing
agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or clearing
agency is not consistent with prevailing or developing custodial
or market practices.
3. Countries Covered. The FCM is responsible for performing the
delegated responsibilities defined below only with respect to the
countries and custody arrangements for each such country listed
on Exhibit C hereto , which may be amended from time to time by
the FCM. The FCM will list on Exhibit C the Eligible Foreign
Custodians selected by the FCM to maintain the assets of each
Portfolio. Mandatory Securities Depositories are listed on
Exhibit D hereto, which Exhibit D may be amended from time to
time by the FCM. The FCM will provide amended versions of
Exhibits C and D in accordance with subsection 7 of this Section
Q.
Upon the receipt by the FCM of Instructions to open an account,
or to place or maintain Foreign Assets, in a country listed on
Exhibit C, and the fulfillment by the Fund of the applicable
account opening requirements for such country, the FCM is deemed
to have been delegated by the Board responsibility as FCM with
respect to that country and to have accepted such delegation.
Following the receipt of Instructions directing the FCM to close
the account of a Portfolio with the Eligible Foreign Custodian
selected by the FCM in a designated country, the delegation by
the Board to IFTC as FCM for that country is deemed to have been
withdrawn and IFTC will immediately cease to be the FCM of the
Portfolio with respect to that country.
The FCM may withdraw its acceptance of delegated responsibilities
with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties
agree in writing) after receipt of any such notice by the Fund,
IFTC will have no further responsibility as FCM to a Portfolio
with respect to the country as to which IFTC's acceptance of
delegation is withdrawn.
4. Scope of Delegated Responsibilities.
a. Selection of Eligible Foreign Custodians. Subject to the
provisions of this Section Q, the FCM may place and maintain
the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the FCM in each country listed on
Exhibit C, as amended from time to time.
In performing its delegated responsibilities as FCM to place
or maintain Foreign Assets with an Eligible Foreign
Custodian, the FCM will determine that the Foreign Assets
will be subject to reasonable care, based on the standards
applicable to custodians in the country in which the Foreign
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Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of
such assets, including, without limitation, those set forth
in Rule 17f-5(c)(1)(i) through (iv).
b. Contracts With Eligible Foreign Custodians. The FCM will
determine that the contract (or the rules or established
practices or procedures in the case of an Eligible Foreign
Custodian that is a foreign securities depository or
clearing agency) governing the foreign custody arrangements
with each Eligible Foreign Custodian selected by the FCM
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
applicable to custodians in the particular country. Each
such contract will include the provisions set forth in Rule
17f-5(c)(2)(I)(A) through (F), or, in lieu of any or all of
the provisions set forth in said (A) through (F), such other
provisions that the FCM determines will provide, in their
entirety, the same or greater level of care and protection
for the Foreign Assets as the provisions set forth in said
(A) through (F) in their entirety.
c. Monitoring. In each case in which the FCM maintains Foreign
Assets with an Eligible Foreign Custodian selected by the
FCM, the FCM will establish a system to monitor (a) the
appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (b) the contract governing
the custody arrangements established by the FCM with the
Eligible Foreign Custodian. In the event the FCM determines
that the custody arrangements with an Eligible Foreign
Custodian it has selected are no longer appropriate, the FCM
will notify the Board in accordance with subsection 7 of
this Section Q.
5. Guidelines for the Exercise of Delegated Authority. For purposes
of this Section Q, the Board will be solely responsible for
considering and determining to accept such Country Risk as is
incurred by placing and maintaining the Foreign Assets in each
country for which IFTC is serving as FCM of a Portfolio, and the
Board will be solely responsible for monitoring on a continuing
basis such Country Risk to the extent that the Board considers
necessary or appropriate. The Fund, on behalf of the Portfolios,
and IFTC each expressly acknowledge that the FCM will not be
delegated any responsibilities under this Section Q with respect
to Mandatory Securities Depositories.
6. Standard of Care as FCM of a Portfolio. In performing the
responsibilities delegated to it, the FCM agrees to exercise
reasonable care, prudence and diligence such as a person having
responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would
exercise.
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7. Reporting Requirements. The FCM will report the withdrawal of the
Foreign Assets from an Eligible Foreign Custodian and the
placement of such Foreign Assets with another Eligible Foreign
Custodian by providing to the Board amended Exhibits C and D at
the end of the calendar quarter in which an amendment to either
Schedule has occurred. The FCM will make written reports
notifying the Board of any other material change in the foreign
custody arrangements of a Portfolio described in this Section Q
after the occurrence of the material change.
8. Representations with Respect to Rule 17f-5. The FCM represents to
the Fund that it is a U.S. Bank as defined in section (a)(7) of
Rule 17f-5.
The Fund represents to IFTC that the Board has determined that it
is reasonable for the Board to rely on IFTC and State Street Bank
& Trust Company to perform the responsibilities delegated
pursuant to this Contract to IFTC and State Street Bank & Trust
Company as the FCM of each Portfolio and that IFTC has been
granted the authority by Fund to delegate to State Street Bank &
Trust Company the FCM functions to which IFTC has been appointed
by Fund.
9. Effective Date and Termination of IFTC as FCM. The Board's
delegation to IFTC as FCM of a Portfolio will be effective as of
the date hereof and will remain in effect until terminated at any
time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become
effective thirty days after receipt by the non-terminating party
of such notice. The provisions of subsection 3 of this Section Q
govern the delegation to and termination of IFTC as FCM of the
Fund with respect to designated countries.
R. Accounts and Records Property of Fund. IFTC acknowledges that all
of the accounts and records maintained by IFTC pursuant hereto
are the property of Fund, and will be made available to Fund for
inspection or reproduction within a reasonable period of time,
upon demand. IFTC will assist Fund's independent auditors, or
upon the prior written approval of Fund, or upon demand, any
regulatory body, in any requested review of Fund's accounts and
records, provided that Fund will reimburse IFTC for all expenses
and employee time invested in any such review outside of routine
and normal periodic reviews. Upon receipt from Fund of the
necessary information or instructions, IFTC will supply
information from the books and records it maintains for Fund that
Fund may reasonably request for tax returns, questionnaires,
periodic reports to shareholders and such other reports and
information requests as Fund and IFTC may agree upon from time to
time.
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S. Adoption of Procedures. IFTC and Fund hereby adopt the Funds
Transfer Operating Guidelines attached hereto as Exhibit B. IFTC
and Fund may from time to time adopt such additional procedures
as they agree upon, and IFTC may conclusively assume that no
procedure approved or directed by Fund, Fund's or Portfolio's
accountants or other advisors conflicts with or violates any
requirements of the prospectus, declaration of trust, any
applicable law, rule or regulation, or any order, decree or
agreement by which Fund may be bound. Fund will be responsible
for notifying IFTC of any changes in statutes, regulations,
rules, requirements or policies which may impact IFTC's
responsibilities or procedures under this Agreement.
T. Advances. Fund will pay on demand any advance of cash or
securities made by IFTC or any Subcustodian, in its sole
discretion, for any purpose (including but not limited to
securities settlements, purchase or sale of foreign exchange or
foreign exchange contracts and assumed settlement) for the
benefit of any Portfolio. Any such cash advance will be subject
to an overdraft charge at the rate set forth in the then-current
fee schedule from the date advanced until the date repaid. As
security for each such advance, Fund hereby grants IFTC and such
Subcustodian a lien on and security interest in all Assets at any
time held for the account of the applicable Portfolio, including
without limitation all Assets acquired with the amount advanced.
Should Fund fail to promptly repay the advance, IFTC and such
Subcustodian may utilize available cash and dispose of such
Portfolio's Assets pursuant to applicable law to the extent
necessary to obtain reimbursement of the amount advanced and any
related overdraft charges.
U. Exercise of Rights; Tender Offers. Upon receipt of Instructions,
IFTC will: (1) deliver warrants, puts, calls, rights or similar
securities to the issuer or trustee thereof, or to the agent of
such issuer or trustee, for the purpose of exercise or sale,
provided that the new Assets, if any, are to be delivered to
IFTC; and (2) deposit securities upon invitations for tenders
thereof, provided that the consideration for such securities is
to be paid or delivered to IFTC or the tendered securities are to
be returned to IFTC.
V. Fund Shares.
1. Fund will deliver to IFTC Instructions with respect to the
declaration and payment of any dividend or other
distribution on the shares of capital stock of a Portfolio
("Fund Shares") by a Portfolio. On the date specified in
such Instruction, IFTC will pay out of the monies held for
the account of the Portfolio, insofar as it is available for
such purposes, and credit to the account of the Dividend
Disbursing Agent for the Portfolio, the amount specified in
such Instructions.
2. Whenever Fund Shares are repurchased or redeemed by a
Portfolio, Portfolio or its agent will give IFTC
Instructions regarding the aggregate dollar amount to be
paid for such shares. Upon receipt of such Instruction, IFTC
will charge such aggregate dollar amount to the account of
the Portfolio and either deposit the same in the account
maintained for the purpose of paying for the repurchase or
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redemption of Fund Shares or deliver the same in accordance
with such Instruction. IFTC has no duty or responsibility to
determine that Fund Shares have been removed from the proper
shareholder accounts or that the proper number of Fund
Shares have been canceled and removed from the shareholder
records.
3. Whenever Fund Shares are purchased from Fund, Fund will
deposit or cause to be deposited with IFTC the amount
received for such shares. IFTC has no duty or responsibility
to determine that Fund Shares purchased from Fund have been
added to the proper shareholder account or that the proper
number of such shares have been added to the shareholder
records.
4. INSTRUCTIONS.
A. The term "Instructions", as used herein, means written (including
telecopied, telexed, or electronically transmitted) or oral
instructions which IFTC reasonably believes were given by a designated
representative of Fund. Fund will deliver to IFTC, prior to delivery
of any Assets to IFTC and thereafter from time to time as changes
therein are necessary, written Instructions naming one or more
designated representatives to give Instructions in the name and on
behalf of Fund, which Instructions may be received and accepted by
IFTC as conclusive evidence of the authority of any designated
representative to act for Fund and may be considered to be in full
force and effect until receipt by IFTC of notice to the contrary.
Unless such written Instructions delegating authority to any person to
give Instructions specifically limit such authority to specific
matters or require that the approval of anyone else will first have
been obtained, IFTC will be under no obligation to inquire into the
right of such person, acting alone, to give any Instructions
whatsoever. If Fund fails to provide IFTC any such Instructions naming
designated representatives, any Instructions received by IFTC from a
person reasonably believed to be an appropriate representative of Fund
will constitute valid and proper Instructions hereunder. The term
"designated representative" may include Fund's or a Portfolio's
employees and agents, including investment managers and their
employees.
B. No later than the next business day immediately following each oral
Instruction, Fund will send IFTC written confirmation of such oral
Instruction. At IFTC's sole discretion, IFTC may record on tape, or
otherwise, any oral Instruction whether given in person or via
telephone, each such recording identifying the date and the time of
the beginning and ending of such oral Instruction.
C. Fund will provide, upon IFTC's request a certificate signed by an
officer or designated representative of Fund, as conclusive proof of
any fact or matter required to be ascertained from Fund hereunder.
Fund will also provide IFTC Instructions with respect to any matter
concerning this Agreement requested by IFTC. If IFTC reasonably
believes that it could not prudently act according to the
Instructions, or the instruction or advice of Fund's or a Portfolio's
accountants or counsel, it may in its discretion, with notice to Fund,
not act according to such Instructions.
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<PAGE>
5. LIMITATION OF LIABILITY OF IFTC. IFTC is not responsible or liable for, and
Fund will indemnify and hold IFTC harmless from and against, any and all
costs, expenses, losses, damages, charges, counsel fees (including, without
limitation, disbursements and the allocable cost of in-house counsel),
payments and liabilities which may be asserted against or incurred by IFTC
or for which IFTC may be held to be liable, arising out of or attributable
to:
A. IFTC's action or failure to act pursuant hereto; provided that IFTC
has acted in good faith and with reasonable care; and provided
further, that, in no event is IFTC liable for consequential, special,
or punitive damages;
B. IFTC's payment of money as requested by Fund, or the taking of any
action which might make it or its nominee liable for payment of monies
or in any other way; provided, however, that nothing herein obligates
IFTC to take any such action or expend its own monies except in its
sole discretion;
C. IFTC's action or failure to act hereunder upon any Instructions,
advice, notice, request, consent, certificate or other instrument or
paper appearing to it to be genuine and to have been properly
executed, including any Instruction, communications, data or other
information received by IFTC by means of the Systems, as hereinafter
defined, or any electronic system of communication;
D. IFTC's action or failure to act in good faith reliance on the advice
or opinion of counsel for Fund or of its own counsel with respect to
questions or matters of law, which advice or opinion may be obtained
by IFTC at the expense of Fund, or on the Instruction, advice or
statements of any officer or employee of Fund, or Fund's accountants
or other authorized individuals, and other persons believed by it in
good faith to be expert in matters upon which they are consulted;
E. The purchase or sale of any securities or foreign currency positions.
Without limiting the generality of the foregoing, IFTC is under no
duty or obligation to inquire into:
1. The validity of the issue of any securities purchased by or for
any Portfolio, or the legality of the purchase thereof or of
foreign currency positions, or evidence of ownership required by
Fund to be received by IFTC, or the propriety of the decision to
purchase or the amount paid therefor;
2. The legality of the sale of any securities or foreign currency
positions by or for any Portfolio, or the propriety of the amount
for which the same are sold; or
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor, the legality
of the repurchase or redemption of any Fund Shares, or the
propriety of the amount to be paid therefor, or the legality of
the declaration of any dividend by Fund, or the legality of the
issue of any Fund Shares in payment of any stock dividend.
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<PAGE>
F. Any error, omission, inaccuracy or other deficiency in any Portfolio's
accounts and records or other information provided to IFTC by or on
behalf of a Portfolio, or the failure of Fund to provide, or provide
in a timely manner, any accounts, records, or information needed by
IFTC to perform its duties hereunder;
G. Fund's refusal or failure to comply with the terms hereof (including
without limitation Fund's failure to pay or reimburse IFTC under
Section 5 hereof), Fund's negligence or willful misconduct, or the
failure of any representation or warranty of Fund hereunder to be and
remain true and correct in all respects at all times;
H. The use or misuse, whether authorized or unauthorized, of the Systems
or any electronic system of communication used hereunder, by Fund or
by any person who acquires access to the Systems or such other systems
through the terminal device, passwords, access instructions or other
means of access to such Systems or such other system which are
utilized by, assigned to or otherwise made available to Fund, except
to the extent attributable to any negligence or willful misconduct by
IFTC;
I. Any money represented by any check, draft, wire transfer,
clearinghouse funds, uncollected funds, or instrument for the payment
of money to be received by IFTC on behalf of a Portfolio until
actually received; provided, however, that IFTC will advise Fund
promptly if it fails to receive any such money in the ordinary course
of business and will cooperate with Fund toward the end that such
money is received;
J. Except as provided in Section 3.P hereof, loss occasioned by the acts,
omissions, defaults or insolvency of any broker, bank, trust company,
securities system or any other person with whom IFTC may deal; and
K. The failure or delay in performance of its obligations hereunder, or
those of any entity for which it is responsible hereunder, arising out
of or caused, directly or indirectly, by circumstances beyond the
affected entity's reasonable control, including, without limitation:
any interruption, loss or malfunction of any utility, transportation,
computer (hardware or software) or communication service; inability to
obtain labor, material, equipment or transportation, or a delay in
mails; governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes,
freezes, floods, fires, tornadoes, acts of God or public enemy,
revolutions, or insurrection.
