PILGRIM AMERICA MASTERS SERIES INC
497, 1998-11-06
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PILGRIM
- -------
THE VALUE OF INVESTING(R)



                                                             P R O S P E C T U S
                                                                November 1, 1998

                                                                       ---------


             40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, AZ 85004
                                 (800) 992-0180

                            -------------------------

The  Pilgrim  Funds  are  a  family  of  diversified,  open-end  and  closed-end
management   investment   companies.  This  Prospectus  describes  the  open-end
investment  company  portfolios, also known as mutual funds (the Funds), each of
which has its own investment objectives and policies.

                                  EQUITY FUNDS

                              PILGRIM MAGNACAP FUND
                    (formerly Pilgrim America MagnaCap Fund)
                                 (MagnaCap Fund)

                          PILGRIM LARGECAP LEADERS FUND
             (formerly Pilgrim America Masters LargeCap Value Fund)
                             (LargeCap Leaders Fund)

                            PILGRIM MIDCAP VALUE FUND
              (formerly Pilgrim America Masters MidCap Value Fund)
                               (MidCap Value Fund)

                          PILGRIM BANK AND THRIFT FUND
                 (formerly Pilgrim America Bank and Thrift Fund)
                             (Bank and Thrift Fund)

                        PILGRIM ASIA-PACIFIC EQUITY FUND
           (formerly Pilgrim America Masters Asia-Pacific Equity Fund)
                           (Asia-Pacific Equity Fund)

                                  INCOME FUNDS

                             PILGRIM HIGH YIELD FUND
                   (formerly Pilgrim America High Yield Fund)
                                (High Yield Fund)

                    PILGRIM GOVERNMENT SECURITIES INCOME FUND
                       (Government Securities Income Fund)
                                        
                                        
Each  Fund offers different classes of shares, with varying types and amounts of
sales and distribution charges. These Pilgrim Purchase Options(TM) permit you to
choose  the  method  of  purchasing  shares  that  best  suits  your  investment
strategy.

This  Prospectus  presents  information you should know before investing. Please
keep  it  for future reference. A Statement of Additional Information about each
Fund,  dated November 1, 1998, as amended from time to time, has been filed with
the  Securities  and  Exchange  Commission and is incorporated by reference into
this  Prospectus  (that is, it is legally considered a part of this Prospectus).
This  Statement  is  available  free upon request by calling Pilgrim Group, Inc.
(Shareholder Servicing Agent) at (800) 992-0180.

INVESTMENT  IN  THE  FUNDS  INVOLVES  INVESTMENT RISK, INCLUDING RISK OF LOSS OF
PRINCIPAL.  THE  FUNDS'  SHARES  ARE NOT OBLIGATIONS, DEPOSITS, OR ACCOUNTS OF A
BANK  AND  ARE  NOT GUARANTEED BY A BANK. IN ADDITION, THE FUNDS' SHARES ARE NOT
INSURED  BY  THE  FEDERAL  DEPOSIT  INSURANCE  CORPORATION,  THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.

   LIKE ALL MUTUAL FUND SHARES, NEITHER THE SECURITIES AND EXCHANGE COMMISSION
     NOR ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED THESE
     SECURITIES OR PASSES UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
           ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
THE EQUITY FUNDS AT A GLANCE ..............................................    3
THE INCOME FUNDS AT A GLANCE ..............................................    4
SUMMARY OF EXPENSES .......................................................    5
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES .............................    8
INVESTMENT PRACTICES AND RISK CONSIDERATIONS ..............................   12
DIVERSIFICATION AND CHANGES IN POLICIES ...................................   19
YEAR 2000 COMPLIANCE ......................................................   19
SHAREHOLDER GUIDE .........................................................   20
 Pilgrim Purchase Options(TM) .............................................   20
 Purchasing Shares ........................................................   27
 Exchange Privileges and Restrictions .....................................   28
 How to Redeem Shares .....................................................   29
MANAGEMENT OF THE FUNDS ...................................................   30
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................   34
PERFORMANCE INFORMATION ...................................................   36
ADDITIONAL INFORMATION ....................................................   36
FINANCIAL HIGHLIGHTS ......................................................   36

                                        2
<PAGE>

                         THE EQUITY FUNDS AT A GLANCE*

         FUND                           OBJECTIVES AND POLICIES
- ----------------------- --------------------------------------------------------
 MagnaCap Fund          Long term growth of capital with income as a
                        secondary consideration.
                        Invests in equity securities that are determined to be
                        of high quality by the Investment Manager based
                        upon certain selection criteria.
                        Normally fully invested.
                        Pilgrim Investments, Inc., serves as Investment
                        Manager for MagnaCap Fund.

 LargeCap Leaders       Long-term capital appreciation.
 Fund                   Invests in equity securities issued by companies
                        believed to be undervalued that generally have a
                        market capitalization of at least $5 billion.
                        Normally fully invested.
                        Pilgrim Investments, Inc. serves as Investment
                        Manager for LargeCap Leaders Fund.

 MidCap Value Fund      Long-term capital appreciation.
                        Invests in equity securities of companies believed to
                        be undervalued that have a market capitalization of
                        between $200 million and $5 billion.
                        Normally fully invested.
                        Cramer Rosenthal McGlynn, LLC., (CRM) provides
                        portfolio management services for MidCap Value
                        Fund.

 Bank and Thrift Fund   Long-term capital appreciation with income as a
                        secondary objective.
                        Invests primarily in equity securities of national and
                        state-chartered banks (other than money center
                        banks), thrifts, the holding or parent companies of
                        such depository institutions, and in savings accounts
                        of mutual thrifts. Up to 35% of the Fund's total assets
                        may be invested in equity securities of money center
                        banks, other financial services companies, other
                        issuers deemed suitable by the Investment Manager,
                        debt securities, and securities of other investment
                        companies.
                        Normally fully invested.
                        Pilgrim Investments, Inc. serves as Investment
                        Manager for Bank and Thrift Fund.

 Asia-Pacific Equity    Long-term capital appreciation.
 Fund                   Invests in equity securities of companies based in the 
                        Asia-Pacific region, which includes China, Hong
                        Kong, Indonesia, Korea, Malaysia, Phillippines,
                        Singapore, Taiwan and Thailand, but not Australia
                        and Japan.
                        Normally fully invested.
                        HSBC Asset Management America, Inc. and HSBC
                        Asset Management Hong Kong Limited, subsidiaries
                        of HSBC Holdings plc, provides portfolio
                        management services for Asia-Pacific Equity Fund.


         FUND                                  STRATEGY
- ----------------------- --------------------------------------------------------

 MagnaCap Fund          The Investment Manager generally selects
                        companies that meet the Fund's disciplined
                        investment strategy: consistent payment of, or
                        ability to, pay dividends; substantial increases in
                        the ability to pay dividends; reinvested
                        substantial earnings; strong balance sheets; and
                        attractive prices.
                        Principal risk factors: exposure to financial and
                        market risks that accompany an investment in
                        equities. You can expect fluctuation in the value
                        of the Fund's portfolio securities and the Fund's
                        shares.*

 LargeCap Leaders       The Investment Manager seeks large
 Fund                   capitalization companies believed to present a
                        good value based upon price compared to
                        projected earnings and that are leaders in their
                        industries, and considers whether those
                        companies have a sustainable competitive edge.
                        Principal risk factors: exposure to financial and
                        market risks that accompany an investment in
                        equities. You can expect fluctuation in the value
                        of the Fund's portfolio securities and the Fund's
                        shares.*

 MidCap Value Fund      CRM, a `value' manager, seeks to identify middle
                        capitalization companies having one or more of
                        the following characteristics: they are undergoing
                        fundamental change; are undervalued; and are
                        misunderstood by the investment community.
                        Investment prospects are viewed on a long-term
                        basis and not on market timing.
                        Principal risk factors: exposure to financial and
                        market risks that accompany an investment in
                        equities. You can expect fluctuation in the value
                        of the Fund's portfolio securities and the Fund's
                        shares.*

 Bank and Thrift Fund   Portfolio securities are selected principally on the
                        basis of fundamental investment value and
                        potential for future growth, including securities
                        of institutions that the Fund believes are
                        well-positioned to take advantage of
                        opportunities currently developing in the banking
                        and thrift industries.
                        Principal risk factors: exposure to financial and
                        market risks that accompany an investment in
                        equities, and exposure to the financial and
                        market risks of the banking and thrift industries,
                        which may present greater risk than a portfolio
                        that is not concentrated in a group of related
                        industries. Bank and thrift stocks may be
                        impacted by state and federal legislation and
                        regulations and regional and general economic
                        conditions.
                        You can expect fluctuation in the value of the
                        Fund's portfolio securities and the Fund's shares.*

 Asia-Pacific Equity    Portfolio securities are selected based upon a
 Fund                   combination of a macroeconomic overview of
                        the region, specific country analysis, setting
                        target country weightings, industry analysis and
                        stock selection.
                        Principal risk factors: exposure to financial and
                        market risks that accompany an investment in
                        equities, and exposure to changes in currency
                        exchange rates and other risks of foreign
                        investment. You can expect fluctuation in the
                        value of the Fund's portfolio securities and the
                        Fund's shares.*

* This  summary description should be read in conjunction with the more complete
  description  of  the  Fund's  investment  objectives  and  policies  set forth
  elsewhere  in  this  Prospectus.  For  information  regarding the purchase and
  redemption  of  shares  of  the  Fund,  refer  to the `Shareholder Guide.' For
  information  regarding  the  risk  factors  of  the Fund, refer to `Investment
  Practices and Risk Considerations' below.

                                       3
<PAGE>
                         THE INCOME FUNDS AT A GLANCE*

       FUND                         OBJECTIVES AND POLICIES
- ------------------ -------------------------------------------------------------
 High Yield Fund   High level of current income with capital
                   appreciation as a secondary objective.
                   Invests at least 65% of its assets in a diversified
                   portfolio of high-yielding debt securities commonly
                   referred to as `junk bonds.' May also invest up to
                   35% of its total assets in other types of fixed income
                   securities, preferred and common stocks, warrants
                   and other securities.
                   Normally fully invested.
                   Pilgrim Investments, Inc. serves as Investment
                   Manager for High Yield Fund.

 Government        High level of current income consistent with liquidity
 Securities        and preservation of capital.
 Income Fund       Normally invests at least 70% of its assets in 
                   securities issued or guaranteed by the U.S.
                   Government, or certain of its agencies and
                   instrumentalities. The Fund does not invest in highly
                   leveraging derivatives, such as swaps, interest-only or
                   principle-only stripped mortgage-backed securities or
                   interest rate futures contracts.
                   Normally fully invested.
                   Pilgrim Investments, Inc. serves as investment
                   Manager for Government Securities Income Fund. 


       FUND                              STRATEGY
- ------------------ -------------------------------------------------------------

 High Yield Fund   The Investment Manager selects high-yielding
                   fixed income securities that do not, in its
                   opinion, involve undue risk relative to the
                   securities' return characteristics.
                   Principal risk factors: exposure to financial,
                   market and interest rate risks and greater credit
                   risks than with higher-rated bonds. You can
                   normally expect greater fluctuation in the value
                   of the Fund's shares than for the Government
                   Securities Income Fund, particularly in response
                   to economic downturns.*

 Government        The Investment Manager analyzes various U.S.
 Securities        Government securities and selects those offering
 Income Fund       the highest yield consistent with maintaining
                   liquidity and preserving capital.
                   Principal risk factors: exposure to financial and
                   interest rate risks, and prepayment risk on
                   mortgage related securities. You can normally
                   expect fluctuation in the value of the Fund's
                   shares in response to changes in interest rates,
                   and relatively little fluctuation in the absence of
                   such changes.*

* This  summary description should be read in conjunction with the more complete
  description  of  the  Fund's  investment  objectives  and  policies  set forth
  elsewhere  in  this  Prospectus.  For  information  regarding the purchase and
  redemption  of  shares  of  the  Fund,  refer  to the `Shareholder Guide.' For
  information  regarding  the  risk  factors  of  the Fund, refer to `Investment
  Practices and Risk Considerations' below.

                                       4
<PAGE>
                               SUMMARY OF EXPENSES

Shares  of  the Funds are available through independent financial professionals,
national   and   regional  brokerage  firms  and  other  financial  institutions
(Authorized  Dealers).  For  each Fund, you may select from up to three separate
classes of shares: Class A, Class B and Class M.

                       SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
                                                            CLASS A      CLASS B      CLASS M(1)
                                                            -------      -------      ----------
<S>                                                         <C>          <C>          <C>
Maximum initial sales charge imposed on purchases of the
 Equity Funds (as a percentage of offering price)  ......   5.75%(2)     None         3.50%(2)
Maximum initial sales charge imposed on purchases of the
 Income Funds (as a percentage of offering price)  ......   4.75%(2)     None         3.25%(2)
Maximum contingent deferred sales charge (CDSC) on each
 Fund (at the lower of original purchase price or the
 redemption proceeds)   .................................   None (3)     5.00%(4)     None
</TABLE>

The  Funds have no redemption fees, exchange fees or sales charges on reinvested
dividends.
- ------------
(1) Bank and Thrift Fund does not offer Class M shares.
(2) Reduced  for  purchases  of  $50,000  and over. See 'Class A Shares: Initial
    Sales  Charge  Alternative'  and 'Class M Shares: Lower Initial Sales Charge
    Alternative.'
(3) A  CDSC  of  no  more  than 1.00% for shares redeemed in the first or second
    year,  depending  on  the  amount of purchase, is 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 'Class A Shares: Initial Sales
    Charge Alternative.'
(4) Imposed  upon  redemption  within  6  years from purchase. Fee has scheduled
    reductions  after  the  first  year.  See  'Class  B  Shares: Deferred Sales
    Charge Alternative.'

                                       5
<PAGE>
                     ANNUAL OPERATING EXPENSES AND EXAMPLES

The  table below reflects the Annual Operating Expenses incurred by the Class A,
B  and  M shares of each Fund for the fiscal year or period ended June 30, 1998.
The  Annual Operating Expenses for certain Funds are subject to waivers that are
described  in  the footnotes following the table. The "Examples" to the right of
the  table  show  the  cumulative expenses you would pay on a $1,000 investment,
assuming  (i)  reinvestment  of  all dividends and distributions, (ii) 5% annual
return and (iii) redemption at the end of the period (unless otherwise noted):

                            ANNUAL OPERATING EXPENSES
                     (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
   MAGNACAP FUND                        CLASS A      CLASS B      CLASS M
                                        -------      -------      -------
    Management fees                      0.72%        0.72%        0.72%
    Distribution (12b-1 fees)(1)         0.30%        1.00%        0.75%
    Other Expenses                       0.35%        0.35%        0.35%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses                  1.37%        2.07%        1.82%
                                         ====         ====         ====  
                                                                
   LARGECAP LEADERS FUND                CLASS A      CLASS B      CLASS M
                                        -------      -------      ------- 
    Management fees                      1.00%        1.00%        1.00%
    Distribution (12b-1 fees)(1)         0.25%        1.00%        0.75%
    Other Expenses                       0.50%        0.50%        0.50%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses(3)               1.75%        2.50%        2.25%
                                         ====         ====         ====    
                                                                
   MIDCAP VALUE FUND                    CLASS A      CLASS B      CLASS M
                                        -------      -------      -------  
    Management fees                      1.00%        1.00%        1.00%
    Distribution (12b-1 fees)(1)         0.25%        1.00%        0.75%
    Other Expenses                       0.50%        0.50%        0.50%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses(3)               1.75%        2.50%        2.25%
                                         ====         ====         ====   
                                                                
   BANK AND THRIFT FUND++               CLASS A      CLASS B    
                                        -------      -------    
    Management fees                      0.72%        0.72%     
    Distribution (12b-1 fees)(1)         0.25%        1.00%     
    Other Expenses                       0.23%        0.23%     
                                         ----         ----       
    Total fund                                                  
     operating expenses                  1.20%        1.95%     
                                         ====         ====      
                                                                
   ASIA-PACIFIC EQUITY FUND             CLASS A      CLASS B      CLASS M
                                        -------      -------      ------- 
    Management fees                      1.25%        1.25%        1.25%
    Distribution (12b-1 fees)(1)         0.25%        1.00%        0.75%
    Other Expenses                       0.50%        0.50%        0.50%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses(3)               2.00%        2.75%        2.50%
                                         ====         ====         ====   
                                                                
   HIGH YIELD FUND                      CLASS A      CLASS B      CLASS M
                                        -------      -------      ------- 
    Management fees(4)                   0.60%        0.60%        0.60%
    Distribution (12b-1 fees)(1)         0.25%        1.00%        0.75%
    Other Expenses                       0.15%        0.15%        0.15%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses(3)               1.00%        1.75%        1.50%
                                         ====         ====         ====    
                                                                
   GOVERNMENT SEC. INC. FUND            CLASS A      CLASS B      CLASS M
                                        -------      -------      ------- 
    Management fees                      0.50%        0.50%        0.50%
    Distribution (12b-1 fees)(1)         0.25%        1.00%        0.75%
    Other Expenses                       0.75%        0.75%        0.75%
                                         ----         ----         ----   
    Total fund                                                  
     operating expenses(5)               1.50%        2.25%        2.00%
                                         ====         ====         ====   
                                                             
                                    EXAMPLES
- --------------------------------------------------------------------------------
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             71           71               21            53
  After 3 years            98           95               65            90
  After 5 years           128          131              111           130
  After 10 years          213          222 (2)          222 (2)       241
                                                                 
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             74           75               25            57
  After 3 years           109          108               78           103
  After 5 years           147          153              133           151
  After 10 years          252          265 (2)          265 (2)       284
                                                                 
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             74           75               25            57
  After 3 years           109          108               78           103
  After 5 years           147          153              133           151
  After 10 years          252          265 (2)          265 (2)       284
                                                                 
                      CLASS A     CLASS B         CLASS B+       
                     ---------   ---------       ----------      
  After 1 year        $    69     $     70        $      20      
  After 3 years            93           91               61      
  After 5 years           120          125              105      
  After 10 years          195          208 (2)          208 (2)  
                                                                 
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             77           78               28            59
  After 3 years           117          115               85           110
  After 5 years           159          165              145           163
  After 10 years          277          290 (2)          290 (2)       309
                                                                 
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             57           68               18            47
  After 3 years            78           85               55            78
  After 5 years           100          115               95           112
  After 10 years          164          186(2)           186 (2)       206
                                                                 
                      CLASS A     CLASS B         CLASS B+         CLASS M
                     ---------   ---------       ----------       --------
  After 1 year             62           73               23            52
  After 3 years            93          100               70            93
  After 5 years           125          140              120           137
  After 10 years          218          240 (2)          240 (2)       258
                                                                 
                                                       (Footnotes on next page.)
                                       6
<PAGE>
- ------------
 +  Assumes no redemption at end of period.
++  The Fund  changed  its  year end from December 31 to June 30, therefore, the
    expenses reflected are for the six months ended June 30, 1998 annualized.
(1) As  a result of distribution (Rule 12b-1) fees, a long term investor may pay
    more  than  the  economic  equivalent of the maximum sales charge allowed by
    the Rules of the National Association of Securities Dealers, Inc. (NASD).
(2) Assumes  Class B shares converted to Class A shares at the end of the eighth
    year following purchase.
(3) The  Investment Manager has entered into expense limitation agreements under
    which  it  will  limit  expenses,  excluding  distribution  fees,  interest,
    taxes,  brokerage  and  extraordinary  expenses,  to  1.50% for MidCap Value
    Fund  and  LargeCap  Leaders  Fund,  1.75% for Asia-Pacific Equity Fund, and
    0.75%  for  High  Yield  Fund.  These expense limitations will apply to each
    Fund  individually  until  at  least  December 31, 1998. Prior to the waiver
    and   reimbursement   of  Fund  expenses,  Other  Expenses  and  Total  Fund
    Operating  Expenses  for  the  fiscal  year  ended  June  30,  1998  for the
    following  Funds  were:  for MidCap Value Fund, 0.53% and 1.78% for Class A,
    0.53%  and  2.53% for Class B, and 0.53% and 2.28% for Class M; for LargeCap
    Leaders  Fund,  1.03%  and  2.28%  for Class A, 1.03% and 3.03% for Class B,
    and  1.03%  and  2.78%  for Class M; for Asia-Pacific Equity Fund, 1.30% and
    2.80%  for  Class  A,  1.30%  and 3.55% for Class B, and 1.30% and 3.30% for
    Class  M;  and  for  High Yield Fund, 0.32% and 1.17% for Class A, 0.32% and
    1.92% for Class B, and 0.32% and 1.67% for Class M.
(4) The  management  fees  for  High  Yield  Fund  have been restated to reflect
    current fees.
(5) The  Investment  Manager  has  agreed to reimburse the Government Securities
    Income  Fund  to  the  extent that the gross operating costs and expenses of
    the   Fund,   excluding   any   interest,   taxes,   brokerage  commissions,
    amortization   of   organizational  expenses,  extraordinary  expenses,  and
    distribution  fees  on  Class  B  and  Class M shares in excess of an annual
    rate  of  0.25%  of  the  average  daily net assets of these classes, exceed
    1.50%  of  the  Fund's  average daily net assets on the first $40 million of
    net  assets  and  1.00% of average daily net assets in excess of $40 million
    for  any  one  fiscal  year.  Without  such waiver, Other Expenses and Total
    Fund  Operating  Expenses for the fiscal year ended June 30, 1998 would have
    been  0.83%  and  1.58%  for Class A, 0.83% and 2.33% for Class B, and 0.83%
    and 2.08% for Class M.

The  purpose of the table on the previous page is to assist you in understanding
the  various  costs  and expenses that you will bear directly or indirectly as a
shareholder  in  a Fund. For more complete descriptions of the various costs and
expenses,  please  refer  to  'Shareholder Guide' and 'Management of the Funds.'
Use  of  the assumed 5% return in the Examples is required by the Securities and
Exchange  Commission.  The  Examples  are  not an illustration of past or future
investment  results,  and  should  not be considered a representation of past or
future expenses, actual expenses may be more or less than those shown.

                                       7
<PAGE>
                 THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

MAGNACAP  FUND. The  Fund's objective is growth of capital, with dividend income
as   a   secondary   consideration.  In  selecting  investments  for  the  Fund,
preservation  of  capital  is also an important consideration. The Fund normally
seeks  its  objectives  by  investing  primarily  in equity securities issued by
companies  that the Investment Manager determines are of high quality based upon
the  selection criteria described below. The equity securities in which the Fund
may  invest  include  common  stocks, securities convertible into common stocks,
rights  or  warrants  to  subscribe  for  or  purchase common stocks, repurchase
agreements,  and  foreign  securities  (including  American  Depositary Receipts
(ADRs)).  Although  it is anticipated that the Fund normally will be invested as
fully  as  practicable  in  equity  securities in accordance with its investment
policies,  assets  of the Fund not invested in equity securities may be invested
in  high  quality  debt  securities,  as  described  in  `Risk Considerations --
Temporary  Defensive  and  other  Short-Term  Positions.'  In  a period that the
Investment  Manager  believes  presents  weakness  in  the  stock  market  or in
economic  conditions,  the Fund may establish a defensive position to attempt to
preserve capital and increase its investment in these instruments.

MagnaCap  Fund  is managed in accordance 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. Normally, stocks
are  acquired  only  if  at  least  65%  of  the  Fund's  assets are invested in
companies that meet the following criteria:

       1. 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.

       2. 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.

       3. REINVESTED  EARNINGS. Dividend payout must be less than 65% of current
          earnings.

       4. 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.

       5. 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  Investment Manager may also consider other factors in selecting investments
for  the  Fund.  The  remainder  of  the Fund's assets may be invested in equity
securities  that  the  Investment Manager believes have growth potential because
they  represent  an  attractive  value.  Also, MagnaCap Fund may not invest more
than  5%  of  its  total  assets in the securities of companies which, including
predecessors,  have  not  had  a  record  of  at least three years of continuous
operations, and it may not invest in any restricted securities.

LARGECAP  LEADERS  FUND. This  Fund's  investment objective is long-term capital
appreciation.  The  Fund  seeks  to  achieve  this  objective  through investing
primarily   in   equity   securities  issued  by  companies  with  large  market
capitalizations  that  the Investment Manager believes sell at reasonable prices
relative  to  their  projected  earnings. The Investment Manager seeks companies
that  it  believes  are  leaders in their industries and considers whether these
companies   have   a  sustainable  competitive  edge.  The  Portfolio  Manager's
investment  goal  is to participate in up markets while cushioning the portfolio
during  a  downturn.  A company with a market capitalization (outstanding shares
multiplied  by  price  per share) of over $5 billion is considered to have large
market  capitalization, 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,  ADRs,  and  warrants. The Fund will
normally  be  invested  as  fully  as  practicable  (at  least  80%)  in  equity
securities  and  will  normally  invest  at least 65% of its assets in companies
with  large  market  capitalizations.  The  Fund may also invest in high-quality
debt  securities,  as  described  in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
                                        8
<PAGE>
MIDCAP  VALUE  FUND. This  Fund's  investment  objective  is  long-term  capital
appreciation.  The  Fund  seeks  to achieve this objective through investment in
equity  securities issued by companies with middle market capitalizations, i.e.,
market  capitalizations  between  $200 million and $5 billion, 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  will normally be invested as fully as practicable (at least 80%) in equity
securities  of  companies  with middle market capitalizations. The Fund may also
invest  in high-quality debt securities, as described in `Risk Considerations --
Temporary Defensive and Other Short-Term Positions.'

The  Fund  is  managed  in accordance with the disciplined investment style that
the  Portfolio Manager, Cramer Rosenthal McGlynn, LLC (CRM), employs in managing
midcap  value  portfolios.  As  a  value  adviser,  CRM does not attempt to time
market  fluctuations;  rather it relies on stock selection to achieve investment
results,  seeking  out  those  stocks  that  are undervalued and, in some cases,
neglected  by  financial analysts. The Portfolio Manager's investment philosophy
is  to  take  advantage of periodic inefficiencies that develop in the valuation
of  publicly traded companies. Generally, its approach to finding such companies
is  to  first  identify  dynamic  change  that  can  be  material to a company's
operations.  Dynamic change means change within a company that is likely to have
a  material  impact  on  its operations. Examples include new senior management,
new  products  or  markets,  or  any  material  divestitures,  acquisitions,  or
mergers.   The   philosophy   is   that   this  type  of  change  often  creates
misunderstanding  in  the marketplace that can result in a company's stock being
undervalued  relative  to  its  future  prospects  and peer group. The Portfolio
Manager  seeks  to  identify  this  change  at  an  early  stage  and conduct an
evaluation  of  the company's business. In applying this approach, the Portfolio
Manager  focuses  on middle capitalization companies where dynamic change can be
material.

CRM  seeks companies that it believes will look different in the future in terms
of  their  operations,  finances,  and/or management. Once change is identified,
the  Portfolio  Manager  conducts  an  evaluation  of  a  company  that includes
creating  a  financial  model  based  principally  upon  projected cash flow, as
opposed  to  reported  earnings. The company's stock is evaluated in the context
of  what the market is willing to pay for the shares of comparable companies and
what  a  strategic buyer would pay for the whole company. CRM also evaluates the
degree  of  investor  recognition  of a company by monitoring the number of sell
side  analysts  who closely follow the company and the nature of the shareholder
base.  Before  deciding  to purchase a stock CRM conducts a business analysis to
corroborate  its  observations  and  assumptions,  including, in most instances,
discussions  with  management,  customers  and  suppliers.  Also,  an  important
consideration  is  the extent to which management holds an ownership interest in
a  company.  In  its  overall assessment, CRM seeks stocks that have a favorable
risk/reward ratio over an 18 to 24 month holding period.

BANK  AND  THRIFT FUND. The Fund primarily seeks long-term capital appreciation;
a  secondary  objective is income. The Fund pursues its objectives by investing,
under  normal  market  conditions,  at  least  65% of its total assets in equity
securities  of  (i)  national and state-chartered banks (other than money center
banks),  (ii)  thrifts, (iii) the holding or parent companies of such depository
institutions,  and  (iv) in savings accounts of mutual thrifts, which investment
may  entitle  the  investor  to  participate  in future stock conversions of the
mutual  thrifts.  These  portfolio  securities  are  selected principally on the
basis   of  fundamental  investment  value  and  potential  for  future  growth,
including  securities of institutions that the Fund believes are well positioned
to  take  advantage of the attractive investment opportunities developing in the
banking  and  thrift industries. In making decisions concerning the selection of
portfolio  securities  for  the  Fund,  the  Investment Manager conducts its own
evaluation  of the depository institution which is a potential investment by the
Fund  and  does  not  take into account the credit rating of the debt securities
issued  by  such  institution. These equity securities include common stocks and
securities   convertible   into   common  stock  (including  convertible  bonds,
convertible  preferred  stock,  and warrants) but do not include non-convertible
preferred stocks or adjustable rate preferred stocks.

An  investment  in  the Fund's shares cannot be considered a complete investment
program.  Because  the  Fund's  investment  portfolio  will  be  concentrated in
specific  segments  of  the  banking  and  thrift  industries, the shares may be
subject  to  greater  risk  than  the  shares  of a fund whose portfolio is less
concentrated.

                                       9
<PAGE>
The  Investment  Manager believes that a number of factors may contribute to the
potential   for   growth  in  the  value  of  equity  securities  of  depository
institutions, including the fact that such depository institutions are:

              (i) located in geographic  regions  experiencing  strong  economic
         growth and able to participate in such growth;

              (ii) well-managed and currently providing above-average returns on
         assets and shareholders' equity;

              (iii) attractive candidates for acquisition by a money center bank
         or  another  regional  bank,  as  defined  in 'The  Banking  and Thrift
         Industries,' below, or attractive  partners for business  combinations,
         as a result of opportunities  created by the trend towards deregulation
         and  interstate  banking or in order to create  larger,  more efficient
         banking combinations;

              (iv)  expanding  their  business  into new  financial  services or
         geographic  areas that have become or may become  permissible due to an
         easing of regulatory constraints; or

              (v) investing  assets in  technology  that is intended to increase
         productivity.

The  Investment  Manager  also believes that factors may contribute to increased
earnings of securities of depository institutions, including the following:

              (i)  changes in the  sources  of  revenues  of banks,  such as the
         implementation of certain new transaction-based fees;

              (ii) a focus on variable rate pricing of bank  products,  which is
         less sensitive than fixed pricing to cyclical interest rate changes;

              (iii) the ability, as a result of liberalization of regulation, to
         offer  financial  products and services which may have a higher rate of
         return than traditional banking and financial services products;

              (iv) the recent  implementation  of share  repurchase  programs by
         certain banks; or

              (v) a trend towards increased savings and investing as the average
         age of the population of the United States gets older.

The  Fund's  policy  of investing under normal market conditions at least 65% of
its  total  assets  in the equity securities of (i) national and state-chartered
banks  (other  than  money  center  banks),  (ii)  thrifts, (iii) the holding or
parent  companies  of such depository institutions, and (iv) in savings accounts
of  mutual  thrifts  is fundamental and may only be changed with approval of the
shareholders of the Fund.

The  Fund  invests  the  remaining  35%  of  its  total  assets  in  the  equity
securities,  including  preferred stocks or adjustable rate preferred stocks, of
money  center  banks,  other  financial services companies, other issuers deemed
suitable  by the Investment Manager (which may include companies that are not in
financial  services industries), in securities of other investment companies 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 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 also
invest  in  short-term,  investment grade debt securities, as described in `Risk
Considerations -- Temporary Defensive and Other Short-Term Positions.'

ASIA-PACIFIC  EQUITY FUND. This Fund's investment objective is long-term capital
appreciation.  The  Fund  seeks  to achieve this objective through investment 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,
ADRs,  European Depositary Receipts and other depositary receipts. The Fund will
normally  be  invested  as  fully  as  practicable  (at  least  80%)  in  equity
securities  of  Asia-Pacific  issuers.  The Fund may also invest in high-quality
debt  securities,  as  described  in `Risk Considerations -- Temporary Defensive
and Other Short-Term Positions.'
                                       10
<PAGE>
The  Fund  will  be  managed  using the investment philosophy that the Portfolio
Manager,  HSBC  Asset  Management  Americas, Inc. and HSBC Asset Management Hong
Kong  Limited  (HSBC),  employs  in  managing  private  Asia-Pacific portfolios.
Investment  decisions  are  based  upon  a  disciplined approach that takes into
consideration  the  following factors: (i) macroeconomic overview of the region;
(ii)  specific  country  analysis; (iii) setting target country weightings; (iv)
evaluation  of  industry  sectors  within  each  country;  and  (v) selection of
specific  stocks.  Decisions  on  company  selection  include  analysis  of such
fundamental  factors  as  absolute  rates of change of earnings growth, earnings
growth  relative  to  the market and industry, quality of earnings and stability
of  earnings  growth,  quality  of  management  and  product line, interest rate
sensitivity  and  liquidity  of  the  stock. HSBC seeks to take profits when the
Portfolio  Manager  believes  that  a  market  or  stock  has  risen  fairly  or
disproportionately to other investment opportunities.

The  criteria  used  by  the Fund to determine whether an issuer is based in the
Asia-Pacific  region are: (1) the country in which the issuer was organized; (2)
the  country  in  which  the  principal  securities  market  for  that issuer is
located;  (3)  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  (4)  the  country  in  which  the issuer has at least 50% of its
assets situated.

HIGH  YIELD  FUND. This  Fund's  primary  investment objective is to seek a high
level  of  current  income  and its secondary objective is capital appreciation,
with  preservation  of  capital  as  a consideration. The Fund normally seeks to
achieve  its objectives by investing at least 65% of its assets in a diversified
portfolio  of  higher  yielding  debt  securities, including preferred stock and
convertible  securities  (High  Yield Securities), that do not in the opinion of
the  Investment  Manager  involve  undue  risk relative to their expected return
characteristics.  High Yield Securities, which are commonly known as junk bonds,
are ordinarily lower rated and include equivalent unrated securities.

Assets  of  the  Fund  not  invested in High Yield Securities (ordinarily not to
exceed  35%  of  the  Fund's assets) may be invested in common stocks; preferred
stocks  rated  Baa or better by Moody's Investor Services, Inc. (Moody's) or BBB
or  better  by  Standard  and  Poor's Corporation (S&P); debt obligations of all
types  rated  Baa  or higher by Moody's or BBB or better by S&P; U.S. Government
securities;  warrants;  foreign debt securities of any rating (not to exceed 10%
of   the   Fund's  total  assets  at  the  time  of  investment);  money  market
instruments,  including  repurchase  agreements  on  U.S. Government securities;
other  mortgage-related  securities;  financial futures and related options; and
participation  interests  and  assignments in floating rate loans and notes. See
`Investment  Practices  and  Risk  Considerations  -- High Yield Securities' for
information on High Yield Securities.

GOVERNMENT  SECURITIES  INCOME FUND. This Fund's investment objective is to seek
high  current income, consistent with liquidity and preservation of capital. The
Fund  normally  seeks to achieve its objectives by investing 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: GNMA, Federal
National  Mortgage  Association  (FNMA),  and  the  Federal  Home  Loan Mortgage
Corporation  (FHLMC).  The  70% threshold may not be met due to changes in value
of  the  Fund's  portfolio  or  due  to  the sale of portfolio securities due to
redemptions.  In  such  instances, further purchases by the Fund will be of 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  U.S.  Government  securities  in which the Fund may invest include, but are
not  limited  to,  the  following:  (1)  direct obligations of the U.S. Treasury
including  Treasury  bills  (maturities  of  one  year  or less), Treasury notes
(maturities  of  one  to ten years), and Treasury bonds (generally maturities of
greater  than  ten years and up to 30 years), and (2) mortgage-backed securities
that  are  issued  or guaranteed by GNMA, FNMA, or FHLMC. The Fund may invest in
short-term,  intermediate-term  and  long-term  U.S.  Government securities. The
Investment  Manager  will  determine  the exact composition and weighted average
maturity  of  the  Fund's  portfolio  on  the  basis of its judgment of existing
market  conditions.  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.

                                       11
<PAGE>
                 INVESTMENT PRACTICES AND RISK CONSIDERATIONS

The  following  pages  contain  information about certain types of securities in
which  one  or  more of the Funds may invest and strategies the Funds may employ
in  pursuit  of  the  investment  objectives.  See  the  Statement of Additional
Information  of  each  Fund  for  more  detailed information on these investment
techniques and the securities in which the Funds may invest.


RISK CONSIDERATIONS

The  investment  objectives  and policies of the Funds described above should be
carefully  considered  before  investing. There is no assurance that a Fund will
achieve  its  investment  objectives.  As  with any security, an investment in a
Fund's  shares involves certain risks, including loss of principal. Each Fund is
subject to varying degrees of financial, market and credit risks.

TEMPORARY  DEFENSIVE  AND  OTHER SHORT-TERM POSITIONS. Each Fund's assets may be
invested  in certain short-term, high-quality debt instruments (and, in the case
of  Bank  and  Thrift  Fund,  investment  grade  debt  instruments)  and in U.S.
Government  securities  for  the  following  purposes:  (i)  to meet anticipated
day-to-day   operating  expenses;  (ii)  pending  the  Investment  Manager's  or
Portfolio  Manager's ability to invest cash inflows; (iii) to permit the Fund to
meet  redemption  requests;  and (iv) for temporary defensive purposes. Bank and
Thrift  Fund,  MagnaCap  Fund,  LargeCap  Leaders  Fund,  MidCap  Value Fund and
Asia-Pacific  Equity  Fund  may  also  invest  in  such securities if the Fund's
assets are insufficient for effective investment in equities.

Although  it  is  expected  that  each Fund will normally be invested consistent
with  its  investment  objectives  and  policies,  the short-term instruments in
which  a Fund (except Government Securities Income Fund) may invest include: (i)
short-term   obligations   of   the   U.S.   Government   and   its   agencies,
instrumentalities,  authorities or political subdivisions; (ii) other short-term
debt  securities;  (iii)  commercial  paper,  including  master notes; (iv) bank
obligations,  including  certificates  of  deposit,  time  deposits and bankers'
acceptances;  and (v) repurchase agreements. LargeCap Leaders Fund, MidCap Value
Fund  and  Asia-Pacific Equity Fund may also invest in long-term U.S. Government
securities  and money market funds, while Asia-Pacific Equity Fund may invest in
short-term   obligations   of   foreign   governments   and   their   agencies,
instrumentalities,   authorities,  or  political  subdivisions.  The  short-term
instruments  in  which  Government  Securities  Income  Fund  may invest include
short-term   U.S.  Government  securities  and  repurchase  agreements  on  U.S.
Government  securities. The Funds will normally invest in short-term instruments
that do not have a maturity of greater than one year.

MIDCAP   COMPANY   EQUITY   SECURITIES. The   MidCap   Value  Fund  will  invest
substantially  all of its assets, and MagnaCap Fund, LargeCap Leaders Fund, Bank
and  Thrift  Fund  and  Asia-Pacific  Equity  Fund  may  invest,  in  the equity
securities   of   middle   capitalization   companies.   Investment   in  middle
capitalization   companies   may   involve  greater  risk  than  is  customarily
associated   with  securities  of  larger,  more  established  companies.  These
securities  may  be less marketable and subject to more abrupt or erratic market
movements than securities of larger companies.

BANK  AND  THRIFT  FUND:  SECURITIES  OF BANKS AND THRIFTS. Bank and Thrift Fund
invests  primarily  in  equity  securities of banks and thrifts. A `money center
bank'  is  a  bank  or  bank  holding  company  that  is typically located in an
international  financial  center  and has a strong international business with a
significant  percentage  of  its  assets  outside  the  United States. `Regional
banks'  are banks and bank holding companies which provide full service banking,
often  operating  in  two  or more states in the same geographic area, and whose
assets  are  primarily  related to domestic business. Regional banks are smaller
than  money  center  banks  and  also may include banks conducting business in a
single  state  or  city and banks operating in a limited number of states in one
or  more  geographic  regions. The third category which constitutes the majority
in  number  of banking organizations are typically smaller institutions that are
more  geographically  restricted  and less well-known than money center banks or
regional banks and are commonly described as `community banks.'

The  Bank  and Thrift Fund may invest in the securities of banks or thrifts that
are  relatively  smaller,  engaged  in  business  mostly within their geographic
region, and are less well-known to the general investment

                                       12
<PAGE>
community  than money center and larger regional banks. The shares of depository
institutions  in  which  the  Fund  may  invest may not be listed or traded on a
national  securities  exchange  or  on  the  National  Association of Securities
Dealers  Automated  Quotation  System  (`NASDAQ');  as  a  result  there  may be
limitations  on  the  Fund's  ability  to dispose of them at times and at prices
that are most advantageous to the Fund.

The  profitability of banks and thrifts is largely dependent upon interest rates
and  the  resulting  availability  and  cost  of  capital funds over which these
concerns  have  limited  control, and, in the past, such profitability has shown
significant  fluctuation  as  a  result  of  volatile  interest  rate levels. In
addition,  general  economic conditions are important to the operations of these
concerns,  with  exposure to credit losses resulting from financial difficulties
of borrowers.

Changes  in  state  and  Federal  law  are  producing significant changes in the
banking  and  financial  services  industries.  Deregulation has resulted in the
diversification  of certain financial products and services offered by banks and
financial  services  companies,  creating increased competition between them. In
addition,  state  and federal legislation authorizing interstate acquisitions as
well  as  interstate  branching  has facilitated the increasing consolidation of
the   banking  and  thrift  industries.  Although  regional  banks  involved  in
intrastate  and  interstate  mergers  and  acquisitions  may  benefit  from such
regulatory  changes,  those  which  do not participate in such consolidation may
find  that  it  is  increasingly difficult to compete effectively against larger
banking  combinations.  Proposals  to  change the laws and regulations governing
banks  and companies that control banks are frequently introduced at the federal
and  state levels and before various bank regulatory agencies. The likelihood of
any  changes and the impact such changes might have are impossible to determine.
 

The  last few years have seen a significant amount of regulatory and legislative
activity  focused  on  the  expansion  of  bank  powers  and  diversification of
services  that  banks  may  offer.  These  expanded powers have exposed banks to
well-established  competitors  and have eroded the distinctions between regional
banks, community banks, thrifts and other financial institutions.

The  thrifts  in which the Bank and Thrift Fund invests generally are subject to
the  same  risks  as  banks  discussed  above.  Such risks include interest rate
changes,  credit  risks, and regulatory risks. Because thrifts differ in certain
respects  from  banks,  however,  thrifts  may  be  affected  by such risks in a
different  manner  than  banks.  Traditionally,  thrifts have different and less
diversified  products than banks, have a greater concentration of real estate in
their  lending  portfolio,  and are more concentrated geographically than banks.
Thrifts  and  their  holding  companies  are  subject  to  extensive  government
regulation  and  supervision  including  regular  examinations of thrift holding
companies  by  the  Office  of  Thrift Supervision (the `OTS'). Such regulations
have  undergone  substantial change since the 1980's and will probably change in
the next few years.

INVESTMENTS  IN  FOREIGN SECURITIES. Asia-Pacific Equity Fund invests primarily,
and  MagnaCap  Fund  may invest up to 5% of its total assets, in certain foreign
securities  (including  ADRs). High Yield Fund may invest up to 10% of its total
assets  in debt obligations (including preferred stocks) issued or guaranteed by
foreign  corporations,  certain  supranational entities (such as the World Bank)
and   foreign   governments  (including  political  subdivisions  having  taxing
authority)  or  their  agencies  or  instrumentalities,  including  ADRs.  These
securities  may be denominated in either U.S. dollars or in non-U.S. currencies.
LargeCap  Leaders  Fund may invest in ADRs. ADRs are dollar-denominated receipts
issued  generally  by domestic banks and representing a deposit with the bank of
a security of a foreign issuer, and are publicly traded in the U.S.

There  are certain risks in owning foreign securities, including those resulting
from:   (i)  fluctuations  in  currency  exchange  rates;  (ii)  devaluation  of
currencies;   (iii)   political   or  economic  developments  and  the  possible
imposition  of currency exchange blockages or other foreign governmental laws or
restrictions;   (iv)  reduced  availability  of  public  information  concerning
issuers;  (v)  accounting,  auditing  and financial reporting standards or other
regulatory  practices  and  requirements  that  are not uniform when compared to
those  applicable  to  domestic  companies;  and  (vi)  settlement and clearance
procedures  in  some countries that may not be reliable and can result in delays
in  settlement;  (vii)  higher  transactional  and  custodial  expenses than for
domestic  securities;  and  (viii)  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

                                       13
<PAGE>
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.

EMERGING  MARKET  INVESTMENTS. Asia-Pacific  Equity  Fund may invest in emerging
market  securities issued by companies based in emerging market countries in the
Asia-Pacific  region. An emerging market country is generally considered to be a
country  whose  economy is less developed or mature than economies in other more
developed  countries  or  whose  markets  are undergoing a process of relatively
basic   development.  `Emerging  market  countries'  consist  of  all  countries
determined  by  the  World  Bank  or  the  United  Nations to have developing or
emerging  economies and markets. 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.

In addition to the risks generally of investing in emerging  market  securities,
there are particular risks associated with investing in developing  Asia-Pacific
countries including:  (i) certain markets,  such as those of China, being in the
earliest stages of development; (ii) 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;  (iii) political and social uncertainties;  (iv) over-dependence
financial  intermediaries;   (iii)  political  and  social  uncertainties;  (iv)
over-dependence  on exports,  especially  with  respect to primary  commodities,
making  these  economies   vulnerable  to  changes  in  commodity  prices;   (v)
overburdened  infrastructure and obsolete financial systems;  (vi) environmental
problems; (vii) less well developed legal systems than many other industrialized
nations; and (viii) less reliable custodial services and settlement practices.

CORPORATE  DEBT  SECURITIES. High  Yield  Fund  may  invest  in  corporate  debt
securities.  In  addition,  High  Yield  Fund  may  also  invest in high quality
short-term  corporate  debt  for  temporary  defensive  purposes. See "Temporary
Defensive  and  Other  Short-Term  Positions"  above.  Corporate debt securities
include  corporate  bonds,  debentures,  notes  and other similar corporate debt
instruments,  including  convertible  securities.  The  investment  return  on a
corporate  debt  security  reflects  interest earnings and changes in the market
value  of  the  security.  The  market  value  of a corporate debt security will
generally  increase  when  interest  rates  decline,  and decrease when interest
rates  rise.  There  is also the risk that the issuer of a debt security will be
unable  to  pay  interest or principal at the time called for by the instrument.
Investments  in  corporate debt securities that are rated below investment grade
are described in "High Yield Securities" below.

HIGH  YIELD  SECURITIES. High  Yield  Fund  may invest in High Yield Securities,
which  are high yield/high risk debt securities that are rated lower than Baa by
Moody's  or  BBB  by  S&P,  or  if  not  rated  by Moody's or S&P, of equivalent
quality.  High  Yield  Securities  often  are  referred  to  as `junk bonds' and
include  certain corporate debt obligations, higher yielding preferred stock and
mortgage-related  securities,  and  securities  convertible  into the foregoing.
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. Generally, the Fund will invest in
securities  rated  no  lower  than  B  by  Moody's or S&P, unless the Investment
Manager  believes  the  financial  condition  of  the  issuer or other available
protections  reduce  the  risk  to the Fund. For example, the Fund may invest in
such  a  security  if  the  Investment  Manager believes the issuer's assets are
sufficient  for  the  issuer to repay its outstanding obligations. Nevertheless,
the  Fund  may  invest  in  securities  rated  C  or D if the Investment Manager
perceives  greater  value  in  these securities than it believes is reflected in
such securities' prevailing market price.

High  Yield  Securities  are  not  considered  to  be investment grade. They 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. A projection of an economic downturn or
of  a  period  of  rising  interest rates, for example, could cause a decline in
High  Yield  Securities  prices. In the case of High Yield Securities structured
as zero-coupon  or pay-in-kind securities, their market prices are affected to a
greater  extent by interest rate changes, and therefore tend to be more volatile
than securities that pay interest periodically and in cash.

                                       14
<PAGE>
The  secondary  market  in  which  High Yield Securities are traded is generally
less  liquid  than  the  market  for  higher  grade bonds. Less liquidity in the
secondary  trading  market  could  adversely  affect the price at which the Fund
could  sell  a  High  Yield  Security,  and could adversely affect the daily net
asset  value  of  the  Fund's shares. At times of less liquidity, it may be more
difficult  to  value  High  Yield  Securities because this valuation may require
more  research,  and  elements  of  judgment  may  play  a  greater  role in the
valuation  since  there  is less reliable, objective data available. In pursuing
the  Fund's  objectives,  the Investment Manager seeks to identify situations in
which the rating agencies have not fully perceived the value of the security.

Based  upon  the  weighted  average  ratings  of  all High Yield Securities held
during  High  Yield  Fund's  most  recent  fiscal  year ended June 30, 1998, the
percentage  of  the  Fund's  total High Yield Securities represented by (1) High
Yield   Securities   rated   by   a  nationally  recognized  statistical  rating
organization,  separated  into each applicable rating category (Aaa, Baa, Ba, B,
Caa,  or  Ca  by  Moody's  or  AAA,  BBB,  BB,  B, CCC, or CC by S&P) by monthly
dollar-weighted  average  is  AAA -- 0%, BBB -- 0%, BB -- 4.61%, B -- 58.6%, CCC
- --  2.42%, CC -- 0.40%, and D -- 0.34%, respectively, and (2) unrated High Yield
Securities as a group -- 33.60%.

The  following  are excerpts from Moody's description of its bond ratings: Ba --
judged  to  have speculative elements; their future cannot be considered as well
assured.  B  -- generally lack characteristics of a desirable investment. Caa --
are  of  poor  standing;  such  issues may be in default or there may be present
elements  of  danger with respect to principal or interest. Ca -- speculative in
a  high  degree;  often in default. C -- lowest rate class of bonds; regarded as
having  extremely poor prospects. Moody's also applies numerical indicators 1, 2
and  3  to  rating  categories. The modifier 1 indicates that the security is in
the  higher  end  of its rating category; 2 indicates a mid-range ranking; and 3
indicates  a  ranking  towards  the lower end of the category. The following are
excerpts  from  S&P's  description  of  its  bond  ratings: BB, B, CCC, CC, C --
predominantly  speculative  with  respect  to capacity to pay interest and repay
principal  in  accordance  with terms of the obligation; BB indicates the lowest
degree  of  speculation  and C the highest. D -- in payment default. S&P applies
indicators  `+,'  no character, and `+' to its rating categories. The indicators
show relative standing within the major rating categories.

OTHER  INVESTMENT  COMPANIES. LargeCap Leaders Fund, MidCap Value Fund, Bank and
Thrift  Fund  and  Asia-Pacific  Equity Fund each may invest in other investment
companies  ("Underlying  Funds").  Each Fund may not (i) invest more than 10% of
its  total  assets  in  Underlying  Funds, (ii) invest more than 5% of its total
assets  in  any  one  Underlying  Fund, or (iii) purchase greater than 3% of the
total outstanding securities of any one Underlying Fund.

There  are  some  potential  disadvantages  associated  with  investing in other
investment  companies.  For  example, you would indirectly bear additional fees.
The   Underlying   Funds   pay   various   fees,   including,  management  fees,
administration  fees,  and  custody fees. By investing in those Underlying Funds
indirectly,  you  indirectly  pay a proportionate share of the expenses of those
funds  (including management fees, administration fees, and custodian fees), and
you also pay the expenses of the Fund.

RESTRICTED  AND  ILLIQUID  SECURITIES. Each  Fund  may  invest in restricted and
illiquid  securities  (except  MagnaCap Fund, which may not invest in restricted
securities).  A  Fund  may  invest  in an illiquid or restricted security if the
Investment   Manager   believes   that  it  presents  an  attractive  investment
opportunity.  Generally,  a  security  is  considered  illiquid  if it cannot be
disposed  of  within  seven  days  at  approximately  the  value  at which it is
carried.  This illiquidity might prevent the sale of the security at a time when
the  Investment  Manager might wish to sell, and these securities 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,  requiring  the  Fund  to  rely  on  judgments that may be
somewhat  subjective  in determining value, which could vary from the amount the
Fund  could realize upon disposition. Each Fund may only invest up to 15% of its
net assets in illiquid securities.

Restricted  securities,  including  private  placements, are subject to legal or
contractual  restrictions  on  resale. They can be eligible for purchase without
Securities   and  Exchange  Commission  registration  by  certain  institutional
investors  known  as  `qualified  institutional  buyers,'  and  under the Fund's
procedures, restricted

                                       15
<PAGE>
securities  could  be treated as liquid. However, some restricted securities may
be  illiquid  and restricted securities that are treated as liquid could be less
liquid than registered securities traded on established secondary markets.

MORTGAGE-RELATED  SECURITIES. Government  Securities  Income Fund and High Yield
Fund  may invest up to 100% of their assets in certain types of mortgage-related
securities.  High  Yield  Fund  may  invest  up  to  35%  of its total assets in
mortgage-related  securities. Investments in mortgage-related securities involve
certain  risks.  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 (1) the
mortgages  will  be  subject  to  normal  principal amortization, and (2) may be
prepaid  prior  to  maturity  due  to  the  sale of the underlying property, the
refinancing  of the loan or foreclosure. Early prepayment may expose a Fund to a
lower  rate  of return upon reinvestment of the principal. Prepayment rates vary
widely  and  cannot  be accurately predicted. They may be affected by changes in
market  interest  rates. Therefore, prepayments will be reinvested at rates that
are  available  upon  receipt,  which  likely  will  be higher or lower than the
original  yield  on  the  certificates.  Accordingly,  the  actual  maturity and
realized yield on mortgage-backed  securities  will  vary  from  the  designated
maturity   and  yield  on  the  original  security  based  upon  the  prepayment
experience of the underlying pool of mortgages.

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.

U.S.  GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities.
U.S.  Government  securities  include  direct  obligations  of the U.S. Treasury
(such  as  U.S. Treasury bills, notes and bonds) and obligations directly issued
or   guaranteed   by   U.S.   Government  agencies  or  instrumentalities.  Some
obligations  issued  or  guaranteed by agencies or instrumentalities of the U.S.
Government  are backed by the full faith and credit of the U.S. Government (such
as  GNMA  certificates);  others  are  backed only by the right of the issuer to
borrow  from  the  U.S. Treasury (such as obligations of FNMA); and still others
are  backed  only  by  the credit of the instrumentality (such as obligations of
FHLMC),  and  thus  may be subject to varying degrees of credit risk. While U.S.
Government  securities  provide substantial protection against credit risk, they
do  not  protect  investors  against  price  declines  in  the securities due to
changing  interest  rates.  Investors  also  should  refer  to the discussion of
`Mortgage-Related Securities.'


INVESTMENT TECHNIQUES

BORROWING. Bank   and  Thrift  Fund  may  borrow  money  from  banks  to  obtain
short-term   credits   as   are   necessary  for  the  clearance  of  securities
transactions,  but not in an amount exceeding 15% of its total assets. All Funds
except  Bank  and Thrift may borrow from banks solely for temporary or emergency
purposes  up  to  certain amounts (10% of total assets in the case of Government
Securities  Income  Fund,  5%  of  total assets in the case of MagnaCap Fund and
High  Yield Fund, and 33 1/3% of  total assets in the case of MidCap Value Fund,
LargeCap  Leaders  Fund  and  Asia-Pacific  Equity  Fund). Government Securities
Income  Fund  may  not  make any additional investment while any such borrowings
exceed  5%  of  its  total assets. The Government Securities Income Fund's entry
into  reverse  repurchase agreements and dollar-roll transactions and any Fund's
entry  into delayed delivery transactions (including those related to pair-offs)
shall  not  be  subject  to  the  above  limits  on  borrowings.  Borrowing  may
exaggerate  the  effect  of  any  increase or decrease in the value of portfolio
securities  or  the  net asset value (NAV) of a Fund, and money borrowed will be
subject to interest costs.

                                       16
<PAGE>
FOREIGN   CURRENCY   TRANSACTIONS. Substantially   all  of  the  assets  of  the
Asia-Pacific  Equity  Fund will be invested in securities denominated in foreign
currencies  and  a corresponding portion of the Fund's revenues will be received
in  such  currencies.  Unfavorable  changes in the relationship between the U.S.
dollar  and  the  relevant  foreign currencies, therefore, will adversely affect
the value of the Fund's shares. The Asia-Pacific  Equity  Fund  ordinarily  will
not  engage  in  hedging  transactions  to  guard  against  the risk of currency
fluctuation.  However,  the  Fund  reserves the right to do so, and, toward this
end,  may  enter  into  forward  foreign  currency  contracts.  This  investment
technique is described in the Fund's Statement of Additional Information.

DOLLAR  ROLL  TRANSACTIONS. Government  Securities  Income  Fund  may  engage in
dollar  roll  transactions  with respect to mortgage-backed securities issued by
GNMA,  FNMA  and  FHLMC  in  order  to  enhance  portfolio  returns  and  manage
prepayment  risks.  In  a  dollar  roll  transaction,  the Fund sells a mortgage
security  held  in  the  portfolio  to a financial institution such as a bank or
broker-dealer,  and  simultaneously agrees to repurchase a substantially similar
security  from  the  institution at a later date at an agreed upon price. During
the  period  between  the  sale and repurchase, the Fund will not be entitled to
receive  interest and principal payments on the securities sold. Proceeds of the
sale  will  be  invested  in  short-term  instruments, and the income from these
investments,  together  with  any  additional  fee  income received on the sale,
could  generate  income  for  the Fund exceeding the yield on the sold security.
When  it  enters into a dollar roll transaction, the Fund will maintain with its
custodian  in  a segregated account cash and/or liquid assets in a dollar amount
sufficient  to  make  payment  for  the  obligations  to  be  repurchased. These
securities  are  marked to market daily and are maintained until the transaction
is settled.

LENDING  PORTFOLIO  SECURITIES. In order to generate additional income, MagnaCap
Fund,  High  Yield Fund and Government Securities Income Fund may lend portfolio
securities  in  an amount up to 33 1/3% of  total Fund assets to broker-dealers,
major   banks,   or   other   recognized  domestic  institutional  borrowers  of
securities.  No  lending  may  be  made  with  any companies affiliated with the
Investment  Manager.  The  borrower  at  all times during the loan must maintain
with  that  Fund  cash  or  high  quality securities or an irrevocable letter of
credit  equal  in  value to at least 100% of the value of the securities loaned.
During  the  time  portfolio  securities are on loan, the borrower pays the Fund
any  dividends  or interest paid on such securities, and the Fund may invest the
cash  collateral  and  earn  additional income, or it may receive an agreed-upon
amount  of  interest  income  from  the  borrower  who  has delivered equivalent
collateral  or a letter of credit. As with other extensions of credit, there are
risks  of  delay in recovery or even loss of rights in the collateral should the
borrower fail financially.

PAIRING  OFF  TRANSACTIONS. Government  Securities  Income  Fund  engages  in  a
pairing-off  transaction  when  it  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. At all times when the
Fund  has  an  outstanding  commitment  to  purchase  securities,  the Fund will
maintain  with  its  custodian in a segregated account cash and/or liquid assets
equal  to the value of the outstanding purchase commitments. When the time comes
to  pay  for  the securities acquired on a delayed delivery basis, the Fund will
meet  its  obligations from the available cash flow, sale of the securities held
in  the  separate  account,  sale  of other securities or, although it would not
normally  expect  to  do  so, from sale of the when-issued securities themselves
(which  may  have  a  market  value  greater  or  less  than  the Fund's payment
obligation).  Whether  a  pairing-off  transaction  produces a gain for the Fund
depends  upon  the  movement of interest rates. If interest rates decrease, then
the  money  received upon the sale of the same security will be greater 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 gain. However, 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.

REVERSE  REPURCHASE AGREEMENTS. Government Securities Income Fund may enter into
reverse  repurchase  agreement  transactions,  which  involve  the  sale of U.S.
Government  Securities  held  by  the Fund, with an agreement that the Fund will
repurchase  the  securities  at  an  agreed  upon  price and date. The Fund will
employ  reverse  repurchase  agreements when necessary to meet unanticipated net
redemptions  and  avoid  liquidation of portfolio investments during unfavorable
market  conditions.  At  the time it enters into a reverse repurchase agreement,
the Fund will place in a segregated account with its custodian cash and/or

                                       17
<PAGE>
liquid  assets  having  a  dollar  value  equal to the repurchase price. Reverse
repurchase  agreements,  together  with  the  Fund's  other  borrowings, may not
exceed 33 1/3% of the Fund's total assets.

USE  OF  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. The Funds will not invest in
highly  leveraging derivatives, such as interest-only or principal-only stripped
mortgage-backed  securities or swaps. In the case of MidCap Value Fund, LargeCap
Leaders  Fund and Asia-Pacific Equity Fund, it is expected that derivatives will
not  ordinarily be used for any of the Funds, but a Fund may make occasional use
of  certain  derivatives  for  hedging. For example, MidCap Value Fund, LargeCap
Leaders  Fund  and Asia-Pacific Equity Fund may purchase put options, which give
the  Fund  the  right  to  sell a security it holds at a specified price. A Fund
would  purchase an option to attempt to preserve the value of securities that it
holds,  which  it could do by exercising the option if the price of the security
falls  below the `strike price' for the option. The Funds will not engage in any
other type of options transactions.

Another  use of derivatives that only may be employed by the Asia-Pacific Equity
Fund  is  to  enter into forward currency contracts and foreign exchange futures
('futures')  contracts,  which  provide  for  delivery  of  a  certain amount of
foreign  currency  to  the Fund on a specified date. The Fund would enter into a
forward  currency  or  futures  contract  when  it intends to purchase or sell a
security  denominated in a foreign currency and it desires to `lock in' the U.S.
dollar  price  of  the  security. The Funds will not engage in any other type of
forward  contracts  or  futures contracts. For additional information on options
and  foreign  currency  contracts,  see  `Options  on  Securities'  and `Foreign
Currency   Exchange   Transactions'   in  the  Fund's  Statement  of  Additional
Information.

Government  Securities  Income  Fund  and  High  Yield  Fund  may invest in U.S.
Government  agency  mortgage-backed  securities issued or guaranteed by the U.S.
Government  or  one  of its agencies or instrumentalities, including GNMA, FNMA,
and  FHLMC. These instruments might be considered derivatives. The primary risks
associated  with these instruments is the risk that their value will change with
changes   in   interest   rates   and   prepayment   risk.  For  information  on
mortgage-backed  securities,  see  'Investment Practices and Risk Considerations
- --   Mortgage-Related   Securities'   in   this   Prospectus,  `U.S.  Government
Securities'  in  Government  Securities  Income  Fund's  Statement of Additional
Information,  and  `Mortgage-Related  Securities' in High Yield Fund's Statement
of Additional Information.

Other  uses  of derivatives that may be employed only by High Yield Fund include
writing   covered  call  options;  purchasing  call  options;  and  engaging  in
financial  futures  and  related  options. It is expected that these instruments
ordinarily  will  not  be  used  for High Yield Fund; however, the Fund may make
occasional  use  of  these techniques. When a Fund writes a covered call option,
it  receives  a  premium  for entering into a contract to sell a security in the
future  at an agreed upon price and date. A Fund would write a call option if it
believes  that  the  premium  would  increase  total return. The primary risk of
writing  call options is that, during the option period, the covered call writer
has,  in  return  for  the  premium  on  the option, given up the opportunity to
profit  from  a  price  increase in the underlying securities above the exercise
price.  A  Fund  may  purchase  call  options for the purpose of `closing out' a
position on a security on which it has already written a call option.

High  Yield  Fund  also  may use financial futures contracts and related options
for  'hedging'  purposes.  A  Fund  would  purchase a financial futures contract
(such  as  an  interest  rate  futures  contract  or  securities  index  futures
contract)  to protect against a decline in the value of its portfolio or to gain
exposure  to  securities  which the Fund otherwise wishes to purchase. A risk of
using  financial  futures  contracts for hedging purposes is that the Investment
Manager  might imperfectly judge the market's direction, so that the hedge might
not  correlate to the market's movements and may be ineffective. Furthermore, if
a  Fund  buys  a  futures  contract  to gain exposure to securities, the Fund is
exposed  to  the  risk  of change in the value of the underlying securities. For
information  on options on securities and financial futures and related options,
see  `Option  Writing'  and `Financial Futures Contracts and Related Options' in
High Yield Fund's Statement of Additional Information.

                                       18
<PAGE>
                    DIVERSIFICATION AND CHANGES IN POLICIES

Each  Fund is diversified, so that with respect to 75% of its assets, it may not
invest  more  than  5%  of  its  assets (measured at market value at the time of
investment)  in  securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.

The  first sentence in the description of each Fund under `The Funds' Investment
Objectives  and Policies,' above, states the Fund's investment objectives. These
investment  objectives  are  `fundamental.'  The  other  investment  policies of
Government  Securities  Income  Fund described in the first paragraph under `The
Funds'  Investment Objectives and Policies -- Government Securities Income Fund'
are  also  `fundamental.'  Fundamental  policies  may  only  be changed with the
approval  of  a majority of shareholders of the pertinent Fund. Unless otherwise
specified,  other  investment policies of any of the Funds may be changed by the
Board  of  Directors  of  that  Fund  without shareholder approval. Each Fund is
subject  to  investment restrictions that are described in that Fund's Statement
of  Additional  Information  under  `Investment  Restrictions.'  Some  of  those
restrictions  are designated as `fundamental.' These fundamental restrictions as
well  as the diversified status of each Fund require a vote of a majority of the
shareholders of the relevant Fund to be changed.


                             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.   The  Investment  Manager  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  the  Investment  Manager and the Fund's 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.

                                       19
<PAGE>
                                SHAREHOLDER GUIDE


PILGRIM PURCHASE OPTIONS(TM)

Depending  upon  the  Fund, you may select from two or three separate classes of
shares:  Class  A,  Class  B  and Class M, each of which represents an identical
interest  in  a Fund's investment portfolio but are offered with different sales
charges  and distribution fee (Rule 12b-1) arrangements. These sales charges and
fees are shown and contrasted in the chart below.

<TABLE>
<CAPTION>
                                                        CLASS A        CLASS B       CLASS M(1)
                                                       ---------      ---------      ---------
<S>                                                    <C>            <C>            <C>
Maximum Initial Sales Charge on Purchases                                         
 MagnaCap Fund, LargeCap Leaders Fund, MidCap                                     
   Value Fund, Asia-Pacific Equity Fund ........        5.75%(2)        None           3.50%
 Bank and Thrift Fund ..........................        5.75%(2)        None            N/A
 High Yield Fund and Government Securities                                        
   Income Fund .................................        4.75%(2)        None           3.25%
CDSC ...........................................        None (3)        5.00%(4)       None
Annual Distribution Fees(5) ....................        0.25%(6)        1.00%          0.75%
Maximum Purchase ...............................       Unlimited      $250,000      $1,000,000
Automatic Conversion to Class A ................          N/A          8 Years          N/A
</TABLE>
- ------------
(1) Bank and Thrift Fund does not offer Class M shares.
(2) Imposed upon purchase. Reduced for purchases of $50,000 or more.
(3) For  investments  of  $1  million  or  more,  a  CDSC  of no more than 1% is
    assessed  on  redemptions  made  within  one  or  two  years  from purchase,
    depending  on  the  amount  of  purchase. See `Class A Shares: Initial Sales
    Charge Alternative.'
(4) Imposed  upon  redemption  within  6  years from purchase. Fee has scheduled
    reductions  after  the  first  year.  See  `Class  B  Shares: Deferred Sales
    Charge Alternative.'
(5) Annual asset-based distribution charge.
(6) MagnaCap Fund imposes an annual distribution fee of 0.30%.


When  choosing  between classes, investors should carefully consider the ongoing
annual  expenses  along  with  the  initial  sales  charge or CDSC. The relative
impact  of  the initial sales charges and ongoing annual expenses will depend on
the  length  of  time  a  share  is  held. 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 Authorized Dealer.

CLASS  A  SHARES:  Initial Sales Charge Alternative. Class A shares of the Funds
are  sold at the NAV per share in effect plus a sales charge as described in the
following  table. For waivers or reductions of the Class A shares sales charges,
see `Special Purchases without a Sales Charge' and `Reduced Sales Charges.'