6. COMPENSATION. In consideration for its services hereunder, Fund will pay to
IFTC the compensation set forth in a separate fee schedule, incorporated
herein by reference, to be agreed to by Fund and IFTC from time to time,
and, upon demand, reimbursement for IFTC's cash disbursements and
reasonable out-of-pocket costs and expenses, including attorney's fees and
disbursements, incurred by IFTC in connection with the performance of
services hereunder. IFTC may charge such compensation against monies held
by it for the account of the Portfolios. IFTC will also be entitled to
charge against any monies held by it for the account of the Portfolios the
amount of any loss, damage, liability, advance, overdraft or expense for
which it is entitled to reimbursement from Fund, including but not limited
to fees and expenses due to IFTC for other services provided to Fund by
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<PAGE>
IFTC. IFTC will be entitled to reimbursement by Fund for the losses,
damages, liabilities, advances, overdrafts and expenses of Subcustodians
only to the extent that (a) IFTC would have been entitled to reimbursement
hereunder if it had incurred the same itself directly, and (b) IFTC is
obligated to reimburse the Subcustodian therefor.
7. TERM AND TERMINATION. The initial term of this Agreement is for a period of
one (1) year. Thereafter, either Fund or IFTC may terminate this Agreement
by notice in writing, delivered or mailed, postage prepaid, to the other
party and received not less than ninety (90) days prior to the date upon
which such termination will take effect. Upon termination hereof:
A. Fund will pay IFTC its fees and compensation due hereunder and its
reimbursable disbursements, costs and expenses paid or incurred to
such date;
B. Fund will designate a successor custodian by Instruction to IFTC by
the termination date. In the event no such Instruction has been
delivered to IFTC on or before the date when such termination becomes
effective, then IFTC may, at its option, (i) choose as successor
custodian a bank or trust company meeting the qualifications for
custodian set forth in the 1940 Act and having not less than Two
Million Dollars ($2,000,000) aggregate capital, surplus and undivided
profits, as shown by its last published report, or (ii) apply to a
court of competent jurisdiction for the appointment of a successor or
other proper relief, or take any other lawful action under the
circumstances; provided, however, that Fund will reimburse IFTC for
its costs and expenses, including reasonable attorney's fees, incurred
in connection therewith; and
C. IFTC will, upon payment of all sums due to IFTC from Fund hereunder or
otherwise, deliver all Assets, duly endorsed and in form for transfer,
to the successor custodian, or as specified by the court, at IFTC's
office. IFTC will co-operate in effecting changes in book-entries at
all Depositories. Upon delivery to a successor or as specified by the
court, IFTC will have no further obligations or liabilities hereunder.
Thereafter such successor will be the successor hereunder and will be
entitled to reasonable compensation for its services.
In the event that Assets remain in the possession of IFTC after the
date of termination hereof for any reason other than IFTC's failure to
deliver the same, IFTC is entitled to compensation as provided in the
then-current fee schedule for its services during such period, and the
provisions hereof relating to the duties and obligations of IFTC will
remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at the address set forth above, or at such other address as Fund may
have designated to IFTC in writing, will be deemed to have been properly
given to Fund hereunder. Notices, requests, Instructions and other writings
addressed to IFTC at the address set forth above, Attention: Custody
Department, or to such other address as it may have designated to Fund in
writing, will be deemed to have been properly given to IFTC hereunder.
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9. THE SYSTEMS; CONFIDENTIALITY.
A. If IFTC provides Fund direct access to the computerized investment
portfolio custody systems used by IFTC ("Systems") or if IFTC and Fund
agree to utilize any electronic system of communication, Fund agrees
to implement and enforce appropriate security policies and procedures
to prevent unauthorized or improper access to or use of the Systems or
such other system.
B. Fund will preserve the confidentiality of the Systems and the tapes,
books, reference manuals, instructions, records, programs,
documentation and information of, and other materials relevant to, the
Systems and the business of IFTC or its affiliates ("Confidential
Information"). Fund agrees that it will not voluntarily disclose any
such Confidential Information to any other person other than its own
employees who reasonably have a need to know such information pursuant
hereto. Fund will return all such Confidential Information to IFTC
upon termination or expiration hereof.
C. Fund has been informed that the Systems are licensed for use by IFTC
and its affiliates from one or more third parties ("Licensors"), and
Fund acknowledges that IFTC and Licensors have proprietary rights in
and to the Systems and all other IFTC or Licensor programs, code,
techniques, know-how, data bases, supporting documentation, data
formats, and procedures, including without limitation any changes or
modifications made at the request or expense or both of Fund
(collectively, the "Protected Information"). Fund acknowledges that
the Protected Information constitutes confidential material and trade
secrets of IFTC and Licensors. Fund will preserve the confidentiality
of the Protected Information, and Fund hereby acknowledges that any
unauthorized use, misuse, disclosure or taking of Protected
Information, residing or existing internal or external to a computer,
computer system, or computer network, or the knowing and unauthorized
accessing or causing to be accessed of any computer, computer system,
or computer network, may be subject to civil liabilities and criminal
penalties under applicable law. Fund will so inform employees and
agents who have access to the Protected Information or to any computer
equipment capable of accessing the same. Licensors are intended to be
and are third party beneficiaries of Fund's obligations and
undertakings contained in this Section.
D. Fund hereby represents and warrants to IFTC that it has determined to
its satisfaction that the Systems are appropriate and suitable for its
use. THE SYSTEMS ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. IFTC
EXPRESSLY DISCLAIMS ALL WARRANTIES INCLUDING, BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, EXCEPT THOSE WARRANTIES STATED EXPRESSLY HEREIN.
10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio, the
following provisions apply:
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A. Each Portfolio will be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered hereby,
every reference herein to Fund is deemed to relate solely to the
particular Portfolio to which such transaction relates. Under no
circumstances will the rights, obligations or remedies with respect to
a particular Portfolio constitute a right, obligation or remedy
applicable to any other Portfolio. The use of this single document to
memorialize the separate agreement as to each Portfolio is understood
to be for clerical convenience only and will not constitute any basis
for joining the Portfolios for any reason.
B. Fund may appoint IFTC as its custodian for additional Portfolios from
time to time by written notice, provided that IFTC consents to such
addition. Rates or charges for each additional Portfolio will be as
agreed upon by IFTC and Fund in writing.
11. MISCELLANEOUS.
A. This Agreement will be construed according to, and the rights and
liabilities of the parties hereto will be governed by, the laws of the
State of Missouri, without reference to the choice of laws principles
thereof.
B. All terms and provisions hereof will be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9 hereof are intended to and
will continue after and survive the expiration, termination or
cancellation hereof.
D. No provisions hereof may be amended or modified in any manner except
by a written agreement properly authorized and executed by each party
hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions hereof or to enforce any rights resulting from any
breach of any of the terms or conditions hereof, including the payment
of damages, will not be construed as a continuing or permanent waiver
of any such terms, conditions, rights or privileges, but the same will
continue and remain in full force and effect as if no such forbearance
or waiver had occurred. No waiver, release or discharge of any party's
rights hereunder will be effective unless contained in a written
instrument signed by the party sought to be charged.
F. The captions herein are included for convenience of reference only,
and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which is deemed an original but all of which together constitute one
and the same instrument.
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H. If any provision hereof is determined to be invalid, illegal, in
conflict with any law or otherwise unenforceable, the remaining
provisions hereof will be considered severable and will not be
affected thereby, and every remaining provision hereof will remain in
full force and effect and will remain enforceable to the fullest
extent permitted by applicable law.
I. The benefits of this Agreement may not be assigned by either party nor
may either party delegate all or a portion of its duties hereunder
without the prior written consent of the other party. Notwithstanding
the foregoing, Fund agrees that IFTC may delegate all or a portion of
its duties to an affiliate of IFTC, provided that such delegation will
not reduce the obligations of IFTC under this Agreement.
J. Neither the execution nor performance hereof will be deemed to create
a partnership or joint venture by and between IFTC and Fund or any
Portfolio.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by either party hereunder will not
affect any rights or obligations of the other party hereunder.
L. Notice is hereby given that a copy of Fund's Trust Agreement and all
amendments thereto is on file with the Secretary of State of the state
of its organization; that this Agreement has been executed on behalf
of Fund by the undersigned duly authorized representative of Fund in
his/her capacity as such and not individually; and that the
obligations of this Agreement are binding only upon the assets and
property of Fund and not upon any trustee, officer of shareholder of
Fund individually.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY PILGRIM MUTUAL FUNDS
By: By:
------------------------- --------------------------
Title: Title:
---------------------- -----------------------
20
ADMINSTRATION AGREEMENT
AGREEMENT made this day of May, 1999 between Pilgrim Mutual Funds (the
"Trust"), a Delaware business trust, and Pilgrim Investments, Inc. (the
"Administrator"), a Delaware corporation.
WHEREAS, the Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust 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 Trust may offer shares of additional series in the future,
and currently intends to offer shares of additional series in the future;
WHEREAS, the Trust desires to avail itself of the services of the
Administrator for the provision of administrative services for the Trust; and
WHEREAS, the Administrator is willing to render such services to the
Trust;
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 Trust hereby appoints the Administrator, subject to
the direction of the Board of Trustees, for the period and on the terms set
forth in this Agreement, to provide administrative services, as described
herein, with respect to each series of the Trust (individually and collectively
referred to herein as "Series"). The Administrator accepts such appointment and
agrees to render the services herein set forth herein.
In the event the Trust establishes and designates additional series
with respect to which it desires to retain the Administrator to render
administrative services hereunder, it shall notify the Administrator in writing.
If the Administrator is willing to render such services, it shall notify the
Trust in writing, whereupon such additional series shall become a Series
hereunder.
2. SERVICES OF THE ADMINISTRATOR. Subject to the general supervision of
the Board of Trustees of the Trust, the Administrator shall provide the
following administrative services with respect to the Series:
(a) Provide all administrative services reasonably necessary for the
operation of the Trust and the Series other than the investment advisory
services performed by the adviser or sub-adviser to the Series, including, but
not limited to, (i) coordinating all matters relating to the operation of the
Series, including any necessary coordination among the Investment Manager,
<PAGE>
custodian, transfer agent, dividend disbursing agent, and portfolio accounting
agent (including pricing and valuation of the Series' portfolios), accountants,
attorneys, and other parties performing services or operational functions for
the Trust; (ii) maintaining or supervising the maintenance by third parties
selected by the Trust of such books and records of the Trust and the Series as
may be required by applicable federal or state law; (iii) preparing or
supervising the preparation by third parties selected by the Trust of all
federal, state, and local tax returns and reports relating to the Series
required by applicable law; (iv) preparing and filing, with the assistance of
counsel, and arranging for the distribution of proxy materials and periodic
reports to shareholders of the Series as required by applicable law; (v)
preparing and arranging for the filing, with the assistance of counsel, of
registration statements and other documents with the Securities and Exchange
Commission (the "SEC") and other federal and state regulatory authorities as may
be required by applicable law; (vi) taking such other action with respect to the
Trust as may be required by applicable law in connection with the Series,
including without limitation the rules and regulations of the SEC and other
regulatory agencies; (vii) providing the Trust, at the Administrator's expense,
with adequate personnel, office space, communications facilities, and other
facilities necessary for operation of the Series as contemplated in this
Agreement; and (viii) arranging for meetings of the Trust's Board of Trustees
and, in connection therewith, providing the Board with necessary or appropriate
information for its meetings. Nothing in this provision shall be deemed to
inhibit the Trust or its officers from engaging, at the expense of the Trust,
other persons to assist in providing administrative services to the Trust and
the Series including, but not limited to, accounting agents, recordkeeping
agents, proxy solicitation agents, attorneys, accountants, consultants and
others.
(b) Render to the Board of Trustees of the Trust such periodic and
special reports as the Board may reasonably request; and
(c) Make available its officers and employees to the Board of Trustees
and officers of the Trust for consultation and discussions regarding the
administration of the Trust and its Series and the services provided to the
Trust under this Agreement.
3. CONFORMITY WITH APPLICABLE LAW. The Administrator, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement of the Trust and with the
instructions and directions of the Board of Trustees of the Trust and will
conform to, and comply with, the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
4. EXCLUSIVITY. The services of the Administrator to the Trust under
this Agreement are not to be deemed exclusive, and the Administrator, 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.
5. EXPENSES. During the term of this Agreement, the Administrator will
pay all expenses incurred by it in connection with its activities under this
Agreement, except such expenses as are assumed by the Trust under this Agreement
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<PAGE>
and such expenses as are assumed by a Series' investment adviser pursuant to an
Investment Management Agreement or by a Series' sub-adviser pursuant to a
Portfolio Management Agreement. The Trust shall be responsible for all of the
other expenses of its operations, including, without limitation, the
administration fee payable hereunder; advisory fees; brokerage commissions;
interest; legal fees and expenses of attorneys; fees of auditors, transfer
agents and dividend disbursing agents, custodians and shareholder servicing
agents; fees of accountants and accounting services; the expense of obtaining
quotations for calculating each Trust's net asset value; taxes, if any, and the
preparation of the Trust'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 Trust under
federal and state laws and regulations (including the salary of employees of the
Administrator engaged in the registering and qualifying of shares of the Trust
under federal and state laws and regulations or a pro-rata portion of the salary
of employees to the extent so engaged); salaries of personnel involved in
placing orders for the execution of the Trust'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 Trust; trade association dues; insurance premiums; extraordinary expenses
such as litigation expenses. To the extent the Administrator incurs any costs or
performs any services which are an obligation of the Trust, as set forth herein,
the Trust shall promptly reimburse the Administrator for such costs and
expenses. To the extent the services for which the Trust is obligated to pay are
performed by the Administrator, the Administrator shall be entitled to recover
from the Trust only to the extent of its costs for such services.
6. COMPENSATION. For the services provided by the Administrator to each
Series pursuant to this Agreement, each Series will pay to the Administrator the
annual fee for such Series set forth in Schedule A hereto.
7. LIABILITY OF THE ADMINISTRATOR. The Administrator 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
Administrator nor its stockholders, officers, directors, employees, or agents
shall be subject to 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
Administrator's duties, or by reason of reckless disregard of the
Administrator's obligations and duties under this Agreement. The liability
incurred by the Administrator pursuant to this paragraph 8 in any year shall be
limited to the revenues of the Administrator derived from the Trust in that
fiscal year of the Trust. The Administrator shall look solely to Trust property
for satisfaction of claims of any nature against the Trust or a trustee,
officer, employee or agent of the Trust arising in connection with the affairs
of the Trust. 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 Trust.
8. CONTINUATION AND TERMINATION. This Agreement shall become effective
on the date first written above, subject to the condition that the Trust'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 Administrator, 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 by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Board of Trustees of the Trust who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of the Trust or the
Administrator.
This Agreement may be terminated by the Trust at any time, without the payment
of any penalty, by vote of a majority of the Board of Trustees of the Trust or
by a vote of a majority of the outstanding voting shares of the Trust, 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 Administrator, or by the
Administrator at any time, without the payment of any penalty, on sixty (60)
days' written notice to the Trust.
9. LIMITATION OF LIABILITY OF TRUSTEES. Notice is hereby given that
this Agreement is executed by an officer of the Trust on behalf of the trustees
of the Trust, as trustees and not individually, and that the obligations of this
Agreement with respect to the Trust shall be binding upon the assets and the
properties of the Trust only and shall not be binding upon the assets or
properties of the trustees, officers, employees, agents or shareholders of the
Trust individually.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
11. 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.
PILGRIM MUTUAL FUNDS
BY:
-------------------------------
TITLE:
----------------------------
PILGRIM INVESTMENTS, INC.
BY:
-------------------------------
TITLE:
----------------------------
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<PAGE>
SCHEDULE A
ADMINISTRATIVE FEE
Pilgrim Money Market Fund 0.25% of the average daily net assets of the Fund.
Each other Series $1.00
-6-
AGENCY AGREEMENT
THIS AGREEMENT made the ______ day of ____________, 1999, by and
between PILGRIM MUTUAL FUNDS, a Delaware trust, currently consisting of twelve
(12) series styled PILGRIM INTERNATIONAL CORE GROWTH, PILGRIM WORLDWIDE GROWTH,
PILGRIM INTERNATIONAL SMALL CAP GROWTH, PILGRIM EMERGING COUNTRIES, PILGRIM
LARGE CAP GROWTH, PILGRIM MIDCAP GROWTH, PILGRIM SMALL CAP GROWTH, PILGRIM
CONVERTIBLE, PILGRIM BALANCED, PILGRIM STRATEGIC INCOME, PILGRIM HIGH YIELD FUND
II and PILGRIM MONEY MARKET, a registered investment company, and any other
registered investment companies established as a series of the aforementioned
investment company and set forth on Exhibit A, attached hereto, as amended from
time to time (each such registered investment company hereinafter jointly and
severally referred to as "Fund") having its principal place of business at Two
Renaissance Square, 40 North Central Avenue., Suite 1200, Phoenix, Arizona 85004
and DST SYSTEMS, INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at 333 West 11th
Street, 5th Floor, Kansas City, Missouri 64105 ("DST"):
WITNESSETH:
WHEREAS, Fund desires to appoint DST as Transfer Agent and Dividend
Disbursing Agent, and DST desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
<PAGE>
1. DOCUMENTS TO BE FILED WITH APPOINTMENT.
In connection with the appointment of DST as Transfer Agent and Dividend
Disbursing Agent for Fund, there will be filed with DST the following
documents:
A. A certified copy of the resolutions of the Board of Directors or
Trustees of Fund appointing DST as Transfer Agent and Dividend
Disbursing Agent, approving the form of this Agreement, and designating
certain persons to sign stock certificates, if any, and give written
instructions and requests on behalf of Fund;
B. A certified copy of the Articles of Incorporation or Declaration of
Trust of Fund and all amendments thereto;
C. A certified copy of the Bylaws of Fund;
D. Copies of Registration Statements and amendments thereto, filed with the
Securities and Exchange Commission.
E. Specimens of all forms of outstanding stock certificates, in the forms
approved by the Board of Directors or Trustees of Fund, with a
certificate of the Secretary of Fund, as to such approval;
F. Specimens of the signatures of the officers of Fund authorized to sign
stock certificates and individuals authorized to sign written
instructions and requests;
G. An opinion of counsel for Fund with respect to:
(1) Fund's organization and existence under the laws of its state of
organization,
(2) The status of all shares of stock of Fund covered by the appointment
under the Securities Act of 1933, as amended, and any other
applicable federal or state statute, and
(3) That all issued shares are, and all unissued shares will be, when
issued, validly issued, fully paid and nonassessable.
2
<PAGE>
2. CERTAIN REPRESENTATIONS AND WARRANTIES OF DST.
DST represents and warrants to Fund that:
A. It is a corporation duly organized and existing and in good standing
under the laws of Delaware.
B. It is duly qualified to carry on its business in the State of Missouri.
C. It is empowered under applicable laws and by its Articles of
Incorporation and bylaws to enter into and perform the services
contemplated in this Agreement.
D. It is registered as a transfer agent to the extent required under the
Securities Exchange Act of 1934.
E. All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
F. It has and will continue to have and maintain the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
3. CERTAIN REPRESENTATIONS AND WARRANTIES OF FUND.
Fund represents and warrants to DST that:
A. It is duly organized as heretofore described and existing and in good
standing under the laws of the State/Commonwealth of organization.
B. It is an open-end or closed-end management investment company registered
under the Investment Company Act of 1940, as amended.
C. A registration statement under the Securities Act of 1933 has been filed
and will be effective with respect to all shares of Fund being offered
for sale.
D. All requisite steps have been and will continue to be taken to register
Fund's shares for sale in all applicable states and such registration
will be effective at all times shares are offered for sale in such
state.
3
<PAGE>
E. Fund is empowered under applicable laws and by its charter or
declaration and bylaws to enter into and perform this Agreement.
4. SCOPE OF APPOINTMENT.
A. Subject to the conditions set forth in this Agreement, Fund hereby
appoints DST as Transfer Agent and Dividend Disbursing Agent.
B. DST hereby accepts such appointment and agrees that it will act as
Fund's Transfer Agent and Dividend Disbursing Agent. DST agrees that it
will also act as agent in connection with Fund's periodic withdrawal
payment accounts and other open accounts or similar plans for
shareholders, if any.
C. Fund agrees to use its best efforts to deliver to DST in Kansas City,
Missouri, as soon as they are available, all of its shareholder account
records.
D. DST, utilizing DST's computerized data processing systems for
securityholder accounting (the "TA2000 System" for open-end funds and
"STS System" for closed-end funds and the "Systems" for both the
TA2000(R)and STS Systems, jointly and severally), and subject to the
provisions of Sections 19, 20 and 21 of this Agreement, will perform the
following services as transfer, dividend disbursing and shareholders'
servicing agent for Fund, and as agent of Fund for shareholder accounts
thereof, in a timely manner: issuing (including countersigning),
transferring and canceling share certificates; maintaining all
shareholder accounts; providing transaction journals; preparing
shareholder meeting lists (one annually at no charge, lists for
additional meetings will be charged for), mailing proxies and proxy
materials, receiving and tabulating proxies, certifying the shareholder
votes in Fund (all proxy activities are subject to proxy fees and
reimbursable fees); mailing shareholder reports and prospectuses
supplied to DST by Fund or its agents; withholding, as required by
4
<PAGE>
Federal law and as directed by Fund, taxes on nonresident alien and
foreign corporation accounts, for pension and deferred income, backup
withholding or other instances agreed upon by Fund and DST, disbursing
income dividends and capital gains distributions to shareholders,
preparing, filing and mailing U.S. Treasury Department Forms 1099, 1042,
1042S and backup withholding as required for all shareholders and as
directed by Fund; preparing and mailing confirmation forms to
shareholders and dealers, as instructed, for all purchases and
liquidations (not applicable to closed-end funds except for transfers
into or out of a shareholders' account) of shares of Fund and other
confirmable transactions in shareholders' accounts; recording
reinvestment of dividends and distributions in shares of Fund; providing
or making available on-line daily and monthly reports as provided by
either of the Systems and as requested by Fund or its management
company; maintaining those records necessary to carry out DST's duties
hereunder, including all information reasonably required by Fund to
account for all transactions (non-valued in closed-end funds) in Fund
shares, calculating the appropriate sales charge with respect to each
purchase of Fund shares as set forth in the prospectus for Fund (not
applicable to closed-end funds); solely for open-end funds: determining
the portion of each sales charge payable to the dealer participating in
a sale in accordance with schedules delivered to DST by Fund's principal
underwriter or distributor (hereinafter "principal underwriter") from
time to time, disbursing dealer commissions collected to such dealers,
determining the portion of each sales charge payable to such principal
underwriter and disbursing such commissions to the principal
underwriter; receiving correspondence pertaining to any former, existing
or new shareholder account, processing such correspondence for proper
5
<PAGE>
recordkeeping, and responding promptly to shareholder correspondence;
mailing to dealers confirmations of wire order trades (not applicable to
closed-end funds); mailing copies of shareholder statements to
shareholders and registered representatives of dealers in accordance
with Fund's instructions; and, solely in the case of open-end funds,
processing, generally on the date of receipt, purchases or redemptions
or instructions to settle any mail or wire order purchase or redemption
(or in the case of closed-end funds, effecting transfer of certificates)
received in proper order as set forth in the prospectus and DST's
Procedures, as hereinafter defined, rejecting promptly any requests not
received in proper order (as defined by Fund or its agents or DST's
Procedures), and, solely in the case of open-end funds, causing
exchanges of shares to be executed in accordance with Fund's
instructions, the applicable prospectus, DST's Procedures and the
general exchange privilege application.
E. At the request of an Authorized Person, DST shall use reasonable efforts
to provide the services set forth in this Agreement in connection with
transactions (i) on behalf of retirement plans and participants in
retirement plans and transactions ordered by brokers as part of a "no
transaction fee" program ("NTF"), the processing of which transactions
require DST to use methods and procedures other than those usually
employed by DST to perform shareholder servicing agent services, (ii)
involving the provision of information to DST after the commencement of
the nightly processing cycle of whichever of the Systems is applicable
or (iii) which require more manual intervention by DST, either in the
entry of data or in the modification or amendment of reports generated
by the Systems than is usually required by non-retirement plan, non-NTF
and pre-nightly transactions (the "Exception Services").
6
<PAGE>
F. Fund shall have the right to add new series to the Systems upon at least
thirty (30) days' prior written notice to DST provided that the
requirements of the new series are generally consistent with services
then being provided by DST under this Agreement. Rates or charges for
additional series shall be as set forth in Exhibit B, as hereinafter
defined, for the remainder of the contract term except as such series
use functions, features or characteristics for which DST has imposed an
additional charge as part of its standard pricing schedule. In the
latter event, rates and charges shall be in accordance with DST's
then-standard pricing schedule.
G. DST shall use reasonable efforts to provide, reasonably promptly under
the circumstances, the same services with respect to any new, additional
functions or features or any changes or improvements to existing
functions or features as provided for in Fund's instructions, prospectus
or application as amended from time to time, for Fund provided (i) DST
is advised in advance by Fund of any changes therein and (ii) the
Systems and the mode of operations utilized by DST as then constituted
support such additional functions and features. If any addition to,
improvement of or change in the features and functions currently
provided by either of the Systems or the operations as requested by Fund
requires an enhancement or modification to either of the Systems or to
operations as presently conducted by DST, DST shall not be liable
therefor until such modification or enhancement is, if DST agrees to
develop or institute it, developed (at Fund's expense) and installed on
the Systems or a new mode of operation is instituted. If any new,
additional function or feature or change or improvement to existing
functions or features or new service or mode of operation measurably
increases DST's cost of performing the services required hereunder at
the current level of service, DST shall advise Fund of the amount of
7
<PAGE>
such increase and if Fund elects to utilize such function, feature or
service, DST shall be entitled to increase its fees by the amount of the
increase in costs. In no event shall DST be responsible for or liable to
provide any additional function, feature, improvement or change in
method of operation until it has consented thereto in writing.
5. LIMIT OF AUTHORITY.
Unless otherwise expressly limited by the resolution of appointment or by
subsequent action by Fund, the appointment of DST as Transfer Agent will be
construed to cover the full amount of authorized stock of the class or
classes for which DST is appointed as the same will, from time to time, be
constituted, and any subsequent increases in such authorized amount.
In case of such increase Fund will file with DST:
A. If the appointment of DST was theretofore expressly limited, a certified
copy of a resolution of Fund's Board of Directors or Trustees, as
applicable, increasing the authority of DST;
B. A certified copy of the amendment to Fund's Articles of Incorporation or
Declaration of Trust, as applicable, authorizing the increase of stock;
C. A certified copy of the order or consent of each governmental or
regulatory authority required by law to consent to the issuance of the
increased stock, and an opinion of counsel that the order or consent of
no other governmental or regulatory authority is required;
D. Opinion of counsel for Fund stating:
8
<PAGE>
(1) The status of the additional shares of stock of Fund under the
Securities Act of 1933, as amended, and any other applicable federal
or state statute and that said shares may be legally issued; and
(2) That the additional shares are, or when issued will be, validly
issued, fully paid and nonassessable.
6. COMPENSATION AND EXPENSES.
A. In consideration for its services hereunder as Transfer Agent and
Dividend Disbursing Agent, Fund will pay to DST from time to time a
reasonable compensation for all services rendered as Agent, and also all
its reasonable out-of-pocket expenses, charges, counsel fees, and other
disbursements (Compensation and Expenses) incurred in connection with
the agency. Such compensation is set forth in a separate schedule to be
agreed to by Fund and DST, a copy of which is attached hereto and
incorporated herein by reference. If Fund has not paid such Compensation
and Expenses to DST within a reasonable time, DST may charge against any
monies held under this Agreement, the amount of any Compensation and/or
Expenses for which it shall be entitled to reimbursement under this
Agreement.
B. Fund also agrees promptly to reimburse DST for all reasonable
reimbursable expenses or disbursements incurred by DST in connection
with the performance of services under this Agreement including, but not
limited to, expenses for postage, express delivery services, freight
charges, envelopes, checks, drafts, forms (continuous or otherwise),
specially requested reports and statements, telephone calls, telegrams,
stationery supplies, counsel fees, outside printing and mailing firms
(including Output Technologies SRI Group, Inc.), magnetic tapes, reels
or cartridges (if sent to a Fund or to third party at Fund's request)
9
<PAGE>
and magnetic tape handling charges, off-site record storage, media for
storage of records (e.g., microfilm, microfiche, optical platters,
computer tapes), computer equipment installed at Fund's request at
Fund's or a third party's premises, telecommunications equipment,
telephone/ telecommunication lines between Fund and its agents, on one
hand, and DST on the other, proxy mailing, soliciting, processing and/or
tabulating costs, second-site backup computer facility, transmission of
statement data for remote printing or processing, and NSCC transaction
fees (as well as any other expenses set forth on Exhibit C, as amended
from time to time) to the extent any of the foregoing are paid or
incurred by DST. Fund agrees to pay postage expenses at least one day in
advance if so requested. In addition, any other expenses incurred by DST
at the request or with the consent of Fund will be promptly reimbursed
by Fund.
C. Amounts due hereunder shall be due and paid on or before the thirtieth
(30th) business day after receipt of the statement therefor by Fund (the
"Due Date"). Fund is aware that its failure to pay all amounts in a
timely fashion so that they will be received by DST on or before the Due
Date will give rise to costs to DST not contemplated by this Agreement,
including but not limited to carrying, processing and accounting
charges. Accordingly, subject to Section 6.D. hereof, in the event that
any amounts due hereunder are not received by DST by the Due Date, Fund
shall pay a late charge equal to the rate set forth in the fee schedule
times the amount overdue, times the number of days from the Due Date up
to and including the day on which payment is received by DST divided by
365. The parties hereby agree that such late charge represents a fair
and reasonable computation of the costs incurred by reason of late
payment or payment of amounts not properly due. Acceptance of such late
10
<PAGE>
charge shall in no event constitute a waiver of Fund's or DST's default
or prevent the non-defaulting party from exercising any other rights and
remedies available to it.
D. In the event that any charges are disputed, Fund shall, on or before the
Due Date, pay all undisputed amounts due hereunder and notify DST in
writing of any disputed charges for out-of-pocket expenses which it is
disputing in good faith. Payment for such disputed charges shall be due
on or before the close of the fifth (5th) business day after the day on
which DST provides to Fund documentation which an objective observer
would agree reasonably supports the disputed charges (the "Revised Due
Date"). Late charges shall not begin to accrue as to charges disputed in
good faith until the first day after the Revised Due Date.
7. OPERATION OF DST SYSTEMS.
In connection with the performance of its services under this Agreement, DST
is responsible for such items as:
A. That entries in DST's records and in Fund's records on the Systems
created by DST accurately reflect the orders, instructions, and other
information received by DST from Fund, Fund's principal manager,
underwriter or distributor or Fund's investment adviser, sponsor,
custodian or administrator (each an "Authorized Person"), broker-dealers
and shareholders;
B. That shareholder lists, shareholder account verifications, confirmations
and other shareholder account information to be produced from its
records or data be available and accurately reflect the data in Fund's
records on the Systems;
C. The accurate and timely issuance of dividend and distribution checks in
accordance with instructions received from Fund and the data in Fund's
records on the Systems;
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<PAGE>
D. That redemption transactions and payments with respect to shares of
open-end funds and transfers with respect to closed-end funds be
effected timely, under normal circumstances on the day of receipt, and
accurately in accordance with instructions received by DST from dealers,
shareholders, or an Authorized Person of Fund provided such instructions
are in proper order as set forth elsewhere in this Agreement and are
consistent with the data in Fund's records on the Systems;
E. The deposit daily in Fund's appropriate special bank account of all
checks and payments received by DST from NSCC, broker-dealers or
shareholders for investment in shares of open-end funds;
F. Notwithstanding anything herein to the contrary, with respect to "as of"
adjustments, DST will not assume one hundred percent (100%)
responsibility for losses resulting from "as of's" due to clerical
errors or misinterpretations of shareholder instructions, but DST will
discuss with Fund DST's accepting liability for an "as of" on a
case-by-case basis and may accept financial responsibility for a
particular situation resulting in a financial loss to Fund where DST and
Fund mutually agree that is appropriate and such loss is "material",
that is, it results in a pricing error on a given day which is (i)
greater than a negligible amount per shareholder, (ii) equals or exceeds
one ($.01) full cent per share times the number of shares outstanding
with respect to whether recompense of Fund is required or (iii) equals
or exceeds the product of one-half of one percent (1/2%) times Fund's
Net Asset Value per share times the number of shares outstanding with
respect to whether recompense at the shareholder level is required (or
such other amounts as may be adopted by applicable accounting or
regulatory authorities from time to time);
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<PAGE>
G. Notwithstanding anything in this Agreement to the contrary, DST shall
perform the services set forth in Section 4.D. of, and elsewhere in,
this Agreement, including but not limited to the requiring of proper
forms of instructions, signatures and signature guarantees and any
necessary documents supporting the opening of shareholder accounts
(where required), transfers, redemptions and other shareholder account
transactions, in conformance with DST's present procedures as set forth
in its Legal Manual, Third Party Check Procedures, Checkwriting Draft
Procedures, and Signature Guarantee Procedures with such changes or
deviations therefrom as may be from time to time required or approved by
Fund, its investment adviser or principal underwriter, or their or DST's
counsel (the "Procedures") and the rejection of orders or instructions
not in good order in accordance with the applicable prospectus or the
Procedures;
H. The maintenance of customary records in connection with its agency, and
particularly those records required to be maintained pursuant to
subparagraph (2) (iv) of paragraph (b) of Rule 31a-1 under the
Investment Company Act of 1940, if any; and
I. The maintenance of a current, duplicate set of Fund's essential records
as of the close of business on the prior business day at a secure
separate location, in a form available and usable forthwith in the event
of any breakdown or disaster disrupting its main operation.