           MAGNACAP FUND, LARGECAP LEADERS FUND, MIDCAP VALUE FUND,
               BANK AND THRIFT FUND AND ASIA-PACIFIC EQUITY FUND

<TABLE>
<CAPTION>
                                                                                        DEALERS'
                                                                                      REALLOWANCE
                                                AS A % OF OFFERING     AS A % OF       AS A % OF
AMOUNT OF TRANSACTION                            PRICE PER SHARE          NAV        OFFERING PRICE
- ---------------------                           ------------------     ---------     --------------
<S>                                                  <C>                <C>           <C>
Less than $50,000   .....................            5.75%              6.10%           5.00%
$50,000 but less than $100,000  .........            4.50%              4.71%           3.75%
$100,000 but less than $250,000 .........            3.50%              3.63%           2.75%
$250,000 but less than $500,000 .........            2.50%              2.56%           2.00%
$500,000 but less than $1,000,000  ......            2.00%              2.04%           1.75%
</TABLE>                                       
                                            
                                       20
<PAGE>
                                HIGH YIELD FUND
                     AND GOVERNMENT SECURITIES INCOME FUND



<TABLE>
<CAPTION>
                                                                                         DEALERS'
                                                                                       REALLOWANCE
                                                 AS A % OF OFFERING     AS A % OF       AS A % OF
AMOUNT OF TRANSACTION                             PRICE PER SHARE          NAV        OFFERING PRICE
- ---------------------                            ------------------     ---------     -------------- 
<S>                                                    <C>                <C>             <C>
Less than $50,000  ............................        4.75%              4.99%           4.25%
$50,000 but less than $100,000 ................        4.50%              4.71%           4.00%
$100,000 but less than $250,000 ...............        3.50%              3.63%           3.00%
$250,000 but less than $500,00 ................        2.50%              2.56%           2.25%
$500,000 but less than $1,000,000 .............        2.00%              2.04%           1.75%
</TABLE>                                       
                                            
There  is  no  initial sales charge on purchases of $1,000,000 or more. However,
the  Distributor  will pay Authorized Dealers of record commissions at the rates
shown  in  the  table  below  for  investments  subject to a CDSC. If shares are
redeemed  within  one  or  two years of purchase, depending on the amount of the
purchase, a CDSC will be imposed on certain redemptions as follows:


<TABLE>
<CAPTION>
                                                                                          PERIOD
                                                                          DEALER       DURING WHICH
ON PURCHASES OF:                                       CDSC             ALLOWANCE      CDSC APPLIES
- ---------------                                       ------            ---------      ------------ 
<S>                                                    <C>                <C>            <C>
$1,000,000 but less than $2,500,000 ...........        1.00%              1.00%          2 Years
$2,500,000 but less than $5,000,000 ...........        0.50%              0.50%          1 Year
$5,000,000 and over  ..........................        0.25%              0.25%          1 Year
</TABLE>                             

CLASS  B  SHARES:  Deferred Sales Charge Alternative. If you choose the deferred
sales  charge  alternative,  you  will  purchase Class B shares at their NAV per
share  without the imposition of a sales charge at the time of purchase. Class B
shares  that are redeemed within six years of purchase, however, will be subject
to  a  CDSC  as described in the table that follows. Class B shares of the Funds
are  subject  to  a  distribution  fee at an annual rate of 1.00% of the average
daily  net  assets  of  the Class, which is higher than the distribution fees of
Class  A  or  Class M shares. The higher distribution fees mean a higher expense
ratio,  so  Class  B  shares  pay correspondingly lower dividends and may have a
lower  NAV  than  Class A or Class M shares. In connection with sales of Class B
shares,  the  Distributor  compensates  Authorized  Dealers  at  a rate of 4% of
purchase  payments  subject  to  a  CDSC. Orders for Class B shares in excess of
$250,000 will be accepted as orders for Class A shares or declined.

The  amount  of  the CDSC is determined as a percentage of the lesser of the NAV
of  the  Class B shares at the time of purchase or redemption. No charge will be
imposed  for  any  net  increase  in  the  value  of shares purchased during the
preceding  six  years  in  excess  of  the  purchase price of such shares or for
shares  acquired  either  by  reinvestment of net investment income dividends or
capital  gain  distributions.  The  percentage  used  to calculate the CDSC will
depend  on  the  number  of  years  since  you  invested the dollar amount being
redeemed according to the following table:




               YEAR OF REDEMPTION AFTER PURCH                    CDSC
               ------------------------------                    ----


               First ...........................................  5%
               Second ..........................................  4%
               Third ...........................................  3%
               Fourth ..........................................  3%
               Fifth ...........................................  2%
               Sixth ...........................................  1%
               Seventh and following ...........................  0%


To  determine  the CDSC payable on redemptions of Class B shares, the Funds will
first  redeem  shares in accounts that are not subject to a CDSC; second, shares
acquired  through  reinvestment  of  net investment income dividends and capital
gain  distributions;  third,  shares  purchased  more  than  6  years  prior  to
redemption;  and  fourth,  shares  subject  to a CDSC in the order in which such
shares  were purchased. Using this method, your sales charge, if any, will be at
the lowest possible rate.

                                       21
<PAGE>
Class  B  shares  will  automatically  convert into Class A shares approximately
eight  years  after  purchase.  For  additional  information on the CDSC and the
conversion   of  Class  B  shares,  see  each  Fund's  Statement  of  Additional
Information.

CLASS  M  SHARES:  Lower  Initial  Sales  Charge  Alternative.  An  investor who
purchases  Class  M  shares  pays a sales charge at the time of purchase that is
lower  than  the  sales charge applicable to Class A shares and does not pay any
CDSC  upon redemption. Class M shares have a higher annual distribution fee than
Class  A  shares,  but  lower  than Class B. The higher distribution fees mean a
higher  expense  ratio  than  Class A but lower than Class B. Class M shares pay
correspondingly  lower dividends and may have a lower NAV per share than Class A
shares,  but generally pay higher dividends and have a higher NAV per share than
Class  B  shares.  Orders  for  Class  M  shares in excess of $1,000,000 will be
accepted  as orders for Class A shares or declined. The public offering price of
Class  M shares is the NAV of each Fund plus a sales charge, which, as set forth
below, varies based on the size of the purchase:

           MAGNACAP FUND, LARGECAP LEADERS FUND, MIDCAP VALUE FUND,
               BANK AND THRIFT FUND AND ASIA-PACIFIC EQUITY FUND

<TABLE>
<CAPTION>
                                                                                         DEALERS'
                                                                                       REALLOWANCE
                                                 AS A % OF OFFERING     AS A % OF       AS A % OF
AMOUNT OF TRANSACTION                             PRICE PER SHARE          NAV        OFFERING PRICE
- ---------------------                            ------------------     ---------     --------------
<S>                                                    <C>                <C>             <C>
Less than $50,000 ..............................       3.50%              3.63%           3.00%
$50,000 but less than $100,000 .................       2.50%              2.56%           2.00%
$100,000 but less than $250,000 ................       1.50%              1.52%           1.00%
$250,000 but less than $500,000 ................       1.00%              1.01%           1.00%
$500,000 and over ..............................       None               None            None
</TABLE>                                        
                                      
             HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND

<TABLE>
<CAPTION>
                                                                                          DEALERS'
                                                                                        REALLOWANCE
                                                  AS A % OF OFFERING     AS A % OF       AS A % OF
AMOUNT OF TRANSACTION                              PRICE PER SHARE          NAV        OFFERING PRICE
- ---------------------                             ------------------     ---------     --------------  
<S>                                                       <C>                <C>             <C>
Less than $50,000 ...............................         3.25%              3.36%           3.00%
$50,000 but less than $100,000 ..................         2.25%              2.30%           2.00%
$100,000 but less than $250,000 .................         1.50%              1.52%           1.25%
$250,000 but less than $500,000 .................         1.00%              1.01%           1.00%
$500,000 and over ...............................         None              None             None
</TABLE>                                

Class  M  shares  are  not offered by Bank and Thrift Fund and do not convert to
Class A.

REDUCED  SALES  CHARGES. An investor may immediately qualify for a reduced sales
charge  on  a  purchase of Class A or Class M shares of a Fund or other open-end
funds  in  the  Pilgrim  Funds  which  offer  Class A shares, Class M Shares, or
shares  with  front-end  sales charges (`Participating Funds') by completing the
Letter  of  Intent  section  of  the Application. Executing the Letter of Intent
expresses  an  intention to invest during the next 13 months a specified amount,
which,  if made at one time, would qualify for a reduced sales charge. An amount
equal  to  the  Letter  amount multiplied by the maximum sales charge imposed on
purchases  of  the  applicable  Fund  and  class  will be restricted within your
account  to  cover additional sales charges that may be due if your actual total
investment  fails  to  qualify  for  the  reduced sales charges. See the Account
Application  or  the  Statement  of  Additional  Information  for details on the
Letter  of  Intent  option  or  contact the Shareholder Servicing Agent at (800)
992-0180 for more information.

The  sales charge for your investment may also be reduced by taking into account
the  current  value  of your existing holdings in the Fund or any other open-end
funds  in  the  Pilgrim  Funds  (excluding  Pilgrim General Money Market Shares)
(`Rights  of  Accumulation').  The  reduced  sales  charges  apply  to  quantity
purchases  made at one time or on a cumulative basis over any period of time by:
(i)  an  investor;  (ii)  the  investor's  spouse  and children under the age of
majority;  (iii)  the investor's custodian account(s) for the benefit of a child
under  the  Uniform  Gifts to Minors Act; (iv) a trustee or other fiduciary of a
single trust estate or a single
                                       22
<PAGE>
fiduciary  account  (including  a  pension,  profit-sharing  and  other employee
benefit  plans  qualified  under  Section 401 of the Internal Revenue Code); and
(v)  by  trust  companies,  registered investment advisers, banks and bank trust
departments  for  accounts  over  which  they  exercise  exclusive discretionary
investment  authority  and  which  are  held  in  a fiduciary, agency, advisory,
custodial  or  similar capacity. See the Account Application or the Statement of
Additional  Information  for  details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.

For  the  purposes of Rights of Accumulation and the Letter of Intent 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 but will not
affect  any  CDSC  which  may be imposed upon the redemption of shares of a Fund
which imposes a CDSC.

WAIVERS  OF  CDSC. The  CDSC  on Class A or Class B shares will be waived in the
following  cases.  In  determining  whether  a  CDSC  is  applicable, it will be
assumed  that  shares  held in the shareholder's account that are not subject to
such charge are redeemed first.

        1)  The  CDSC on Class A or Class B shares will be waived in the case of
     redemption  following the death or permanent disability of a shareholder if
     made  within  one  year  of  death  or  initial  determination of permanent
     disability.  The  waiver  is  available for total or partial redemptions of
     shares  of  each  Fund  owned  by  an  individual or an individual in joint
     tenancy  (with  rights  of survivorship), but only for those shares held at
     the time of death or initial determination of permanent disability.

        2)  The  CDSC also may be waived for Class B Shares redeemed 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.

        3)  The  CDSC  also  will  be  waived  in the case of a total or partial
     redemption   of   shares  in  a  Fund  in  connection  with  any  mandatory
     distribution   from   a   tax-deferred  retirement  plan  or  an  IRA.  The
     shareholder  must  have attained the age of 70 1/2 to  qualify for the CDSC
     waiver  relating  to  mandatory distributions. The waiver does not apply in
     the  case  of  a  tax-free  rollover  or transfer of assets, other than one
     following  a  separation  of  service.  The  shareholder  must  notify  the
     Transfer  Agent  either directly or through the Distributor, at the time of
     redemption,  that  the shareholder is entitled to a waiver of the CDSC. The
     CDSC  Waiver Form included in the Account Application must be completed and
     provided  to  the Transfer Agent at the time of the redemption request. The
     waiver  will  be  granted  subject  to  confirmation of the grounds for the
     waiver. The foregoing waivers may be changed at any time.

REINSTATEMENT  PRIVILEGE. Class B shareholders who have redeemed their shares in
any  open-end  Pilgrim  Fund  within the previous 90 days may repurchase Class B
shares  at  NAV (at the time of reinstatement) in an amount up to the redemption
proceeds.  Reinstated  Class  B  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, 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  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. See `Tax
Considerations' in the Statement of Additional Information.

SPECIAL  PURCHASE  WITHOUT  A  SALES  CHARGE. Class  A  or Class M shares may be
purchased at NAV without a sales charge by:

        1)  Class  A  or  Class M shareholders who have redeemed their shares in
     any  open-end  Pilgrim Fund within the previous 90 days. These shareholders
     may  repurchase  shares  at  NAV in an amount equal to their net redemption
     proceeds.  Authorized  Dealers  who  handle these purchases may charge fees
     for this service.

        2)  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 which unaffiliated fund was: with
     respect  to purchases of Bank and Thrift Fund, a fund invested primarily in
     financial services entities;

                                       23
<PAGE>
   with  respect  to  purchases  of  MagnaCap Fund, a domestic growth fund; with
   respect  to  purchases of the MidCap Value Fund, a mid-cap fund; with respect
   to  purchases  of  the  LargeCap Leaders Fund, a large-cap fund; with respect
   to  purchases  of the Asia-Pacific Equity Fund, a fund investing in companies
   based  in  the  Asia-Pacific  region; with respect to purchases of High Yield
   Fund,  a  high  yield  bond fund; and with respect to purchases of Government
   Securities Income Fund, a government securities fund.

        3)   Any   charitable  organization  or  governmental  entity  that  has
     determined  that  a  Fund  is a legally permissible investment and which is
     prohibited  by  applicable  law from paying a sales charge or commission in
     connection with the purchase of shares of any mutual fund.

        4)  Officers,  directors  and full-time employees, and their families of
     Pilgrim America Capital Corporation (Pilgrim) and its subsidiaries.

        5)  Certain  fee  based  broker-dealers  or  registered  representatives
     thereof  or  registered  investment  advisers  under  certain circumstances
     making investments on behalf of their clients.

        6)  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.

        7)  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 Fund
     alone  or  in  any combination of shares of any Fund plus Class A shares of
     certain  other  Participating  Funds  as  described  herein  under `Pilgrim
     Purchase Options(TM) --  Reduced Sales Charges', during the 13 month period
     commencing  with  the  first  investment pursuant hereto equals at least $1
     million.   The   Distributor  may  pay  Authorized  Dealers  through  which
     purchases  are made an amount up to 0.50% of the amount invested, over a 12
     month period following the transaction.

        8)  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).

        9)   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.

       10)  Accounts  as  to  which a banker or broker-dealer charges an account
      management fee (`wrap accounts').

       11)  Any  registered  investment  company  for which Pilgrim Investments,
      Inc. serves as investment manager.

The  Funds  may  terminate or amend the terms of offering shares at NAV to these
investors  at  any  time.  For  additional  information, contact the Shareholder
Servicing   Agent  at  (800)  992-0180,  or  see  the  Statement  of  Additional
Information.

INCENTIVES. The   Distributor,   at   its   expense,   will  provide  additional
promotional  incentives to Authorized Dealers in connection with sales of shares
of  the  Funds  and  other open-end Pilgrim Funds. In some instances, additional
compensation  or  promotional  incentives  will be offered to Authorized 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 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 to various locations for such seminars or
training  programs,  seminars  for  the  public, advertising and sales campaigns
regarding  the  Funds  or  other  open-end  Pilgrim  Funds  and/or  other events
sponsored  by  Authorized  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)

                                       24
<PAGE>
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.

RULE  12B-1 PLAN. Each Fund has a distribution plan pursuant to Rule 12b-1 under
the  1940 Act applicable to each class of shares of that Fund (Rule 12b-1 Plan).
Under  the Rule 12b-1 Plan, the Distributor may receive from each Fund an annual
fee  in  connection  with  the  offering,  sale and shareholder servicing of the
Fund's Class A, Class B and Class M shares.

DISTRIBUTION  AND  SERVICING  FEES. As  compensation  for  services rendered and
expenses  borne by the Distributor in connection with the distribution of shares
of  the  Funds  and in connection with services rendered to shareholders of each
Fund,  each Fund pays the Distributor servicing fees and distribution fees up to
the  annual  rates  set  forth  below (calculated as a percentage of each Fund's
average daily net assets attributable to that class):

        CLASS A SHARES
                                                     SERVICING     DISTRIBUTION
         FUND                                           FEE            FEE
         ----                                        ---------     ------------
         MagnaCap Fund .............................   0.25%          0.05%

         LargeCap Leaders Fund, MidCap
          Value Fund, Bank and Thrift Fund,
          Asia-Pacific Equity Fund .................   0.25%           n/a*

         High Yield Fund and
          Government Securities Income Fund ........   0.25%           n/a

          ------------
          * Subject  to increase by action of the Fund's Directors to a rate not
           exceeding .10% per annum.


        CLASS B SHARES

                                                     SERVICING     DISTRIBUTION
         FUNDS                                          FEE            FEE
         -----                                       ---------     ------------

         All Funds .................................   0.25%          0.75%



        CLASS M SHARES



                                                     SERVICING     DISTRIBUTION
         FUND                                           FEE            FEE
         ----                                        ---------     ------------

         All Funds except Bank and Thrift Fund ......  0.25%          0.50%*


          ------------
          * Subject  to increase by action of the Fund's Directors to a rate not
           exceeding 0.75% per annum.


Fees  paid  under  the  Rule 12b-1 Plan may be used to cover the expenses of the
Distributor  from  the  sale of Class A, Class B or Class M shares of the Funds,
including  payments  to Authorized Dealers, and for shareholder servicing. These
fees  may  be  used  to  pay  the costs of the following: payments to Authorized
Dealers;  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; supplemental payments to
Authorized  Dealers  that  provide  shareholder  services;  interest  on accrued
distribution  expenses;  and costs of administering the Rule 12b-1 Plan. No more
than  0.75%  per  annum  of  a  Fund's average net assets may be used to finance
distribution  expenses,  exclusive  of  shareholder  servicing  payments, and no
Authorized  Dealer may receive shareholder servicing payments in excess of 0.25%
per  annum  of  a  Fund's  average  net  assets  held by the Authorized Dealer's
clients  or  customers.  With  respect  to Class A shares of MagnaCap Fund, High
Yield  Fund  and  Government  Securities  Income  Fund,  the Distributor will be
reimbursed for its actual expenses incurred under the 12b-1

                                       25
<PAGE>
Plan.  The  Distributor  has incurred costs and expenses with respect to Class A
shares  that  may  be  reimbursable  in future months or years in the amounts of
$4,916,710  for  MagnaCap  Fund  (1.11%  of its net assets), $1,561,725 for High
Yield  Fund  (0.56%  of  its net assets), and $927,642 for Government Securities
Income  Fund  (3.42%  of  its  net  assets) as of June 30, 1998. With respect to
Class  A  shares  of  all other Funds and the Class B and Class M shares of each
Fund,   the   Distributor   will   receive  payment  without  regard  to  actual
distribution  expenses  that  it incurs. Fees paid by one of the Funds under the
Rule  12b-1  Plan may be used to finance distribution of the shares of that Fund
and  the  servicing  of  shareholders  of  the Fund as well as the other Pilgrim
Funds.

Under  the  Rule  12b-1 Plan, ongoing payments will be made on a quarterly basis
to  Authorized  Dealers  for distribution and shareholder servicing as set forth
below.


        CLASS A AND B SHARES



                                                     SERVICING
          FUND                                          FEE
          ----                                          ---


          All Funds ................................   .25%

        CLASS M SHARES
                                                     SERVICING     DISTRIBUTION
         FUND                                           FEE            FEE
         ----                                        ---------     ------------
       Magna Cap Fund, LargeCap
        Leaders Fund, MidCap Value Fund,
        Asia-Pacific Equity Fund ...................   .25%           .40%

       High Yield Fund and Government
        Securities Income Fund .....................   .25%           .15%

Payments  are  calculated  as  a  percentage  of  the  Fund's  average daily NAV
attributed  to  each  class  of  shares  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 or B
shares  and  on  the  anniversary  date  in  the 1st month following the date of
purchase  of  Class  M  shares,  and they cease upon exchange (or purchase) into
Pilgrim  General  Money  Market  Shares.  The  payments  are also subject to the
continuation  of  the  relevant  distribution  plan,  the  terms  of the service
agreements  between  dealers  and  the  Distributor,  and  any applicable limits
imposed by the National Association of Securities Dealers, Inc.

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  Directors  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.

                                       26
<PAGE>
PURCHASING SHARES

     Your  Authorized  Dealer  can help you establish and maintain your account,
and  the  Shareholder  Servicing  Agent  is  available  to  assist  you with any
questions you may have.

     The  Fund  reserves  the  right  to  liquidate sufficient shares to recover
annual  Transfer Agent fees should the investor fail to maintain his/her account
value at a minimum of $1,000.00 ($250.00 for IRA's).

<TABLE>
<CAPTION>
       Method                      Initial Investment                           Additional Investment
       ------                      ------------------                           ---------------------
<S>                   <C>                                             <C>
 By contacting your    The minimum initial investment in a Fund is    The minimum for additional investment 
 Authorized Dealer     $1,000 ($250 for IRAs).                        in a Fund is $100.

 By Mail               Visit or consult an Authorized Dealer.         Visit or consult your Authorized Dealer.
                       Make your check payable to the Pilgrim         Fill out the Account Additions form
                       Funds and mail it, along with a                included on the bottom of your account
                       completed Application, to the address          statement along with your check payable to
                       indicated on the Application. Please           the Fund and mail them in the envelope
                       indicate an Authorized Dealer on the New       provided with the account statement.
                       Account Application.                           Remember to write your account number on
                                                                      the check.

 By wire               Call the Pilgrim Operations Department         Call the Pilgrim Operations Dept.
                       at (800) 336-3436 to obtain an account         at (800) 336-3436 to obtain a wire
                       number and indicate an Authorized Dealer on    reference number. Give that number to your
                       the account. Instruct your bank to wire        bank and have them wire the
                       funds to the Fund in care of:                  same manner described under `Initial
                       Investors Fiduciary Trust Co.                  Investment.'
                       ABA #101003621
                       Kansas City, MO
                       credit to:
                       Pilgrim
                       ____________________________ (Fund)
                       A/C #751-8315; for further credit to:
                       Shareholder A/C
                       #___________________________
                       (A/C # you received over the telephone)
                       Shareholder Name:
                       ____________________________ (Your Name Here)
                       After wiring funds you must complete the
                       Account Application and send it to:
                       Pilgrim Funds.
                       P.O. Box 419368
                       Kansas City, MO 64141-6368
</TABLE>

The  Funds  and  the Distributor reserve the right to reject any purchase order.
Please  note 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.  The  Investment  Manager reserves the right to waive minimum
investment amounts.

PRICE  OF SHARES. Purchase, sale and exchange orders are effected at NAV for the
respective  class of shares of each Fund, determined after the order is received
by  the  Transfer Agent or Distributor, plus any applicable sales charge (Public
Offering Price).

Purchases  of  each  class of a Fund's shares are effected at that Fund's Public
Offering  Price  determined  after  a purchase order has been received in proper
form.  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.
In  the  case  of an investment 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.  A  shareholder who purchases by wire 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

                                       27
<PAGE>
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.

DETERMINATION  OF  NET  ASSET VALUE. The NAV of each class of each Fund's shares
will  be  determined  daily  as  of the close of regular trading on the New York
Stock  Exchange (usually at 4:00 p.m. New York City time) on each day that it is
open  for  business.  Each  class'  NAV represents that class' pro rata share of
that  Fund's  net  assets  as  adjusted for any class specific expenses (such as
fees  under  a  Rule 12b-1 plan), and divided by that class' outstanding shares.
In  general,  the  value  of  each Fund's assets is based on actual or estimated
market  value,  with  special provisions for assets not having readily available
market quotations and short-term  debt  securities.  The  NAV  per share of each
class  of  each  Fund will fluctuate in response to changes in market conditions
and  other factors. Portfolio securities for which market quotations are readily
available  are  stated  at  market  value.  Short-term  debt securities having a
maturity  of  60 days or less are valued at amortized cost, unless the amortized
cost  does  not approximate market value. Securities prices may be obtained from
automated  pricing services. In other cases, securities are valued at their fair
value  as  determined  in  good  faith  by  the Board of Directors, although the
actual  calculations will be made by persons acting under the supervision of the
Board.  For information on valuing foreign securities, see each Fund's Statement
of Additional Information.

PRE-AUTHORIZED  INVESTMENT  PLAN. You  may establish a pre-authorized investment
plan  to  purchase  shares  with  automatic  bank  account debiting. For further
information  on  pre-authorized investment plans, see the Account Application or
contact the Shareholder Servicing Agent at (800) 992-0180.

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  custodian fee annually for the maintenance of
such accounts.

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: (i) recording telephone instructions for
exchanges  and  expedited redemptions; (ii) requiring the caller to give certain
specific  identifying  information;  and (iii) 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.  Telephone  redemptions may be executed on all accounts
other than retirement accounts.

EXCHANGE PRIVILEGES AND RESTRICTIONS.

An  exchange privilege is available. Exchange requests may be made in writing to
the  Transfer  Agent  or  by  calling  the  Shareholder Servicing Agent at (800)
992-0180.  There  is no specific limit on exchange frequency; however, the Funds
are  intended  for  long  term  investment  and  not  as  a trading vehicle. The
Investment  Manager  reserves  the  right  to prohibit excessive exchanges (more
than  four  per  year). The Investment Manager reserves the right, upon 60 days'
prior  notice, to restrict the frequency of, otherwise modify, or impose charges
of  up  to  $5.00 upon exchanges. The total value of shares being exchanged must
at  least  equal  the minimum investment requirement of the fund into which they
are being exchanged.

Shares  of one class of a Fund may be exchanged for shares of that same class of
any  other  open-end Pilgrim Fund other than Pilgrim General Money Market Shares
(`Money  Market'), at NAV without payment of any additional sales charge. If you
exchange  and subsequently redeem your shares, any applicable CDSC will be based
on  the  full  period  of  the  share  ownership.  Shares of a Fund that are not
subject  to  a  CDSC  may be exchanged for shares of Money Market, and shares of
Money  Market  acquired in the exchange may subsequently be exchanged for shares
of an open-end Pilgrim Fund of the same class as the original shares

                                       28
<PAGE>
acquired.  Shares  of  a  Fund  that  are  subject  to a CDSC may be redeemed to
purchase  shares  of  Money  Market  upon  payment  of  the  CDSC.  Shareholders
exercising the exchange privilege with any other open-end  Pilgrim  Fund  should
carefully  review the prospectus of that Fund. Exchanges of shares are sales and
may  result  in  a  gain  or loss for federal and state income tax purposes. You
will  automatically be assigned the telephone exchange privilege unless you mark
the  box  on the Account Application that signifies you do not wish to have this
privilege.  The  exchange  privilege is only available in states where shares of
the Fund being acquired may be legally sold.

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. The exchange privilege may
be  modified  at  any  time  or  terminated  upon  60  days  written  notice  to
shareholders.

HOW TO REDEEM SHARES

Shares  of  each  Fund  will  be  redeemed  at the NAV (less any applicable CDSC
and/or  federal  income  tax  withholding)  next  determined  after receipt of a
redemption  request  in good form on any day the New York Stock Exchange is open
for business.

<TABLE>
<CAPTION>
             METHOD                                                    PROCEDURES
- -------------------------------- ----------------------------------------------------------------------------------
<S>                              <C>
 Redemption By Contacting Your   Authorized Dealers may communicate redemption orders by wire or telephone to
 Authorized Dealer               the Distributor. These firms may charge for their services in connection with your
                                 redemption request, but neither the Funds nor the Distributor imposes any such
                                 charge.

 Redemption By Mail              A written request for redemption must be received by the Transfer Agent in order
                                 to constitute a valid tender. If certificated shares have been issued, the certificate
                                 must accompany the written request. The Transfer Agent may also require a signa-
                                 ture guarantee by an eligible guarantor. It will also be necessary for corporate in-
                                 vestors and other associations to have an appropriate certification on file
                                 authorizing redemptions by a corporation or an association before a redemption
                                 request will be considered in proper form. A suggested form of such certification
                                 is provided on the Account Application. If you are entitled to a CDSC waiver, you
                                 must complete the CDSC waiver form in the Account Application. To determine
                                 whether a signature guarantee or other documentation is required, shareholders
                                 may call the Shareholder Servicing Agent at (800) 992-0180.

 Expedited Redemption            By Check
                                 The Expedited Redemption privilege allows you to effect a liquidation from your
                                 account via a telephone call and have the proceeds (maximum $100,000) mailed
                                 to an address which has been on record with the Pilgrim Funds for at least 30
                                 days. This privilege is automatically assigned to you unless you check the box on
                                 the Account Application which signifies that you do not wish to utilize such
                                 option.
                                 By Wire
                                 The Expedited Redemption Privilege additionally allows you to effect a liquidation
                                 from your account and have the proceeds (minimum $5,000) wired to your pre-
                                 designated bank account. But, this aspect of the Expedited Redemption privilege
                                 will NOT automatically be assigned to you. If you want to take advantage of this
                                 aspect of the privilege, please check the appropriate box and attach a voided
                                 check to the Account Application. Under normal circumstances, proceeds will be
                                 transmitted to your bank on the business day following receipt of your instruc-
                                 tions, provided redemptions may be made. To effect an Expedited Redemption,
                                 please call the Shareholder Servicing Agent at (800) 992-0180. In the event that
                                 share certificates have been issued, you may not request a wire redemption by
                                 telephone or wire. This option is not available for retirement accounts.
</TABLE>
                                       29
<PAGE>
SYSTEMATIC   WITHDRAWAL   PLAN. You   may  elect  to  have  monthly,  quarterly,
semi-annual  or  annual  payments  in any fixed amount in excess of $100 made to
yourself,  or  to anyone else you properly designate, as long as the account has
a  current  value  of  at  least  $10,000. During the withdrawal period, you may
purchase  additional  shares  for  deposit  to  your  account  if the additional
purchases  are  equal  to  at  least one year's scheduled withdrawals, or $1,200
whichever  is  greater.  There  are  no separate charges to you under this Plan,
although a CDSC may apply if you purchased Class A or B shares.

The  number  of  full  and fractional shares equal in value to the amount of the
payment  will  be  redeemed  at NAV (less any applicable CDSC). Such 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. Shareholders who elect to have a
systematic   cash   withdrawal   must  have  all  dividends  and  capital  gains
reinvested.  To  establish  a  systematic  cash  withdrawal, please 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  change  the  amount,  frequency  and  payee, or terminate this plan by
giving  written  notice  to the Transfer Agent. As shares of a Fund are redeemed
under  the Plan, you may realize a capital gain or loss for income tax purposes.
A  Systematic  Withdrawal  Plan  may  be  modified  at  any  time by the Fund or
terminated upon written notice by you or the relevant Fund.

PAYMENTS. Payment  to shareholders for shares redeemed or repurchased ordinarily
will  be made within three days after receipt by the Transfer Agent of a written
request  in good order. A Fund may delay the mailing of a redemption check until
the  check used to purchase the shares being redeemed has cleared which may take
up  to  15  days  or more. To reduce such delay, all purchases should be made by
bank  wire  or  federal  funds. A Fund may suspend the right of redemption under
certain  extraordinary  circumstances  in  accordance  with  the  Rules  of  the
Securities  and Exchange Commission. 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.  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.

                            MANAGEMENT OF THE FUNDS

MORE  ABOUT  THE  FUNDS. MagnaCap Fund and High Yield Fund are series of Pilgrim
Investment  Funds,  Inc.,  which  is  a  registered  investment company that was
organized as a Maryland corporation in July 1969.

LargeCap  Leaders  Fund,  MidCap  Value  Fund  and  Asia-Pacific Equity Fund are
series  of  Pilgrim  Advisory  Funds,  Inc.,  which  is  a registered investment
company that was organized as a Maryland corporation in April, 1995.

Bank  and  Thrift  Fund  is  the  single series of Pilgrim Bank and Thrift Fund,
Inc.,  which  is  a  registered  investment  company  that  was  incorporated in
Maryland  in  November,  1985 as a closed-end, diversified management investment
company.  The  Fund  operated as a closed-end fund prior to October 17, 1997. On
October  16,  1997, shareholders approved open-ending the Fund and since October
17, 1997, the Fund has operated as an open-end fund.

Government  Securities  Income  Fund  is the single series of Pilgrim Government
Securities  Income Fund, Inc., which is a registered investment company that was
organized as a California corporation in May 1984.

Each  Fund  is governed by its Board of Directors, which oversees the operations
of  the  Fund.  The majority of Directors are not affiliated with the Investment
Manager.

INVESTMENT  MANAGER. The  Investment  Manager has overall responsibility for the
management  of the Funds. Each Fund and the Investment Manager have entered into
an  agreement  that  requires  the  Investment Manager to provide or oversee all
investment advisory and portfolio management services for the Fund.

                                       30
<PAGE>
Each  agreement  also  requires the Investment Manager to assist 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.  The
Investment   Manager  provides  the  Funds  with  office  space,  equipment  and
personnel  necessary to administer the Funds. Each agreement with the Investment
Manager  can  be  canceled  by  the Board of Directors of each Fund upon 60 days
written   notice.   Organized  in  December  1994,  the  Investment  Manager  is
registered   as   an   investment  adviser  with  the  Securities  and  Exchange
Commission.  The  Investment  Manager  acquired  certain  assets of the previous
adviser  to  the  Funds  in  a  transaction  that  closed  on April 7, 1995. The
Investment  Manager  bears  its  expenses  of  providing  the services described
above.  Investment  Management  fees  are  computed  and  accrued daily and paid
monthly

Bank  and  Thrift  Fund  pays  the Investment Manager a fee at an annual rate of
1.00%  of  the  first $30,000,000 of average daily net assets, 0.75% of the next
$95,000,000  of  average daily net assets, and 0.70% of average daily net assets
in excess of $125,000,000. .

MagnaCap  Fund  pays  the Investment Manager a fee at an annual rate of 1.00% of
the  average  daily  net  assets  of  the  Fund  up to $30 million; 0.75% of the
average  daily  net  assets  above  $30  million  to $250 million; 0.625% of the
average  daily  net  assets above $250 million to $500 million; and 0.50% of the
average daily net assets in excess of $500 million.

High  Yield Fund pays the Investment Manager a fee at an annual rate of 0.60% of
the  average  daily  net  assets  of  the Fund. LargeCap Leaders Fund and MidCap
Value  Fund  each pay the Investment Manager a fee at an annual rate of 1.00% of
the  Fund's  average  daily  net  assets,  and  the  Asia-Pacific  Fund  pay the
Investment  Manager a fee at an annual rate of 1.25% of the Fund's average daily
net assets.