8. INDEMNIFICATION.
A. DST shall at all times use reasonable care, due diligence and act in
good faith in performing its duties under this Agreement. DST shall
provide its services as transfer agent in accordance with Section 17A of
the Exchange Act, and the rules and regulations thereunder. In the
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<PAGE>
absence of bad faith, willful misconduct, knowing violations of
applicable law pertaining to the manner in which transfer agency
services are to be performed by DST (excluding any violations arising
directly or indirectly out of the actions of DST-unaffiliated third
parties), reckless disregard of the performance of its duties, or
negligence on its part, DST shall not be liable for any action taken,
suffered, or omitted by it or for any error of judgment made by it in
the performance of its duties under this Agreement. For those activities
or actions delineated in the Procedures, DST shall be presumed to have
used reasonable care, due diligence and acted in good faith if it has
acted in accordance with the Procedures, copies of which have been
provided to Fund and reviewed and approved by Fund counsel, as amended
from time to time with approval of counsel, or for any deviation
therefrom approved by an Authorized Person, Fund or Fund's or DST's
counsel.
B. DST shall not be responsible for, and Fund shall indemnify and hold DST
harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability which may be asserted
against DST or for which DST may be held to be liable, arising out of or
attributable to:
(1) All actions of DST required to be taken by DST pursuant to this
Agreement, provided that DST has acted in good faith and with due
diligence and reasonable care;
(2) Fund's refusal or failure to comply with the terms of this
Agreement, Fund's negligence or willful misconduct, or the breach of
any representation or warranty of Fund hereunder;
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<PAGE>
(3) The good faith reliance on or the carrying out of any written or
recorded oral instructions or requests of persons designated by Fund
in writing from time to time as authorized to give instructions on
its behalf or of representatives of an Authorized Person or DST's
good faith reliance on or use of information, data, records and
documents received from, or which have been prepared and/or
maintained by or on behalf of, an Authorized Person;
(4) Defaults by dealers or shareowners with respect to payment for share
orders previously entered;
(5) The offer or sale of Fund's shares in violation of any requirement
under federal securities laws or regulations or the securities laws
or regulations of any state or in violation of any stop order or
other determination or ruling by any federal agency or state with
respect to the offer or sale of such shares in such state (unless
such violation results from DST's failure to comply with written
instructions of Fund or of any officer of Fund that no offers or
sales be input into Fund's securityholder records in or to residents
of such state);
(6) Fund's or its agents' and Authorized Persons' omissions, errors and
mistakes: (a) in the use of (i) the Systems, (ii) the data center,
computer and related equipment used to access the Systems (the "DST
Facilities"), and (iii) control procedures in the Systems, and (b)
in the verification of output and (c) in the remote input of data;
(7) Errors, inaccuracies and omissions in, or errors, inaccuracies or
omissions of DST arising out of or resulting from such errors,
inaccuracies and omissions in, Fund's records, shareholder records
and other records, delivered to DST hereunder by Fund or its prior
agent(s) (but not including errors, inaccuracies or omissions
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resulting from the negligence or willful misconduct of DST while DST
was acting as sub-agent on behalf of Investors Fiduciary Trust
Company, Fund's prior transfer agent);
(8) Actions or omissions to act by Fund or agents designated by Fund
with respect to duties assumed thereby as provided for in Section 21
hereof; and
(9) DST's performance of Exception Services except where DST acted or
omitted to act in bad faith, with reckless disregard of its
obligations or with gross negligence.
C. Except where DST is entitled to indemnification under Section 8.B.
hereof and with respect to "as ofs" set forth in Section 7.F., DST shall
indemnify and hold Fund harmless from and against any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability
arising out of DST's failure to comply with the terms of this Agreement
or arising out of or attributable to DST's negligence or willful
misconduct or breach of any representation or warranty of DST hereunder.
D. EXCEPT FOR VIOLATIONS OF SECTIONS 23, IN NO EVENT AND UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO ANYONE,
INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR CONSEQUENTIAL
DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER ANY PROVISION OF THIS
AGREEMENT EVEN IF ADVISED OF THE POSSIBILITY THEREOF.
E. Promptly after receipt by an indemnified person of notice of the
commencement of any action, such indemnified person will, if a claim in
respect thereto is to be made against an indemnifying party hereunder,
notify the indemnifying party in writing of the commencement thereof;
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but the failure so to notify the indemnifying party will not relieve an
indemnifying party from any liability that it may have to any
indemnified person for contribution or otherwise under the indemnity
agreement contained herein except to the extent it is prejudiced as a
proximate result of such failure to timely notify. In case any such
action is brought against any indemnified person and such indemnified
person seeks or intends to seek indemnity from an indemnifying party,
the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, assume the defense thereof (in its own name or
in the name and on behalf of any indemnified party or both with counsel
reasonably satisfactory to such indemnified person); provided, however,
if the defendants in any such action include both the indemnified person
and an indemnifying party and the indemnified person shall have
reasonably concluded that there may be a conflict between the positions
of the indemnified person and an indemnifying party in conducting the
defense of any such action or that there may be legal defenses available
to it and/or other indemnified persons which are inconsistent with those
available to an indemnifying party, the indemnified person or
indemnified persons shall have the right to select one separate counsel
(in addition to counsel provided by the indemnifying party) to assume
such legal defense and to otherwise participate in the defense of such
action on behalf of such indemnified person or indemnified persons at
such indemnified party's sole expense. Upon receipt of notice from an
indemnifying party to such indemnified person of its election so to
assume the defense of such action and approval by the indemnified person
of counsel, which approval shall not be unreasonably withheld (and any
disapproval shall be accompanied by a written statement of the reasons
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therefor), the indemnifying party will not be liable to such indemnified
person hereunder for any legal or other expenses subsequently incurred
by such indemnified person in connection with the defense thereof. An
indemnifying party will not settle or compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified persons are
actual or potential parties to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional
release of each indemnified person from all liability arising out of
such claim, action, suit or proceeding. An indemnified party will not,
without the prior written consent of the indemnifying party, settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder. If it
does so, it waives its right to indemnification therefor.
9. CERTAIN COVENANTS OF DST AND FUND.
A. All requisite steps will be taken by Fund from time to time when and as
necessary to register Fund's shares for sale in all states in which
Fund's shares shall at the time be offered for sale and require
registration. If at any time Fund receives notice of any stop order or
other proceeding in any such state affecting such registration or the
sale of Fund's shares, or of any stop order or other proceeding under
the federal securities laws affecting the sale of Fund's shares, Fund
will give prompt notice thereof to DST.
B. DST hereby agrees to perform such transfer agency functions as are set
forth in section 4.D. above and establish and maintain facilities and
procedures reasonably acceptable to Fund for safekeeping of stock
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certificates, check forms, and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices, and to carry such insurance as it
considers adequate and reasonably available.
C. To the extent required by Section 31 of the Investment Company Act of
1940 as amended and Rules thereunder, DST agrees that all shareholder-
or Fund-related records maintained by DST relating to the services
performed by DST under this Agreement are the property of Fund and will
be preserved, and will, upon receipt of payment of all sums due to DST
in connection with DST's performance under this Agreement, be
surrendered promptly to Fund on request.
D. DST agrees to furnish Fund semiannual reports of its financial
condition, consisting of a balance sheet, earnings statement and any
other readily and publicly available financial information reasonably
requested by Fund. The annual financial statements will be certified by
DST's certified public accountants.
E. DST represents and agrees that it will use its reasonable efforts to
keep current on the trends of the investment company industry relating
to shareholder services and will use its reasonable efforts to continue
to modernize and improve.
F. DST will permit Fund and its authorized representatives to make periodic
inspections of its operations as such would involve Fund upon reasonable
prior notice and at reasonable times during business hours.
G. DST agrees to use its reasonable efforts to provide in Kansas City at
Fund's expense two (2) man weeks of training for Fund's personnel in
connection with use and operation of the Systems. All travel and
reimbursable expenses incurred by Fund's personnel in connection with
and during training at DST's Facility shall be borne by Fund. At Fund's
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option and expense, DST also agrees to use its best efforts to provide
an additional two (2) man weeks of training at Fund's facility for
Fund's personnel in connection with the Systems. Reasonable travel, per
diem and reimbursable expenses incurred by DST personnel in connection
with and during training at Fund's facility or in connection with the
conversion shall be borne by Fund.
H. Notwithstanding anything in this Agreement to the contrary, DST's only
warranty or covenant with respect to year 2000 compliance is that the
TA2000 System will be year 2000 compliant during the term set forth in
Section 22 of this Agreement. As used in this Agreement "year 2000
compliant" shall mean that the TA2000 System will perform in accordance
with the terms of this Agreement regardless of the century with respect
to which date data is encountered by the TA2000 System; provided, that
(i) all date data received by DST for use by the TA2000 System is
accurate and in formats specified by DST from time to time, (ii) all
date data generated by the TA2000 System is accepted by the recipient in
formats provided by DST from time to time, and (iii) DST shall not be
obligated to provide date data for interface functions such as screens,
reports or data transmission files in any format other than that
specified by DST from time to time. Notwithstanding the foregoing, DST
makes no representation or warranty as to the ability of any hardware,
firmware, software, products or services provided to DST by any other
party to manipulate or to process date data, or as to the functionality
of any DST software (including without limitation the TA2000 System) in
circumstances where data received from any third party system (including
without limitation that of Fund and its Authorized Persons, agents or
customers) is invalid, incorrect or otherwise corrupt.
10. RECAPITALIZATION OR READJUSTMENT.
In case of any recapitalization, readjustment or other change in the
capital structure of Fund requiring a change in the form of stock
certificates, DST will, upon agreement with Fund as to the charges to
apply thereto, issue or register certificates in the new form in
exchange for, or in transfer of, the outstanding certificates in the old
form, upon receiving:
A. Written instructions from an officer of Fund;
B. Certified copy of the amendment to the Articles of Incorporation or
other document effecting the change;
C. Certified copy of the order or consent of each governmental or
regulatory authority required by law to the issuance of the stock in the
new form, and an opinion of counsel that the order or consent of no
other government or regulatory authority is required;
D. Specimens of the new certificates in the form approved by the Board of
Directors or Trustees of Fund, with a certificate of the Secretary of
Fund as to such approval;
E. Opinion of counsel for Fund stating:
(1) The status of the shares of stock of Fund in the new form under the
Securities Act of 1933, as amended and any other applicable federal
or state statute; and
(2) That the issued shares in the new form are, and all unissued shares
will be, when issued, validly issued, fully paid and nonassessable.
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11. STOCK CERTIFICATES.
Fund will furnish DST with a sufficient supply of blank stock
certificates and from time to time will renew such supply upon the
request of DST. Such certificates will be signed manually or by
facsimile signatures of the officers of Fund authorized by law and by
bylaws to sign stock certificates and, if required, will bear the
corporate seal or facsimile thereof.
12. DEATH, RESIGNATION OR REMOVAL OF SIGNING OFFICER.
Fund will file promptly with DST written notice of any change in the
officers authorized to sign stock certificates, written instructions or
requests, together with two certificates of the Secretary or Clerk
bearing the specimen signature of each newly authorized officer. In case
any officer of Fund who has signed manually or whose facsimile signature
has been affixed to blank stock certificates dies, resigns, or is
removed prior to the issuance of such certificates, DST may issue or
register such stock certificates as the stock certificates of Fund
notwithstanding such death, resignation, or removal, until specifically
directed to the contrary by Fund in writing. In the absence of such
direction, Fund will file promptly with DST such approval, adoption, or
ratification as may be required by law.
13. FUTURE AMENDMENTS OF CHARTER AND BYLAWS.
Fund will promptly file with DST copies of all material amendments to
its Articles of Incorporation or Declaration of Trust, as applicable, or
bylaws made after the date of this Agreement.
14. INSTRUCTIONS, OPINION OF COUNSEL AND SIGNATURES.
At any time DST may apply to any person authorized by Fund, including
without limitation the duly authorized representative of any Authorized
Person and any Authorized Personnel set forth on Exhibit D to this
Agreement, to give instructions to DST, and may with the approval of a
Fund officer consult with legal counsel for Fund or its own legal
counsel at the expense of Fund, with respect to any matter arising in
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connection with the agency and it will not be liable for any action
taken or omitted by it in good faith in reliance upon such instructions
or upon the opinion of such counsel. DST will be protected in acting
upon any paper or document reasonably believed by it to be genuine and
to have been signed by the proper person or persons and will not be held
to have notice of any change of authority of any person, until receipt
of written notice thereof from Fund. It will also be protected in
recognizing stock certificates which it reasonably believes to bear the
proper manual or facsimile signatures of the officers of Fund, and the
proper countersignature of any former Transfer Agent or Registrar, or of
a present or former co-Transfer Agent or co-Registrar.
15. FORCE MAJEURE AND DISASTER RECOVERY PLANS.
A. DST SHALL NOT BE RESPONSIBLE OR LIABLE FOR ITS FAILURE OR DELAY IN
PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT ARISING OUT OF OR
CAUSED, DIRECTLY OR INDIRECTLY, BY CIRCUMSTANCES BEYOND ITS REASONABLE
CONTROL, INCLUDING, WITHOUT LIMITATION: ANY INTERRUPTION, LOSS OR
MALFUNCTION OR ANY UTILITY, TRANSPORTATION, COMPUTER (HARDWARE OR
SOFTWARE) OR COMMUNICATION SERVICE; INABILITY TO OBTAIN LABOR, MATERIAL,
EQUIPMENT OR TRANSPORTATION, OR A DELAY IN MAILS; GOVERNMENTAL OR
EXCHANGE ACTION, STATUTE, ORDINANCE, RULINGS, REGULATIONS OR DIRECTION;
WAR, STRIKE, RIOT, EMERGENCY, CIVIL DISTURBANCE, TERRORISM, VANDALISM,
EXPLOSIONS, LABOR DISPUTES, FREEZES, FLOODS, FIRES, TORNADOS, ACTS OF
GOD OR PUBLIC ENEMY, REVOLUTIONS, OR INSURRECTION; OR ANY OTHER CAUSE,
CONTINGENCY, CIRCUMSTANCE OR DELAY NOT SUBJECT TO DST'S CONTROL WHICH
PREVENTS OR HINDERS DST'S PERFORMANCE HEREUNDER.
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B. DST currently maintains an agreement with a third party whereby DST is
to be permitted to use on a "shared use" basis a "hot site" (the
"Recovery Facility") maintained by such party in event of a disaster
rendering the DST Facilities inoperable. DST has developed and is
continually revising a business contingency plan (the "Business
Contingency Plan") detailing which, how, when, and by whom data
maintained by DST at the DST Facilities will be installed and operated
at the Recovery Facility. Provided Fund is paying its pro rata portion
of the charge therefor, DST would, in event of a disaster rendering the
DST Facilities inoperable, use reasonable efforts to convert the Systems
containing the designated Fund data to the computers at the Recovery
Facility in accordance with the then current Business Contingency Plan.
C. DST also currently maintains, separate from the area in which the
operations which provide the services to Fund hereunder are located, a
Crisis Management Center consisting of phones, computers and the other
equipment necessary to operate a full service transfer agency business
in the event one of its operations areas is rendered inoperable. The
transfer of operations to other operating areas or to the Crisis
Management Center is also covered in DST's Business Contingency Plan.
16. CERTIFICATION OF DOCUMENTS.
The required copy of the Articles of Incorporation or Declaration of
Trust of Fund and copies of all amendments thereto will be certified by
the Secretary of State (or other appropriate official) of the State of
Incorporation, and if such Articles of Incorporation or Declaration of
Trust and amendments are required by law to be also filed with a county,
city or other officer of an official body, a certificate of such filing
will appear on the certified copy submitted to DST. A copy of the order
or consent of each governmental or regulatory authority required by law
to the issuance of the stock will be certified by the Secretary or Clerk
of such governmental or regulatory authority, under proper seal of such
authority. The copy of the Bylaws and copies of all amendments thereto,
and copies of resolutions of the Board of Directors or Trustees of Fund,
as applicable, will be certified by the Secretary or Clerk or an
Assistant Secretary or Clerk of Fund under Fund's seal.
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17. RECORDS.
DST will maintain customary records in connection with its agency, and
particularly will maintain those records required to be maintained
pursuant to subparagraph (2) (iv) of paragraph (b) of Rule 31a-1 under
the Investment Company Act of 1940, if any.
18. DISPOSITION OF BOOKS, RECORDS AND CANCELED CERTIFICATES.
DST may send periodically to Fund, or to where designated by the
Secretary or an Assistant Secretary of Fund, all books, documents, and
records no longer deemed needed for current purposes and all stock
certificates which have been canceled in transfer or in exchange, upon
the understanding that such books, documents, records, and stock
certificates will be maintained by Fund under and in accordance with the
requirements of Section 17Ad-7 adopted under the Securities Exchange Act
of 1934. Such materials will not be destroyed by Fund without the
consent of DST (which consent will not be unreasonably withheld), but
will be safely stored for possible future reference and maintained,
preserved and made available to DST and the U.S. Securities and Exchange
Commission in accordance with the requirement of Sections 17Ad-7 and 17
C.F.R. ss.240.17Ad-7.
19. PROVISIONS RELATING TO DST AS TRANSFER AGENT.
A. DST will make original issues of stock certificates upon written request
of an officer of Fund, and upon mutual agreement as to the charges to
apply thereto and being furnished with a certified copy of a resolution
of the Board of Directors or Trustees authorizing such original issue,
an opinion of counsel as outlined in Section 1.G. of this Agreement, any
documents required by Sections 5. or 10. of this Agreement, and
necessary funds for the payment of any original issue tax.
B. Before making any original issue of certificates, Fund will furnish DST
with sufficient funds to pay all required taxes on the original issue of
the stock, if any. Fund will furnish DST such evidence as may be
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required by DST to show the actual value of the stock. If no taxes are
payable, DST will be furnished with an opinion of outside counsel to
that effect.
C. Shares of stock will be transferred and new certificates issued in
transfer, or, except in the case of closed-end funds, shares of stock
will be accepted for redemption and funds remitted therefor, or book
entry transfer will be effected, upon surrender of the old certificates
in form or receipt by DST of instructions deemed by DST properly
endorsed for transfer or, except in the case of closed-end funds,
redemption accompanied by such documents as DST may deem necessary to
evidence the authority of the person making the transfer or redemption.
DST reserves the right to refuse to transfer or redeem shares until it
is satisfied that the endorsement or signature on the certificate or any
other document is valid and genuine, and for that purpose, unless Fund
has instructed DST not to require a signature guarantee, DST may require
a guaranty of signature in accordance with the Procedures. DST shall
have the right to refuse to transfer or redeem shares until it is
satisfied that the requested transfer or redemption is legally
authorized, and it will incur no liability for the refusal in good faith
to make transfers or redemptions which, in its judgment, are improper or
unauthorized. DST may, in effecting transfers or redemptions, rely upon
Simplification Acts, Uniform Commercial Code, or other statutes which
protect it and Fund in not requiring complete fiduciary documentation.
In cases in which DST is not directed or otherwise required to maintain
the consolidated records of shareholder's accounts, DST will not be
liable for any loss which may arise by reason of not having such
records.
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D. When mail is used for delivery of stock certificates, DST will forward
stock certificates in "nonnegotiable" form by first class or registered
mail and stock certificates in "negotiable" form by registered mail, all
such mail deliveries to be covered while in transit to the addressee by
insurance arranged for by DST.
E. DST will issue and mail subscription warrants, certificates representing
stock dividends, exchanges or split ups, or act as Conversion Agent upon
receiving written instructions from any officer of Fund and such other
documents as DST deems necessary upon agreement between DST and Fund as
to the charges to apply thereto.
F. DST will issue, transfer, and split up certificates and will issue
certificates of stock representing full shares upon surrender of scrip
certificates aggregating one full share or more when presented to DST
for that purpose upon receiving written instructions from an officer of
Fund and such other documents as DST may deem necessary.
G. DST may issue new certificates in place of certificates represented to
have been lost, destroyed, stolen or otherwise wrongfully taken upon
receiving instructions from Fund and indemnity satisfactory to DST and
Fund, and may issue new certificates in exchange for, and upon surrender
of, mutilated certificates. Such instructions from Fund will be in such
form as will be approved by the Board of Directors or Trustees of Fund
and will be in accordance with the provisions of law and the bylaws of
Fund governing such matter.
H. DST will supply a shareholder's list to Fund for its annual meeting upon
receiving a request from an officer of Fund. It will also supply lists
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at such other times as may be requested by an officer of Fund, subject
to payment of applicable charges therefor.
I. Upon receipt of written instructions of an officer of Fund, DST will
address and mail notices to shareholders.
J. In case of any request or demand for the inspection of the stock books
of Fund or any other books in the possession of DST, DST will endeavor
to notify Fund and to secure instructions as to permitting or refusing
such inspection. DST reserves the right, however, to exhibit the stock
books or other books to any person in case it is advised by its counsel
that it may be held responsible for the failure to exhibit the stock
books or other books to such person.
20. PROVISIONS RELATING TO DIVIDEND DISBURSING AGENCY.
A. DST will, at the expense of Fund, provide a special form of check
containing the imprint of any device or other matter desired by Fund.
Said checks must, however, be of a form and size convenient for use by
DST.
B. If Fund desires to include additional printed matter, financial
statements, ETC., with the dividend checks, the same will be furnished
to DST within a reasonable time prior to the date of mailing of the
dividend checks, at the expense of Fund.
C. If Fund desires its distributions mailed in any special form of
envelopes, sufficient supply of the same will be furnished to DST, but
the size and form of said envelopes will be subject to the approval of
DST. If stamped envelopes are used, they must be furnished by Fund; or
if postage stamps are to be affixed to the envelopes, the stamps or the
cash necessary for such stamps must be furnished by Fund in advance of
such mailing.
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D. DST is hereby authorized to open and to maintain at a Bank acceptable to
Fund one or more non-interest bearing deposit accounts as Agent for
Fund, into which the funds for payment of dividends, distributions,
redemptions or other disbursements provided for hereunder will be
deposited, and against which checks will be drawn.
E. DST is authorized and directed to stop payment of checks theretofore
issued hereunder, but not presented for payment, when the payees thereof
allege either that they have not received the checks or that such checks
have been mislaid, lost, stolen, destroyed or through no fault of
theirs, are otherwise beyond their control, and cannot be produced by
them for presentation and collection, and, to issue and deliver
duplicate checks in replacement thereof.
21. ASSUMPTION OF DUTIES BY FUND OR AGENTS DESIGNATED BY FUND.
A. Fund or its designated agents other than DST may assume certain duties
and responsibilities of DST or those services of Transfer Agent and
Dividend Disbursement Agent as those terms are referred to in Section
4.D. of this Agreement including but not limited to answering and
responding to telephone inquiries from shareholders and brokers,
accepting shareholder and broker instructions (either or both oral and
written) and transmitting orders based on such instructions to DST,
preparing and mailing confirmations, obtaining certified TIN numbers,
classifying the status of shareholders and shareholder accounts under
applicable tax law, establishing shareholder accounts on the Systems and
assigning social codes and Taxpayer Identification Number codes thereof,
and disbursing monies of Fund, said assumption to be embodied in writing
to be signed by both parties.
B. To the extent Fund or its agent or affiliate assumes such duties and
responsibilities, DST shall be relieved from all responsibility and
liability therefor and is hereby indemnified and held harmless against
any liability therefrom and in the same manner and degree as provided
for in Section 8 hereof.
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C. Initially Fund shall be responsible for the following: (i) answer and
respond to phone calls from shareholders and broker-dealers, and (ii)
scan items into the AWD(TM) System as such calls or items are received
by Fund, and (iii) enter and confirm wire order trades.
22. TERMINATION OF AGREEMENT.
A. This Agreement shall be in effect from the date set forth on the first
page (the "Effective Date") through September 30, 1999 and thereafter
may be terminated by either party upon receipt of six (6) months written
notice from the other party, provided, however, that the effective date
of any termination shall not occur during the period from December 15
through March 30 of any year to avoid adversely impacting year end. Upon
the Effective Date, the prior agency agreement between Fund and
Investor's Fiduciary Trust Company ("IFTC") which was assigned by IFTC
to DST, shall terminate and be of no further force and effect except as
otherwise provided therein.
B. Each party, in addition to any other rights and remedies, shall have the
right to terminate this Agreement forthwith upon the occurrence at any
time of any of the following events with respect to the other party:
(1) Any interruption or cessation of operations by the other party or
its assigns which materially interferes with the business operation
of the first party;
(2) The bankruptcy of the other party or its assigns or the appointment
of a receiver for the other party or its assigns;
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(3) Failure by the other party or its assigns to perform its duties in
accordance with the Agreement, which failure materially adversely
affects the business operations of the first party and which failure
continues for thirty (30) days after receipt of written notice from
the first party; and
(4) The acquisition of a controlling interest in DST Systems, Inc. or
its assigns, by any broker, dealer, investment adviser or investment
company except as may presently exist.
C. In the event of any termination, Fund will promptly pay DST all amounts
due to DST hereunder. In addition, if this Agreement is terminated by
Fund for any reason other than those set forth in Section 22.B. hereof,
then Fund shall pay to DST on the last business day of each of the next
three (3) whole or partial calendar months (commencing with the last day
of the month in which termination actually occurs if termination does
not occur on the last business day of the month, and with the last
business day of the immediately following month if termination actually
occurs on the last business day of a month) an amount equal to the
average monthly fees, exclusive of the out-of-pocket expenses, paid by
or on behalf of each terminating party under the affected Agreement
during the six (6) calendar months preceding the month during which the
termination notice was received by DST.
D. If the termination date set forth in the original termination notice is
extended by any terminating party (which extension shall require the
agreement of DST), then the fees and charges payable by the terminating
party under this Agreement shall increase by twenty percent (20%) during
the period commencing with the original termination date set forth in
the initial termination notice and concluding with the day upon which
termination actually occurs. These provisions are in addition to any
other contractual provision or compensation agreements that may be in
existence at the time of an actual transfer.
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E. DST shall, upon termination of this Agreement and receipt of payment of
all outstanding bills and invoices, deliver to the successor so
specified or appointed, or to Fund, at DST's office, all records then
held by DST hereunder, all funds and other properties of Fund deposited
with or held by DST hereunder. In the event no written order designating
a successor (which may be Fund) shall have been delivered to DST on or
before the date when such termination shall become effective, then DST
shall deliver the records, funds and properties of Fund to a bank or
trust company at the selection of DST or if a satisfactory successor
cannot be obtained, DST may deliver the assets to Fund, at DST's offices
or as otherwise agreed to between the parties. Thereafter Fund or such
bank or trust company shall be the successor under this Agreement and
shall be entitled to reasonable compensation for its services.
Notwithstanding the foregoing requirement as to delivery upon
termination of this Agreement, DST may make any other delivery of the
funds and property of Fund which shall be permitted by the Investment
Company Act of 1940 and Fund's Articles of Incorporation, Declaration of
Trust, and/or Bylaws then in effect. Except as otherwise provided
herein, neither this Agreement nor any portion thereof may be assigned
by DST without the consent of Fund.
F. In the event of termination, DST shall provide reasonable assistance to
Fund and its designated successor transfer agent and other information
relating to its service provided hereunder (subject to the recompense of
DST for such assistance at its standard rates and fees for personnel
then in effect at that time); provided, however, as used herein
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"reasonable assistance" and "other information" shall not include
assisting any new service or system provider to modify, alter, enhance,
or improve its system or to improve, enhance, or alter its current, or
to provide any new, functionality or to require DST to disclose any DST
Protected Information, as defined in Section 23 of this Agreement, or
any information which is otherwise confidential to DST. DST's assistance
shall be billed at its then current rates. DST's present rates, which
are subject to annual increase as DST's labor costs for such personnel
increase, are set forth in Exhibit B.
G. Nothing in this Agreement is intended to, nor does it, compel DST to
disclose non-public information concerning its operations or operating
systems or to provide programming assistance or information which might
tend to improve, enhance, or add functionality to anyone else's
operating systems.
23. CONFIDENTIALITY.
A. DST agrees that, except as provided in the last sentence of Section 19.J
hereof, or as otherwise required by law, DST will keep confidential all
records of and information in its possession relating to Fund or its
shareholders or shareholder accounts and will not disclose the same to
any person except at the request or with the consent of Fund.
B. Fund agrees to keep confidential all provisions, terms and conditions of
this Agreement, all financial statements and other financial records
(other than statements and records relating solely to Fund's business
dealings with DST) and all manuals, systems and other technical
information and data, not publicly disclosed, relating to DST's
operations and programs furnished to it by DST pursuant to this
Agreement and will not disclose the same to any person except at the
request or with the consent of DST.
32
<PAGE>
C. Fund acknowledges that DST has proprietary rights in and to the
computerized data processing recordkeeping system used by DST to perform
services hereunder including but not limited to the maintenance of
shareholder accounts and records, processing of related information and
generation of output, the Systems, including without limitation any
changes or modifications of the Systems and any other DST programs, data
bases, supporting documentation, or procedures (collectively "DST
Protected Information") which Fund's access to the Systems or software
or DST Facilities may permit Fund or its employees or agents to become
aware of or to access and that the DST Protected Information constitutes
confidential material and trade secrets of DST. Fund agrees to maintain
the confidentiality of the DST Protected Information.
D. Fund acknowledges that any unauthorized use, misuse, disclosure or
taking of DST Protected Information which is confidential as provided by
law, or which is a trade secret, residing or existing internal or
external to a computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be accessed of any
computer, computer system, or computer network, may be subject to civil
liabilities and criminal penalties under applicable state law. Fund will
advise all of its employees and agents who have access to any DST
Protected Information or to any computer equipment capable of accessing
DST hardware or software of the foregoing.
E. Fund acknowledges that disclosure of the DST Confidential Information
may give rise to an irreparable injury to DST inadequately compensable
in damages. Accordingly, DST may seek (without the posting of any bond
33
<PAGE>
or other security) injunctive relief against the breach of the foregoing
undertaking of confidentiality and nondisclosure, in addition to any
other legal remedies which may be available, and Fund consents to the
obtaining of such injunctive relief. All of the undertakings and
obligations relating to confidentiality and nondisclosure, whether
contained in this Section or elsewhere in this Agreement shall survive
the termination or expiration of this Agreement for a period of ten (10)
years.