Government  Securities  Income  Fund  pays  the  Investment  Manager a fee at an
annual  rate  of  0.50%  of  the average daily net assets of the Fund up to $500
million;  0.45%  of  the  average  daily  net  assets  above  $500 million to $1
billion;  and 0.40% of the average daily net assets in excess of $1 billion. The
agreement  with the Investment Manager for the Government Securities Income Fund
provides  that  the  Investment Manager will reimburse the Government Securities
Income  Fund  to  the extent that the gross operating costs and expenses of that
Fund,  excluding  any  interest,  taxes,  brokerage commissions, amortization of
organizational  expenses,  extraordinary expenses, and distribution (Rule 12b-1)
fees  on  Class B and Class M shares in excess of an annual rate of 0.25% of the
average  daily  net  assets of these classes, exceed 1.50% of the Fund's average
daily  net  asset  value  for  the  first $40 million of net assets and 1.00% of
average  daily net assets in excess of $40 million for any one fiscal year. This
reimbursement  policy  cannot  be changed unless the agreement is amended, which
would require shareholder approval.

The  Investment  Manager  has  entered  into  expense limitation agreements with
respect  to  certain  of the Funds, 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 these Funds (excluding interest,
taxes,  brokerage  commissions, extraordinary expenses such as litigation, other
expenses  not  incurred in the ordinary course of such Fund's business, expenses
of  any counsel or other persons or services retained by the Company's directors
who  are  not  "interested  persons" of the Investment Manager, and distribution
(12b-1)  fees)  do  not  exceed:  0.75%  for High Yield Fund; 1.50% for LargeCap
Leaders Fund and MidCap Value Fund; and 1.75% for Asia-Pacific Equity Fund.

The  expense  limitation agreements provide that these expense limitations shall
continue  until  December  31,  1998 for High Yield Fund, LargeCap Leaders Fund,
MidCap  Value  Fund  and  Asia-Pacific  Equity  Fund. The Investment Manager may
extend,  but  may  not  shorten,  the  period  of  these limitations without the
consent  of  the  Funds,  so  long  as  the  extension  is  at  the same expense
limitation  amount  discussed  above.  Each Fund described above will at a later
date  reimburse  the  Investment  Manager  for  management fees waived and other
expenses  assumed  by  the Investment Manager during the previous 36 months, but
only  if, after such reimbursement, the Fund's expense ratio does not exceed the
percentage  described  above. The Investment Manager will only be reimbursed for
fees  waived  or  expenses  assumed  after  the  effective  date  of the expense
limitation   agreements.   Each  expense  limitation  agreement  will  terminate
automatically   upon   termination   of  the  respective  investment  management
agreement  with  the Investment Manager, and may be terminated by the Investment
Manager or the Fund upon 90 days written notice.

                                       31
<PAGE>
THE  PORTFOLIO MANAGERS. For MidCap Value Fund and Asia-Pacific Equity Fund, the
Investment   Manager  has  engaged  two  of  the  most  respected  institutional
investment  advisers  in the world. For portfolios similar to these Funds, these
firms  usually  require  large investment minimums to open an account, and their
services  for  these types of portfolios are typically available only to wealthy
individuals  and  large  institutional clients. The Portfolio Managers 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.

MIDCAP  VALUE  FUND. Cramer  Rosenthal  McGlynn,  LLC. (CRM) serves as Portfolio
Manager  to  the  MidCap  Value  Fund.  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,  with  a minimum investment size for private accounts of
$5  million.  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 Portfolio
Manager  to  the  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,  with  a  minimum  investment size for private accounts of $10
million   for   Asia-Pacific  investors.  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.

Each  Portfolio  Manager  serves  the pertinent Fund under an agreement with the
Investment  Manager.  Each Portfolio Manager has discretion to purchase and sell
securities  for  the  portfolio  of  its respective Fund in accordance with that
Fund's  objectives,  policies  and restrictions. Although the Portfolio Managers
are  subject  to  the  general  supervision  by  the  Board of Directors and the
Investment  Manager, the Board and/or the Investment Manager do not evaluate the
investment  merits  of specific securities transactions. The agreement with each
Portfolio  Manager  may be terminated by the Board of Directors of the Funds, by
the  Investment  Manager  or by the Portfolio Manager. Thus, it is possible that
in  the future, one or more of the current Portfolio Managers would no longer be
engaged  for  a  Fund.  It  is  not  anticipated that Portfolio Managers will be
replaced in the ordinary course of operations.

As  compensation  for  their  services to the Funds, the Investment Manager (and
not  the  Fund)  pays  HSBC and CRM fees at annual rates of 0.50% of the average
daily   net   assets   of  the  Asia-Pacific  Equity  and  MidCap  Value  Funds,
respectively.

PARENT COMPANY AND DISTRIBUTOR

     The  Investment  Manager  and  Pilgrim  Securities, Inc. (Distributor), the
Funds'  principal  underwriter,  are  indirect,  wholly  owned  subsidiaries  of
Pilgrim America Capital Corporation (NASDAQ: PACC). Through its

                                       32
<PAGE>
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.  For  more information on Pilgrim America Capital Corporation
please see each Fund's Statement of Additional Information.

INVESTMENT PERSONNEL

MAGNACAP  FUND. This Fund is managed by a team led by Howard N. Kornblue, Senior
Vice  President  and  Senior  Portfolio  Manager for the Investment Manager. Mr.
Kornblue  has  served  as a Portfolio Manager of MagnaCap Fund since 1989. Prior
to  joining  Pilgrim  Group (and its predecessor) in 1986, Mr. Kornblue was Vice
President,  Director  of  Research  and  Portfolio  Manager  at  First  Wilshire
Securities  Management;  supervised  mergers  and  acquisitions  for  Getty  Oil
Company;  was  portfolio  manager  and research analyst in both the fixed-income
and  equity  departments  for Western Asset Management Company; and was research
analyst  and  pension  fund  manager  at Southern California Edison Company. Mr.
Kornblue received a B.S. from U.C.L.A., and M.S. and M.B.A. from U.S.C.

The  other  individuals  on  the team are G. David Underwood, Anuradha Sahai and
Robert M. Kloss.

LARGECAP  LEADERS  FUND. This  Fund  is  managed  by  a  team  led  by  G. David
Underwood,   C.F.A.,  Vice  President  and  Senior  Portfolio  Manager  for  the
Investment  Manager.  Mr.  Underwood  is  the Lead Portfolio Manager of LargeCap
Leaders  Fund.  Prior  to  joining the investment Manager 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 and two years with C.S. McKee Investment
Advisors  as  a  Portfolio  Manager.  A  Chartered  Financial  Analyst  and past
president  of  the  Pittsburgh  Society  of  Financial  Analysts,  Mr. Underwood
received  his  B.S.  degree  from Arizona State University and has done graduate
work  in  economics  and  finance  at  Washington and Jefferson College. He is a
graduate of Pennsylvania Bankers Trust School.

The other individuals on the team are Anuradha Sahai and Robert M. Kloss.

BANK  AND  THRIFT  FUND. Carl  Dorf,  C.F.A.,  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  the  Investment  Manager's
predecessor.  Mr.  Dorf  is  also  a  Senior  Vice  President  of the Investment
Manager.  Prior  to  joining  the  Investment  Manager's  predecessor,  he was a
principal  of  Dorf  &  Associates  Investment  Counsel.  His  35  plus years of
portfolio  management  and  research  experience  include positions with Moody's
Investors  Service,  Inc.,  as  an  analyst in the Banking & Finance Department;
with  Nuveen Corp. as a financial securities analyst; with Loews Corp. as a fund
manager  with  responsibility  for $150 to $250 million in utility and financial
stocks;  with  BA  Investment  Management  Corp.  as  a  senior  financial stock
analyst;  and with RNC Capital Management as manager of 150 individual, pension,
and  profit-sharing  accounts.  A  Chartered  Financial Analyst, Mr. Dorf earned
both  BBA/Finance  and  Investments and MBA/Finance and Investments degrees from
the  Bernard  Baruch  School  of  Business  and  Public Administration, The City
College of New York.

HIGH  YIELD  FUND. Kevin  G. Mathews, Senior Vice President and Senior Portfolio
Manager  of  the  Investment  Manager,  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
the  Investment  Manager,  Mr. Mathews was a Vice President and Senior Portfolio
Manager   with   Van   Kampen   American   Capital.  Since  1987,  Mr.  Mathews'
responsibilities  included the management of open-end high yield bond funds, two
New  York  Stock  Exchange  listed  closed-end bond funds, variable annuity high
yield  products  and individual institutional high yield asset managed accounts.
In  a prior position, Mr. Mathews was a high yield portfolio fixed income credit
analyst.  Mr.  Mathews  received  a  B.A. from the University of Illinois and an
M.B.A. from Drake University.

GOVERNMENT  SECURITIES INCOME FUND. Charles G. Ullerich, C.F.A. and C.I.A., Vice
President  of  the  Investment  Manager,  has  served  as  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 Group, Mr. Ullerich was Vice President of Treasury Services for
First Liberty Bank of
                                       33
<PAGE>
Macon,  GA,  where  he  was  Portfolio Manager for a conservatively-managed $150
million  mortgage and treasury securities portfolio, since 1991. Before that, he
was  an  internal  auditor  for  Georgia  Federal  Bank in Atlanta. Mr. Ullerich
received  a  B.S.  from  Arizona State University, and he holds the professional
designations  of  Chartered Financial Analyst and Certified Internal Auditor. He
is  Past President of the Georgia Chapter of the Arizona State University Alumni
Association.

DISTRIBUTOR. In  addition  to  providing  for  the expenses discussed above, the
Rule  12b-1  Plan  also  recognizes  that  the  Investment  Manager  may use its
investment  management  fees  or other resources to pay expenses associated with
activities  primarily  intended  to  result in the promotion and distribution of
the  Funds'  shares.  The Distributor will, from time to time, pay to Authorized
Dealers  in  connection  with  the  sale  or  distribution  of  shares of a Fund
material  compensation in the form of merchandise or trips. Salespersons and any
other  person entitled to receive any compensation for selling or servicing Fund
shares  may  receive different compensation with respect to one particular class
of shares over another in a Fund.

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.

PORTFOLIO  TRANSACTIONS. The  Investment  Manager,  or  Portfolio Manager in the
case  of  MidCap  Value  Fund and Asia-Pacific Equity Fund, will place orders to
execute  securities  transactions  that  are  designed  to implement each Fund's
investment  objectives  and  policies.  The  Investment  Manager,  or  Portfolio
Manager,  will  use  its  reasonable  efforts  to  place  all  purchase and sale
transactions  with  brokers,  dealers  and  banks (`brokers') that provide `best
execution'  of  these  orders.  In  placing  purchase and sale transactions, the
Investment  Manager,  or Portfolio Managers, may consider brokerage and research
services  provided by a broker to Portfolio Manager or the Investment Manager or
their  affiliates,  and  a  Fund may pay a commission for effecting a securities
transaction  that  is  in excess of the amount another broker would have charged
if  the  Investment  Manager  or Portfolio Manager determines in good faith that
the  amount  of  commission  is  reasonable  in  relation  to  the  value of the
brokerage  and  research  services  provided by the broker. Consistent with this
policy,  portfolio  transactions  may  be  executed by brokers affiliated with a
Portfolio  Manager  or the Investment Manager, 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. In
addition,  the  Investment  Manager  or  Portfolio  Manager may place securities
transactions  with  brokers  that  provide  certain  services  to  a  Fund.  The
Investment  Manager  or  Portfolio  Manager also may consider a broker's sale of
Fund  shares  if the Investment Manager is satisfied that the Fund would receive
best execution of the transaction from that broker.

                        DIVIDENDS, DISTRIBUTIONS & TAXES

DIVIDENDS  AND DISTRIBUTIONS. In the case of LargeCap Leaders Fund, MidCap Value
Fund,  Bank  and  Thrift  Fund,  and  Asia-Pacific  Equity  Fund,  dividends and
distributions  from  net  investment  income  and capital gains, if any, will be
paid  at  least  annually.  MagnaCap  Fund  makes  semi-annual payments from net
investment  income  and one or more payments from net realized capital gains, if
any.  High  Yield  Fund and Government Securities Income Fund each have a policy
of  paying  monthly  dividends  from  their  net  investment  income, and paying
capital  gains, if any, annually. Dividends and distributions will be determined
on a class basis.

Any  dividends and distributions paid by a Fund will be automatically reinvested
in  additional  shares of the respective class of that Fund, unless you elect to
receive  distributions in cash. When a dividend or distribution is paid, the NAV
per share is reduced by the amount of the payment.

You  may,  upon  written request or by completing the appropriate section of the
Account  Application  in  this Prospectus, elect to have all dividends and other
distributions  paid  on  a  Class  A,  B  or M account in a Fund invested into a
Pilgrim  Fund  which offers Class A, B or M shares. Both accounts must be of the
same  class.  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

                                       34
<PAGE>
account  of  any  open-end  Pilgrim  Fund  which offers Class A, B, or M shares.
Distributions  are invested into the selected funds at the net asset value as of
the  payable date of the distribution only if shares of such selected funds have
been registered for sale in the investor's state.

FEDERAL  TAXES. Each Fund intends to operate as a `regulated investment company'
under  the  Internal  Revenue Code. To qualify, a Fund must meet certain income,
asset  diversification  and  distribution  requirements.  In  any fiscal year in
which  a  Fund  so  qualifies and distributes to shareholders all of its taxable
income  and  gains,  the Fund itself generally is relieved of federal income and
excise taxes.

Dividends  paid  out  of  a  Fund's investment company taxable income (including
dividends,  interest  and  short-term  capital  gains) will be taxable to a U.S.
shareholder  as  ordinary  income.  If  a portion of a Fund's income consists of
dividends  paid  by  U.S.  corporations,  a portion of the dividends paid by the
Fund   may   be   eligible   for  the  corporate  dividends-received  deduction.
Distributions  of  net  capital gains (the excess of net long-term capital gains
over  net  short-term  capital  losses),  if  any,  designated  as  capital gain
dividends  will  be  taxable  as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares.

All  dividends  and  capital  gains  are  taxable whether they are reinvested or
received  in  cash,  unless  you  are  exempt  from  taxation or entitled to tax
deferral.  Early  each  year,  you will be notified as to the amount and federal
tax  status  of all dividends and capital gains paid during the prior year. Such
dividends  and  capital  gains  may  also  be  subject  to state or local taxes.
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.

Upon  the  sale  or  other  disposition  of  shares of a Fund, a shareholder may
realize  a  gain  or loss which will be a capital gain or loss if the shares are
held  as  a  capital  asset  and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.

If  you  have  not  furnished a certified correct taxpayer identification number
(generally  your Social Security number) and have not certified that withholding
does  not  apply,  or if the Internal Revenue Service has notified the Fund that
the   taxpayer  identification  number  listed  on  your  account  is  incorrect
according  to  their  records  or  that  you  are subject to backup withholding,
federal  law  generally  requires  the  Fund  to withhold 31% from any dividends
and/or  redemptions  (including  exchange  redemptions).  Amounts  withheld  are
applied  to  your  federal  tax  liability;  a  refund  may be obtained from the
Service  if  withholding  results  in  overpayment  of  taxes.  Federal law also
requires  the  Fund  to  withhold  30%  or  the  applicable tax treaty rate from
ordinary  dividends  paid to certain nonresident alien, non-U.S. partnership and
non-U.S. corporation shareholder accounts.

Certain  of  the  Funds,  and  in  particular Asia-Pacific Equity Fund, may make
investments  outside  the  U.S. If a Fund has income from sources within foreign
countries,  that income may be subject to withholding and other taxes imposed by
such countries, which could reduce the Fund's investment income.

This  is  a brief summary of some of the tax laws that affect your investment in
a  Fund. Please see each Fund's Statement of Additional Information and your tax
adviser for further information.

                                       35
<PAGE>
                            PERFORMANCE INFORMATION

From  time  to  time,  a Fund may advertise its average annual total return over
various  periods  of  time as well as the Fund's current yield. The total return
figures  show  the  average  percentage  change in value of an investment in the
Fund  from  the  beginning  date  of  the  measuring period. The 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).
Total  returns  and  current  yield  are  based  on  past  results  and  are not
necessarily  a prediction of future performance. The Fund will compute its yield
by  dividing  its net investment income per share during a 30-day base period by
the  maximum  offering  price  on  the  last day of the base period. This 30-day
yield  is  then  compounded  over  six  monthly periods and multiplied by two to
provide an annualized yield.

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.

ADDITIONAL  PERFORMANCE  QUOTATIONS. Advertisements  of total return will always
show  a calculation that includes the effect of the maximum sales charge but may
also  show  total  return  without  giving  effect to that charge. Because these
additional  quotations  will not reflect the maximum sales charge payable, these
performance  quotations  will  be  higher  than  the performance quotations that
reflect the maximum sales charge.


                            ADDITIONAL INFORMATION

MORE   ABOUT  THE  FUNDS. Each  Fund's  Articles  of  Incorporation  permit  the
Directors  to  authorize  the  creation  of additional series, each of which may
issue  separate classes of shares. A Fund may be terminated and liquidated under
certain circumstances.

SHAREHOLDERS  HAVE  CERTAIN  VOTING RIGHTS. Each share of each Fund is given one
vote.  Matters  such  as  approval  of  new  investment  advisory agreements and
changes  in  fundamental policies of a Fund will require the affirmative vote of
the  shareholders of that Fund. Matters affecting a certain class of a Fund will
only  be  voted  on by shareholders of that particular class and Fund. The Funds
are   not  required  to  hold  annual  shareholder  meetings,  although  special
shareholder meetings may be held from time to time.


                             FINANCIAL HIGHLIGHTS

                 For a Share Outstanding Throughout Each Period

The  following  tables  present condensed financial information about each Fund.
The  tables  present  historical  information  based  upon  a  share outstanding
through  each  Fund's  fiscal  year.  This information has been derived from the
financial  statements  that are in the Funds' Annual Report dated as of June 30,
1998.  Further  information  about  each  Fund's performance is contained in the
Funds' Annual Report, which may be obtained without charge.

                                       36
<PAGE>
                             PILGRIM MAGNACAP FUND

For  the  fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in  the  table  below  has  been  audited  by KPMG Peat Marwick LLP, independent
auditors.  For  all  periods  ending  prior  to  July  1,  1994,  the  financial
information was audited by another independent auditor.

<TABLE>
<CAPTION>
                                                               CLASS A
                                       ----------------------------------------------------
                                                         YEAR ENDED JUNE 30,
                                       ----------------------------------------------------
                                         1998          1997          1996          1995(a)
                                       --------      --------      ----------    ----------
<S>                                    <C>           <C>           <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period   $  15.92      $  16.69      $    14.03    $    12.36
                                       --------      --------      ----------    ----------
Income from investment
operations:
 Net investment income (loss)              0.04          0.10            0.09          0.12
 Net realized and unrealized gain
  on investments                           3.02          4.16            2.87          2.29
                                       --------      --------      ----------    ----------
  Total from investment operations         3.06          4.26            2.96          2.41
                                       --------      --------      ----------    ----------
Less distributions from:
 Net investment income                     0.04          0.10            0.06          0.14
 Distributions in excess of net
  investment income                        0.02          0.02              --            --
 Realized gains on investment              1.85          4.91            0.24          0.60
                                       --------      --------      ----------    ----------
  Total distributions                      1.91          5.03            0.30          0.74
                                       --------      --------      ----------    ----------
Net asset value, end of period         $  17.07      $  15.92      $    16.69    $    14.03
                                       ========      ========      ==========    ==========
TOTAL RETURN(c)                           20.53%        30.82%          21.31%        20.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)      $348,759      $290,355      $  235,393    $  211,330
Ratios to average net assets:
 Expenses                                  1.37%         1.46%           1.68%         1.59%
 Net investment income                     0.29%         0.64%           0.54%         0.98%
Portfolio turnover rate                      53%           77%             15%            6%
Average commission rate paid(e)        $ 0.0422      $ 0.0686            --            --

                                                                          CLASS A
                                       -------------------------------------------------------------------------------- 
                                                                     YEAR ENDED JUNE 30,
                                       -------------------------------------------------------------------------------- 
                                           1994          1993          1992          1991         1990           1989
                                           ----          ----          ----          ----         ----           ----
<S>                                    <C>           <C>           <C>            <C>          <C>            <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period   $    12.05    $    11.98    $    10.93     $  10.74     $   10.52      $    9.12
                                       ----------    ----------    ----------     --------     ---------      ---------
Income from investment
operations:
 Net investment income (loss)                0.15          0.14          0.13         0.20          0.15           0.17
 Net realized and unrealized gain
  on investments                             0.89          0.82          1.16         0.33          1.24           1.39
                                       ----------    ----------    ----------     --------     ---------      ---------
  Total from investment operations           1.04          0.96          1.29         0.53          1.39           1.56
                                       ----------    ----------    ----------     --------     ---------      ---------
Less distributions from:
 Net investment income                       0.14          0.12          0.24         0.16          0.17           0.16
 Distributions in excess of net
  investment income                            --            --            --           --            --             --
 Realized gains on investment                0.59          0.77            --         0.18          1.00             --
                                       ----------    ----------    ----------     --------     ---------      ---------
  Total distributions                        0.73          0.89          0.24         0.34          1.17           0.16
                                       ----------    ----------    ----------     --------     ---------      ---------
Net asset value, end of period         $    12.36    $    12.05    $    11.98     $  10.93     $   10.74      $   10.52
                                       ==========    ==========    ==========     ========     =========      =========
TOTAL RETURN(c)                              9.13%         8.21%        11.93%        5.21%        13.84%         17.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)      $  190,435    $  197,250    $  196,861     $199,892     $ 224,059      $ 204,552
Ratios to average net assets:
 Expenses                                    1.53%         1.53%         1.60%        1.50%         1.50%          1.60%
 Net investment income                       1.16%         1.09%         1.20%        2.00%         1.40%          1.80%
Portfolio turnover rate                         7%           36%           49%         182%          12%           1.29%
Average commission rate paid(e)                --            --            --           --            --             --
</TABLE>

- ------------
(a)  Pilgrim Investments,  Inc., the Fund's Investment Manager,  acquired 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.
(e)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.

                                       37
<PAGE>
                             PILGRIM MAGNACAP FUND
                                  (Continued)

<TABLE>
<CAPTION>
                                                                            CLASS B
                                                             ---------------------------------------
                                                                YEAR         YEAR        JULY 17,
                                                                ENDED        ENDED      1995(b) TO
                                                               JUNE 30,     JUNE 30,     JUNE 30,
                                                                1998         1997          1996
                                                                ----         ----          ----
<S>                                                          <C>           <C>           <C>
PER SHARE OPERATING PERFORMANCE                              
Net asset value, beginning of period                         $   15.81     $   16.59     $    14.22
                                                             ---------     ---------     ----------
Income from investment operations:                           
 Net investment income (loss)                                    (0.04)           --           0.06
 Net realized and unrealized gain on investments                  2.97          4.13           2.61
                                                             ---------     ---------     ----------
  Total from investment operations                                2.93          4.13           2.67
                                                             ---------     ---------     ----------
Less distributions from:                                     
 Net investment income                                              --            --           0.06
 Distributions in excess of net investment income                 0.03            --             --
 Realized gains on investment                                     1.85          4.91           0.24
                                                             ---------     ---------     ----------
  Total distributions                                             1.88          4.91           0.30
                                                             ---------     ---------     ----------
Net asset value, end of period                               $   16.86     $   15.81     $    16.59
                                                             =========     =========     ==========
TOTAL RETURN(c)                                                  19.76%        29.92%         18.98%
RATIOS/SUPPLEMENTAL DATA                                     
NET ASSETS, END OF PERIOD (000'S)                            $  77,787     $  37,427     $   10,509
Ratios to average net assets:                                
 Expenses                                                         2.07%         2.16%          2.38%(d)
 Net investment income                                           (0.41)%       (0.04)%         0.07%(d)
Portfolio turnover rate                                             53%           77%            15%
Average commission rate paid(e)                              $  0.0422     $  0.0686             --
                                                             
                                                                            CLASS M
                                                             ------------------------------------------
                                                                 YEAR          YEAR         JULY 17,
                                                                 ENDED         ENDED       1995(b) TO
                                                               JUNE 30,      JUNE 30,       JUNE 30,
                                                                 1998          1997           1996
                                                                 ----          ----           ----
<S>                                                          <C>            <C>             <C>
PER SHARE OPERATING PERFORMANCE                              
Net asset value, beginning of period                         $   15.87      $   16.63       $    14.22
                                                             ---------      ---------       ----------
Income from investment operations:                                             
 Net investment income (loss)                                       --           0.02             0.08
 Net realized and unrealized gain on investments                  2.98           4.16             2.63
                                                             ---------      ---------       ----------
  Total from investment operations                                2.98           4.18             2.71
                                                             ---------      ---------       ----------
Less distributions from:                                                       
 Net investment income                                              --           0.02             0.06
 Distributions in excess of net investment income                 0.05           0.01               --
 Realized gains on investment                                     1.85           4.91             0.24
                                                             ---------      ---------       ----------
  Total distributions                                             1.90           4.94             0.30
                                                             ---------      ---------       ----------
Net asset value, end of period                               $   16.95      $   15.87       $    16.63
                                                             =========      =========       ==========
TOTAL RETURN(c)                                                  20.00%         30.26%           19.26%
RATIOS/SUPPLEMENTAL DATA                                                       
Net assets, end of period (000's)                            $  14,675      $   6,748       $    1,961
Ratios to average net assets:                                                  
 Expenses                                                         1.82%          1.91%            2.13%(d)
 Net investment income                                           (0.16)%         0.22%            0.32%(d)
Portfolio turnover rate                                             53%            77%              15%
Average commission rate paid(e)                              $  0.0422      $  0.0686               --
</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.
(e)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.

                                       38
<PAGE>
                        PILGRIM LARGECAP LEADERS FUND*

The  information  in  the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.

<TABLE>
<CAPTION>
                                                                         CLASS A
                                                      ----------------------------------------------
                                                          YEAR            YEAR           TEN MONTHS
                                                         ENDED            ENDED            ENDED
                                                        JUNE 30,         JUNE 30,          JUNE 30,
                                                          1998             1997            1996 (a)
                                                          ----             ----            --------
<S>                                                    <C>              <C>              <C>
PER SHARE OPERATING PERFORMANCE                       
Net asset value, beginning of period                   $    14.17       $     11.77      $    10.00
                                                                             
INCOME FROM INVESTMENT OPERATIONS                                            
 Net investment income (loss)                                0.01              0.06            0.07
 Net realized and unrealized gain on investments             2.30              2.63            1.87
                                                       ----------       -----------      ----------
  Total from investment operations                           2.31              2.69            1.94
                                                       ----------       -----------      ----------
Less distributions:                                                          
 Net investment income                                         --                --            0.07
 In excess of net investment income                            --              0.05            0.01
 Realized gains on investments                               1.59              0.24            0.09
 In excess of realized gains                                 0.19                --              --
                                                       ----------       -----------      ----------
  Total distributions                                        1.78              0.29            0.17
                                                       ----------       -----------      ----------
Net asset value, end of period                         $    14.70       $     14.17      $    11.77
                                                       ==========       ===========      ==========
TOTAL RETURN (b)                                            17.71%            23.24%          19.56%
RATIOS/SUPPLEMENTAL DATA                                                     
Net assets, end of period (000's)                      $    7,606       $     8,961      $    2,530
Ratios to average net assets:                                                
 Expenses (c)(d)(e)                                          1.75%             1.75%           1.75%(f)
 Net investment income (loss) (c)(d)(e)                      0.03%             0.41%           0.65%(f)
Portfolio turnover rate                                        78%               86%             59%(f)
Average commission rate paid (g)                       $    0.0518      $    0.0586              --
                                                                         
                                                                           CLASS B                     
                                                       ----------------------------------------------
                                                           YEAR            YEAR            TEN MONTHS     
                                                           ENDED           ENDED             ENDED        
                                                         JUNE 30,        JUNE 30,           JUNE 30,      
                                                           1998            1997             1996 aA)      
                                                           ----            ----             --------      
<S>                                                    <C>              <C>              <C>                
PER SHARE OPERATING PERFORMANCE                                                         
Net asset value, beginning of period                   $     14.04      $     11.71      $      10.00     
                                                                                            
INCOME FROM INVESTMENT OPERATIONS                                                           
 Net investment income (loss)                                (0.10)           (0.02)             0.06      
 Net realized and unrealized gain on investments              2.28             2.59              1.81      
                                                       -----------      -----------      ------------     
  Total from investment operations                            2.18             2.57              1.87      
                                                       -----------      -----------      ------------     
Less distributions:                                                                         
 Net investment income                                          --               --              0.06      
 In excess of net investment income                             --               --              0.01      
 Realized gains on investments                                1.59             0.24              0.09      
 In excess of realized gains                                  0.19               --                --       
                                                       -----------      -----------      ------------     
  Total distributions                                         1.78             0.24              0.16      
                                                       -----------      -----------      ------------     
Net asset value, end of period                         $     14.44      $     14.04      $      11.71      
                                                       ===========      ===========      ============      
TOTAL RETURN (b)                                             16.91%           22.23%            18.85%     
RATIOS/SUPPLEMENTAL DATA                                                                    
Net assets, end of period (000's)                      $    15,605      $    13,611      $      1,424      
Ratios to average net assets:                                                               
 Expenses (c)(d)(e)                                           2.50%            2.50%             2.50%(f)  
 Net investment income (loss) (c)(d)(e)                      (0.72)%          (0.35)%           (0.25)%(f) 
Portfolio turnover rate                                         78%              86%               59%(f)  
Average commission rate paid (g)                       $    0.0518      $    0.0586                --       
                                                                                           
                                                                       CLASS M           
                                                    ------------------------------------------------
                                                        YEAR              YEAR            TEN MONTHS
                                                       ENDED             ENDED               ENDED
                                                      JUNE 30,          JUNE 30,            JUNE 30,
                                                        1998              1997              1996 (A)
                                                        ----              ----              --------
<S>                                                 <C>                <C>                <C>
PER SHARE OPERATING PERFORMANCE                                                     
Net asset value, beginning of period                $     14.10        $     11.73        $     10.00
                                                    -----------        -----------        -----------
                                                                                        
INCOME FROM INVESTMENT OPERATIONS                                                       
 Net investment income (loss)                             (0.07)                --               0.06
 Net realized and unrealized gain on investments           2.30               2.62               1.83
                                                    -----------        -----------        -----------
  Total from investment operations                         2.23               2.62               1.89
                                                    -----------        -----------        -----------
Less distributions:                                                                     
 Net investment income                                       --                 --               0.06
 In excess of net investment income                          --               0.01               0.01
 Realized gains on investments                             1.59               0.24               0.09
 In excess of realized gains                               0.19                 --                --
                                                    -----------        -----------        -----------
  Total distributions                                      1.78               0.25               0.16
                                                    -----------        -----------        -----------
Net asset value, end of period                      $     14.55        $     14.10        $     11.73
                                                    ===========        ===========        ===========
TOTAL RETURN (b)                                          17.20%             22.58%             19.06%
RATIOS/SUPPLEMENTAL DATA                                                                
NET ASSETS, END OF PERIOD (000'S)                   $     5,533        $     4,719        $     1,240
Ratios to average net assets:                                                           
 Expenses (c)(d)(e)                                        2.25%              2.25%              2.25%(f)
 Net investment income (loss) (c)(d)(e)                   (0.47)%            (0.10)%             0.06%(f)
Portfolio turnover rate                                      78%                86%                59%(f)
Average commission rate paid (g)                    $    0.0518        $    0.0586                 --
</TABLE>
- ------------
*    Effective November 1, 1997, Pilgrim Investments, Inc. assumed the portfolio
     investment  responsibilities of the Fund from ARK Asset Management Company,
     Inc.
(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)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1998,  the ratios of expenses to average net assets were 2.28%,  3.03%
     and 2.78% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.50)%,  (1.25)%  and  (1.00)%  for Class A, B and M shares,
     respectively.
(d)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1997,  the ratios of expenses to average net assets were 2.33%,  3.08%
     and 2.83% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.18)%,  (0.91)%  and  (0.68)%  for Class A, B and M shares,
     respectively.
(e)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1996,  the  annualized  ratios of  expenses to average net assets were
     5.44%,  5.79% and 5.90% and the annualized  ratios of net investment income
     (loss) to average net assets were (3.04)%, (3.53)% and (3.59)% for Class A,
     B and M shares, respectively.
(f)  Annualized.
(g)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.
                                       39
<PAGE>
                           PILGRIM MIDCAP VALUE FUND

The  information  in  the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.

<TABLE>
<CAPTION>
                                                                   CLASS A
                                                   -----------------------------------------------
                                                       YEAR           YEAR            TEN MONTHS
                                                       ENDED          ENDED              ENDED
                                                     JUNE 30,        JUNE 30,           JUNE 30,
                                                       1998           1997              1996 (aa
                                                       ----           ----              --------
<S>                                                <C>             <C>               <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period               $     14.64     $     11.99       $       10.00
                                                                      
INCOME FROM INVESTMENT OPERATIONS                                     
 Net investment income (loss)                            (0.07)          (0.02)               0.13
 Net realized and unrealized gain on investments          2.71            2.85                1.91
                                                   -----------     -----------       -------------
  Total from investment operations                        2.64            2.83                2.04
                                                   -----------     -----------       -------------
Less distributions:                                                   
 Net investment income                                      --              --                0.05
 In excess of net investment income                         --            0.07                  --
 Realized gains on investments                            0.49            0.11                  --
                                                   -----------     -----------       -------------
  Total distributions                                     0.49            0.18                0.05
                                                   -----------     -----------       -------------
Net asset value, end of period                     $     16.79     $     14.64       $       11.99
                                                   ===========     ===========       =============
TOTAL RETURN (b)                                         18.40%          23.89%              20.48%
RATIOS/SUPPLEMENTAL DATA                                              
Net assets, end of period (000's)                  $    27,485     $    16,985       $       2,389
Ratios to average net assets:                                         
 Expenses (c)(d)(e)                                       1.75%           1.75%               1.75%(f)
 Net investment income (loss) (c)(d)(e)                  (0.53)%         (0.13)%              2.00%(f)
Portfolio turnover rate                                     85%             86%                 60%(f)
Average commission rate paid (g)                   $    0.0421     $    0.0592               --
                                                                    
                                                                        CLASS B                        CLASS M
                                                   ------------------------------------   ------------------------------------
                                                     YEAR        YEAR      TEN MONTHS       YEAR         YEAR       Ten Months     
                                                     ENDED       ENDED        ENDED         ENDED        ENDED        Ended       
                                                   JUNE 30,     JUNE 30,     JUNE 30,      JUNE 30,     JUNE 30,     June 30,  
                                                     1998         1997       1996 (a)       1998          1997       1996 (a)  
                                                     ----         ----       --------       ----          ----       --------  
<S>                                                <C>           <C>        <C>            <C>          <C>        <C>         
PER SHARE OPERATING PERFORMANCE                                                                                                
Net asset value, beginning of period               $  14.49     $  11.94    $  10.00       $  14.49     $  11.93     $   10.00 
                                                                                                                               
INCOME FROM INVESTMENT OPERATIONS                                                                                              
 Net investment income (loss)                         (0.18)       (0.05)       0.07          (0.15)       (0.03)         0.06 
 Net realized and unrealized gain on investments       2.65         2.76        1.90           2.67         2.76          1.91 
                                                   --------     --------    --------       --------     --------     --------- 
  Total from investment operations                     2.47         2.71        1.97           2.52         2.73          1.97 
                                                   --------     --------    --------       --------     --------     --------- 
Less distributions:                                                                                                            
 Net investment income                                   --           --        0.03             --           --          0.04 
 In excess of net investment income                      --         0.05          --             --         0.06            -- 
 Realized gains on investments                         0.49         0.11          --           0.49         0.11            -- 
                                                   --------     --------    --------       --------     --------     --------- 
  Total distributions                                  0.49         0.16        0.03           0.49         0.17          0.04 
                                                   --------     --------    --------       --------     --------     --------- 
Net asset value, end of period                     $  16.47     $  14.49    $  11.94       $  16.52     $  14.49     $   11.93 
                                                   ========     ========    ========       ========     ========     ========= 
TOTAL RETURN (b)                                      17.40%       22.95%      19.80%         17.76%       23.21%        19.82%
RATIOS/SUPPLEMENTAL DATA                                                                                                       
Net assets, end of period (000's)                  $ 40,575     $ 23,258    $  2,123       $ 13,232     $  8,378     $   1,731 
Ratios to average net assets:                                                                                                   
 Expenses (c)(d)(e)                                    2.50%        2.50%       2.50%(f)       2.25%        2.25%         2.25%(f)
 Net investment income (loss) (c)(d)(e)               (1.28)%      (0.90)%      1.27%(f)      (1.03)%      (0.63)%        1.16%(f)
Portfolio turnover rate                                  85%          86%         60%(f)         85%          86%           60%(f)
Average commission rate paid (g)                   $ 0.0421     $ 0.0592          --       $ 0.0421     $ 0.0592            -- 
</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)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1998,  the ratios of expenses to average net assets were 1.78%,  2.53%
     and 2.28% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.57)%,  (1.32)%  and  (1.07)%  for Class A, B and M shares,
     respectively.
(d)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1997,  the ratios of expenses to average net assets were 1.94%,  2.69%
     and 2.44% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.32)%,  (1.11)%  and  (0.81)%  for Class A, B and M shares,
     respectively.
(e)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1996,  the  annualized  ratios of  expenses to average net assets were
     4.91%,  5.32% and 4.72% and the annualized  ratios of net investment income
     (loss) to average net assets were (1.17)%, (1.56)% and (1.32)% for Class A,
     B and M shares, respectively.
(f)  Annualized.
(g)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.
                                       40
<PAGE>
                          PILGRIM BANK AND THRIFT FUND

For  the  six-month  period ended June 30, 1998 and the years ended December 31,
1997,  1996, and 1995, the information in the table below, with the exception of
the  information in the row labeled "Total Investment Return at Net Asset Value"
for  periods  prior  to  January 1, 1997, have been audited by KPMG Peat Marwick
LLP,  independent  auditors.  For all periods ending prior to December 31, 1995,
the  financial  information,  with  the  exception of the information in the row
labeled  "Total  Investment  Return  at Net Asset Value", was audited by another
independent  auditor.  The  information  in  the  row  labeled "Total Investment
Return  at Net Asset Value" has not been audited for periods prior to January 1,
1997.  Prior  to  October 17, 1997, the Class A shares were designated as Common
Stock and the Fund operated as a closed-end investment company.

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                SIX MONTHS ENDED            --------------------------------
                                                 JUNE 30, 1998*                          1997**
                                      ------------------------------------- --------------------------------
                                         CLASS A            CLASS B          CLASS A        CLASS B(a)
                                      ------------------ ------------------ ------------- ------------------
<S>                                   <C>                <C>                <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
 beginning of year                    $      25.87       $      25.85       $     17.84     $      25.25
                                      ------------       ------------       -----------     ------------
Income (loss) from investment                                                  
 operations:                                                                   
 Net investment income                        0.11               0.01              0.34             0.04
 Net realized and unrealized                                                   
  gain (loss) on investments                  1.54               1.54             10.83             2.92
                                      ------------       ------------       -----------     ------------
Total from investment operations              1.65               1.55             11.17             2.96
                                      ------------       ------------       -----------     ------------
Less distributions:                                                            
 Net investment income                          --                 --              0.31             0.04
 Excess of net investment in-                                                  
  come                                          --                 --                --               --
 Realized capital gains                         --                 --              2.65             2.04
 Tax return of capital                          --                 --              0.18             0.28
                                      ------------       ------------       -----------     ------------
Total distributions                           0.00               0.00              3.14             2.36
                                      ------------       ------------       -----------     ------------
Other:                                                                         
 Reduction in net asset value                                                  
  from rights offering                          --                 --                --               --
                                      ------------       ------------       -----------     ------------
Net asset value, end of year          $      27.52       $      27.40       $     25.87     $      25.85
                                      ============       ============       ===========     ============
Closing market price, end of year               --                 --                --               --
TOTAL INVESTMENT RETURN AT                                                     
 MARKET VALUE(c)                                --                 --                --               --
TOTAL INVESTMENT RETURN AT                                                     
 NET ASSET VALUE(e)                           6.38%              6.00%            64.86%           11.88%
RATIOS/SUPPLEMENTAL DATA                                                       
Net assets, end of year ($millions)   $        549       $        360       $       383    $          76
Ratios to average net assets:                                                  
 Expenses                                     1.20%(h)           1.95%(h)          1.10%            1.89%(h)
 Net investment income                        0.94%(h)           0.19%(h)          1.39%            0.99%(h)
Portfolio turnover rate                          2%                 2%               22%              22%
Average commission rate paid(i)       $      0.023       $      0.023       $     0.013    $       0.013

                                        1996     1995(b)   1994       1993        1992         1991      1990      1989       1988
                                      -------   -------   -------   -------     --------     -------   --------   -------   -------
<S>                                   <C>       <C>       <C>       <C>         <C>          <C>       <C>        <C>        <C>    
PER SHARE OPERATING PERFORMANCE                                                                                                     
Net Asset Value,                                                                                                                    
 beginning of year                    $ 14.83   $ 10.73   $ 11.87   $ 12.46     $  10.12     $  7.49   $  10.26   $  9.54   $  8.17 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Income (loss) from investment                                                                                                       
 operations:                                                                                                                        
 Net investment income                   0.32      0.31      0.26      0.26         0.22        0.24       0.31      0.30      0.31 
 Net realized and unrealized                                                                                                        
  gain (loss) on investments             5.18      4.78     (0.53)     0.75         2.93        3.33      (2.20)     1.50      1.43 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Total from investment operations         5.50      5.09     (0.27)     1.01         3.15        3.57      (1.89)     1.80      1.74 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Less distributions:                                                                                                                 
 Net investment income                   0.32      0.31      0.22      0.26         0.22        0.24       0.31      0.31      0.37 
 Excess of net investment in-                                                                                                       
  come                                   0.03      0.03        --        --           --          --         --        --        -- 
 Realized capital gains                  2.14      0.65      0.65      0.73         0.47          --         --      0.44        -- 
 Tax return of capital                     --        --        --        --         0.12        0.70       0.57      0.33        -- 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Total distributions                      2.49      0.99      0.87      0.99         0.81        0.94       0.88      1.08      0.37 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Other:                                                                                                                              
 Reduction in net asset value                                                                                                       
  from rights offering                     --        --        --     (0.61)          --          --         --        --        -- 
                                      -------   -------   -------   -------     --------     -------   --------   -------   ------- 
Net asset value, end of year          $ 17.84   $ 14.83   $ 10.73   $ 11.87     $  12.46     $ 10.12   $   7.49   $ 10.26   $  9.54 
                                      =======   =======   =======   =======     ========     =======   ========   =======   ======= 
Closing market price, end of year     $ 15.75   $ 12.88   $  9.13   $ 10.88     $  11.63     $  9.50   $   7.13   $  9.13   $  7.75 
TOTAL INVESTMENT RETURN AT                                                                                                          
 MARKET VALUE(c)                        43.48%    52.81%    (8.85)%    1.95%(d)    31.53%      47.52%    (12.45)%   32.25%    30.17%
TOTAL INVESTMENT RETURN AT                                                                                                          
 NET ASSET VALUE(e)                     41.10%    49.69%    (1.89)%    7.79%(f)    32.36%(g)   49.49%    (18.14)%   20.79%    22.58%
RATIOS/SUPPLEMENTAL DATA                                                                                                            
Net assets, end of year ($millions)   $   252   $   210   $   152   $   168     $    141     $   101   $     75   $   103   $    96 
Ratios to average net assets:                                                                                                       
 Expenses                                1.01%     1.05%     1.28%     0.91%        1.24%       1.31%      1.29%     1.26%     1.18%
 Net investment income                   1.94%     2.37%     2.13%     2.08%        2.00%       2.68%      3.59%     4.15%     3.28%
Portfolio turnover rate                    21%       13%       14%       17%          20%         31%        46%       63%       43%
Average commission rate paid(i)            --        --        --        --           --          --         --        --        -- 
</TABLE>

                                                          Footnotes on next page
                                       41
<PAGE>
                          PILGRIM BANK AND THRIFT FUND
                                  (Continued)

*    Effective June 30, 1998,  Bank and Thrift Fund changed its year end to June
     30.

**   The Fund  converted  from a  closed-end  investment  company to an open-end
     investment company on October 17, 1997.

(a)  From the period  October  20,  1997  (initial  offering  of Class B shares)
     through December 31, 1997.

(b)  On April 7, 1995, the Investment  Manager acquired the rights to manage the
     Fund  and  certain  other  mutual  funds  previously   managed  by  Pilgrim
     Management Corporation.

(c)  Total  return was  calculated  at market value  without  deduction of sales
     commissions and assuming  reinvestment  of all dividends and  distributions
     during the period.

(d)  Calculation  of total return  excludes the effect of the per share dilution
     resulting  from the Rights  Offering as the total  account value of a fully
     subscribed shareholder was minimally impacted.

(e)  Total return is calculated  at net asset value  without  deduction of sales
     commissions  and assumes  reinvestment  of all dividends and  distributions
     during the period. Total investment returns based on net asset value, which
     can be higher or lower  than  market  value,  may  result in  substantially
     different  returns than total return based on market value. For all periods
     prior to January 1, 1997, the total returns presented are unaudited.

(f)  Total return is calculated  assuming full  participation in the 1993 rights
     offering.

(g)  Total  return is  calculated  assuming no  particpation  in the 1992 rights
     offering.

(h)  Annualized.

(i)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.
      
                                       42
<PAGE>
                       PILGRIM ASIA-PACIFIC EQUITY FUND

The  information  in  the table below has been audited by KPMG Peat Marwick LLP,
independent auditors.



<TABLE>
<CAPTION>
                                                                    CLASS A
                                                     -----------------------------------------
                                                        YEAR          YEAR         TEN MONTHS
                                                        ENDED         ENDED          ENDED
                                                       JUNE 30,      JUNE 30,       JUNE 30,
                                                        1998          1997          1996 (a)
                                                        ----          ----          --------
<S>                                                  <C>            <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period                 $    10.93     $   10.35      $    10.00

INCOME FROM INVESTMENT OPERATIONS:
 Net investment income (loss)                              0.03          0.02            0.03
 Net realized and unrealized gain (loss) on invest-
  ments and foreign currency transactions                 (6.50)         0.58            0.34
                                                     ----------     ---------      ----------
  Total from investment operations                        (6.47)         0.60            0.37
                                                     ----------     ---------      ----------
Less distributions:
 Net investment income                                       --            --              --
 In excess of net investment income                          --            --            0.02
 Realized gains on investments                               --            --              --
 Tax return of capital                                       --          0.02              --
                                                     ----------     ---------      ----------
  Total distributions                                        --          0.02            0.02
                                                     ----------     ---------      ----------
Net asset value, end of period                       $     4.46     $   10.93      $    10.35
                                                     ==========     =========      ==========
TOTAL RETURN (b)                                         (59.29)%        5.78%           3.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)                    $   11,796     $  32,485      $   18,371
Ratios to average net assets:
 Expenses (c)(d)(e)                                        2.00%         2.00%           2.00%(f)
 Net investment income (loss) (c)(d)(e)                    0.38%         0.00%           0.33%(f)
Portfolio turnover rate                                      81%           38%             15%
Average commission rate paid (g)                     $   0.0081     $  0.0096              --

<CAPTION>
                                                                    CLASS B                             CLASS M
                                                     -----------------------------------     ----------------------------------
                                                        YEAR       YEAR       TEN MONTHS      YEAR        YEAR       TEN MONTHS
                                                       ENDED       ENDED        ENDED         ENDED       ENDED         ENDED  
                                                      JUNE 30,    JUNE 30,     JUNE 30,      JUNE 30,    JUNE 30,     JUNE 30, 
                                                        1998       1997        1996 (a)       1998        1997        1996 (a) 
                                                        ----       ----       --------        ----        ----       ----------
<S>                                                  <C>         <C>          <C>           <C>         <C>          <C>       
PER SHARE OPERATING PERFORMANCE                                                                                                
Net asset value, beginning of period                 $  10.83    $  10.31     $  10.00      $  10.86    $   10.32    $   10.00 

INCOME FROM INVESTMENT OPERATIONS:                                                                                              
 Net investment income (loss)                           (0.03)      (0.07)       (0.01)           --        (0.05)         --   
 Net realized and unrealized gain (loss) on invest-                                                                             
  ments and foreign currency transactions               (6.43)       0.59         0.32         (6.46)        0.59         0.33  
                                                     --------    --------     --------      --------    ---------    ---------  
  Total from investment operations                      (6.46)       0.52         0.31         (6.46)        0.54         0.33  
                                                     --------    --------     --------      --------    ---------    ---------  
Less distributions:                                                                                                             
 Net investment income                                     --          --           --            --           --          --   
 In excess of net investment income                        --          --           --            --           --         0.01  
 Realized gains on investments                             --          --           --            --           --          --   
 Tax return of capital                                     --          --           --            --           --          --   
                                                     --------    --------     --------      --------    ---------    ---------  
  Total distributions                                      --          --           --            --           --         0.01  
                                                     --------    --------     --------      --------    ---------    ---------  
Net asset value, end of period                       $   4.37    $  10.83     $  10.31      $   4.40    $   10.86    $   10.32  
                                                     ========    ========     ========      ========    =========    =========  
TOTAL RETURN (b)                                       (59.65)%      5.04%        3.19%       (59.48)%       5.26%        3.32% 
RATIOS/SUPPLEMENTAL DATA                                                                                                        
Net assets, end of period (000's)                    $  9,084    $ 30,169     $ 17,789      $  4,265    $  11,155    $   6,476  
Ratios to average net assets:                                                                                                   
 Expenses (c)(d)(e)                                      2.75%       2.75%        2.75%(f)      2.50%        2.50%        2.50%(f)
 Net investment income (loss) (c)(d)(e)                 (0.39)%     (0.79)%      (0.38)%(f)    (0.07)%      (0.55)%      (0.16)%(f)
Portfolio turnover rate                                    81%         38%          15%           81%          35%          15%
Average commission rate paid (g)                     $ 0.0081    $ 0.0096           --      $ 0.0081    $  0.0096          --  
</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)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1998,  the ratios of expenses to average net assets were 2.80%,  3.55%
     and 3.30% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.42)%,  (1.19)%  and  (0.88)%  for Class A, B and M shares,
     respectively.
(d)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1997,  the ratios of expenses to average net assets were 2.54%,  3.29%
     and 3.04% and the ratios of net  investment  income  (loss) to average  net
     assets  were  (0.53)%,  (1.33)%  and  (1.09)%  for Class A, B and M shares,
     respectively.
(e)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1996,  the  annualized  ratios of  expenses to average net assets were
     3.47%,  4.10% and 3.88% and the annualized  ratios of net investment income
     (loss) to average net assets were (1.14)%, (1.73)% and (1.53)% for Class A,
     B and M shares, respectively.
(f)  Annualized.
(g)  For  fiscal  years  beginning  on or after  September  1,  1995,  a fund is
     required to disclose  its average  commission  rate per share for trades on
     which commissions are charged.

                                       43
<PAGE>
                            PILGRIM HIGH YIELD FUND

For  the  fiscal  years  ended June 30, 1998, 1997, and 1996 and the eight-month
period  ended June 30, 1995, the information in the table below has been audited
by  KPMG Peat Marwick LLP, independent auditors. For all periods ending prior to
November  1,  1994, the financial information was audited by another independent
auditor.  Information for High Yield Fund for the fiscal years ended October 31,
1986  through  October  31,  1989 was not included in such Fund's 1994 financial
statements.

<TABLE>
<CAPTION>
                                                          CLASS A
                                       -----------------------------------------------
                                                                              EIGHT 
                                                                              MONTHS
                                               YEAR ENDED JUNE 30,            ENDED 
                                       ---------------------------------     JUNE 30,
                                          1998        1997        1996      1995(a)(b)
                                       ---------     -------     -------    ----------
<S>                                    <C>          <C>         <C>         <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period    $   6.80     $  6.36     $  6.15    $    5.95
Income (loss) from
 investment operations:
 Net investment income                      0.61        0.61        0.59         0.35
 Net realized and unrealized
  gain (loss) on investments                0.16        0.43        0.16         0.21
                                        --------     -------     -------    ---------
  Total from investment operation           0.77        1.04        0.75         0.56
                                        --------     -------     -------    ---------
Less distributions from:
 Net investment income                      0.63        0.60        0.54         0.36
 Distributions in excess of net
  investment income                           --          --          --           --
                                        --------     -------     -------    ---------
  Total distributions                       0.63        0.60        0.54         0.36
                                        --------     -------     -------    ---------
Net asset value, end of period          $   6.94     $  6.80     $  6.36    $    6.15
                                        ========     =======     =======    =========
TOTAL RETURN(d)                            11.71%      17.14%      12.72%       9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)       $102,424     $35,940     $18,691    $  15,950
Ratios to average net assets:
 Expenses(e)(f)(g)                          1.00%       1.00%       1.00%        2.25%(i)
 Net investment income(e)(f)(g)(h)          9.05%       9.54%       9.46%        8.84%(i)
Portfolio turnover rate                      209%        394%        399%         166%

<CAPTION>
                                                                YEAR ENDED OCTOBER 31,
                                       ------------------------------------------------------------------------
                                          1994        1993         1992         1991         1990         1989
                                       --------     --------     --------     --------    --------     --------
<S>                                     <C>         <C>          <C>          <C>          <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period    $  6.47     $   5.77     $   5.70     $   5.03    $   6.46     $   7.29
Income (loss) from                                                                                       
 investment operations:                                                                                  
 Net investment income                     0.54         0.53         0.63         0.66        0.82         0.88
 Net realized and unrealized                                                                             
  gain (loss) on investments              (0.51)        0.70         0.07         0.74       (1.40)       (0.80)
                                        -------     --------     --------     --------    ----------   --------
  Total from investment operation          0.03         1.23         0.70         1.40       (0.58)        0.08
                                        -------     --------     --------     --------    ----------   --------
Less distributions from:                                                                                 
 Net investment income                     0.55         0.53         0.63         0.68        0.85         0.91
 Distributions in excess of net                                                                          
  investment income                          --           --           --         0.05          --           --
                                        -------     --------     --------     --------    ----------   --------
  Total distributions                      0.55         0.53         0.63         0.73        0.85         0.91
                                        -------     --------     --------     --------    ----------   --------
Net asset value, end of period          $  5.95     $   6.47     $   5.77     $   5.70    $   5.03     $   6.46
                                        =======     ========     ========     ========    ==========   ========
TOTAL RETURN(d)                            0.47%       22.12%       12.65%       30.00%     (10.08)%       0.94%
RATIOS/SUPPLEMENTAL DATA                                                                                 
Net assets, end of period (000's)       $16,046     $ 18,797     $ 17,034     $ 23,820    $ 21,598     $ 31,356
Ratios to average net assets:                                                                            
 Expenses(e)(f)(g)                         2.00%        2.02%        2.03%        1.89%       1.75%        1.79%
 Net investment income(e)(f)(g)(h)         8.73%        8.36%       10.93%       12.40%      14.11%       12.61%
Portfolio turnover rate                     192%         116%         193%         173%        183%         210%
</TABLE>

                                                          Footnotes on next page
                                       44
<PAGE>
                            PILGRIM HIGH YIELD FUND

                                  (Continued)

<TABLE>
<CAPTION>
                                                                        CLASS B                           CLASS M
                                                          ----------------------------------    -------------------------------- 
                                                                                   JULY 17,                             JULY 17, 
                                                            YEAR ENDED JUNE 30,   1995(c) TO     YEAR ENDED JUNE 30,    1995(c)  
                                                          ----------------------   JUNE 30,     --------------------    JUNE 30, 
                                                              1998        1997       1996         1998       1997         1996   
                                                          ------------ ----------- ---------    -------    --------     -------- 
<S>                                                       <C>          <C>         <C>              <C>         <C>         <C>  
PER SHARE OPERATING PERFORMANCE                                                                                                  
Net asset value,                                                                                                                 
 beginning of period                                       $   6.78     $  6.36   $   6.20      $  6.78    $   6.36    $   6.20  
Income (loss) from investment operations:                                                                                        
 Net investment income                                         0.58        0.57       0.48         0.59        0.58        0.50  
 Net realized and unrealized gain (loss) on investments        0.14        0.41       0.14         0.14        0.41        0.14  
                                                           --------     -------   --------      -------    ---------   --------  
  Total from investment operation                              0.72        0.98       0.62         0.73        0.99        0.64  
                                                           --------     -------   --------      -------    ---------   --------  
Less distributions from:                                                                                                         
 Net investment income                                         0.58        0.56       0.46         0.59        0.57        0.48  
 Distributions in excess of net investment income                --          --         --           --          --          --  
                                                           --------     -------   --------      -------    ---------   --------  
  Total distributions                                          0.58        0.56       0.46         0.59        0.57        0.48  
                                                           --------     -------   --------      -------    ---------   --------  
Net asset value, end of period                             $   6.92     $  6.78   $   6.36      $  6.92    $   6.78    $   6.36  
                                                           ========     =======   ========      =======    =========   ========  
TOTAL RETURN(d)                                               10.90%      16.04%     10.37%       11.16%      16.29%      10.69% 
RATIOS/SUPPLEMENTAL DATA                                                                                                         
Net assets, end of period (000's)                          $154,303     $40,225   $  2,374      $19,785    $  8,848    $  1,243  
Ratios to average net assets:                                                                                                    
 Expenses(e)(f)(g)                                             1.75%       1.75%      1.75%(i)     1.50%       1.50%       1.50%(i)
 Net investment income(e)(f)(g)(h)                             8.30%       8.64%      9.02%(i)     8.55%       8.93%       9.41%(i)
Portfolio turnover rate                                         209%        394%       339%         209%        394%        339%
</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)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1998,  the ratios of expenses to average net assets were 1.17%,  1.92%
     and 1.67% and the ratios of net  investment  income to  average  net assets
     were 8.88%, 8.13% and 8.38% for Class A, B and M shares, respectively.
(f)  Prior to the waiver and  reimbursement  of expenses for the year ended June
     30,  1997,  the ratios of expenses to average net assets were 1.42%,  2.17%
     and 1.92% and the ratios of net  investment  income to  average  net assets
     were 9.09%, 8.18% and 8.47% for Class A, B and M shares, respectively.
(g)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1996,  the ratios of expenses to average net assets were 2.19%,  2.94%
     (i) and 2.69% (i), and the ratios of net  investment  income to average net
     assets  were 8.27%,  8.05% (i) and 8.51% (i),  for Class A, B and M shares,
     respectively.
(h)  Prior to the waiver of  expenses,  the ratio of  expenses  to  average  net
     assets was 2.35% (i) in 1995 and 2.07% in 1994 for Class A shares. Prior to
     the waiver of expenses,  the ratio of net investment  income to average net
     assets was 8.74% (i) in 1995 and 8.66% in 1994 for Class A shares.
(i)  Annualized.

                                       45
<PAGE>
                   PILGRIM GOVERNMENT SECURITIES INCOME FUND

For  the  fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in  the  table  below  has  been  audited  by KPMG Peat Marwick LLP, independent
auditors.  For  all  periods  ending  prior  to  July  1,  1994,  the  financial
information was audited by another independent auditor.

<TABLE>
<CAPTION>
                                                                   CLASS A
                                     -----------------------------------------------------------------
                                                             YEAR ENDED JUNE 30,
                                     -----------------------------------------------------------------
                                        1998          1997         1996        1995(a)         1994
                                     ----------    ----------    --------    ----------    -----------  
<S>                                  <C>           <C>           <C>         <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
 beginning of period                 $    12.71    $    12.59    $  12.97    $    12.73    $    13.96
Income (loss) from
 investment operations:
 Net investment income                     0.64          0.69        0.75          0.84          0.84
 Net realized and unrealized
  gain (loss) on investments               0.30          0.20       (0.32)         0.24         (1.17)
                                     ----------    ----------    --------    ----------    ----------
  Total from investment operations         0.94          0.89        0.43          1.08         (0.33)
                                     ----------    ----------    --------    ----------    ----------
Less distributions from:
 Net investment income                     0.64          0.69        0.75          0.84          0.90
 Distributions in excess of net
  investment income                        0.13          0.04          --            --            --
 Tax return of capital                       --          0.04        0.06            --            --
                                     ----------    ----------    --------    ----------    ----------
  Total distributions                      0.77          0.77        0.81          0.84          0.90
                                     ----------    ----------    --------    ----------    ----------
Net asset value, end of period       $    12.88    $    12.71    $  12.59    $    12.97    $    12.73
                                     ==========    ==========    ========    ==========    ==========
TOTAL RETURN(d)                            7.63%         7.33%       3.34%         8.96%        (2.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)    $   23,682    $   29,900    $ 38,753    $   43,631    $   61,100
Ratios to average net assets:
 Expenses(e)(f)(g)                         1.50%         1.42%       1.51%         1.40%         1.21%
 Net investment income(e)(f)(g)            5.13%         5.78%       5.64%         6.37%         6.44%
Portfolio turnover rate                     134%          172%        170%          299%          402%



<CAPTION>
                                        1993(c)        1992          1991         1990          1989
                                     ----------    ----------     --------     --------      ---------
<S>                                  <C>           <C>            <C>          <C>           <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
 beginning of period                 $    13.76    $    13.76     $  13.79     $  14.23      $   14.23
Income (loss) from
 investment operations:
 Net investment income                     1.13          1.19         1.25         1.25           1.31
 Net realized and unrealized
  gain (loss) on investments               0.18            --        (0.03)       (0.38)          0.02
                                     ----------    ----------     --------     --------      ---------
  Total from investment operations         1.31          1.19         1.22         0.87           1.33
                                     ----------    ----------     --------     --------      ---------
Less distributions from:
 Net investment income                     1.11          1.19         1.25         1.31           1.33
 Distributions in excess of net
  investment income                          --            --           --           --             --
 Tax return of capital                       --            --           --           --             --
                                     ----------    ----------     --------     --------      ---------
  Total distributions                      1.11          1.19         1.25         1.31           1.33
                                     ----------    ----------     --------     --------      ---------
Net asset value, end of period       $    13.96    $    13.76     $  13.76     $  13.79      $   14.23
                                     ==========    ==========     ========     ========      =========
TOTAL RETURN(d)                            9.82%         8.98%        9.27%        6.51%        10.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)    $   87,301    $   96,390     $110,674     $122,212      $ 144,769
Ratios to average net assets:
 Expenses(e)(f)(g)                         1.12%         1.10%        1.14%        1.14%          1.06%
 Net investment income(e)(f)(g)            8.06%         8.59%        9.09%        9.02%          9.45%
Portfolio turnover rate                     466%          823%         429%         448%           537%
</TABLE>

                                                          Footnotes on next page
                                       46
<PAGE>
                   PILGRIM GOVERNMENT SECURITIES INCOME FUND
                                  (Continued)


<TABLE>
<CAPTION>
                                                                        CLASS B                             CLASS M
                                                          ---------------------------------     ---------------------------------
                                                             YEAR      YEAR       JULY 17,        Year        Year      July 17,    
                                                             ENDED     ENDED     1995(b) TO       Ended       Ended    1995(b) to   
                                                           JUNE 30,   JUNE 30,    JUNE 30,       June 30,    June 30,   June 30,    
                                                             1998      1997        1996           1998         1997       1996      
                                                             ----      ----        ----           ----         ----       ----      
<S>                                                       <C>        <C>        <C>             <C>         <C>        <C> 
PER SHARE OPERATING PERFORMANCE                                                                                            
Net asset value, beginning of period                      $  12.68   $  12.59   $    12.95      $  12.72    $  12.59   $   12.95    
Income (loss) from investment operations:                                                                                           
 Net investment income                                        0.60       0.67         0.66          0.64        0.70        0.68    
 Net realized and unrealized gain (loss) on investments       0.24       0.11        (0.37)         0.23        0.14       (0.36)   
                                                          ---------  ---------  ----------      ---------   ---------  ---------    
  Total from investment operations                            0.84       0.78         0.29          0.87        0.84        0.32    
                                                          ---------  ---------  ----------      ---------   ---------  ---------    
Less distributions from:                                                                                                            
 Net investment income                                        0.60       0.67         0.65          0.63        0.70        0.68    
 Distributions in excess of net investment income             0.08       0.02           --          0.08          --          --    
 Tax return of capital                                          --         --           --            --        0.01          --    
                                                          ---------  ---------  ----------      ---------   ---------  ---------    
  Total distributions                                         0.68       0.69         0.65          0.71        0.71        0.68    
                                                          ---------  ---------  ----------      ---------   ---------  ---------    
Net asset value, end of period                            $  12.84   $  12.68   $    12.59      $  12.88    $  12.72   $   12.59    
                                                          =========  =========  ==========      =========   =========  =========    
TOTAL RETURN(d)                                               6.78%      6.38%        2.25%         7.02%       6.88%       2.52%   
RATIOS/SUPPLEMENTAL DATA                                                                                                            
Net assets, end of period (000's)                         $  3,220   $  1,534   $       73      $    224    $     61   $      24    
Ratios to average net assets:                                                                                                       
 Expenses(e)(f)(g)                                            2.25%      2.17%        2.26%(h)      2.00%       1.92%       2.01%(h)
 Net investment income(e)(f)(g)                               4.24%      4.92%        4.98%(h)      4.29%       5.25%       5.73%(h)
Portfolio turnover rate                                        134%       172%         170%          134%        172%        170%   
                                                                                                 
</TABLE>

(a)  Pilgrim Investments,  Inc., the Fund's Investment Manager,  acquired 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)  During this period,  average  daily  borrowing  were  $11,038,044,  average
     monthly shares  outstanding were 6,429,755 and average daily borrowings per
     share were $1.72.  The Fund earned  income and realized  capital gains as a
     result of entering into reverse repurchase agreements during the six months
     from  July  to  December  1992.  Such  transactions  constituted  borrowing
     transactions  and,  as a  result,  the  Fund  exceeded  its  10%  borrowing
     limitations  during that  period.  Therefore,  the Fund's  performance  was
     higher  than it would  have  been had the Fund  adhered  to its  investment
     restrictions.  This  borrowing  technique  was  discontinued  subsequent to
     December 1992, until April 4, 1995, when shareholders  approved a change in
     the Fund's investment policies.
(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)  Prior to the waiver and reimbursement of expenses for the period ended June
     30,  1998,  the ratios of expenses to average net assets were 1.58%,  2.33%
     and 2.08% (g),  and the  ratios of net  investment  income to  average  net
     assets  were  5.06%,  4.20%  and  4.24%  for  Class  A,  B  and  M  shares,
     respectively.
(f)  Prior to the waiver and reimbursement of expenses for the period ended June
     30, 1996, the ratios of expenses to average net assets were 1.57%, 2.41%(g)
     and 2.16%(g), and the ratios of net investment income to average net assets
     were  5.74%,   4.83%(g)   and  5.58%(g)  for  Class  A,  B  and  M  shares,
     respectively.
(g)  Prior to the waiver  expenses for the period ended June 30, 1995, the ratio
     of  expenses  to  average  net  assets  was  1.54%,  and the  ratio  of net
     investment income to average net assets was 6.23% for Class A shares.
(h)  Annualized.
                                       47

<PAGE>
                                                              Investment Manager
                                                       PILGRIM INVESTMENTS, INC.
                                             40 North Central Avenue, Suite 1200
                                                     Phoenix, Arizona 85004-4408

                                                                     Distributor
                                                        PILGRIM SECURITIES, INC.
                                             40 North Central Avenue, Suite 1200
                                                     Phoenix, Arizona 85004-4408

                                                     Shareholder Servicing Agent
                                                             PILGRIM GROUP, INC.
                                             40 North Central Avenue, Suite 1200
                                                     Phoenix, Arizona 85004-4408

                                                                  Transfer Agent
                                                               DST SYSTEMS, INC.
                                                                 P.O. Box 419368
                                                Kansas City, Missouri 64141-6368

                                                                       Custodian
                                               INVESTORS FIDUCIARY TRUST COMPANY
                                                                801 Pennsylvania
                                                     Kansas City, Missouri 64105

                                                                   Legal Counsel
                                                          DECHERT PRICE & RHOADS
                                                           1775 Eye Street, N.W.
                                                          Washington, D.C. 20006

                                                            Independent Auditors
                                                           KPMG PEAT MARWICK LLP
                                                       725 South Figueroa Street
                                                   Los Angeles, California 90017

                                   Prospectus
                                November 1, 1998
<PAGE>
                          PILGRIM ADVISORY FUNDS, INC.
                        PILGRIM ASIA-PACIFIC EQUITY FUND
                            PILGRIM MIDCAP VALUE FUND
                          PILGRIM LARGECAP LEADERS FUND
                          PILGRIM STRATEGIC INCOME FUND

                       40 NORTH CENTRAL AVENUE, SUITE 1200
                             PHOENIX, ARIZONA 85004
                                 (800) 992-0180

                       STATEMENT OF ADDITIONAL INFORMATION
                                NOVEMBER 1, 1998

Pilgrim  Advisory  Funds,  Inc.  (the  "Company")  is  an  open-end   management
investment  company  commonly  known as a mutual  fund.  The  Company  currently
consists of four separate  diversified  investment funds,  Pilgrim  Asia-Pacific
Equity Fund  ("Asia-Pacific  Equity  Fund"),  Pilgrim MidCap Value Fund ("MidCap
Value  Fund"),  Pilgrim  LargeCap  Leaders Fund  ("LargeCap  Leaders  Fund") and
Pilgrim  Strategic  Income Fund  ("Strategic  Income  Fund")1  each with its own
investment objective and policies.