24. CHANGES AND MODIFICATIONS.
A. During the term of this Agreement DST will use on behalf of Fund without
additional cost all modifications, enhancements, or changes which DST
may make to the Systems in the normal course of its business and which
are applicable to functions and features offered by Fund, unless
substantially all DST clients are charged separately for such
modifications, enhancements or changes, including, without limitation,
substantial system revisions or modifications necessitated by changes in
existing laws, rules or regulations. Fund agrees to pay DST promptly for
modifications and improvements which are charged for separately at the
rate provided for in DST's standard pricing schedule which shall be
identical for substantially all clients, if a standard pricing schedule
shall exist. If there is no standard pricing schedule, the parties shall
mutually agree upon the rates to be charged.
B. DST shall have the right, at any time and from time to time, to alter
and modify any systems, programs, procedures or facilities used or
employed in performing its duties and obligations hereunder; provided
that Fund will be notified as promptly as possible prior to
implementation of such alterations and modifications and that no such
34
<PAGE>
alteration or modification or deletion shall materially adversely change
or affect the operations and procedures of Fund in using or employing
the Systems or DST Facilities hereunder or the reports to be generated
by such system and facilities hereunder, unless Fund is given thirty
(30) days prior notice to allow Fund to change its procedures and DST
provides Fund with revised operating procedures and controls.
C. All enhancements, improvements, changes, modifications or new features
added to the Systems however developed or paid for shall be, and shall
remain, the confidential and exclusive property of, and proprietary to,
DST.
25. SUBCONTRACTORS.
Nothing herein shall impose any duty upon DST in connection with or make
DST liable for the actions or omissions to act of unaffiliated third
parties such as, by way of example and not limitation, the banks at
which the deposit accounts are maintained, The National Securities
Clearing Corporation, airborne services, the U.S. mails and
telecommunication companies, provided, if DST selected such company, DST
shall have exercised due care in selecting the same.
26. LIMITATIONS ON LIABILITY.
A. If Fund is comprised of more than one Portfolio, each Portfolio shall be
regarded for all purposes hereunder as a separate party apart from each
other Portfolio. Unless the context otherwise requires, with respect to
every transaction covered by this Agreement, every reference herein to
Fund shall be deemed to relate solely to the particular Portfolio to
which such transaction relates. Under no circumstances shall the rights,
obligations or remedies with respect to a particular Portfolio
constitute a right, obligation or remedy applicable to any other
35
<PAGE>
Portfolio. The use of this single document to memorialize the separate
agreement of each Portfolio is understood to be for clerical convenience
only and shall not constitute any basis for joining the Portfolios for
any reason.
B. Notice is hereby given that a copy of Fund's Articles of Incorporation
or Trust Agreement (as applicable) and all amendments thereto is on file
with the Secretary of State of the state of its organization; that this
Agreement has been executed on behalf of Fund by the undersigned duly
authorized representative of Fund in his/her capacity as such and not
individually; and that the obligations of this Agreement shall only be
binding upon the assets and property of Fund and shall not be binding
upon any director, trustee, officer or shareholder of Fund individually.
27. NOTICES.
All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be validly given, made or
served if in writing and delivered personally, sent by mail, registered
or certified, return receipt requested, postage prepaid, by telegram or
by facsimile transmission:
If to Fund:
The Pilgrim Group of Funds
Two Renaissance Square
40 North Central Avenue., Suite 1200
Phoenix, Arizona 85004
Telephone No.: (602) 417-8115
Telecopier No.: (602) 417-8301
Attn: Jim Hennessy
And if to DST:
DST Systems, Inc.
210 West 10th Street, 7th Floor
Kansas City, Missouri 64105
Telephone No.: (816) 843-7500
Telecopier No.: (816) 843-7502
Attn: Senior Vice President
36
<PAGE>
With a copy of non-operational notices to:
DST Systems, Inc.
333 West 11th Street, 5th Floor
Kansas City, Missouri 64105
Telephone No.: (816) 435-8688
Telecopier No.: (816) 435-8630
Attn: Legal Department
or to such other address as DST or Fund may from time to time designate
in writing delivered as provided above.
28. MISCELLANEOUS.
A. This Agreement is executed and delivered in the State of Missouri and
shall be construed according to, and the rights and liabilities of the
parties hereto shall be governed by, the laws of the State of Missouri,
excluding that body of law applicable to choice of law.
B. All terms and provisions of this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties, all indemnifications and any
limitations on liability set forth in this Agreement are intended to and
shall continue after and survive the expiration, termination or
cancellation of this Agreement until any statute of limitations
applicable to the matter at issues shall have expired.
D. No provisions of this Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed each
party hereto.
37
<PAGE>
E. The captions in this Agreement are included for convenience of reference
only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
F. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
G. If any part, term or provision of this Agreement is by the courts held
to be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and not be
affected, and the rights and obligations of the parties shall be
construed and enforced as if this Agreement did not contain the
particular part, term or provision held to be illegal or invalid.
H. This Agreement may not be assigned any party hereto without prior
written consent of the other parties.
I. Neither the execution nor performance of this Agreement shall be deemed
to create a partnership or joint venture by and between Fund and DST. It
is understood and agreed that all services performed hereunder by DST
shall be as an independent contractor and not as an employee of Fund.
This Agreement is between DST and Fund and neither this Agreement nor
the performance of services under it shall create any rights in any
third parties. There are no third party beneficiaries hereto.
J. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by any party hereunder shall not affect
any rights or obligations of any other party hereunder.
38
<PAGE>
K. The failure of either party to insist upon the performance of any terms
or conditions of this Agreement or to enforce any rights resulting from
any breach of any of the terms or conditions of this Agreement,
including the payment of damages, shall not be construed as a continuing
or permanent waiver of any such terms, conditions, rights or privileges,
but the same shall continue and remain in full force and effect as if no
such forbearance or waiver had occurred.
L. This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement, draft or agreement or
proposal with respect to the subject matter hereof, whether oral or
written.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers, to be effective as of the
day and year first above written.
DST SYSTEMS, INC. PILGRIM MUTUAL FUNDS
Pilgrim International Core Growth
Pilgrim Worldwide Growth
Pilgrim International Small Cap Growth
Pilgrim Emerging Countries
Pilgrim Large Cap Growth
Pilgrim MidCap Growth
Pilgrim Small Cap Growth
Pilgrim Convertible
Pilgrim Balanced
Pilgrim Strategic Income
Pilgrim High Yield Fund II
Pilgrim Money Market
By: By:
---------------------------- --------------------------
Title: Title:
----------------------- -----------------------
39
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Open/ State of Taxpayer
Taxpayer/fund Name Type of Organization Closed Organization I.d. No.
- ------------------ -------------------- ------ ------------ --------
<S> <C> <C> <C> <C>
Pilgrim Mutual Funds corporation Delaware
Pilgrim International a series of Pilgrim
Core Growth Mutual Funds
Pilgrim Worldwide Growth a series of Pilgrim
Mutual Funds
Pilgrim International
Small Cap Growth a series of Pilgrim
Mutual Funds
Pilgrim Emerging Countries a series of Pilgrim
Mutual Funds
Pilgrim Large Cap Growth a series of Pilgrim
Mutual Funds
Pilgrim MidCap Growth a series of Pilgrim
Mutual Funds
Pilgrim Small Cap Growth a series of Pilgrim
Mutual Funds
Pilgrim Convertible a series of Pilgrim
Mutual Funds
Pilgrim Balanced a series of Pilgrim
Mutual Funds
Pilgrim Strategic Income a series of Pilgrim
Mutual Funds
Pilgrim High Yield Fund II a series of Pilgrim
Mutual Funds
Pilgrim Money Market a series of Pilgrim
Mutual Funds
</TABLE>
40
<PAGE>
EXHIBIT B
[intentionally left blank]
41
<PAGE>
EXHIBIT C
REIMBURSABLE EXPENSES
Forms
Postage (to be paid in advance if so requested)
Mailing Services
Computer Hardware and Software - specific to Fund or installed at
remote site at Fund's direction
Telecommunications Equipment and Lines/Long Distance Charges
Magnetic Tapes, Reels or Cartridges
Magnetic Tape Handling Charges
Microfiche/Microfilm
Freight Charges
Printing Bank Wire and ACH Charges
Proxy Processing - per proxy mailed not including postage
Includes: Proxy Card
Printing
Outgoing Envelope
Return Envelope
Tabulation and Certification
T.I.N. Certification (W-8 & W-9)
(Postage associated with the return
envelope is included)
N.S.C.C. Communications Charge See Optional Services
(Fund/Serv and Networking) and Exhibit B.2
Off-site Record Storage
Disaster Backup Fee (per account) See Optional Services
Transmission of Statement Data for Currently $.035/per
Remote Processing record
Travel, Per Diem and other Billables
Incurred by DST personnel traveling
to, at and from Fund at the request
of Fund
42
<PAGE>
EXHIBIT D
AUTHORIZED PERSONNEL
Pursuant to Section 8.A. of the Agency Agreement between Fund and DST (the
"Agreement"), Fund authorizes the following Fund personnel to provide
instructions to DST, and receive inquiries from DST in connection with the
Agreement:
Name Title
---- -----
- --------------------------------- --------------------------------
- --------------------------------- --------------------------------
- --------------------------------- --------------------------------
- --------------------------------- --------------------------------
- --------------------------------- --------------------------------
This Exhibit may be revised by Fund by providing DST with a substitute Exhibit
B. Any such substitute Exhibit B shall become effective twenty-four (24) hours
after DST's receipt of the document and shall be incorporated into the
Agreement.
ACKNOWLEDGMENT OF RECEIPT:
PILGRIM MUTUAL FUNDS
Pilgrim International Core Growth
Pilgrim Worldwide Growth
Pilgrim International Small Cap Growth
Pilgrim Emerging Countries
Pilgrim Large Cap Growth
Pilgrim MidCap Growth
Pilgrim Small Cap Growth
Pilgrim Convertible
Pilgrim Balanced
Pilgrim Strategic Income
Pilgrim High Yield Fund II
Pilgrim Money Market
DST SYSTEMS, INC.
By: By:
---------------------------- --------------------------
Title: Title:
------------------------- -----------------------
Date: Date:
------------------------- -----------------------
43
SHAREHOLDER SERVICE AGREEMENT
This Agreement made on the 24th day of May, 1999 by and between Pilgrim Mutual
Funds, a Delaware Trust, having its principal place of business at Two
Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
(the "Trust"), and Pilgrim Group Inc., a Delaware corporation having its
principal place of business at Two Renaissance Square, 40 North Central Avenue,
Suite 1200, Phoenix, Arizona 85004 ("PGI"):
WITNESSETH:
WHEREAS, the Trust is party to a transfer agent agreement with DST
Systems, Inc.("DST") wherein DST provides all transaction processing and record
keeping for the Trust's shareholders and would provide shareholder services for
the Trust if the Trust so desired, and
WHEREAS, the Trust has determined that PGI is capable of providing
superior shareholder services to the Trust in conjunction with DST as the
Transfer Agent, and
WHEREAS, the Trust desires to appoint PGI as Shareholder Service Agent
and PGI desires to accept such appointment:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
SCOPE OF APPOINTMENT
Trust hereby appoints PGI as Shareholder Service Agent and as such PGI hereby
accepts such appointment and agrees that it will provide the Trust with services
which include but are not limited to the following:
A. Reviewing correspondence pertaining to any former, existing or new
shareholder account, processing such correspondence for proper record
keeping, and responding promptly to correspondence from shareholders and
dealers.
B. Receiving telephone calls pertaining to any former, existing or new
shareholder account, verbally responding to such calls and when required
responding in writing and maintaining prior record keeping regarding such
calls from shareholders and dealers and responses thereto.
C. PGI further agrees that the scope of this appointment does not include any
services required to be provided by a registered broker-dealer or
registered transfer agent.
<PAGE>
CERTAIN REPRESENTATIONS AND WARRANTIES OF PGI AND THE TRUST
PGI represents and warrants to the Trust that:
A. It is a Trust duly organized and existing and in good standing under the
laws of Delaware.
B. It is duly qualified to carry on its business in the State of Arizona.
C. It has and will continue to have and maintain the necessary facilities,
equipment and personnel to perform its duties and obligations under this
agreement.
D. PGI is empowered under applicable laws and by its charter and bylaws to
enter into this Agreement.
The Trust represents and warrants to PGI that:
A. It is a corporation duly organized and existing and in good standing under
the laws of Maryland.
B. It is an open-end diversified management investment company registered
under the Investment Company Act of 1940, as amended.
C. The Trust is empowered under applicable laws and by its charter and bylaws
to enter into this Agreement.
COMPENSATIONS AND EXPENSES
In consideration for its services here under as Shareholder Service Agent, the
Trust will pay to PGI reasonable compensation for all services rendered as
Agent, and all its reasonable out-of-pocket expenses incurred in connection with
the agency. Such compensation is set forth in a separate schedule to be agreed
to by the Trust and PGI, a copy of which is attached hereto.
The Trust agrees to promptly reimburse PGI for all reasonable out-of-pocket
expenses or disbursements incurred by PGI in connection with the performance of
services under this Agreement including, but not limited to, expenses for
postage, express delivery services, envelopes, forms, telephone communication
expenses and stationary supplies. PGI agrees to furnish to the Trust's Board of
Directors, upon request, reasonable documentation of any expenses for which
reimbursement is sought.
<PAGE>
INDEMNIFICATIONS
PGI shall at all times use reasonable care, due diligence and act in good faith
in performing its duties under this Agreement. PGI shall not be responsible for,
and the Trust shall indemnify and hold PGI harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liability which may be asserted against PGI or for which PGI may be held liable,
arising out of or attributable to all actions of PGI required to be taken by PGI
pursuant to this Agreement provided that PGI has acted in good faith and with
due diligence and reasonable care. The Trust shall not be responsible for, and
PGI shall indemnify and hold harmless the Trust from and against, any and all
losses, damages, costs, charges, counsel fees, payments, expenses, and liability
which any be asserted against the Trust or for which the Trust may be held
liable, arising out of or attributable to all actions of PGI required to be
taken by PGI pursuant to this Agreement in which PGI has not acted in good faith
and with due diligence and reasonable care.
TERMINATION OF AGREEMENT
This Agreement shall be in effect from May 24, 1999 through July 29, 2002 and
thereafter may be terminated by either party upon receipt of 60 days' written
notice.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers, to be effective as of the
day and year first written above.
PILGRIM GROUP, INC.
BY:
-------------------------------
TITLE:
----------------------------
PILGRIM MUTUAL FUNDS
BY:
-------------------------------
TITLE:
----------------------------
EXPENSE LIMITATION AGREEMENT
PILGRIM MUTUAL FUNDS
EXPENSE LIMITATION AGREEMENT, effective as of May 21, 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 class of 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 fiscal
year with respect to each class of each Fund shall be the amount specified in
SCHEDULE A based on a percentage of the average daily net assets of such class
of the Fund.
<PAGE>
1.3. METHOD OF COMPUTATION. To determine the Investment Manager's
obligation with respect to the Excess Amount, each day the Fund Operating
Expenses for each class of a Fund shall be annualized. If the annualized Fund
Operating Expenses for any day of a class of a Fund exceed the Operating Expense
Limit of for that class of such Fund, the Investment Manager shall remit to the
appropriate class of the Fund 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.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of
the first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the amount of the investment management fees
waived or reduced and other payments remitted by the Investment Manager to each
class of each Fund with respect to the previous fiscal year shall equal the
Excess Amount.
2. RECOUPMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. RECOUPMENT. If on any day during which the Management Agreement is
in effect, the estimated annualized Fund Operating Expenses of a class of a Fund
for that day are less than the Operating Expense Limit, the Investment Manager
shall be entitled to recoup from such Fund the investment management fees waived
or reduced and other payments remitted by the Investment Manager to such class
of the Fund pursuant to Section 1 hereof (the "Recoupment Amount") during any of
the previous thirty-six (36) months, to the extent that such class' annualized
Operating Expenses plus the amount so recouped 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 Recoupment Amount
and will not include any amounts previously recouped.
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 each class
of each a Fund for the prior fiscal year (including any recoupment 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%
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.