This  Statement of Additional  Information  is not a prospectus and it should be
read in conjunction with the Prospectus,  dated November 1, 1998, which has been
filed  with the  Securities  and  Exchange  Commission  ("SEC").  Copies  of the
Prospectus may be obtained at no charge by calling (800) 992-0180.

                                TABLE OF CONTENTS

Organization of Pilgrim Advisory Funds, Inc....................................2
Management of The Funds........................................................2
Supplemental Description of Investments.......................................12
Supplemental Investment Techniques............................................36
Investment Restrictions.......................................................36
Portfolio Transactions........................................................38
Additional Purchase and Redemption Information................................40
Determination of Share Price..................................................45
Shareholder Services and Privileges...........................................45
Distributions.................................................................48
Tax Considerations............................................................48
Shareholder Information.......................................................53
Calculation of Performance Data...............................................53
General Information...........................................................56
Financial Statements..........................................................56

- ----------
1    Strategic Income fund is not currently being offered as of the date of this
     Statement of Additional Information, but may be offered in the future.

<PAGE>
                  ORGANIZATION OF PILGRIM ADVISORY FUNDS, INC.

Pilgrim  Advisory  Funds,  Inc. is an  open-end  management  investment  company
commonly known as a mutual fund. The Company currently consists of four separate
diversified  investment  funds,  Asia-Pacific  Equity  Fund,  MidCap Value Fund,
LargeCap  Leaders Fund and Strategic Income Fund (each a "Fund" and collectively
the "Funds"), each with its own investment objective and policies.

The Board of Directors has approved a change in the name of the Company and each
Fund,  to be effective on November  16, 1998.  Until that date,  the name of the
Company is "Pilgrim  America Masters  Series,  Inc.," and the names of the Funds
are "Pilgrim America Masters Asia-Pacific Equity Fund," "Pilgrim America Masters
MidCap Value Fund," "Pilgrim  America Masters  LargeCap Value Fund" and "Pilgrim
America  Masters  Strategic  Income Fund." On November 16, 1998, the name of the
Company will become "Pilgrim  Advisory Funds,  Inc.," and the names of the Funds
will become  "Pilgrim  Asia-Pacific  Equity Fund,"  "Pilgrim MidCap Value Fund,"
"Pilgrim  LargeCap  Leaders  Fund" and  "Pilgrim  Strategic  Income  Fund." This
Statement of Additional  Information  reflects the names of the Company and each
Fund as they will be on November 16, 1998.

The authorized  capital stock of the Company  consists of  1,000,000,000  shares
having  par value of $.01 per  share.  Holders of shares of a Fund have one vote
for each share held, and a proportionate fraction of a vote for each fraction of
a  share  held.   All  shares  issued  and   outstanding   are  fully  paid  and
non-assessable,  transferable,  and redeemable at the option of the shareholder.
Shares have no preemptive  rights.  Shares have  non-cumulative  voting  rights,
which  means  that the  holders  of more than 50% of the  shares  voting for the
election of Directors  can elect 100% of the  Directors if they choose to do so,
and in such event the holders of the remaining shares voting for the election of
Directors  will not be able to elect  any  person  or  persons  to the  Board of
Directors.

The Board of Directors  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  Investment  Company Act of 1940 (the "1940
Act").

                             MANAGEMENT OF THE FUNDS

BOARD OF  DIRECTORS.  The  Company  is managed  by its Board of  Directors.  The
Directors and Officers of the Company are listed below. An asterisk (*) has been
placed next to the name of each Director who is an "interested  person," as that
term is defined in the 1940 Act, by virtue of that person's affiliation with the
Company or Pilgrim Investments, Inc., the Company's investment manager ("Pilgrim
Investments" or the "Investment Manager").

         Mary A. Baldwin,  Ph.D,  2525 E. Camelback  Road,  Suite 200,  Phoenix,
         Arizona  85016.  (Age 59) Director.  Realtor,  Coldwell  Banker Success
         Realty (formerly, The Prudential Arizona Realty) for more than the last
         five years.  Ms. Baldwin is also Vice President,  United States Olympic
         Committee  (November 1996 - Present),  and formerly  Treasurer,  United
         States Olympic  Committee  (November 1992 - November 1996). Ms. Baldwin
         is also a director  and/or  trustee of each of the funds managed by the
         Investment Manager.

         John P. Burke, 260 Constitution  Plaza,  Hartford,  Connecticut  06130.
         (Age 66)  Director.  Commissioner  of  Banking,  State  of  Connecticut
         (January 1995 - Present).  Mr. Burke 

                                      -2-
<PAGE>
         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) Director. President of Al Burton Productions for more than the last
         five years; formerly Vice President, First Run Syndication, Castle Rock
         Entertainment  (July  1992 -  November  1994).  Mr.  Burton  is  also a
         director  and/or trustee of each of the funds managed by the Investment
         Manager.

         Jock Patton, 40 North Central Avenue,  Suite 1200,  Phoenix,  AZ 85004.
         (Age 52) Director.  Private  Investor.  Director of Artisoft,  Inc. Mr.
         Patton was formerly President and Co-owner,  StockVal, Inc. (April 1993
         - June 1997) and a partner  and  director  of the law firm of  Streich,
         Lang, P.A. (1972 - 1993).  Mr. Patton is also a director and/or trustee
         of each of the funds managed by the Investment Manager.

         *Robert W. Stallings,  40 North Central Avenue, Suite 1200, Phoenix, AZ
         85004.  (Age 49) Chairman,  Chief  Executive  Officer,  and  President.
         Chairman,  Chief Executive Officer and President of Pilgrim Group, Inc.
         ("Pilgrim Group") (since December 1994); Chairman, Pilgrim Investments,
         Inc.  (since  December  1994);  Director,   Pilgrim  Securities,   Inc.
         ("Pilgrim Securities") (since December 1994); Chairman, Chief Executive
         Officer and  President of Pilgrim Bank and Thrift Fund,  Inc.,  Pilgrim
         Government  Securities Income Fund, Inc. and Pilgrim  Investment Funds,
         Inc.  (since  April  1995).  Chairman  and Chief  Executive  Officer of
         Pilgrim  Prime  Rate  Trust  (since  April  1995).  Chairman  and Chief
         Executive  Officer of Pilgrim  America Capital  Corporation  (formerly,
         Express America Holdings Corporation) ("Pilgrim Capital") (since August
         1990).

Each Fund pays each Director who is not an  interested  person a pro rata share,
as  described  below,  of (i) an annual  retainer  of  $20,000;  (ii) $1,500 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 the  Funds  is  based  on the  Funds'  average  net  assets  as a
percentage of the average net assets of all the funds managed by the  Investment
Manager for which the Directors serve in common as directors/trustees.

COMPENSATION OF DIRECTORS.

The following table sets forth information  regarding  compensation of Directors
by the Company and other funds managed by the Investment  Manager for the fiscal
year  ended  June 30,  1998.  Officers  of the  Company  and  Directors  who are
interested  persons of the Company do not receive any compensation from the Fund
or any other  funds  managed by the  Investment  Manager.  In the column  headed
"Total  Compensation  From  Registrant and Fund Complex Paid to Directors,"  the
number in  parentheses  indicates the total number of boards in the fund complex
on which the Director serves.

                                      -3-
<PAGE>
                               COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                    PENSION OR                        TOTAL
                                                                    RETIREMENT                    COMPENSATION
                                                                     BENEFITS       ESTIMATED         FROM
                                                      AGGREGATE      ACCRUED         ANNUAL        REGISTRANT
                                                    COMPENSATION    AS PART OF      BENEFITS        AND FUND
                                                        FROM           FUND           UPON        COMPLEX PAID
                 NAME OF PERSON, POSITION            REGISTRANT      EXPENSES      RETIREMENT     TO DIRECTORS
                 ------------------------            ----------      --------      ----------     ------------
<S>                                                    <C>              <C>            <C>         <C>
Mary A. Baldwin(1), Director......................     $1,879           N/A            N/A           $28,600
                                                                                                   (5 boards)
John P. Burke(1)(2), Director ....................     $1,887           N/A            N/A           $28,700
                                                                                                   (5 boards)
Al Burton(1), Director............................     $1,887           N/A            N/A           $28,700
                                                                                                   (5 boards)
Bruce S. Foerster(1)(3), Former Director..........     $1,887           N/A            N/A           $28,700
                                                                                                   (5 boards)
Jock Patton(1), Director..........................     $1,887           N/A            N/A           $28,700
                                                                                                   (5 boards)
Robert W. Stallings(3), Director and Chairman.....       $0             N/A            N/A           $0
                                                                                                   (5 boards)
</TABLE>
- ----------
(1)  Member of the Audit Committee.
(2)  Commenced service as Trustee on May 5, 1997.
(3)  Mr. Foerster resigned as a Director of the Company effective  September 30,
     1998.
(4)  "Interested  person," as defined in the Investment  Company Act of 1940, of
     the Company because of the affiliation with the Investment Manager.

OFFICERS

         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 each of
         the other funds in the Pilgrim Group of Funds;  Chief Financial Officer
         (since December  1993),  Vice Chairman and Assistant  Secretary  (since
         April 1993) and former  President (May 1991 - December  1993),  Pilgrim
         Capital  (formerly  Express America  Holdings  Corporation).  Presently
         serves or has served as an officer or director of other  affiliates  of
         Pilgrim Capital.
                                      -4-
<PAGE>
         Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
         40 North Central Avenue,  Suite 1200, Phoenix,  Arizona 85004. (Age 48)
         Executive Vice President (since August 1996), Pilgrim Group;  President
         and Chief Executive Officer (since August 1996),  Pilgrim  Investments;
         Executive  Vice  President of (since July 1996) of most of the funds in
         the Pilgrim Group of Funds.  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 each of the  funds in the  Pilgrim  Group of  Funds.
         Formerly  Senior Vice  President,  Pilgrim  Capital (April 1995 - April
         1998);  Senior Vice  President,  Express America  Mortgage  Corporation
         (June 1992 - August 1994) and President, Beverly Hills Securities Corp.
         (January 1990 - June 1992).

         Michael J.  Roland,  SENIOR  VICE  PRESIDENT  AND  PRINCIPAL  FINANCIAL
         OFFICER
         40 North Central Avenue,  Suite 1200, Phoenix,  Arizona 85004. (Age 40)
         Senior Vice  President  and Chief  Financial  Officer,  Pilgrim  Group,
         Pilgrim  Investments,  Pilgrim Securities (since June 1998) and Pilgrim
         Financial  (since  August,  1998).  He  served  in same  capacity  from
         January,  1995 - April, 1997. Chief Financial Officer of Endeaver Group
         (April, 1997 to June, 1998).

         Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
         40 North Central Avenue,  Suite 1200, Phoenix,  Arizona 85004. (Age 35)
         Vice  President,  Pilgrim  Investments  (since  April 1997) and Pilgrim
         Group,  Inc.  (since  February  1997).  Vice  President  and  Assistant
         Secretary of each of the funds in the Pilgrim Group of Funds.  Formerly
         Assistant Vice President,  Pilgrim Group,  Inc. (August 1995 - February
         1997).  Formerly Operations Manager,  Pilgrim Group, Inc. (April 1992 -
         April 1995).

         Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
         40 North Central Avenue,  Suite 1200, Phoenix,  Arizona 85004. (Age 30)
         Vice  President,  Pilgrim  Investments  (since August 1997) and Pilgrim
         Financial (since May 1998),  Accounting  Manager (since November 1995).
         Formerly  Assistant  Vice  President  and  Accounting   Supervisor  for
         PaineWebber (June, 1993 - April, 1995).

PRINCIPAL SHAREHOLDERS.  As of September 30, 1998, the Directors and Officers of
the Company as a group owned less than 1% of any class of the Fund's outstanding
shares.  As of September  30, 1998, 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: With respect to Asia-Pacific Equity Fund,
Contiinvestments  c/o Continental Grain Company,  277 Park Avenue, New York, New
York  10172-0003,  owned  12.68% of the Class A shares.  With  respect to MidCap
Value Fund,  Merrill Lynch Pierce Fenner & Smith Inc.  ("Merrill  Lynch"),  4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, owned 7.56% of the Class
A shares and 14.61% of the Class B shares.  With  respect  to  LargeCap  Leaders
Fund,  Merrill  Lynch,  4800  Deer  Lake  Drive  East,   Jacksonville,   Florida
32246-6484, owned 5.36% of the Class A shares and 7.52% of the Class B shares.

                                      -5-
<PAGE>
INVESTMENT  MANAGER.  The Investment Manager serves as investment manager to the
Funds and has  overall  responsibility  for the  management  of the  Funds.  The
Investment  Management  Agreement between the Company and the Investment Manager
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 five other  registered
investment  companies (or series thereof) as well as privately managed accounts.
As of October 15, 1998,  the Investment  Manager had assets under  management of
approximately  $5.3 billion.  The Investment  Manager,  with the approval of the
Company's Board of Directors, may select and employ investment advisers to serve
as portfolio manager for any Fund ("Portfolio Manager"),  monitors the Portfolio
Managers'  investment  programs  and results,  and  coordinates  the  investment
activities  of the  Portfolio  Managers  to ensure  compliance  with  regulatory
restrictions.

Since November 1, 1997, the Investment Manager has provided  investment advisory
services to the LargeCap  Leaders  Fund  pursuant to the  Investment  Management
Agreement. Prior to that time, investment advisory services were provided to the
LargeCap Leaders Fund by a Portfolio Manager selected by the Investment Manager.
The Investment  Manager has employed  Portfolio  Managers to provide  investment
advisory services to the Asia-Pacific Equity Fund and the MidCap Value Fund.
More information regarding the Portfolio Managers is provided below.

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
NASDAQ National Market System (NASDAQ: PACC) and which is a holding company that
through its subsidiaries engages in the financial services business.

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
Directors  and  Officers  of the  Company who are  employees  of the  Investment
Manager or its affiliates and office rent of the Company. The Portfolio Managers
pay all of their  expenses  arising from the  performance  of their  obligations
under the Portfolio Management Agreements.  Subject to the expense reimbursement
provisions described in the Prospectus, other expenses incurred in the operation
of the Company 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; expenses of registering and qualifying shares of the Funds under federal
and state laws and  regulations;  salary and other  expenses of the employees of
Investment  Manager  engaged in registering  and qualifying  shares of the Funds
under  federal  and  state  laws  and  regulations,  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  Directors of the
Company  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 Manager bears the expense of providing its services, and pays the
fees of each Fund's Portfolio Manager.  For its services,  the MidCap Value Fund
and LargeCap  Leaders Fund pay the  

                                      -6-
<PAGE>
Investment Manager a monthly fee in arrears equal to 1/12 of 1.00% of the Fund's
average  daily net  assets  during the month  (approximately  1.00% on an annual
basis),  the Asia-Pacific  Equity Fund pays the Investment Manager a monthly fee
in arrears equal to 1/12 of 1.25% of the Fund's  average daily net assets during
the month  (approximately  1.25% on an annual basis),  and the Strategic  Income
Fund pays the Investment Manager a monthly fee in arrears equal to 1/12 of 0.60%
of the Fund's average daily net assets during the month  (approximately 0.60% on
an  annual  basis).  The  Investment  Manager  waives  its  management  fee from
Strategic  Income Fund to the extent such fees arise from the Fund's  investment
in other investment  companies managed by the Investment Manager. For the fiscal
period of  September  1, 1995  (commencement  of  operations)  to June 30, 1996,
Asia-Pacific  Equity  Fund,  MidCap Value Fund,  and LargeCap  Leaders Fund paid
management  fees to the Investment  Manager of $169,861,  $19,762,  and $18,405,
respectively. For the fiscal year ended June 30, 1997, Asia-Pacific Equity Fund,
MidCap  Value  Fund,  and  LargeCap  Leaders  Fund paid  management  fees to the
Investment Manager of $773,252,  $250,512, and $174,325,  respectively.  For the
fiscal year ended June 30, 1998, Asia-Pacific Equity Fund, MidCap Value Fund and
LargeCap  Leaders  Fund  paid  management  fees  to the  Investment  Manager  of
$553,589, $678,816 and $286,830 respectively.

The  Investment  Manager has entered into an expense  limitation  agreement  the
Company,  pursuant to which the Investment  Manager has agreed to waive or limit
its  fees  and to  assume  other  expenses  so that the  total  annual  ordinary
operating  expenses of the Funds  (which  excludes  interest,  taxes,  brokerage
commissions,  extraordinary  expenses  such as  litigation,  other  expenses not
incurred in the ordinary course of such Fund's business, expenses of any counsel
or other  persons or services  retained by the  Company's  directors who are not
"interested persons" (as defined in the 1940 Act) of the Investment Manager, and
amounts  payable  pursuant to a plan adopted in accordance with Rule 12b-1 under
the 1940 Act) do not exceed: 0.75% for Strategic Income Fund; 1.50% for LargeCap
Leaders Fund and MidCap Value Fund; and 1.75% for Asia-Pacific Equity Fund.

The expense limitation  agreements provide that these expense  limitations shall
continue  until December 31, 1998 for LargeCap  Leaders Fund,  MidCap Value Fund
and  Asia-Pacific  Equity Fund, and until December 31, 1999 for Strategic Income
Fund.  The  Investment  Manager may extend,  but may not shorten,  the period of
these limitations  without the consent of the Funds, so long as the extension is
at the same expense limitation amount discussed above. Each Fund will at a later
date  reimburse  the  Investment  Manager for  management  fees waived and other
expenses  assumed by the Investment  Manager during the previous 36 months,  but
only if, after such reimbursement,  the Fund's expense ratio does not exceed the
percentage  described above. The Investment  Manager will only be reimbursed for
fees  waived  or  expenses  assumed  after  the  effective  date of the  expense
limitation   agreements.   Each  expense  limitation  agreement  will  terminate
automatically upon termination of the respective investment management agreement
with the Investment Manager,  and may be terminated by the Investment Manager or
the Fund upon 90 days written notice.

PORTFOLIO MANAGERS. The Investment Manager has entered into Portfolio Management
Agreements with Portfolio  Managers to provide  investment  advisory services to
certain of the Funds. The Investment  Manager  recommends  Portfolio Managers to
the Board of Directors of the Company primarily on the basis of their successful
application of a consistent,  well-defined, long-term investment approach over a
period of several  market  cycles.  Each  Portfolio  Manager has  discretion  to
purchase  and  sell  securities  for its Fund in  accordance  with  that  Fund's
investment objective, policies and restrictions. Although the Portfolio Managers
are subject to general  supervision  by the Investment  Manager,  the Investment
Manager  does  not  evaluate  the  investment  merits  of  specific   securities
transactions.
                                      -7-
<PAGE>
HSBC ASSET  MANAGEMENT  -- HSBC Asset  Management  Americas  Inc. and HSBC Asset
Management Hong Kong Limited (collectively HSBC) serve collectively as Portfolio
Managers to the Asia-Pacific Equity Fund. HSBC is part of HSBC Asset Management,
the global investment  advisory and fund management  business of the HSBC Group,
which,  with  headquarters in London,  is one of the world's largest banking and
financial   organizations.   HSBC  Asset  Management   currently   manages  over
approximately   $49  billion  of  assets   globally   for  a  wide   variety  of
institutional,  retail and private  clients,  with a minimum account size of $10
million for  Asia-Pacific  investors.  As  compensation  for its services to the
Asia-Pacific  Equity  Fund,  the  Investment  Manager pays HSBC a monthly fee in
arrears equal to 1/12 of 0.50% of the Fund's  average  daily net assets  managed
during the month.  For the fiscal period of September 1, 1995  (commencement  of
operations) to June 30, 1996, the Investment  Manager paid portfolio  management
fees to HSBC of $62,403. For the fiscal year ended June 30, 1997, the Investment
Manager paid portfolio management fees to HSBC of $307,103.  For the fiscal year
ended June 30, 1998, the Investment  Manager paid portfolio  management  fees to
HSBC of $221,487.

CRAMER ROSENTHAL MCGLYNN, LLC -- Cramer Rosenthal McGlynn, LLC. (CRM), serves as
Portfolio  Manager to the MidCap Value Fund.  CRM is registered as an investment
adviser under the Investment  Advisers Act of 1940.  The principal  shareholders
and portfolio managers of CRM have significant  experience in managing the money
of pension plans,  endowment funds,  other  institutions and individuals.  CRM's
predecessor  was  founded in 1973 to manage  portfolios  for a select  number of
wealthy  individuals  and their  related  foundations,  pension  plans and other
entities.  The three  founding  principals  of the firm have each  spent over 35
years in the investment business.  CRM manages approximately $4 billion for more
than 200 individual and institutional clients, with a minimum account size of $5
million.  As  compensation  for its  services  to the  MidCap  Value  Fund,  the
Investment  Manager pays CRM a monthly fee in arrears  equal to 1/12 of 0.50% of
the Fund's  average daily net assets  managed  during the month.  For the fiscal
period of September 1, 1995  (commencement  of operations) to June 30, 1996, the
Investment  Manager paid portfolio  management fees to CRM of $125,000.  For the
fiscal  year  ended  June  30,  1997,  the  Investment  Manager  paid  portfolio
management fees to CRM of $193,080. For the fiscal year ended June 30, 1998, the
Investment Manager paid portfolio  management fees to CRM of $339,347.  Accounts
managed by CRM own in the aggregate  approximately 17% of the outstanding voting
securities of Pilgrim Capital.

FORMER PORTFOLIO  MANAGER FOR LARGECAP LEADERS FUND -- Ark Asset Management Co.,
Inc.  (Ark)  served as  Portfolio  Manager  to the  LargeCap  Leaders  Fund from
September 1, 1995 through  October 31, 1997.  For the fiscal period of September
1, 1995  (commencement  of operations) to June 30, 1996, the Investment  Manager
paid portfolio  management fees to Ark of $4,996. For the fiscal year ended June
30, 1997,  the  Investment  Manager  paid  portfolio  management  fees to Ark of
$60,843.  For the  period  from July 1,  1997  through  October  31,  1997,  the
Portfolio Manager paid portfolio management fees to Ark of $48,365.

The Investment  Management and Portfolio  Management  Agreements  will remain in
effect for two years  following  their date of execution,  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 Directors 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  Directors  who are not
"interested  persons" (as defined in the 1940 Act) of the Investment  Manager or
the  Portfolio  Managers  by vote cast in person  at a  meeting  called  for the
purpose of voting on such approval.

The  Investment  Management and Portfolio  Management  Agreements are terminable
without  penalty  with not less than 60 days notice by the Board of Directors 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.  Each of the Investment  Management and Portfolio Management Agreements
will terminate automatically in the event of its "assignment" (as defined in the
1940 Act).
                                      -8-
<PAGE>
DISTRIBUTOR.  Shares of the Funds are  distributed by Pilgrim  Securities,  Inc.
("Pilgrim Securities" or the "Distributor") pursuant to a Distribution Agreement
between the Company 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 Company 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.  The  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 Directors 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 Directors or a majority of the  outstanding
voting  securities  of the  Company.  See  the  Prospectus  of the  Company  for
information on how to purchase and sell shares of the Funds, and the charges and
expenses associated with an investment.

For the fiscal period of September 1, 1995  (commencement of operations) to June
30,  1996,  total  commissions   allowed  to  other  dealers  under  the  Funds'
underwriting  arrangements were approximately  $836,554 for Asia-Pacific  Equity
Fund,  $90,542 for MidCap Value Fund,  and $70,285 for Large Cap Value Fund. For
that  same  period,   the   Distributor   retained   approximately   $28,873  or
approximately  3.3% of the total commissions  assessed on shares of Asia-Pacific
Equity Fund,  approximately  $27,485 or approximately 23.3% of total commissions
assessed  on  shares  of  MidCap  Value  Fund,  and  approximately   $70,285  or
approximately 27.8% of total commissions  assessed on shares of LargeCap Leaders
Fund.

For the fiscal  year ended June 30,  1997,  total  commissions  allowed to other
dealers under the Funds' underwriting  arrangements were approximately  $756,504
for Asia-Pacific  Equity Fund,  $871,644 for MidCap Value Fund, and $479,658 for
LargeCap  Leaders  Fund.  For  that  same  period,   the  Distributor   retained
approximately  $109,236 or approximately 14.4% of the total commissions assessed
on shares of Asia-Pacific  Equity Fund,  approximately  $95,048 or approximately
10.9% of total  commissions  assessed  on  shares  of  MidCap  Value  Fund,  and
approximately  $45,962 or approximately  9.58% of total commissions  assessed on
shares of LargeCap Leaders Fund.

For the fiscal  year ended June 30,  1998,  total  commissions  allowed to other
dealers under the Funds' underwriting  arrangements were approximately  $271,211
for Asia-Pacific Equity Fund, $1,161,599 for MidCap Value Fund, and $185,225 for
LargeCap  Leaders  Fund.  For  that  same  period,   the  Distributor   retained
approximately  $44,451 or approximately 16.42% of the total commissions assessed
on shares of Asia-Pacific  Equity Fund,  approximately  $64,225 or approximately
5.53% of total  commissions  assessed  on  shares  of  MidCap  Value  Fund,  and
approximately  $8,380 or approximately  4.52% of total  commissions  assessed on
shares of LargeCap Leaders Fund.

RULE 12B-1 PLANS.  The Company 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 Company  intends 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, and Class M 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 the 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 the Fund; and with respect to Class M shares
at an annual rate of up to 1.00% of the average  daily net assets of the Class M
shares of the Fund.  The Board of Directors  has  approved  under the Rule 12b-1
Plans  payments  of the  
                                      -9-
<PAGE>
following amounts to the Distributor each month in connection with the offering,
sale,  and  shareholder  servicing  of Class A,  Class B, and  Class M 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; and (iii) 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. Of these amounts, fees equal to an annual rate of 0.25% of the
average daily net assets of each of the Funds is for  shareholder  servicing for
each of the classes.

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% and 0.65% of a Fund's  average  daily net assets of
Class A, Class B, and Class M 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 or B shares and in the 1st month following a purchase of Class M shares. These
fees may be used to cover the expenses of the Distributor  primarily intended to
result  in the sale of  Class A,  Class  B,  and  Class M shares  of the  Funds,
including payments to Authorized 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:  preparation and distribution of advertising materials
and sales  literature;  expenses of organizing  and conducting  sales  seminars;
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; and costs of administering the Rule 12b-1 Plans.

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.  The  Distributor  will
receive payment under the Rule 12b-1 Plan without regard to actual  distribution
expenses it incurs.

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 Directors, including all
of the Directors who are not interested persons of the Company as defined in the
1940 Act, and by the Funds'  shareholders.  Each Rule 12b-1 Plan must be renewed
annually by the Board of  Directors,  including a majority of the  Directors 

                                      -10-
<PAGE>
who are not interested persons of the Company and who have no direct or indirect
financial  interest in the operation of the Rule 12b-1 Plan, cast in person at a
meeting  called for that  purpose.  It is also  required  that the selection and
nomination  of  such  Directors  be  committed  to the  Directors  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 Directors 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 Directors 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  Directors,  including  those
Directors who are not interested persons of the Company,  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 Directors who are not interested persons of the Company, 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  Directors at
least  quarterly on the monies  reimbursed  to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably be
requested  in  connection  with the  payments  made under the Rule 12b-1 Plan in
order to enable the Board to make an informed  determination of whether the Rule
12b-1 Plan should be continued.

Total  distribution  expenses  incurred  by the  Distributor  for the  costs  of
promotion  and  distribution  of each  Fund's  Class A, B, and M shares  for the
fiscal year ended June 30, 1998 were as follows:

                                      -11-
<PAGE>
                                          Class A        Class B        Class M
ASIA-PACIFIC EQUITY FUND
- ------------------------
Advertising...........................   $  6,014       $  4,607       $  2,175
Printing..............................     16,261         12,455          5,881
Salaries & Commissions................    279,677        214,221        101,160
Broker Servicing......................     35,497         27,189         12,839
Miscellaneous.........................      8,977          6,876          3,247

MIDCAP VALUE FUND                       
- -----------------                       
Advertising...........................   $  7,766       $ 11,421       $  3,655
Printing..............................     20,998         30,879          9,881
Salaries & Commissions................    230,972        339,665        108,693
Broker Servicing......................     46,000         67,647         21,647
Miscellaneous.........................     11,951         17,575          5,624

LARGECAP LEADERS FUND
- ---------------------
Advertising...........................   $  2,316       $  4,811       $  1,782
Printing..............................      6,263         13,008          4,818
Salaries & Commissions................     73,852        153,386         56,801
Broker Servicing......................     13,703         28,461         10,541
Miscellaneous.........................      3,526          7,323          2,712

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.

                     SUPPLEMENTAL DESCRIPTION OF INVESTMENTS

Some of the different types of securities in which the Funds may invest, subject
to their  respective  investment  objectives,  policies  and  restrictions,  are
described  in  the  Prospectus  under  "The  Funds'  Investment  Objectives  and
Policies"  and  "Investment  Practices  and  Risk  Considerations."   Additional
information  concerning the  characteristics  and risks of certain of the Funds'
investments are set forth below.

COMMON STOCK,  CONVERTIBLE  SECURITIES  AND OTHER EQUITY  SECURITIES.  The Funds
(other than Strategic Income Fund) will invest in common stocks, which represent
an equity (ownership)  interest in a company.  This ownership interest generally
gives a Fund the right to vote on issues  affecting the  company's  organization
and operations.

The Funds may also buy other  types of  equity  securities  such as  convertible
securities,   preferred  stock,  and  warrants  or  other  securities  that  are
exchangeable  for shares of common stock.  A convertible  security is a 

                                      -12-
<PAGE>
security  that  may be  converted  either  at a stated  price  or rate  within a
specified  period of time into a specified  number of shares of common stock. By
investing in convertible securities,  a Fund seeks the opportunity,  through the
conversion  feature,  to participate in the capital  appreciation  of the common
stock into which the securities  are  convertible,  while  investing at a better
price than may be available on the common stock or obtaining a higher fixed rate
of return than is available on common stocks.

U.S.  GOVERNMENT  SECURITIES.  U.S.  Government  securities include  instruments
issued by the U.S.  Treasury,  such as bills, notes and bonds. These instruments
are direct  obligations of the U.S.  Government  and, as such, are backed by the
full faith and credit of the  United  States.  They  differ  primarily  in their
interest  rates,  the  lengths  of  their  maturities  and the  dates  of  their
issuances.  In addition, U.S. Government securities include securities issued by
instrumentalities  of the  U.S.  Government,  such  as the  Government  National
Mortgage Association,  which are also backed by the full faith and credit of the
United States. Also included in the category of U.S.  Government  securities are
instruments  issued by  instrumentalities  established  or sponsored by the U.S.
Government, such as the Student Loan Marketing Association, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation. While these
securities  are issued,  in general,  under the authority of an Act of Congress,
the U.S. Government is not obligated to provide financial support to the issuing
instrumentalities,   although   under  certain   conditions   certain  of  these
authorities  may borrow from the U.S.  Treasury.  In the case of securities  not
backed  by the full  faith  and  credit  of the  U.S.,  the  investor  must look
principally  to the  agency  or  instrumentality  issuing  or  guaranteeing  the
obligation for ultimate repayment, and may not be able to assert a claim against
the U.S.  itself in the event the  agency or  instrumentality  does not meet its
commitment.   Each  Fund  will  invest  in   securities   of  such  agencies  or
instrumentalities  only when the Portfolio  Manager is satisfied that the credit
risk with respect to any  instrumentality  is  comparable  to the credit risk of
U.S.  government  securities  backed by the full  faith and credit of the United
States.

BANKING  INDUSTRY  OBLIGATIONS.   The  Funds  may  invest  in  banking  industry
obligations,  including certificates of deposit, bankers' acceptances, and fixed
time deposits. A Fund will not invest in obligations issued by a bank unless (i)
the bank is a U.S.  bank and a  member  of the FDIC and (ii) the bank has  total
assets of at least $1  billion  (U.S.)  or, if not,  the  Fund's  investment  is
limited to the FDIC-insured amount of $100,000.

WHEN-ISSUED  SECURITIES AND  DELAYED-DELIVERY  TRANSACTIONS.  In order to secure
prices or yields deemed advantageous at the time, the Funds may purchase or sell
securities on a when-issued or a  delayed-delivery  basis.  The Funds will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the  purpose of  leverage.  In such  transactions,  delivery  of the
securities  occurs  beyond  the  normal  settlement  periods,  but no payment or
delivery  is made by, and no  interest  accrues to, the Fund prior to the actual
delivery or payment by the other party to the  transaction.  Due to fluctuations
in the value of  securities  purchased on a  when-issued  or a  delayed-delivery
basis,  the yields  obtained on such  securities may be higher or lower than the
yields  available in the market on the dates when the  investments  are actually
delivered to the buyers.  Similarly, the sale of securities for delayed-delivery
can involve the risk that the prices  available  in the market when  delivery is
made may actually be higher than those obtained in the transaction  itself. Each
Fund will establish a segregated  account with the Custodian  consisting of cash
and/or  liquid  assets in an amount equal to the amount of its  when-issued  and
delayed-delivery commitments which will be "marked to market" daily.

HIGH  YIELD  SECURITIES.  The  Strategic  Income  Fund may  invest in High Yield
Securities,  which are debt  securities that are rated lower than Baa by Moody's
or BBB by S&P. These securities tend to have speculative  characteristics or are
speculative,  and  generally  involve more risk of loss of principal  and income
than  higher-rated  securities.  Also,  their  yields and market  values tend to
fluctuate  more.  
                                      -13-
<PAGE>
Fluctuations in value do not affect the cash income from the securities, but are
reflected in the Strategic  Income Fund's net asset value. The greater risks and
fluctuations  in yield and value occur,  in part,  because  investors  generally
perceive issuers of lower-rated and unrated securities to be less creditworthy.

Many fixed income  securities  may present risks based on payment  expectations.
For example,  a fixed income security may contain redemption or call provisions.
These  features  allow  an  issuer  to  call,  or buy  back,  these  securities.
Typically,  an issuer will exercise a redemption or call provision when interest
rates decline,  in order to take advantage of less expensive  financing.  Such a
call or  redemption is usually made at par or at a premium to par. The Strategic
Income  Fund  then  would be forced to  replace a called  security  with a lower
yielding  security,  thereby  decreasing  the Fund's rate of return.  High Yield
Securities are subject to special risks.  These risks cannot be eliminated,  but
may be reduced significantly through a careful analysis of prospective portfolio
securities and through diversification.

The yields earned on High Yield Securities  generally are related to the quality
ratings assigned by recognized  rating agencies.  The medium- to lower-rated and
unrated  securities  in which the  Strategic  Income Fund  invests tend to offer
higher yields than those of other securities with the same maturities because of
the additional risks associated with them. These risks include:

HIGH YIELD BOND MARKET. A severe economic downturn or increase in interest rates
might  increase  defaults in High Yield  Securities  issued by highly  leveraged
companies.  An  increase in the number of defaults  could  adversely  affect the
value of all outstanding High Yield  Securities,  thus disrupting the market for
such securities.

SENSITIVITY  TO INTEREST RATE AND ECONOMIC  CHANGES.  High Yield  Securities are
more sensitive to adverse economic changes or individual corporate  developments
but less  sensitive to interest  rate  changes  than are Treasury or  investment
grade bonds. As a result, when interest rates rise, causing bond prices to fall,
the value of high  yield  debt  bonds  tend not to fall as much as  Treasury  or
investment  grade  corporate  bonds.  Conversely  when interest rates fall, high
yield bonds tend to underperform  Treasury and investment  grade corporate bonds
because  high yield bond  prices tend not to rise as much as the prices of these
bonds.

The financial  stress resulting from an economic  downturn or adverse  corporate
developments  could have a greater  negative effect on the ability of issuers of
High Yield Securities to service their principal and interest payments,  to meet
projected  business  goals  and to  obtain  additional  financing  than  on more
creditworthy issuers.  Holders of High Yield Securities could also be at greater
risk because High Yield  Securities are generally  unsecured and  subordinate to
senior  debt  holders  and  secured  creditors.  If the  issuer of a High  Yield
Security  owned by the  Strategic  Income  Fund  defaults,  the  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 Securities and the Strategic Income Fund's net asset
value.  Furthermore,  in the case of High Yield  Securities  structured  as zero
coupon or pay-in-kind securities,  their market prices are affected to a greater
extent by interest  rate  changes and thereby  tend to be more  speculative  and
volatile than securities which pay in cash.

PAYMENT  EXPECTATIONS.  High Yield  Securities  present  risks  based on payment
expectations.  For example, High Yield Securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market,  the Strategic Income Fund may have to replace the security with a lower
yielding  security,  resulting in a decreased  return for  investors.  Also, the
value of High Yield Securities may decrease in a rising interest rate market. In
addition,  there is a higher risk of non-payment of interest and/or principal by
issuers of High Yield Securities than in the case of investment grade bonds.

                                      -14-
<PAGE>
LIQUIDITY AND VALUATION  RISKS.  Lower-rated  bonds are typically traded among a
smaller  number  of  broker-dealers  rather  than in a broad  secondary  market.
Purchasers  of High  Yield  Securities  tend  to be  institutions,  rather  than
individuals,  a factor that further limits the secondary  market.  To the extent
that no established  retail secondary market exists,  many High Yield Securities
may not be as liquid as Treasury and investment  grade bonds. The ability of the
Company's  Board of  Directors  to value or sell High Yield  Securities  will be
adversely  affected  to the extent  that such  securities  are thinly  traded or
illiquid.  Adverse publicity and investor  perceptions,  whether or not based on
fundamental  analysis,  may  decrease  the  values and  liquidity  of High Yield
Securities more than other securities,  especially in a thinly-traded market. To
the extent the  Strategic  Income Fund owns  illiquid or  restricted  High Yield
Securities, these securities may involve special registration  responsibilities,
liabilities and costs, and liquidity and valuation difficulties.

ZERO COUPON AND PAY-IN-KIND SECURITIES.  The Strategic Income Fund may invest in
zero coupon and  pay-in-kind  securities,  which do not pay interest in cash. In
the event of a default, the Fund may receive no return on its investment.

TAXATION. Special tax considerations are associated with investing in High Yield
Securities  structured as zero coupon or pay-in-kind  securities.  The Strategic
Income Fund  reports the interest on these  securities  as income even though it
receives no cash interest until the security's maturity or payment date.

LIMITATIONS  OF CREDIT  RATINGS.  The  credit  ratings  assigned  to High  Yield
Securities  may not accurately  reflect the true risks of an investment.  Credit
ratings typically evaluate the safety of principal and interest payments, rather
than the  market  value  risk of High  Yield  Securities.  In  addition,  credit
agencies may fail to adjust credit  ratings to reflect rapid changes in economic
or company  conditions  that affect a  security's  market  value.  Although  the
ratings of recognized  rating  services such as Moody's and S&P are  considered,
the  Investment  Manager  primarily  relies on its own  credit  analysis,  which
includes a study of existing debt, capital  structure,  ability to service debts
and to pay  dividends,  the issuer's  sensitivity  to economic  conditions,  its
operating  history and the current trend of earnings.  Thus, the  achievement of
the Strategic  Income Fund's  investment  objective may be more dependent on the
Investment Manager's own credit analysis than might be the case for a fund which
invests in higher quality bonds. The Investment Manager continually monitors the
investments  in the Strategic  Income Fund's  portfolio and carefully  evaluates
whether to dispose of or retain High Yield  Securities whose credit ratings have
changed.  The Strategic  Income Fund may retain a security whose rating has been
changed.

OPTION  WRITING.  The  Strategic  Income Fund may write only covered call option
contracts.  Currently,  the  principal  exchanges  on which such  options may be
written are the Chicago Board Option Exchange and the American, Philadelphia and
Pacific Stock Exchanges.  In addition,  and in certain instances,  the Strategic
Income Fund may purchase and sell options in the  over-the-counter  market ("OTC
Options").  The  Strategic  Income  Fund's  ability  to close  option  positions
established in the over-the-counter  market may be more limited than in the case
of  exchange-traded  options.  The  writing  of  option  contracts  is a  highly
specialized  activity that involves  investment  techniques and risks  different
from those ordinarily associated with investment companies.  A call option gives
the  purchaser of the option the right to buy the  underlying  security from the
writer  at the  exercise  price  at any  time  prior  to the  expiration  of the
contract,  regardless  of the  market  price of the  security  during the option
period.  The premium paid to the writer is the consideration for undertaking the
obligations  under the option  contract.  The writer forgoes the  opportunity to
profit from an increase in the market price of the underlying security above the
exercise price so long as the option remains open and covered, except insofar as
the premium represents such a profit.

The Strategic Income Fund may purchase options only to close out a position.  In
order to close out a position,  the  Strategic  Income Fund will make a "closing
purchase  transaction"-- the purchase of a call 

                                      -15-
<PAGE>
option on the same security with the same exercise price and expiration  date as
the call option that it has previously written on any particular  security.  The
Strategic Income Fund will effect a closing purchase  transaction so as to close
out any  existing  call  option  on a  security  that it  intends  to sell.  The
Strategic  Income  Fund will  realize  a profit or loss from a closing  purchase
transaction if the amount paid to execute a closing purchase transaction is less
or more than the amount received from the sale thereof.  In determining the term
of any option  written,  the  Strategic  Income Fund will  consider the Internal
Revenue Code's  limitations  on the sale or  disposition of securities  held for
less than three months in order to maintain its status as a regulated investment
company.

The staff of the  Securities and Exchange  Commission  (the "SEC") has taken the
position that purchased  over-the-counter options ("OTC Options") and the assets
used as cover for written OTC Options are  illiquid  securities.  The  Strategic
Income Fund will write OTC Options only with primary U.S. Government  Securities
dealers  recognized by the Board of Governors of the Federal  Reserve  System or
member banks of the Federal Reserve System  ("primary  dealers").  In connection
with these special arrangements,  the Strategic Income Fund intends to establish
standards  for the  creditworthiness  of the primary  dealers  with which it may
enter into OTC Option  contracts and those  standards,  as modified from time to
time, will be implemented and monitored by the Investment  Manager.  Under these
special  arrangements,  the Fund will enter into contracts with primary  dealers
that  provide that the Fund has the absolute  right to  repurchase  an option it
writes at any time at a repurchase price which represents the fair market value,
as determined in good faith through negotiation between the parties, but that in
no event will exceed a price determined  pursuant to a formula  contained in the
contract.  Although  the  specific  details  of the  formula  may  vary  between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option,  plus the
amount,  if any, by which the option is  "in-the-money."  The formula  will also
include a factor to account for the difference between the price of the security
and the strike price of the option if the option is written  "out-of-the-money."
"Strike price" refers to the price at which an option will be exercised.  "Cover
assets" refers to the amount of cash or liquid assets that must be segregated to
collateralize the value of the futures contracts written by the Fund. Under such
circumstances,  the Strategic  Income Fund will treat as illiquid that amount of
the  cover  assets  equal to the  amount  by which  the  formula  price  for the
repurchase of the option is greater than the amount by which the market value of
the security subject to the option exceeds the exercise price of the option (the
amount by which the option is  "in-the-money").  Although  each  agreement  will
provide that the Strategic Income Fund's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined  pursuant to the
formula), the formula price will not necessarily reflect the market value of the
option  written.  Therefore,  the  Strategic  Income  Fund  might  pay  more  to
repurchase  the OTC  Option  contract  than the Fund  would  pay to close  out a
similar exchange traded option.

The Strategic Income Fund will receive a premium (less any commissions) from the
writing of such contracts,  and it is believed that the total return to the Fund
can be increased  through such premiums  consistent  with the Fund's  investment
objectives.  Generally,  the Fund  expects  that  options  written by it will be
conducted on recognized securities exchanges.

In determining the Strategic  Income Fund's net asset value,  the current market
value of any option written by the Fund is subtracted  from net asset value.  If
the current market value of the option exceeds the premium received by the Fund,
the excess  represents  an  unrealized  loss,  and,  conversely,  if the premium
exceeds the current market value of the option,  such excess would be unrealized
gain.

FINANCIAL FUTURES  CONTRACTS AND RELATED OPTIONS.  The Strategic Income Fund may
use financial  futures contracts and related options to hedge against changes in
the market value of its portfolio  securities  or securities  that it intends to
purchase.  Hedging is  accomplished  when an  investor  takes a position  in the

                                      -16-
<PAGE>
futures  market  opposite  to his cash market  position.  There are two types of
hedges -- long (or buying) and short (or selling) hedges.  Historically,  prices
in the futures  market have tended to move in concert  with cash market  prices,
and  prices  in  the  futures  market  have  maintained  a  fairly   predictable
relationship  to prices in the cash market.  Thus, a decline in the market value
of securities in the Strategic Income Fund's portfolio may be protected  against
to  a  considerable  extent  by  gains  realized  on  futures  contracts  sales.
Similarly,  it is possible to protect against an increase in the market price of
securities that the Strategic  Income Fund may wish to purchase in the future by
purchasing futures contracts.

The Strategic Income Fund may purchase or sell any financial  futures  contracts
which are traded on a recognized  exchange or board of trade.  Financial futures
contracts  consist of interest  rate  futures  contracts  and  securities  index
futures  contracts.  A public market  presently  exists in interest rate futures
contracts   covering   long-term  U.S.  Treasury  bonds,  U.S.  Treasury  notes,
three-month U.S. Treasury bills and GNMA certificates.  Securities index futures
contracts  are  currently  traded  with  respect  to the  Standard  & Poor's 500
Composite Stock Price Index and such other  broad-based  stock market indices as
the New York Stock Exchange  Composite  Stock Index and the Value Line Composite
Stock Price Index. A clearing corporation  associated with the exchange or board
of trade on which a financial futures contract trades assumes responsibility for
the completion of transactions  and also guarantees that open futures  contracts
will be performed.

An  interest  rate  futures  contract  obligates  the seller of the  contract to
deliver,  and the purchaser to take  delivery of, the interest  rate  securities
called for in the contract at a specified  future time and at a specified price.
A stock  index  assigns  relative  values to the common  stocks  included in the
index,  and the index fluctuates with changes in the market values of the common
stocks so included.  A stock index futures contract is an agreement  pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified  dollar amount times the  difference  between the stock index value at
the close of the last  trading  day of the  contract  and the price at which the
futures contract is originally struck. An option on a financial futures contract
gives the  purchaser  the right to assume a  position  in the  contract  (a long
position if the option is a call and short position if the option is a put) at a
specified exercise price at any time during the period of the option.

In contrast to the situation when the Strategic Income Fund purchases or sells a
security,  no security is delivered or received by the Fund upon the purchase or
sale of a financial  futures contract.  Initially,  the Fund will be required to
segregate with its custodian  bank an amount of cash and/or liquid assets.  This
amount is known as initial margin and is in the nature of a performance  bond or
good faith deposit on the contract.  The current initial margin deposit required
per contract is approximately  5% of the contract amount.  Brokers may establish
deposit  requirements  higher than this  minimum.  Subsequent  payments,  called
variation  margin,  will be made to and from the account on a daily basis as the
price of the futures  contract  fluctuates.  This process is known as marking to
market.  At the time of  purchase  of a futures  contract  or a call option on a
futures  contract,  an  amount of cash,  U. S.  Government  securities  or other
appropriate  high-grade  securities  equal to the  market  value of the  futures
contract  minus the Strategic  Income Fund's initial margin deposit with respect
thereto will be segregated with the Fund's custodian bank to collateralize fully
the position and thereby  ensure that it is not  leveraged.  The extent to which
the Strategic Income Fund may enter into financial futures contracts and related
options may also be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.

The writer of an option on a futures  contract  is  required  to deposit  margin
pursuant to requirements similar to those applicable to futures contracts.  Upon
exercise  of an  option on a  futures  contract,  the  delivery  of the  futures
position  by the  writer of the  option  to the  holder  of the  option  will be
accompanied  by  delivery  of the  accumulated  balance in the  writer's  margin
account.  This amount  will be equal to the amount by which the 

                                      -17-
<PAGE>
market  price of the futures  contract at the time of exercise  exceeds,  in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.

Although  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  the  making  or taking of  delivery.  Closing  out is
accomplished by effecting an offsetting transaction.  A futures contract sale is
closed out by  effecting  a futures  contract  purchase  for the same  aggregate
amount of securities  and the same delivery  date. If the sale price exceeds the
offsetting  purchase price, the seller  immediately would be paid the difference
and would  realize a gain.  If the  offsetting  purchase  price exceeds the sale
price, the seller immediately would pay the difference and would realize a loss.
Similarly,  a futures  contract  purchase  is closed out by  effecting a futures
contract  sale  for the  same  securities  and the same  delivery  date.  If the
offsetting sale price exceeds the purchase price,  the purchaser would realize a
gain,  whereas if the purchase  price  exceeds the  offsetting  sale price,  the
purchaser would realize a loss.

The Strategic  Income Fund will pay commissions on financial  futures  contracts
and related  options  transactions.  These  commissions may be higher than those
that would apply to purchases and sales of securities directly.

LIMITATIONS ON FUTURES CONTRACTS AND RELATED OPTIONS.  The Strategic Income Fund
may not engage in transactions in financial futures contracts or related options
for speculative  purposes but only as a hedge against anticipated changes in the
market  value of its  portfolio  securities  or  securities  that it  intends to
purchase.  The Strategic Income Fund may not purchase or sell financial  futures
contracts or related options if, immediately  thereafter,  the sum of the amount
of initial margin  deposits on the Fund's  existing  futures and related options
positions  and the  premiums  paid for related  options  would  exceed 2% of the
market value of the Fund's  total  assets  after taking into account  unrealized
profits and losses on any such  contracts.  At the time of purchase of a futures
contract  or a call  option on a  futures  contract,  an  amount  of cash,  U.S.
Government securities or other appropriate  high-grade debt obligations equal to
the market value of the futures contract minus the Fund's initial margin deposit
with  respect  thereto  will be  segregated  with the Fund's  custodian  bank to
collateralize fully the position and thereby ensure that it is not leveraged.

The extent to which the Strategic  Income Fund may enter into financial  futures
contracts  and related  options also may be limited by the  requirements  of the
Internal Revenue Code for qualification as a regulated  investment company.  See
"Federal Tax Treatment of Dividends and Distributions."

RISKS RELATING TO FUTURES  CONTRACTS AND RELATED  OPTIONS.  Positions in futures
contracts  and  related  options  may be  closed  out only on an  exchange  that
provides a secondary market for such contracts or options.  The Strategic Income
Fund will enter into an option or futures position only if there appears to be a
liquid  secondary  market.  However,  there  can be no  assurance  that a liquid
secondary market will exist for any particular option or futures contract at any
specific  time.  Thus,  it may not be possible to close out a futures or related
option  position.  In the case of a futures  position,  in the event of  adverse
price movements the Strategic  Income Fund would continue to be required to make
daily margin payments.  In this situation,  if the Fund has insufficient cash to
meet daily margin  requirements  it may have to sell  portfolio  securities at a
time  when it may be  disadvantageous  to do so.  In  addition,  the Fund may be
required  to take or make  delivery  of the  securities  underlying  the futures
contracts it holds. The inability to close out futures positions also could have
an adverse impact on the Fund's ability to hedge its portfolio effectively.

There are several  risks in  connection  with the use of futures  contracts as a
hedging device. While hedging can provide protection against an adverse movement
in market prices, it can also preclude a hedger's  opportunity to benefit from a
favorable  market  movement.  In addition,  investing in futures  contracts  and

                                      -18-
<PAGE>
options on futures  contracts will cause the Fund to incur additional  brokerage
commissions and may cause an increase in the Fund's portfolio turnover rate.

The successful use of futures  contracts and related options also depends on the
ability of the Investment Manager to forecast correctly the direction and extent
of market  movements  within a given time  frame.  To the extent  market  prices
remain stable during the period a futures contract or option is held by the Fund
or such prices move in a direction  opposite to that  anticipated,  the Fund may
realize a loss on the hedging  transaction  that is not offset by an increase in
the value of its portfolio securities.  As a result, the Strategic Income Fund's
return  for the period  may be less than if it had not  engaged  in the  hedging
transaction.

The use of futures  contracts by the Strategic  Income Fund involves the risk of
imperfect  correlation  in  movements  in the  price of  futures  contracts  and
movements in the price of the securities that are being hedged.  If the price of
the futures  contract moves more or less than the price of the securities  being
hedged, a Fund will experience a gain or loss that will not be completely offset
by movements in the price of the securities. It is possible that, where the Fund
has sold  futures  contracts  to hedge its  portfolio  against a decline  in the
market,  the market may advance and the value of  securities  held in the Fund's
portfolio  may  decline.  If this  occurred,  the Fund  would  lose money on the
futures  contract and would also  experience a decline in value in its portfolio
securities.  Where futures are purchased to hedge against a possible increase in
the  prices of  securities  before  the 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;  if the Fund  then  determines  not to invest in
securities  (or options) at that time because of concern as to possible  further
market decline or for other reasons, the Fund will realize a loss on the futures
that  would  not be  offset  by a  reduction  in  the  price  of the  securities
purchased.

The market prices of futures  contracts may be affected if  participants  in the
futures  market  elect  to  close  out  their  contracts   through   off-setting
transactions  rather than to meet margin deposit  requirements.  In such a case,
distortions  in the normal  relationship  between the cash and  futures  markets
could  result.  Price  distortions  could also  result if  investors  in futures
contracts opt to make or take delivery of the underlying  securities rather than
to  engage  in  closing  transactions  due to  the  resultant  reduction  in the
liquidity of the futures  market.  In addition,  due to the fact that,  from the
point of view of  speculators,  the deposit  requirements in the futures markets
are  less  onerous  than  margin  requirements  in the  cash  market,  increased
participation  by speculators in the futures market could cause  temporary price
distortions.  Due to the possibility of price  distortions in the futures market
and because of the  imperfect  correlation  between  movements  in the prices of
securities and movements in the prices of futures contracts,  a correct forecast
of market trends may still not result in a successful transaction.

Compared to the  purchase or sale of futures  contracts,  the purchase of put or
call options on futures  contracts  involves  less  potential  risk for the Fund
because the  maximum  amount at risk is the  premium  paid for the options  plus
transaction costs.  However,  there may be circumstances when the purchase of an
option  on a  futures  contract  would  result  in a loss to the Fund  while the
purchase or sale of the futures contract would not have resulted in a loss, such
as when there is no movement in the price of the underlying securities.

MORTGAGE-RELATED  SECURITIES.  The  Strategic  Income Fund may invest in certain
types of mortgage  related  securities.  One type of  mortgage-related  security
includes  certificates that represent pools of mortgage loans assembled for sale
to investors by various governmental and private organizations. These securities
provide a monthly  payment,  which  consists of both an interest and a principal
payment that is in effect a  "pass-through"  of the monthly payment made by each
individual  borrower on his or her  residential  mortgage  loan, net of any fees
paid to the issuer or  guarantor  of such  securities.  Additional  payments are

                                      -19-
<PAGE>
caused by  repayments  of principal  resulting  from the sale of the  underlying
residential property, refinancing, or foreclosure, net of fees or costs that may
be incurred.  Some certificates (such as those issued by the Government National
Mortgage Association) are described as "modified pass-through." These securities
entitle the holder to receive all interest and  principal  payments  owed on the
mortgage pool, net of certain fees, regardless of whether the mortgagor actually
makes the payment.

A major  governmental  guarantor of pass-through  certificates is the Government
National Mortgage Association ("GNMA"). GNMA guarantees, with the full faith and
credit of the United  States  government,  the timely  payments of principal and
interest on securities issued by institutions  approved by GNMA (such as savings
and loan  institutions,  commercial  banks and  mortgage  bankers) are backed by
pools of FHA-insured or VA-guaranteed  mortgages.  Other governmental guarantors
(but not backed by the full faith and  credit of the United  States  Government)
include the Federal National Mortgage  Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA purchases residential mortgages from a
list of approved  seller/services  that include  state and  federally  chartered
savings and loan  associations,  mutual saving banks,  commercial banks,  credit
unions and mortgage bankers.

GNMA CERTIFICATES.  Certificates of the GNMA ("GNMA  Certificates")  evidence an
undivided  interest in a pool of mortgage loans. GNMA  Certificates  differ from
bonds,  in that  principal  is paid  back  monthly  as  payments  of  principal,
including  prepayments,  on the  mortgages  in the  underlying  pool are  passed
through to  holders of GNMA  Certificates  representing  interests  in the pool,
rather than returned in a lump sum at maturity.  The GNMA  Certificates that the
Strategic  Income  Fund  may  purchase  are the  "modified  pass-through"  type.
"Modified  pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid or owed to the mortgage pool, net of
fees paid or due to the  "issuer"  and GNMA  regardless  of  whether  or not the
mortgagor actually makes the payment.

GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal  and interest on  securities  backed by a pool of mortgages
insured by the  Federal  Housing  Administration  ("FHA") or the  Farmers'  Home
Administration  ("FMHA") or  guaranteed by the Veterans  Administration  ("VA").
GNMA is also empowered to borrow without limitation from the U.S.  Treasury,  if
necessary, to make payments required under its guarantee.

LIFE OF GNMA  CERTIFICATES.  The average life of a GNMA Certificate is likely to
be substantially  less than the stated maturity of the mortgages  underlying the
securities.  Prepayments  of principal by mortgagors  and mortgage  foreclosures
will usually  result in the return of the greater  part of principal  investment
long before the maturity of the  mortgages in the pool.  Foreclosures  impose no
risk of loss of the  principal  balance  of a  Certificate,  because of the GNMA
guarantee,  but foreclosure may impact the yield to shareholders  because of the
need to reinvest  proceeds of  foreclosure.  As  prepayment  rates of individual
mortgage pools vary widely, it is not possible to predict accurately the average
life of a particular issue of GNMA Certificates.  However,  statistics published
by the FHA indicate  that the average life of single family  dwelling  mortgages
with 25 to 30-year  maturities,  the type of mortgages backing the vast majority
of GNMA  Certificates,  is  approximately  12 years.  Prepayments  are likely to
increase in periods of falling  interest  rates.  It is  customary to treat GNMA
Certificates  as 30-year  mortgage-backed  securities  that prepay  fully in the
twelfth year.

YIELD CHARACTERISTICS OF GNMA CERTIFICATES.  The coupon rate of interest of GNMA
Certificates  is lower  than the  interest  rate  paid on the  VA-guaranteed  or
FHA-insured  mortgages  underlying the  certificates,  by the amount of the fees
paid to GNMA and the  issuer.  The  coupon  rate by  itself,  however,  does not
indicate  the  yield  that  will be earned  on GNMA  Certificates.  First,  GNMA
Certificates  may be issued at a premium or discount  rather  than at par,  and,
after issuance, GNMA Certificates may trade in the secondary market at a premium
or discount.  Second,  interest is earned monthly,  rather than semi-annually as
with traditional 
                                      -20-
<PAGE>
bonds;  monthly  compounding  raises the effective  yield earned.  Finally,  the
actual yield of a GNMA Certificate is influenced by the prepayment experience of
the  mortgage  pool  underlying  it. For  example,  if interest  rates  decline,
prepayments may occur faster than had been originally projected and the yield to
maturity and the investment income of the Fund would be reduced.

FHLMC SECURITIES.  "FHLMC" is a federally chartered  corporation created in 1970
through  enactment of Title III of the Emergency  Home Finance Act of 1970.  Its
purpose  is  to  promote  development  of  a  nationwide   secondary  market  in
conventional  residential  mortgages.  The FHLMC  issues  two types of  mortgage
pass-through  securities,   mortgage  participation   certificates  ("PCs")  and
guaranteed  mortgage  certificates  ("GMCs").  PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal  payments
made or owed on the  underlying  pool.  The FHLMC  guarantees  timely payment of
interest on PCs and the ultimate payment of principal.  Like GNMA  Certificates,
PCs are assumed to be prepaid fully in their twelfth year. GMCs also represent a
pro  rata  interest  in a pool of  mortgages.  However,  these  instruments  pay
interest  annually  and  return  principal  once a year  in  guaranteed  minimum
payments.  The expected average life of these  securities is  approximately  ten
years.

FNMA SECURITIES. "FNMA" is a federally chartered and privately owned corporation
that was established in 1938 to create a secondary  market in mortgages  insured
by the  FHA.  It was  originally  established  as a  government  agency  and was
transformed into a private  corporation in 1968. FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates  in that each FNMA  Certificate  represents a pro rata share of all
interest  and  principal  payments  made or owed on the  underlying  pool.  FNMA
guarantees  timely payment of interest on FNMA  certificates and the full return
of  principal.  Like GNMA  Certificates,  FNMA  Certificates  are  assumed to be
prepaid fully in twelfth year.

Commercial  banks,  savings and loan  institutions,  private mortgage  insurance
companies,  mortgage  bankers and other  secondary  market  issuers  also create
pass-through pools of conventional  residential mortgage loans. Such issuers may
in addition be the  originators of the underlying  mortgage loans as well as the
guarantors   of  the   pass-through   certificates.   Pools   created   by  such
non-governmental   issuers   generally  offer  a  higher  rate  of  return  than
governmental  pools  because  there  are  no  direct  or  indirect  governmental
guarantees of payments in the former pools. However,  timely payment of interest
and  principal of these pools may be supported by various  forms of insurance or
guarantees,  including  individual loan, title,  pool and hazard insurance.  The
insurance and guarantees are issued by government entities, private insurers and
the mortgage poolers.

The  Strategic  Income Fund expects that  governmental  or private  entities may
create  mortgage loan pools  offering  pass-through  investments  in addition to
those described above. As new types of pass-through securities are developed and
offered to investors,  the Investment Manager may, consistent with the Strategic
Income Fund's investment objectives, policies and restrictions,  consider making
investments in such new types of securities.

Other types of  mortgage-related  securities  include debt  securities  that are
secured,  directly or  indirectly,  by  mortgages on  commercial  real estate or
residential  rental  properties,  or by first liens on residential  manufactured
homes (as  defined  in  section  603(6)  of the  National  Manufactured  Housing
Construction and Safety Standards Act of 1974),  whether such manufactured homes
are considered  real or personal  property under the laws of the states in which
they are located.

Securities  in  this  investment  category  include,   among  others,   standard
mortgage-backed  bonds and newer collateralized  mortgage obligations  ("CMOs").
Mortgage-backed bonds are secured by pools of mortgages, but unlike pass-through
securities,  payments  to  bondholders  are not  determined  by  payments on the

                                      -21-
<PAGE>
mortgages.   The  bonds  consist  of  a  single  class,  with  interest  payable
periodically  and  principal  payable on the stated date of maturity.  CMOs have
characteristics of both pass-through  securities and mortgage-backed bonds. CMOs
are  secured  by  pools of  mortgages,  typically  in the  form of  "guaranteed"
pass-through certificates such as GNMA, FNMA, or FHLMC securities.  The payments
on the collateral securities determine the payments to bondholders, but there is
not a direct  "pass-through"  of payments.  CMOs are  structured  into  multiple
classes,  each  bearing  a  different  date of  maturity.  Monthly  payments  of
principal received from the pool of underlying mortgages, including prepayments,
is first returned to investors  holding the shortest  maturity class.  Investors
holding the longest  maturity  class  receive  principal  only after the shorter
maturity classes have been retired.

CMOs are issued by entities that operate under order from the SEC exempting such
issuers from the  provisions of the 1940 Act. Until  recently,  the staff of the
SEC had taken the position that such issuers were investment companies and that,
accordingly,  an  investment  by an  investment  company  (such as the Strategic
Income Fund) in the  securities  of such issuers was subject to the  limitations
imposed  by  Section  12 of the 1940  Act.  However,  in  reliance  on SEC staff
interpretations,  the Strategic  Income Fund may invest in securities  issued by
certain  "exempted  issuers"  without regard to the limitations of Section 12 of
the 1940 Act. In its interpretation, the SEC staff defined "exempted issuers" as
unmanaged,  fixed asset issuers that:  (a) invest  primarily in  mortgage-backed
securities;  (b) do not  issue  redeemable  securities  as  defined  in  Section
2(a)(32)  of the 1940 Act;  (c)  operate  under  the  general  exemptive  orders
exempting  them from all  provisions of the 1940 Act; and (d) are not registered
or regulated under the 1940 Act as investment companies.

Investments in mortgage-related  securities involve certain risks. In periods of
declining  interest  rates,  prices  of fixed  income  securities  tend to rise.
However,  during such periods,  the rate of  prepayment of mortgages  underlying
mortgage-related  securities  tends to  increase,  with  the  result  that  such
prepayments  must be reinvested by the issuer at lower rates.  In addition,  the
value of such securities may fluctuate in response to the market's perception of
the creditworthiness of the issuers of mortgage-related  securities owned by the
Strategic Income Fund. Because  investments in  mortgage-related  securities are
interest  sensitive,  the  ability  of  the  issuer  to  reinvest  favorably  in
underlying mortgages may be limited by government  regulation or tax policy. For
example, action by the Board of Governors of the Federal Reserve System to limit
the growth of the  nation's  money supply may cause  interest  rates to rise and
thereby reduce the volume of new residential mortgages.  Additionally,  although
mortgages and  mortgage-related  securities are generally supported by some form
of government or private guarantees and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.  Further,
stripped  mortgage-backed  securities  are likely to  experience  greater  price
volatility than other types of mortgage securities. The yield to maturity on the
interest  only class is  extremely  sensitive,  both to  changes  in  prevailing
interest rates and to the rate of principal payments (including  prepayments) on
the  underlying  mortgage  assets.  Similarly,  the  yield  to  maturity  on CMO
residuals  is  extremely  sensitive  to  prepayments  on the related  underlying
mortgage assets.  In addition,  if a series of a CMO includes a class that bears
interest  at an  adjustable  rate,  the yield to  maturity  on the  related  CMO
residual  will also be extremely  sensitive to changes in the level of the index
upon  which  interest  rate  adjustments  are made.  A Fund  could fail to fully
recover its initial  investment in a CMO residual or a stripped  mortgage-backed
security.

SUBORDINATED  MORTGAGE SECURITIES.  The Strategic Income Fund may also invest in
subordinated  mortgage securities that have certain  characteristics and certain
associated risks. In general, the subordinated  mortgage securities in which the
Fund may invest consist of a series of certificates  issued in multiple  classes
with a stated maturity or final  distribution  date. One or more classes of each
series may be entitled to receive  distributions  allocable  only to  principal,
principal prepayments,  interest or any combination thereof prior to one or more
other  classes,  or only  after the  occurrence  of certain  events,  and may be
subordinated in the right to receive such  distributions on such certificates to
one or more senior  classes of  certificates.  The 

                                      -22-
<PAGE>
rights  associated  with  each  class  of  certificates  are  set  forth  in the
applicable  pooling and servicing  agreement,  form of certificate  and offering
documents for the certificates.

The subordination terms are usually designed to decrease the likelihood that the
holders of senior  certificates  will experience losses or delays in the receipt
of  their   distributions  and  to  increase  the  likelihood  that  the  senior
certificate  holders  will receive  aggregate  distributions  of  principal  and
interest in the amounts anticipated.  Generally,  pursuant to such subordination
terms, distributions arising out of scheduled principal,  principal prepayments,
interest or any  combination  thereof that otherwise  would be payable to one or
more other  classes of  certificates  of such  series  (i.e.,  the  subordinated
certificates) are paid instead to holders of the senior certificates.  Delays in
receipt of scheduled payments on mortgage loans and losses on defaulted mortgage
loans  are  typically  borne  first  by  the  various  classes  of  subordinated
certificates and then by the holders of senior certificates.

In some cases, the aggregate losses in respect of defaulted  mortgage loans that
must  be  borne  by  the  subordinated   certificates  and  the  amount  of  the
distributions  otherwise  distributable  on the subordinated  certificates  that
would,  under certain  circumstances,  be  distributable  to senior  certificate
holders  may  be  limited  to  a  specified  amount.   All  or  any  portion  of
distributions otherwise payable to holders of subordinated  certificates may, in
certain  circumstances,  be deposited into one or more reserve  accounts for the
benefit of the senior certificate holders. Since a greater risk of loss is borne
by the subordinated  certificate  holders,  such  certificates  generally have a
higher stated yield than the senior certificates.

Interest  on the  certificates  generally  accrues  on the  aggregate  principal
balance of each class of  certificates  entitled to  interest  at an  applicable
rate. The  certificate  interest rate may be a fixed rate, a variable rate based
on current  values of an objective  interest index or a variable rate based on a
weighted  average of the  interest  rate on the  mortgage  loans  underlying  or
constituting the mortgage assets. In addition, the underlying mortgage loans may
have variable interest rates.