-2-
<PAGE>
3.2. ALLOCATION OF RECOUPMENTS. The Investment Manager shall promptly
remit to the Portfolio Manager 50% of any amount recouped by the Investment
Manager from 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 recouped under this
Agreement.
4. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall have an initial term through June 30, 2001.
Thereafter, this Agreement shall automatically renew for one-year terms unless
the Investment Manager provides written notice of the termination of this
Agreement to the Trust at least 30 days prior to the end of the then-current
term; provided, however, that the Portfolio Manager may terminate this Agreement
with respect to any Sub-Adviser Fund at least 30 days prior to the end of the
then-current term. In addition, this Agreement shall terminate upon termination
of the Investment Management Agreement, or it may be terminated by the Trust,
without payment of any penalty, upon ninety (90) days' prior written notice to
the Investment Manager at its principal place of business. 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.
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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and year first above
written.
PILGRIM MUTUAL FUNDS
ON BEHALF OF
EACH OF ITS SERIES
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
PILGRIM INVESTMENTS, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT L.P.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
-4-
<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 SmallCap Growth Fund 1.95% 2.60% 2.60% 1.50%
Pilgrim MidCap Growth Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim LargeCap Growth Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Convertible Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Balanced Fund 1.60% 2.25% 2.25% 1.25%
Pilgrim Strategic Income 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 SmallCap Growth Fund 1.95% 2.60% 2.60% 1.65%
Pilgrim International Core Growth Fund 1.95% 2.60% 2.60% 1.65%
Pilgrim High Yield Fund II 1.10% 1.75% 1.75% 1.00%
-5-
<PAGE>
SCHEDULE B
SUB-ADVISED FUNDS
Pilgrim SmallCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim LargeCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Emerging Countries Fund
Pilgrim Worldwide Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim International Core Growth Fund
-6-
RECORDKEEPING AGREEMENT
THIS AGREEMENT is made effective the 24th day of May, 1999, by and
between INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the
laws of the state of Missouri, having its principal office and place of business
at 801 Pennsylvania, Kansas City, Missouri 64105 ("IFTC"), and PILGRIM MUTUAL
FUNDS, a Delaware trust, having its principal office and place of business at
Two Renaissnce Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint IFTC as its agent to perform certain
investment accounting and recordkeeping functions for the assets of the Fund's
investment portfolio or portfolios (each a "Portfolio", and collectively the
"Portfolios"); and
WHEREAS, IFTC is willing to accept such appointment on the terms and
conditions hereinafter set forth;
NOW THEREFORE, for and in consideration of the mutual promises
contained herein, the parties hereto, intending to be legally bound, mutually
covenant and agree as follows:
1. APPOINTMENT OF AGENT. Fund hereby constitutes and appoints IFTC as its
agent to perform certain accounting and recordkeeping functions relating to
portfolio transactions required of a duly registered investment company
under Rule 31a of the Investment Company Act of 1940, as amended (the "1940
Act") and to calculate the net asset value of the Portfolios.
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to IFTC:
1. That it is a trust duly organized and existing and in good
standing under the laws of its state of organization, and that it
is registered under the 1940 Act; and
2. That it has the requisite power and authority under applicable
law and its declaration of trust to enter into this Agreement; it
has taken all requisite action necessary to appoint IFTC as
investment accounting and recordkeeping agent; this Agreement has
been duly executed and delivered by Fund; and this Agreement
constitutes a legal, valid and binding obligation of Fund,
enforceable in accordance with its terms.
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B. IFTC hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in
good standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into and perform this
Agreement; this Agreement has been duly executed and delivered by
IFTC; and this Agreement constitutes a legal, valid and binding
obligation of IFTC, enforceable in accordance with its terms.
3. DUTIES AND RESPONSIBILITIES OF THE PARTIES.
A. Delivery of Accounts and Records. Fund will turn over or cause to be
turned over to IFTC all accounts and records needed by IFTC to perform
its duties and responsibilities hereunder fully and properly. IFTC may
rely conclusively on the completeness and correctness of such accounts
and records.
B. Accounts and Records. IFTC will prepare and maintain, under the
direction of and as interpreted by Fund, Fund's or Portfolio's
accountants and/or other advisors, in complete, accurate and current
form such accounts and records: (1) required to be maintained by Fund
with respect to portfolio transactions under Section 31(a) of the 1940
Act and the rules and regulations from time to time adopted
thereunder; (2) required as a basis for calculation of each
Portfolio's net asset value; and (3) as otherwise agreed upon by the
parties. Fund will advise IFTC in writing of all applicable record
retention requirements, other than those set forth in the 1940 Act.
IFTC will preserve such accounts and records in the manner and for the
periods prescribed in the 1940 Act or for such longer period as is
agreed upon by the parties. Fund will furnish, in writing or its
electronic or digital equivalent, accurate and timely information
needed by IFTC to complete such accounts and records when such
information is not readily available from generally accepted
securities industry services or publications.
C. Accounts and Records Property of Fund. IFTC acknowledges that all of
the accounts and records maintained by IFTC pursuant hereto are the
property of Fund, and will be made available to Fund for inspection or
reproduction within a reasonable period of time, upon demand. IFTC
will assist Fund's independent auditors, or upon the prior written
approval of Fund, or upon demand, any regulatory body, in any
requested review of Fund's accounts and records but Fund will
reimburse IFTC for all expenses and employee time invested in any such
review outside of routine and normal periodic reviews. Upon receipt
from Fund of the necessary information or instructions, IFTC will
supply information from the books and records it maintains for Fund
that Fund may reasonably request for tax returns, questionnaires,
periodic reports to shareholders and such other reports and
information requests as Fund and IFTC may agree upon from time to
time.
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D. Adoption of Procedures. IFTC and Fund may from time to time adopt such
procedures as they agree upon, and IFTC may conclusively assume that
no procedure approved or directed by Fund, Fund's or Portfolio's
accountants or other advisors conflicts with or violates any
requirements of the prospectus, declaration of trust, any applicable
law, rule or regulation, or any order, decree or agreement by which
Fund may be bound. Fund will be responsible for notifying IFTC of any
changes in statutes, regulations, rules, requirements or policies
which may impact IFTC's responsibilities or procedures under this
Agreement.
E. Valuation of Assets. IFTC will value the Assets in accordance with
Fund's Instructions utilizing the pricing sources designated by Fund
("Pricing Sources"). In the event that Fund specifies Reuters America,
Inc., it will enter into the Agreement attached hereto as Exhibit A.
IFTC will calculate each Portfolio's net asset value in accordance
with the Portfolio's prospectus.
4. INSTRUCTIONS.
A. The term "Instructions", as used herein, means written (including
telecopied, telexed, or electronically transmitted) or oral
instructions which IFTC reasonably believes were given by a designated
representative of Fund. Fund will deliver to IFTC, prior to delivery
of any Assets to IFTC and thereafter from time to time as changes
therein are necessary, written Instructions naming one or more
designated representatives to give Instructions in the name and on
behalf of Fund, which Instructions may be received and accepted by
IFTC as conclusive evidence of the authority of any designated
representative to act for Fund and may be considered to be in full
force and effect until receipt by IFTC of notice to the contrary.
Unless such written Instructions delegating authority to any person to
give Instructions specifically limit such authority to specific
matters or require that the approval of anyone else will first have
been obtained, IFTC will be under no obligation to inquire into the
right of such person, acting alone, to give any Instructions
whatsoever. If Fund fails to provide IFTC any such Instructions naming
designated representatives, any Instructions received by IFTC from a
person reasonably believed to be an appropriate representative of Fund
will constitute valid and proper Instructions hereunder. The term
"designated representative" may include Fund's or a Portfolio's
employees and agents, including investment managers and their
employees.
B. No later than the next business day immediately following each oral
Instruction, Fund will send IFTC written confirmation of such oral
Instruction. At IFTC's sole discretion, IFTC may record on tape, or
otherwise, any oral Instruction whether given in person or via
telephone, each such recording identifying the date and the time of
the beginning and ending of such oral Instruction.
C. Fund will provide upon IFTC's request a certificate signed by an
officer or designated representative of Fund, as conclusive proof of
any fact or matter required to be ascertained from Fund hereunder.
Fund will also provide IFTC Instructions with respect to any matter
concerning this Agreement requested by IFTC. If IFTC reasonably
3
<PAGE>
believes that it could not prudently act according to the
Instructions, or the instruction or advice of Fund's or a Portfolio's
accountants or counsel, it may in its discretion, with notice to Fund,
not act according to such Instructions.
5. LIMITATION OF LIABILITY OF IFTC. IFTC is not responsible or liable for, and
Fund will indemnify and hold IFTC harmless from and against, any and all
costs, expenses, losses, damages, charges, counsel fees (including, without
limitation, disbursements and the allocable cost of in-house counsel),
payments and liabilities which may be asserted against or incurred by IFTC
or for which IFTC may be held to be liable, arising out of or attributable
to:
A. IFTC's action or failure to act pursuant hereto; provided that IFTC
has acted in good faith and with reasonable care; and provided
further, that in no event is IFTC liable for consequential, special,
or punitive damages;
B. IFTC's payment of money as requested by Fund, or the taking of any
action which might make it or its nominee liable for payment of monies
or in any other way; provided, however, that nothing herein obligates
IFTC to take any such action or expend its own monies except in its
sole discretion;
C. IFTC's action or failure to act hereunder upon any Instruction,
advice, notice, request, consent, certificate or other instrument or
paper appearing to it to be genuine and to have been properly
executed, including any Instructions, communications, data or other
information received by IFTC by means of the Systems, as hereinafter
defined, or any electronic system of communication;
D. IFTC's action or failure to act in good faith reliance on the advice
or opinion of counsel for Fund or of its own counsel with respect to
questions or matters of law, which advice or opinion may be obtained
by IFTC at the expense of Fund, or on the Instruction, advice or
statements of any officer or employee of Fund, or Fund's accountants
or other authorized individuals, and other persons believed by it in
good faith to be expert in matters upon which they are consulted;
E. Any error, omission, inaccuracy or other deficiency in any Portfolio's
accounts and records or other information provided to IFTC by or on
behalf of a Portfolio, including the accuracy of the prices quoted by
the Pricing Sources or for the information supplied by Fund to value
the Assets, or the failure of Fund to provide, or provide in a timely
manner, any accounts, records, or information needed by IFTC to
perform its duties hereunder;
F. Fund's refusal or failure to comply with the terms hereof (including
without limitation Fund's failure to pay or reimburse IFTC under
Section 5 hereof), Fund's negligence or willful misconduct, or the
failure of any representation or warranty of Fund hereunder to be and
remain true and correct in all respects at all times;
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<PAGE>
G. The use or misuse, whether authorized or unauthorized, of the Systems
or any electronic system of communication used hereunder, by Fund or
by any person who acquires access to the Systems or such other systems
through the terminal device, passwords, access instructions or other
means of access to such Systems or such other system which are
utilized by, assigned to or otherwise made available to Fund, except
to the extent attributable to any negligence or willful misconduct by
IFTC;
H. Loss occasioned by the acts, omissions, defaults or insolvency of any
broker, bank, trust company, securities system or any other person
with whom IFTC may deal; and
I. The failure or delay in performance of its obligations hereunder, or
those of any entity for which it is responsible hereunder, arising out
of or caused, directly or indirectly, by circumstances beyond the
affected entity's reasonable control, including, without limitation:
any interruption, loss or malfunction of any utility, transportation,
computer (hardware or software) or communication service; inability to
obtain labor, material, equipment or transportation, or a delay in
mails; governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes,
freezes, floods, fires, tornadoes, acts of God or public enemy,
revolutions, or insurrection.
6. COMPENSATION. In consideration for its services hereunder, Fund will pay to
IFTC the compensation set forth in a separate fee schedule, incorporated
herein by reference, to be agreed to by Fund and IFTC from time to time,
and, upon demand, reimbursement for IFTC's cash disbursements and
reasonable out-of-pocket costs and expenses, including attorney's fees and
disbursements, incurred by IFTC in connection with the performance of
services hereunder.
7. TERM AND TERMINATION. The initial term of this Agreement is for a period of
one (1) year. Thereafter, either Fund or IFTC may terminate this Agreement
by notice in writing, delivered or mailed, postage prepaid, to the other
party and received not less than ninety (90) days prior to the date upon
which such termination will take effect. Upon termination hereof:
A. Fund will pay IFTC its fees and compensation due hereunder and its
reimbursable disbursements, costs and expenses paid or incurred to
such date;
B. Fund will designate a successor (which may be Fund) by Instruction to
IFTC; and
C. IFTC will, upon payment of all sums due to IFTC from Fund hereunder or
otherwise, deliver all accounts and records and other properties of
Fund to the successor, or, if none, to Fund, at IFTC's office.
In the event that accounts, records or other properties remain in the
possession of IFTC after the date of termination hereof for any reason
other than IFTC's failure to deliver the same, IFTC is entitled to
compensation as provided in the then-current fee schedule for its services
during such period, and the provisions hereof relating to the duties and
obligations of IFTC will remain in full force and effect.
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<PAGE>
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at the address set forth above, or at such other address as Fund may
have designated to IFTC in writing, will be deemed to have been properly
given to Fund hereunder. Notices, requests, Instructions and other writings
addressed to IFTC at the address set forth above, Attention: Investment
Accounting Department, or to such other address as it may have designated
to Fund in writing, will be deemed to have been properly given to IFTC
hereunder.
9. THE SYSTEMS; CONFIDENTIALITY.
A. If IFTC provides Fund direct access to the computerized investment
portfolio recordkeeping and accounting systems used by IFTC
("Systems") or if IFTC and Fund agree to utilize any electronic system
of communication, Fund agrees to implement and enforce appropriate
security policies and procedures to prevent unauthorized or improper
access to or use of the Systems or such other system.
B. Fund will preserve the confidentiality of the Systems and the tapes,
books, reference manuals, instructions, records, programs,
documentation and information of, and other materials relevant to, the
Systems and the business of IFTC or its affiliates ("Confidential
Information"). Fund agrees that it will not voluntarily disclose any
such Confidential Information to any other person other than its own
employees who reasonably have a need to know such information pursuant
hereto. Fund will return all such Confidential Information to IFTC
upon termination or expiration hereof.
C. Fund has been informed that the Systems are licensed for use by IFTC
and its affiliates from one or more third parties ("Licensors"), and
Fund acknowledges that IFTC and Licensors have proprietary rights in
and to the Systems and all other IFTC or Licensor programs, code,
techniques, know-how, data bases, supporting documentation, data
formats, and procedures, including without limitation any changes or
modifications made at the request or expense or both of Fund
(collectively, the "Protected Information"). Fund acknowledges that
the Protected Information constitutes confidential material and trade
secrets of IFTC and Licensors. Fund will preserve the confidentiality
of the Protected Information, and Fund hereby acknowledges that any
unauthorized use, misuse, disclosure or taking of Protected
Information, residing or existing internal or external to a computer,
computer system, or computer network, or the knowing and unauthorized
accessing or causing to be accessed of any computer, computer system,
or computer network, may be subject to civil liabilities and criminal
penalties under applicable law. Fund will so inform employees and
agents who have access to the Protected Information or to any computer
equipment capable of accessing the same. Licensors are intended to be
and are third party beneficiaries of Fund's obligations and
undertakings contained in this Section.
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<PAGE>
D. Fund hereby represents and warrants to IFTC that it has determined to
its satisfaction that the Systems are appropriate and suitable for its
use. THE SYSTEMS ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. IFTC
EXPRESSLY DISCLAIMS ALL WARRANTIES INCLUDING, BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, EXCEPT THOSE WARRANTIES EXPRESSLY STATED HEREIN.
E. State Street will take reasonable steps to ensure that its products
(and those of its third-party suppliers) reflect the available state
of the art technology to offer products that are Year 2000 compliant,
including, but not limited to, century recognition of dates,
calculations that correctly compute same century and multi century
formulas and date values, and interface values that reflect the date
issues arising between now and the next one-hundred years, and if any
changes are required, State Street will make the changes to its
products at no cost to the Fund and in a commercially reasonable time
frame and will require third-party suppliers to do likewise.
Similarly, Fund will take reasonable steps to ensure that its
electronic systems reflect the available state of the art technology
and are Year 2000 compliant, including, but not limited to, century
recognition of dates, calculations that correctly compute same century
and multi century formulas and date values, and interface values that
reflect the date issues arising between now and the next one-hundred
years, and if any changes are required, Fund will make the changes to
its systems at no cost to State Street and in a commercially
reasonable time frame.
10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio, the
following provisions apply:
A. Each Portfolio will be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered hereby,
every reference herein to Fund is deemed to relate solely to the
particular Portfolio to which such transaction relates. Under no
circumstances will the rights, obligations or remedies with respect to
a particular Portfolio constitute a right, obligation or remedy
applicable to any other Portfolio. The use of this single document to
memorialize the separate agreement as to each Portfolio is understood
to be for clerical convenience only and will not constitute any basis
for joining the Portfolios for any reason.
B. Fund may appoint IFTC as its investment accounting and recordkeeping
agent for additional Portfolios from time to time by written notice,
provided that IFTC consents to such addition. Rates or charges for
each additional Portfolio will be as agreed upon by IFTC and Fund in
writing.
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11. MISCELLANEOUS.
A. This Agreement will be construed according to, and the rights and
liabilities of the parties hereto will be governed by, the laws of the
State of Missouri, without reference to the choice of laws principles
thereof.
B. All terms and provisions hereof will be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9 hereof are intended to and
will continue after and survive the expiration, termination or
cancellation hereof.
D. No provisions hereof may be amended or modified in any manner except
by a written agreement properly authorized and executed by each party
hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions hereof or to enforce any rights resulting from any
breach of any of the terms or conditions hereof, including the payment
of damages, will not be construed as a continuing or permanent waiver
of any such terms, conditions, rights or privileges, but the same will
continue and remain in full force and effect as if no such forbearance
or waiver had occurred. No waiver, release or discharge of any party's
rights hereunder will be effective unless contained in a written
instrument signed by the party sought to be charged.
F. The captions herein are included for convenience of reference only,
and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which is deemed an original but all of which together constitute one
and the same instrument.
H. If any provision hereof is determined to be invalid, illegal, in
conflict with any law or otherwise unenforceable, the remaining
provisions hereof will be considered severable and will not be
affected thereby, and every remaining provision hereof will remain in
full force and effect and will remain enforceable to the fullest
extent permitted by applicable law.
I. The benefits of this Agreement may not be assigned by either party nor
may either party delegate all or a portion of its duties hereunder
without the prior written consent of the other party. Notwithstanding
the foregoing, Fund agrees that IFTC may delegate all or a portion of
its duties to an affiliate of IFTC, provided that such delegation will
not reduce the obligations of IFTC under this Agreement.
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<PAGE>
J. Neither the execution nor performance hereof will be deemed to create
a partnership or joint venture by and between IFTC and Fund or any
Portfolio.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by either party hereunder will not
affect any rights or obligations of the other party hereunder.
L. Notice is hereby given that a copy of Fund's Trust Agreement and all
amendments thereto is on file with the Secretary of State of the state
of its organization; that this Agreement has been executed on behalf
of Fund by the undersigned duly authorized representative of Fund in
his/her capacity as such and not individually; and that the
obligations of this Agreement are binding only upon the assets and
property of Fund and not upon any trustee, officer of shareholder of
Fund individually.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST PILGRIM MUTUAL FUNDS
COMPANY
By: By:
----------------------------- -----------------------------
Title: Title:
--------------------------- ---------------------------
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<PAGE>
EXHIBIT A--REUTERS DATA SERVICE AGREEMENT
The undersigned acknowledges and agrees that some of the data being provided in
the service by IFTC to Fund contains information supplied to IFTC by Reuters
America Inc. ("Reuters") (the "Data"). Fund agrees that:
(i) although Reuters makes every effort to ensure the accuracy and
reliability of the Data, Fund acknowledges that Reuters, its
employees, agents, contractors, subcontractors, contributors and
third party providers will not be liable for any loss, cost or
damage suffered or incurred by Fund arising out of any fault,
interruption or delays in the Data or out of any inaccuracies,
errors or omissions in the Data however such faults,
interruptions, delays, inaccuracies, errors or omissions arise,
unless due to the gross negligence or willful misconduct of
Reuters;
(ii) it will not transfer, transmit, recirculate by digital or
analogue means, republish or resell all or part of the Data; and
(iii) certain parts of the Data are proprietary and unique to Reuters.
The undersigned further agrees that the benefit of this clause will inure to the
benefit of Reuters.
PILGRIM MUTUAL FUNDS
By:
-----------------------------
Title:
---------------------------
Date:
---------------------------
10
[LETTERHEAD OF DECHERT PRICE & RHOADS]
May 24, 1999
Pilgrim Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim Mutual Funds
(File Nos. 33-56094 and 811-7428)
Dear Sirs:
We have examined such documents and records as we deemed necessary to
render this opinion. Based upon the foregoing, we are of the opinion that the
shares to be sold pursuant to the Registration Statement of Pilgrim Mutual Funds
(the "Trust"), when paid for as contemplated in the Trust's Registration
Statement, will be legally and validly issued, fully paid and non-assessable by
the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement, and to all references to our firm therein. In
giving such consent, however, we do not admit that we are within the category of
persons whose consent is required by Section 7 of the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" in Post-Effective Amendment No. 68 under
the Securities Act of 1933 and Amendment No. 70 under the Investment Company Act
of 1940 to the Registration Statement (Form N-1A, No. 33-56094) and related
Prospectus and Statement of Additional Information of Pilgrim Mutual Funds
(formerly Nicholas-Applegate Mutual Funds), and to the incorporation by
reference therein of our report dated May 7, 1999, with respect to the financial
statements and financial highlights of Pilgrim Mutual Funds, included in its
Annual Report for the year ended March 31, 1999, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 24, 1999
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pilgrim Advisory Funds, Inc.
Pilgrim Investment Funds, Inc.
Pilgrim Bank and Thrift Fund, Inc.,
Pilgrim Government Securities Income Fund, Inc. and
Pilgrim Mutual Funds:
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the heading "Financial Highlights" in the
prospectus for Class A, B, C and M shares and "Independent Auditors" in the
Statements of Additional Information.
/s/ KPMG LLP
Los Angeles, California
May 21, 1999
AMENDMENT TO AMENDED AND RESTATED
SERVICE AND DISTRIBUTION PLAN FOR
PILGRIM MUTUAL FUNDS
Class B Shares
(1) Schedule A of the above named Plan is hereby amended and restated
as follows to add the following Series of the Trust (as that term is defined in
the Plan) and to reflect certain name changes to certain series of the Trust:
Schedule A
Pilgrim International Core Growth Fund Pilgrim Convertible Fund
Pilgrim Worldwide Growth Fund Pilgrim Balanced Fund
Pilgrim International SmallCap Growth Fund Pilgrim Money Market Fund
Pilgrim Emerging Countries Fund Pilgrim Strategic Income Fund
Pilgrim LargeCap Growth Fund Pilgrim High Yield Fund II
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
(2) The first paragraph of Section 1A of the Plan is hereby amended and
restated as follows:
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; provided however, that the
Distribution Fee paid by Class B Shares of the Pilgrim Money Market
Fund shall be reduced by the amount, if any, paid to Distributor or
any affiliate of Distributor from the investment adviser or
distributor of any investment company in which the Pilgrim Money
Market Fund invests substantially all of its assets, and the
Distribution Fee for Pilgrim Strategic Income Fund shall be 0.50% per
annum of that Fund's average daily net assets attributable to Class B
Shares of that Fund. The Distribution Fee shall be payable monthly or
at such other intervals as the Trustees shall determine, subject to
any applicable restrictions imposed by the rules of the National
Association of Securities Dealers, Inc. ("NASD").
<PAGE>
IN WITNESS WHEREOF, the Distributor and the Trust have signed this
Amendment pursuant to the terms of the Plan.
PILGRIM SECURITIES, INC. PILGRIM MUTUAL FUNDS
By By
------------------------------ --------------------------------
Name: Name:
Title: Title:
Dated: May ___, 1999
AMENDMENT TO AMENDED AND RESTATED
SERVICE AND DISTRIBUTION PLAN FOR
PILGRIM MUTUAL FUNDS
Class C Shares
(1) Schedule A of the above named Plan is hereby amended and restated
as follows to add the following Series of the Trust (as that term is defined in
the Plan) and to reflect certain name changes to certain series of the Trust:
Schedule A
Pilgrim International Core Growth Fund Pilgrim Convertible Fund
Pilgrim Worldwide Growth Fund Pilgrim Balanced Fund
Pilgrim International SmallCap Growth Fund Pilgrim Money Market Fund
Pilgrim Emerging Countries Fund Pilgrim Strategic Income Fund
Pilgrim LargeCap Growth Fund Pilgrim High Yield Fund II
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
(2) Paragraph 1.A of the Plan is hereby amended and restated as
follows:
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% (0.50% for Pilgrim Strategic Income Fund) 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 limitations upon such payments established by this Plan to be
exceeded. To the extent the investment company in which the Pilgrim
Money Market Fund invests substantially all of its assets pays the
Distributor or any affiliate of Distributor a fee for distribution the
distribution fee provided herein shall be reduced by the amount, if
any, paid by such investment company. The distribution fee provided
for herein 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.
<PAGE>
IN WITNESS WHEREOF, the Distributor and the Trust have signed this
Amendment pursuant to the terms of the Plan.
PILGRIM SECURITIES, INC. PILGRIM MUTUAL FUNDS
By By
------------------------------ --------------------------------
Name: Name:
Title: Title:
Dated: May ___, 1999
AMENDED AND RESTATED MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
FOR
PILGRIM MUTUAL FUNDS
WHEREAS, 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"); and
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; and
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; and
WHEREAS, the Trust desires to amend the Plan to include a new series,
the Pilgrim Money Market Fund, which will offer only Class B and Class C shares,
to reflect that certain series of the Pilgrim Mutual Funds has changed their
names and to reflect changes to the fees charged to Pilgrim Strategic Income
Fund;
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, other than the Pilgrim
Money Market Fund, issues its shares of beneficial interest in four classes:
"Class A Shares," "Class B Shares," "Class C Shares" and "Class Q Shares."
Pilgrim Money Market Fund offers Class B and Class C Shares only. 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.
-1-
<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 (other than the Pilgrim
Money Market Fund and the Pilgrim Strategic Income 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
-2-
<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. Class B shares of the Pilgrim Strategic Income Fund may pay PSI
monthly a fee at the annual rate of 0.50% 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. Class B shares of the Pilgrim Money
Market 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; provided,
however, that to the extent the Pilgrim Money Market Fund invests substantially
all of its assets in another investment company and PSI or any affiliate thereof
receives compensation from the investment adviser and/or distributor of such
investment company, the 1.00% will be reduced by the amount received.
(c) CLASS C SHARES. Class B shares of each Fund (other than the Pilgrim
Money Market Fund and the Pilgrim Strategic Income 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. Class C shares of the Pilgrim Strategic Income Fund may pay PSI
monthly a fee at the annual rate of 0.50% 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. Class C shares of the Pilgrim Money
Market 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; provided,
however, that to the extent the Pilgrim Money Market Fund invests substantially
all of its assets in another investment company and PSI or any affiliate thereof
receives compensation from the investment adviser and/or distributor of such
investment company, the 1.00% will be reduced by the amount received.
(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'
-3-
<PAGE>
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.
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,
-4-
<PAGE>
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
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 which offers the same class of shares, 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, Pilgrim High Yield Fund II and Pilgrim Strategic Income 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.
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
-5-
<PAGE>
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:
(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
-6-
<PAGE>
(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
-7-
<PAGE>
SCHEDULE A
Pilgrim Money Market Fund
Pilgrim International Core Growth Fund
Pilgrim Worldwide Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim Strategic Income Fund
Pilgrim High Yield Fund II
-8-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<INVESTMENTS-AT-COST> 225301643
<INVESTMENTS-AT-VALUE> 320944611
<RECEIVABLES> 2511502
<ASSETS-OTHER> 24366
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323480479
<PAYABLE-FOR-SECURITIES> 4312902
<SENIOR-LONG-TERM-DEBT> 0
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<OTHER-INCOME> 105947
<EXPENSES-NET> 4462157
<NET-INVESTMENT-INCOME> 5162409
<REALIZED-GAINS-CURRENT> 25455864
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<DISTRIBUTIONS-OF-GAINS> 931875
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<SHARES-REINVESTED> 84764
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<ACCUMULATED-NII-PRIOR> (11011)
<ACCUMULATED-GAINS-PRIOR> 1008420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1997038
<INTEREST-EXPENSE> 11059
<GROSS-EXPENSE> 4780182
<AVERAGE-NET-ASSETS> 52301276
<PER-SHARE-NAV-BEGIN> 19.12
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 3.17
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 0.36
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 225301643
<INVESTMENTS-AT-VALUE> 320944611
<RECEIVABLES> 2511502
<ASSETS-OTHER> 24366
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323480479
<PAYABLE-FOR-SECURITIES> 4312902
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1359931
<TOTAL-LIABILITIES> 5672833
<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 2461500
<SHARES-COMMON-PRIOR> 1786124
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<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<DISTRIBUTIONS-OF-INCOME> 606496
<DISTRIBUTIONS-OF-GAINS> 393694
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1107458
<NUMBER-OF-SHARES-REDEEMED> 468699
<SHARES-REINVESTED> 36617
<NET-CHANGE-IN-ASSETS> 65068172
<ACCUMULATED-NII-PRIOR> (11011)
<ACCUMULATED-GAINS-PRIOR> 1008420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1997038
<INTEREST-EXPENSE> 11059
<GROSS-EXPENSE> 4780182
<AVERAGE-NET-ASSETS> 46010759
<PER-SHARE-NAV-BEGIN> 20.56
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> 3.47
<PER-SHARE-DIVIDEND> 0.27
<PER-SHARE-DISTRIBUTIONS> 0.19
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.86
<EXPENSE-RATIO> 2.18
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
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<INVESTMENTS-AT-COST> 225301643
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323480479
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<SENIOR-LONG-TERM-DEBT> 0
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<SHARES-COMMON-STOCK> 4285793
<SHARES-COMMON-PRIOR> 4171144
<ACCUMULATED-NII-CURRENT> (27873)
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<OVERDISTRIBUTION-GAINS> 0
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<DISTRIBUTIONS-OF-INCOME> 1087019
<DISTRIBUTIONS-OF-GAINS> 1833010
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 884820
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<SHARES-REINVESTED> 110911
<NET-CHANGE-IN-ASSETS> 65068172
<ACCUMULATED-NII-PRIOR> (11011)
<ACCUMULATED-GAINS-PRIOR> 1008420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1997038
<INTEREST-EXPENSE> 11059
<GROSS-EXPENSE> 4780182
<AVERAGE-NET-ASSETS> 84403567
<PER-SHARE-NAV-BEGIN> 19.55
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 3.25
<PER-SHARE-DIVIDEND> 0.25
<PER-SHARE-DISTRIBUTIONS> 0.43
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<PER-SHARE-NAV-END> 22.40
<EXPENSE-RATIO> 2.18
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<INVESTMENTS-AT-COST> 225301643
<INVESTMENTS-AT-VALUE> 320944611
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<OTHER-ITEMS-ASSETS> 0
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1359931
<TOTAL-LIABILITIES> 5672833
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 229802929
<SHARES-COMMON-STOCK> 411948
<SHARES-COMMON-PRIOR> 383344
<ACCUMULATED-NII-CURRENT> (27873)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 22389741
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65642849
<NET-ASSETS> 317807646
<DIVIDEND-INCOME> 3782442
<INTEREST-INCOME> 5736177
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<EXPENSES-NET> 4462157
<NET-INVESTMENT-INCOME> 5162409
<REALIZED-GAINS-CURRENT> 25455864
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<DISTRIBUTIONS-OF-INCOME> 185952
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 895430
<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> PILGRIM MUTUAL FUNDS
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