Generally,  to the extent  funds are  available,  interest  accrued  during each
interest  accrual period on each class of  certificates  entitled to interest is
distributable  on  certain  distribution  dates  until the  aggregate  principal
balance of the certificates of such class has been distributed in full.

The amount of interest that accrues during any interest  accrual period and over
the  life of the  certificates  depends  primarily  on the  aggregate  principal
balance of the class of certificates, which, unless otherwise specified, depends
primarily on the principal  balance of the mortgage  assets for each such period
and the rate of payment  (including  prepayments) of principal of the underlying
mortgage loans over the life of the trust.

A  series  of  certificates  may  consist  of one or more  classes  as to  which
distributions allocable to principal will be allocated.  The method by which the
amount of principal to be distributed on the  certificates on each  distribution
date is calculated and the manner in which such amount could be allocated  among
classes varies and could be effected  pursuant to a fixed schedule,  in relation
to the occurrence of certain events or otherwise. Special distributions are also
possible if distributions are received with respect to the mortgage assets, such
as is the case when underlying mortgage loans are prepaid.

A  mortgage-related  security  that  is  senior  to a  subordinated  residential
mortgage  security  will not bear a loss  resulting  from  the  occurrence  of a
default on an underlying  mortgage until all credit enhancement  protecting such
senior  holder is exhausted.  For example,  the senior holder will only suffer a
credit loss after all subordinated interests have been exhausted pursuant to the
terms of the subordinated residential mortgage security. The primary credit risk
to the Strategic Income Fund by investing in subordinated  residential  mortgage
securities is potential  losses  resulting from defaults by the borrowers  under
the  underlying  
                                      -23-
<PAGE>
mortgages.  The Fund would  generally  realize such a loss in connection  with a
subordinated  residential  mortgage security only if the subsequent  foreclosure
sale of the  property  securing  a mortgage  loan does not  produce an amount at
least  equal to the sum of the  unpaid  principal  balance of the loan as of the
date the borrower went into  default,  the interest that was not paid during the
foreclosure period and all foreclosure expenses.

The Investment  Manager will seek to limit the risks  presented by  subordinated
residential  mortgage  securities by reviewing and analyzing the characteristics
of the mortgage  loans that  underlie the pool of  mortgages  securing  both the
senior and subordinated residential mortgage securities.  The Investment Manager
has  developed a set of  guidelines  to assist in the  analysis of the  mortgage
loans  underlying  subordinated  residential  mortgage  securities.   Each  pool
purchase is reviewed  against the  guidelines.  The Strategic  Income Fund seeks
opportunities to acquire subordinated  residential mortgage securities where, in
the view of the  Investment  Manager,  the  potential for a higher yield on such
instruments  outweighs any  additional  risk presented by the  instruments.  The
Investment  Manager  will  seek to  increase  yield to  shareholders  by  taking
advantage of perceived inefficiencies in the market for subordinated residential
mortgage securities.

CREDIT ENHANCEMENT.  Credit enhancement for the senior certificates comprising a
series is provided by the holders of the subordinated certificates to the extent
of  the  specific  terms  of  the  subordination  and,  in  some  cases,  by the
establishment of reserve funds.  Depending on the terms of a particular  pooling
and servicing  agreement,  additional or alternative  credit  enhancement may be
provided by a pool insurance policy and/or other insurance policies, third party
limited  guaranties,  letters of credit,  or  similar  arrangements.  Letters of
credit may be available to be drawn upon with respect to losses due to mortgagor
bankruptcy  and with respect to losses due to the failure of a master service to
comply with its obligations, under a pooling and servicing agreement, if any, to
repurchase a mortgage loan as to which there was fraud or negligence on the part
of the mortgagor or originator  and  subsequent  denial of coverage under a pool
insurance policy, if any. A master service may also be required to obtain a pool
insurance policy to cover losses in an amount up to a certain  percentage of the
aggregate  principal balance of the mortgage loans in the pool to the extent not
covered by a primary mortgage  insurance policy by reason of default in payments
on mortgage loans.

OPTIONAL  TERMINATION OF A TRUST. A pooling and servicing  agreement may provide
that the depositor and master service could effect early termination of a trust,
after a certain  specified  date or the date on which the aggregate  outstanding
principal  balance  of the  underlying  mortgage  loans is less than a  specific
percentage  of the  original  aggregate  principal  balance  of  the  underlying
mortgage  loans by  purchasing  all of such  mortgage  loans at a price,  unless
otherwise  specified,  equal to the  greater of a  specified  percentage  of the
unpaid principal  balance of such mortgage loans,  plus accrued interest thereon
at the  applicable  certificate  interest rate, or the fair market value of such
mortgage assets.  Generally, the proceeds of such repurchase would be applied to
the  distribution of the specified  percentage of the principal  balance of each
outstanding certificate of such series, plus accrued interest,  thereby retiring
such  certificates.  Notice of such optional  termination  would be given by the
trustee prior to such distribution date.

                                      -24-
<PAGE>
UNDERLYING  MORTGAGE  LOANS.  The  underlying  trust assets are a mortgage  pool
generally  consisting of mortgage loans on single,  multi-family and mobile home
park  residential  properties.  The mortgage loans are originated by savings and
loan associations,  savings banks,  commercial banks or similar institutions and
mortgage banking companies.

Various services provide certain customary  servicing  functions with respect to
the mortgage  loans pursuant to servicing  agreements  entered into between each
service and the master service.  A service duties generally  include  collection
and remittance of principal and interest  payments,  administration  of mortgage
escrow accounts,  collection of insurance claims, foreclosure procedures and, if
necessary,  the advance of funds to the extent certain  payments are not made by
the mortgagors and are recoverable under applicable  insurance  policies or from
proceeds of liquidation of the mortgage loans.

The  mortgage  pool is  administered  by a master  service  who (a)  establishes
requirements  for each service,  (b)  administers,  supervises  and enforces the
performance  by the  services  of their  duties and  responsibilities  under the
servicing agreements,  and (c) maintains any primary insurance,  standard hazard
insurance, special hazard insurance and any pool insurance required by the terms
of the certificates. The master service may be an affiliate of the depositor and
also may be the service with  respect to all or a portion of the mortgage  loans
contained in a trust fund for a series of certificates.

SENIOR LOANS.  The Strategic  Income Fund may invest in interests in variable or
floating  rate  Senior  Loans,   which,   in  most   circumstances,   are  fully
collateralized  by  assets  of a  corporation,  partnership,  limited  liability
company,  or other business  entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions.  Strategic Income Fund
invests in Senior Loans that have interest rates that float  periodically  based
upon a benchmark  indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S. dollar-denominated.
Generally,  the Senior  Loans in which  Strategic  Income Fund invests are fully
collateralized  with assets and/or cash flow that Pilgrim  Investments  believes
have a market  value at the time of  acquisition  that  equals  or  exceeds  the
principal  amount of the Senior Loan.  Strategic Income Fund also only purchases
interests  in Senior Loans of borrowers  that Pilgrim  Investments  believes can
meet debt service  requirements  from cash flow.  Strategic Income Fund does not
invest in Senior Loans whose  interest rates are tied to  non-domestic  interest
rates other than LIBOR.

Senior Loans vary from other types of debt in that they  generally hold the most
senior  position in the capital  structure  of a  borrower.  Priority  liens are
obtained by the lenders that typically  provide the first right to cash flows or
proceeds  from the  sale of a  borrower's  collateral  if the  borrower  becomes
insolvent  (subject to the  limitations  of  bankruptcy  law,  which may provide
higher  priority to certain  claims  such as, for  example,  employee  salaries,
employee  pensions and taxes).  Thus,  Senior Loans are generally  repaid before
unsecured bank loans, corporate bonds,  subordinated debt, trade creditors,  and
preferred or common stockholders.

Senior  Loans that  Strategic  Income  Fund may  acquire  include  participation
interests in lease  financings  ("Lease  Participations")  where the  collateral
quality,  credit  quality of the  borrower  and the  likelihood  of payback  are
believed by Pilgrim  Investments to be the same as those applied to conventional
Senior Loans. A Lease Participation is also required to have a floating interest
rate that is indexed to a benchmark indicator of prevailing interest rates, such
as LIBOR or the Prime Rate.

Substantial  increases in interest  rates may cause an increase in loan defaults
as borrowers may lack  resources to meet higher debt service  requirements.  The
value  of  Strategic  Income  Fund's  assets  may  

                                      -25-
<PAGE>
also be affected by other uncertainties such as economic developments  affecting
the market for Senior Loans or affecting borrowers generally. Also, a default on
a Senior Loan in which the Fund has invested or a sudden and extreme increase in
prevailing interest rates may cause a decline in the Fund's net asset value.

The maximum  period of time of interest  rate reset on any Senior Loans in which
Strategic Income Fund may invest is one year. In addition,  the Strategic Income
Fund will ordinarily  maintain a  dollar-weighted  average time to next interest
rate adjustment on its Senior Loans of 90 days or less. In the event of a change
in the  benchmark  interest  rate on a Senior Loan,  the rate payable to lenders
under the Senior Loan will, in turn, change at the next scheduled reset date. If
the  benchmark  rate goes up, the  Strategic  Income  Fund as lender  would earn
interest  at a higher  rate,  but  only on and  after  the  reset  date.  If the
benchmark  rate goes  down,  the  Strategic  Income  Fund as lender  would  earn
interest at a lower rate, but only on and after the reset date.

Senior Loans  generally  are arranged  through  private  negotiations  between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the lenders. On behalf of
the lenders,  generally the agent is primarily  responsible  for negotiating the
loan agreement ("loan agreement"), which establishes the terms and conditions of
the Senior Loan and the rights of the borrower  and the  lenders.  The agent and
the  other  original  lenders   typically  have  the  right  to  sell  interests
("participations") in their share of the Senior Loan to other participants.  The
agent and the other  original  lenders also may assign all or a portion of their
interests in the Senior Loan to other participants.

Strategic  Income Fund's  investment  in Senior Loans  generally may take one of
several  forms  including:  acting as one of the group of lenders  originating a
Senior Loan (an "original lender");  purchase of an assignment ("assignment") or
a portion of a Senior Loan from a third party, or acquiring a participation in a
Senior Loan. The Fund may pay a fee or forego a portion of interest  payments to
the  lender  selling  a  participation  or  assignment  under  the terms of such
participation  or assignment.  The Fund may serve as the agent or co-agent for a
Senior Loan.

When Strategic  Income Fund is an original lender or acquires an assignment,  it
will have a direct  contractual  relationship  with the  borrower,  may  enforce
compliance by the borrower with the terms of the Senior Loan agreement,  and may
have rights with respect to any funds acquired by other lenders through set-off.
Certain  decisions,  such as  reducing  the  amount or  increasing  the time for
payment of interest on or repayment of principal of a Senior Loan,  or releasing
collateral  therefor,  frequently  require the unanimous  vote or consent of all
lenders affected.

When Strategic Income Fund is a purchaser of an assignment it typically succeeds
to all the rights and  obligations  under the loan  agreement  of the  assigning
lender and becomes a lender  under the loan  agreement  with the same rights and
obligations as the assigning lender.  Assignments are, however, arranged through
private  negotiations,  and the rights and obligations acquired by the purchaser
of an assignment may be more limited than those held by the assigning lender.

Strategic Income Fund also may invest in  participations  in Senior Loans.  With
respect to any given  Senior  Loan,  the  rights of the Fund when it  acquires a
participation  may be more  limited  than the rights of  original  lenders or of
investors who acquire an  assignment.  Participations  may entail  certain risks
relating to the  creditworthiness  of the parties from which the  participations
are obtained.  Participation  by the Fund in a lender's portion of a Senior Loan
typically  results in the Fund having a contractual  relationship  only with the
lender,  not with the  borrower.  The Fund has the right to receive  payments of
principal,  interest  and any fees to which it is entitled  only from the lender
selling the  participation and 

                                      -26-
<PAGE>
only  upon  receipt  by such  lender  of such  payments  from the  borrower.  In
connection with purchasing participations, the Fund generally will have no right
to  enforce  compliance  by the  borrower  with  the  terms of the  Senior  Loan
agreement,  nor any rights with respect to any funds  acquired by other  lenders
through  set-off  against  the  borrower  with the  result  that the Fund may be
subject to delays,  expenses  and risks that are  greater  than those that exist
where the Fund is the original  lender,  and the Fund may not  directly  benefit
from the  collateral  supporting  the Senior Loan because it may be treated as a
creditor of the lender instead of the borrower. As a result, the Fund may assume
the credit risk of both the borrower and the lender  selling the  participation.
In the event of insolvency of the lender selling a  participation,  the Fund may
be treated as a general  creditor of such  lender,  and may not benefit from any
set-off  between such lender and the  borrower.  In the event of  bankruptcy  or
insolvency of the borrower,  the  obligation of the borrower to repay the Senior
Loan may be subject to certain defenses that can be asserted by such borrower as
a result of improper conduct of the lender selling the participation.

In acquiring a Senior Loan, Pilgrim Investments considers the following factors:
positive   cashflow   coverage  of  debt  service;   adequate  working  capital;
appropriate  capital  structure;  leverage ratio consistent with industry norms;
historical  experience  of attaining  business and  financial  projections;  the
quality  and  experience  of  management;   and  adequate  collateral  coverage.
Strategic Income Fund does not impose any minimum standard  regarding the rating
of any outstanding debt securities of borrowers.

Senior Loans usually include  restrictive  covenants which must be maintained by
the borrower.  Such covenants, in addition to the timely payment of interest and
principal,  may include mandatory  prepayment  provisions arising from free cash
flow,  restrictions on dividend  payments and usually state that a borrower must
maintain  specific minimum  financial  ratios as well as establishing  limits on
total  debt.  A breach  of a  covenant,  which is not  waived by the  agent,  is
normally  an event of  acceleration,  I.E.,  the agent has the right to call the
outstanding  Senior Loan.  In addition,  loan  covenants  may include  mandatory
prepayment  provisions stemming from free cash flow. Free cash flow is cash that
is in excess of capital expenditures plus debt service requirements of principal
and  interest.  The free cash flow shall be applied to prepay the Senior Loan in
an order of maturity described in the loan documents. Under certain interests in
Senior Loans,  Strategic  Income Fund may have an obligation to make  additional
loans upon demand by the  borrower.  The Fund  intends to reserve  against  such
contingent   obligations  by  segregating  sufficient  assets  in  high  quality
short-term liquid investments or borrowing to cover such obligations.

Senior Loans,  unlike certain bonds,  usually do not have call protection.  This
means that interests comprising the Fund's portfolio,  while having a stated one
to ten-year term, may be prepaid, often without penalty. Senior Loans frequently
require  full or partial  prepayment  of a loan when there are asset  sales or a
securities  issuance.  Prepayments  on  Senior  Loans  may  also  be made by the
borrower at its election. 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.  Prepayment may be deferred by the
Fund.  This  should,  however,  allow  the  Fund to  reinvest  in a new loan and
recognize as income any unamortized loan fees. In many cases this will result in
a new facility  fee payable to the Fund.  Because  interest  rates paid on these
Senior Loans  periodically  fluctuate  with the market,  it is expected that the
prepayment  and a subsequent  purchase of a new Senior Loan by the Fund will not
have a material adverse impact on the yield of the portfolio.

Strategic  Income Fund may be required to pay and may receive  various  fees and
commissions in the process of purchasing,  selling and holding Senior Loans. The
amount of fees is negotiated at the time of transaction.

                                      -27-
<PAGE>
CREDIT RISK. Pilgrim Investments performs its own independent credit analysis of
the borrower.  In so doing,  Pilgrim  Investments may use information and credit
analyses  from the agents that  originate or  administer  loans,  other  lenders
investing in a Senior Loan, and other sources. These analyses will continue on a
periodic basis for any Senior Loan purchased by the Fund. Credit analysis may be
difficult to perform for many  issuers.  Information  about  interests in Senior
Loans  generally will not be in the public  domain,  and interests are generally
not currently rated by any nationally  recognized  rating service.  Many issuers
have not  issued  securities  to the public  and are not  subject  to  reporting
requirements under federal securities laws.  Generally,  issuers are required to
provide  financial  information to lenders,  including the Fund, and information
may be available from other Senior Loan participants or agents that originate or
administer Senior Loans.

While all  investments  involve  some  amount of risk,  Senior  Loans  generally
involve less risk than equity instruments of the same issuer because the payment
of principal of and interest on debt instruments is a contractual  obligation of
the  issuer  that,  in most  instances,  takes  precedence  over the  payment of
dividends, or the return of capital, to the issuer's shareholders.  Senior Loans
are also subject to the risk of  nonpayment  of scheduled  interest or principal
payments.  In the event of a failure  to pay  scheduled  interest  or  principal
payments on Senior Loans held by the Fund, the Fund could experience a reduction
in its  income,  and would  experience  a  decline  in the  market  value of the
particular  Senior Loan so affected,  and may experience a decline in the NAV of
Fund Shares or the amount of its dividends.

In the event of a bankruptcy of the borrower,  the Fund could experience  delays
or  limitations  with  respect to its  ability to realize  the  benefits  of the
collateral  securing  the Senior  Loan.  Among the credit  risks  involved  in a
bankruptcy  would be an assertion  that the pledging of collateral to secure the
Senior Loan  constituted a fraudulent  conveyance or preferential  transfer that
would have the effect of  nullifying or  subordinating  the Fund's rights to the
rights of other creditors of the borrower under applicable law.

COLLATERAL. Senior Loans typically will be secured by pledges of collateral from
the borrower in the form of tangible assets such as cash,  accounts  receivable,
inventory,  property,  plant and  equipment,  common and/or  preferred  stock of
subsidiaries,  and intangible assets including  trademarks,  copyrights,  patent
rights and franchise value. Strategic Income Fund may also receive guarantees as
a form of  collateral.  In some  instances,  the Fund may invest in Senior Loans
that  are  secured  only  by  stock  of  the  borrower  or its  subsidiaries  or
affiliates.  The value of the collateral may decline below the principal  amount
of the Senior Loan  subsequent to the Fund's  investment in such Senior Loan. In
addition, to the extent that collateral consists of stock of the borrower or its
subsidiaries or affiliates, the Fund will be subject to the risk that this stock
may decline in value, be relatively  illiquid,  or may lose all or substantially
all of its value, causing the Senior Loan to be undercollateralized.

If the agent becomes aware that the value of the  collateral  has declined,  the
agent  may take  action  as it deems  necessary  for the  protection  of its own
interests and the interests of the other lenders, including, for example, giving
the borrower an opportunity to provide additional collateral or accelerating the
loan. There is no assurance, however, that the borrower would provide additional
collateral or that the liquidation of the existing  collateral would satisfy the
borrower's  obligation  in the event of  nonpayment  of  scheduled  interest  or
principal, or that such collateral could be readily liquidated.

LIMITED  SECONDARY  MARKET.  Although it is growing,  the  secondary  market for
Senior Loans is currently  limited.  There is no organized  exchange or board of
trade on which Senior Loans may be traded;  instead,  the  secondary  market for
Senior Loans is an unregulated  inter-dealer or inter-bank market.  Accordingly,
some or many of the Senior Loans in which the Fund invests will be illiquid.  In
addition,  Senior Loans in which the Fund invests  generally require the consent
of the borrower  prior to sale or  assignment.  These consent  requirements  may
delay or impede  the  Fund's  ability to sell  Senior  Loans.  The Fund may have

                                      -28-
<PAGE>
difficulty disposing of illiquid assets if it needs cash to pay redemptions,  to
pay  dividends,  to  pay  expenses  or  to  take  advantage  of  new  investment
opportunities.

In addition,  because the secondary  market for Senior Loans may be limited,  it
may be difficult to value Senior Loans.  Market  quotations may not be available
and valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in the valuation,  because there is
less reliable, objective data available.

HYBRID  LOANS.  The  growth of the  syndicated  loan  market has  produced  loan
structures with characteristics similar to Senior Loans but which resemble bonds
in some respects,  and generally offer less covenant or other  protections  than
traditional  Senior  Loans while still being  collateralized  ("Hybrid  Loans").
Strategic  Income Fund may invest in Hybrid  Loans that are secured  debt of the
borrower,  although they may not in all  instances be considered  senior debt of
the borrower.  With Hybrid Loans, the Fund may not possess a senior claim to all
of the  collateral  securing the Hybrid Loan.  Hybrid Loans also may not include
covenants  that are typical of Senior  Loans,  such as covenants  requiring  the
maintenance  of minimum  interest  coverage  ratios.  As a result,  Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although  they may provide a  relatively  higher  yield.  Because the lenders in
Hybrid Loans waive or forego certain loan covenants,  their negotiating power or
voting  rights in the event of a default  may be  diminished.  As a result,  the
lenders'  interests may not be represented as  significantly as in the case of a
conventional  Senior Loan. In addition,  because the Fund's security interest in
some of the  collateral  may be  subordinate  to  other  creditors,  the risk of
nonpayment  of interest or loss of  principal  may be greater  than would be the
case with conventional  Senior Loans.  Strategic Income Fund will invest only in
Hybrid Loans which meet credit standards established by Pilgrim Investments with
respect to Hybrid  Loans and  nonetheless  provide  certain  protections  to the
lender such as collateral maintenance or call protection.

SUBORDINATED  AND UNSECURED LOANS. The Strategic Income Fund may invest up to 5%
of its assets in subordinated and unsecured loans. The primary risk arising from
a holder's  subordination  is the potential  loss in the event of default by the
issuer of the  loans.  Subordinated  loans in an  insolvency  bear an  increased
share,  relative  to  senior  secured  lenders,  of the  ultimate  risk that the
borrower's  assets are  insufficient  to meet its  obligations to its creditors.
Unsecured loans are not secured by any specific collateral of the borrower. They
do not enjoy  the  security  associated  with  collateralization  and may pose a
greater  risk of  nonpayment  of interest or loss of  principal  than do secured
loans.  Strategic  Income  Fund will  acquire  unsecured  loans  only  where the
Investment  Manager  believes,  at the time of acquisition,  that the Fund would
have the right to payment  upon  default  that is not  subordinate  to any other
creditor.

ZERO COUPON AND PAY-IN-KIND SECURITIES.  The Strategic Income Fund may invest in
zero coupon and  pay-in-kind  securities.  Zero  coupon,  or  deferred  interest
securities are debt  obligations  that do not entitle the holder to any periodic
payment of interest  prior to maturity or a specified  date when the  securities
begin paying current interest (the "cash payment date") and therefore are issued
and traded at a discount  from their  face  amounts or par value.  The  discount
varies,  depending on the time  remaining  until  maturity or cash payment date,
prevailing  interest rates,  liquidity of the security and the perceived  credit
quality of the issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date of the security
approaches.  The market  prices of zero coupon and delayed  interest  securities
generally  are more  volatile  than the  market  prices of  securities  that pay
interest  periodically and are likely to respond to changes in interest rates to
a greater degree than do non-zero coupon  securities  having similar  maturities
and credit  quality.  Current  federal  income tax law requires  holders of zero
coupon  securities  to report as  interest  income  each year the portion of the
original issue discount on such securities (other than tax-exempt original issue
discount from a zero coupon  security)  that accrues that year,  even though the
holders receive no cash payments of interest during the year.

                                      -29-
<PAGE>
Pay-in-kind securities are securities that pay interest or dividends through the
issuance of additional securities. The Strategic Income Fund will be required to
report as income annual  inclusions of original  issue discount over the life of
such securities as if it were paid on a current basis, although no cash interest
or dividend payments are received by the Fund until the cash payment date or the
securities mature. Under certain circumstances,  the Fund could also be required
to  include  accrued  market  discount  or  capital  gain  with  respect  to its
pay-in-kind securities.

The risks associated with lower rated debt securities apply to these securities.
Zero coupon and pay-in-kind  securities are also subject to the risk that in the
event of a default,  the Fund may realize no return on its  investment,  because
these securities do not pay cash interest.

AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. Each of the Funds
(except  Strategic  Income Fund) may invest in securities of foreign  issuers in
the form of American Depositary Receipts ("ADRs"),  European Depositary Receipts
("EDRs") or other similar securities representing securities of foreign issuers.
These  securities may not necessarily be denominated in the same currency as the
securities they represent. ADRs are receipts typically issued by a United States
bank or trust company evidencing ownership of the underlying foreign securities.
EDRs are  receipts  issued by a  European  financial  institution  evidencing  a
similar arrangement.  Generally,  ADRs, in registered form, are designed for use
in the United States securities markets,  and EDRs, in bearer form, are designed
for use in European securities markets.

EMERGING  MARKET AND OTHER  FOREIGN  SECURITIES.  Asia-Pacific  Equity Fund will
invest  substantially  all of its assets in the equity  securities  of companies
based in the Asia-Pacific  region.  Asia-Pacific  countries include, but are not
limited  to,  China,  Hong  Kong,  Indonesia,   Korea,  Malaysia,   Philippines,
Singapore,  Taiwan and Thailand,  although the Fund will not invest in Japan and
Australia.  Foreign financial  markets,  while growing in volume,  have, for the
most part,  substantially less volume than United States markets, and securities
of many foreign  companies  are less liquid and their prices more  volatile than
securities  of  comparable  domestic  companies.  The foreign  markets also have
different clearance and settlement procedures, and in certain markets there have
been times  when  settlements  have been  unable to keep pace with the volume of
securities  transactions,  making it  difficult  to conduct  such  transactions.
Delivery of securities may not occur at the same time as payment in some foreign
markets.  Delays in settlement could result in temporary  periods when a portion
of the assets of the  Asia-Pacific  Equity Fund is  uninvested  and no return is
earned thereon.  The inability of the Fund to make intended  security  purchases
due to settlement  problems could cause the Fund to miss  attractive  investment
opportunities.  Inability to dispose of portfolio  securities  due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the  portfolio  security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.

As foreign companies are not generally subject to uniform  accounting,  auditing
and financial reporting  standards and practices  comparable to those applicable
to domestic  companies,  there may be less publicly available  information about
certain foreign companies than about domestic companies. There is generally less
government  supervision and regulation of exchanges,  financial institutions and
issuers in foreign  countries  than  there is in the  United  States.  A foreign
government may impose exchange  control  regulations  that may have an impact on
currency  exchange  rates,  and there is the  possibility  of  expropriation  or
confiscatory   taxation,   political  or  social   instability,   or  diplomatic
developments that could affect U.S. investments in those countries.

Although Asia-Pacific Equity Fund will use reasonable efforts to obtain the best
available   price  and  the  most  favorable   execution  with  respect  to  all
transactions and the Portfolio  Manager will consider the full 

                                      -30-
<PAGE>
range and quality of  services  offered by the  executing  broker or dealer when
making these  determinations,  fixed commissions on many foreign stock exchanges
are generally  higher than  negotiated  commissions on U.S.  exchanges.  Certain
foreign governments levy withholding taxes against dividend and interest income.
Although  in some  countries  a  portion  of these  taxes are  recoverable,  the
non-recovered  portion  of  foreign  withholding  taxes  will  reduce the income
received by the Fund on these investments.  However,  these foreign  withholding
taxes are not expected to have a significant  impact on the Asia-Pacific  Equity
Fund,  since  the  Fund's  investment  objective  is to seek  long-term  capital
appreciation and any income earned by the Fund should be considered incidental.

The risks of investing in foreign  securities  may be intensified in the case of
investments  in issuers  domiciled  or doing  substantial  business  in emerging
markets or countries with limited or developing capital markets. Security prices
in  emerging  markets  can be  significantly  more  volatile  than  in the  more
developed  nations  of  the  world,  reflecting  the  greater  uncertainties  of
investing in less established  markets and economies.  In particular,  countries
with emerging markets may have relatively unstable governments, present the risk
of sudden  adverse  government  action and even  nationalization  of businesses,
restrictions  on foreign  ownership,  or prohibitions of repatriation of assets,
and may have less protection of property  rights than more developed  countries.
The economies of countries with emerging markets may be  predominantly  based on
only a few  industries,  may be highly  vulnerable to changes in local or global
trade  conditions,  and may suffer from  extreme and  volatile  debt  burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable  to  respond  effectively  to  increases  in  trading  volume,
potentially  making prompt  liquidation  of  substantial  holdings  difficult or
impossible at times.  Transaction  settlement and dividend collection procedures
may be less reliable in emerging markets than in developed  markets.  Securities
of  issuers  located  in  countries  with  emerging  markets  may  have  limited
marketability and may be subject to more abrupt or erratic price movements.

INVESTING IN  DEVELOPING  ASIA-PACIFIC  SECURITIES  MARKETS AND  ECONOMIES.  The
securities markets of developing  Asia-Pacific countries are not as large as the
U.S. securities markets and have substantially less trading volume, resulting in
a lack of liquidity and high price volatility. Certain markets, such as those of
China,  are in only the  earliest  stages of  development.  There is also a 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.  Many of such markets
also may be affected by developments with respect to more established markets in
the region,  such as in Japan.  Developing  Asia-Pacific  brokers  typically are
fewer in number and less  capitalized  than brokers in the United States.  These
factors,  combined with the U.S. regulatory  requirements of open-end investment
companies and the restrictions on foreign investments discussed below, result in
potentially fewer investment  opportunities for Asia-Pacific Equity Fund and may
have an adverse  impact on the  investment  performance  of the Fund. The Fund's
investment  restrictions  permit  it to  invest  up to 15% of its net  assets in
securities that are determined by the Portfolio Manager to be illiquid.

The investment  objective of  Asia-Pacific  Equity Fund reflects the belief that
the economies of the developing  Asia-Pacific countries will continue to grow in
such a fashion as to provide attractive  investment  opportunities.  At the same
time,  emerging  economies  present  certain  risks  that do not  exist  in more
established  economies.  Especially  significant  is that  political  and social
uncertainties  exist  for  many of the  developing  Asia-Pacific  countries.  In
addition, the governments of many of such countries,  such as Indonesia,  have a
heavy role in regulating  and  supervising  the economy.  Another risk common to
most  such  countries  is that the  economy  is  heavily  export  oriented  and,
accordingly,   is  dependent  upon   international   trade.   The  existence  of
overburdened  infrastructure  and obsolete financial systems also presents risks
in certain  countries,  as do  environmental  problems.  Certain  economies also
depend  to a  significant  degree  upon  exports  of  primary  commodities  and,
therefore,  are vulnerable to changes in commodity prices which, 

                                      -31-
<PAGE>
in  turn,  may be  affected  by a  variety  of  factors.  In  addition,  certain
developing Asia-Pacific countries, such as the Philippines, are especially large
debtors to commercial banks and foreign governments.

Archaic legal systems in certain developing Asia-Pacific countries also may have
an adverse  impact on the  Asia-Pacific  Equity  Fund.  For  example,  while the
potential liability of a shareholder in a U.S.  corporation with respect to acts
of the  corporation  is  generally  limited to the  amount of the  shareholder's
investment,  the notion of limited liability is less clear in certain developing
Asia-Pacific  countries.  Similarly,  the rights of  investors  in  Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.

Certain of the risks associated with international  investments and investing in
smaller   capital   markets  are  heightened   for   investments  in  developing
Asia-Pacific  countries.  For  example,  some of the  currencies  of  developing
Asia-Pacific  countries  have  experienced  devaluations  relative  to the  U.S.
dollar,  and major  adjustments  have been made  periodically in certain of such
currencies. Certain countries face serious exchange constraints. In addition, as
mentioned  above,  governments of many  developing  Asia-Pacific  countries have
exercised and continue to exercise  substantial  influence  over many aspects of
the private sector.

In certain cases, the government owns or controls many companies,  including the
largest in the country. Accordingly, government actions in the future could have
a  significant  effect  on  economic   conditions  in  developing   Asia-Pacific
countries,  which could affect  private  sector  companies and the  Asia-Pacific
Equity Fund, as well as the value of securities in the Fund's portfolio.

In  addition  to the  relative  lack of  publicly  available  information  about
developing Asia-Pacific issuers and the possibility that such issuers may not be
subject to the same accounting,  auditing and financial  reporting  standards as
are applicable to U.S. companies,  inflation accounting rules in some developing
Asia-Pacific  countries  require,  for companies that keep accounting records in
the local currency,  for both tax and accounting  purposes,  that certain assets
and  liabilities be restated on the company's  balance sheet in order to express
items in terms of currency of constant  purchasing power.  Inflation  accounting
may indirectly  generate losses or profits for certain  developing  Asia-Pacific
companies.

Satisfactory  custodial services for investment  securities may not be available
in some developing Asia-Pacific countries,  which may result in the Asia-Pacific
Equity Fund incurring  additional  costs and delays in providing  transportation
and custody services for such securities outside such countries, if possible.

As a result, the Portfolio Manager of the Asia-Pacific Equity Fund may determine
that,  notwithstanding  otherwise favorable investment  criteria,  it may not be
practicable  or appropriate  to invest in a particular  developing  Asia-Pacific
country. The Fund may invest in countries in which foreign investors,  including
the Portfolio Manager of the Fund, have had no or limited prior experience.

RESTRICTIONS  ON FOREIGN  INVESTMENTS.  Some developing  Asia-Pacific  countries
prohibit or impose  substantial  restrictions  on  investments  in their capital
markets,  particularly  their equity  markets,  by foreign  entities such as the
Asia-Pacific  Equity  Fund.  As  illustrations,  certain  countries  may require
governmental  approval  prior to  investments  by  foreign  persons or limit the
amount of  investment  by foreign  persons in a particular  company or limit the
investment  by  foreign  persons  to only a specific  class of  securities  of a
company that may have less advantageous  terms (including price) than securities
of the company  available  for  purchase by  nationals.  Certain  countries  may
restrict  investment  opportunities in issuers or industries deemed important to
national interests.

                                      -32-
<PAGE>
The  manner in which  foreign  investors  may  invest in  companies  in  certain
developing  Asia-Pacific  countries, as well as limitations on such investments,
also may have an adverse  impact on the  operations of the  Asia-Pacific  Equity
Fund.  For  example,  the Fund may be required in certain of such  countries  to
invest initially through a local broker or other entity and then have the shares
purchased  re-registered  in the name of the Fund.  Re-registration  may in some
instances  not be able to occur on timely  basis,  resulting  in a delay  during
which the Fund may be denied  certain  of its rights as an  investor,  including
rights as to dividends or to be made aware of certain corporate  actions.  There
also may be instances where the Fund places a purchase order but is subsequently
informed, at the time of re-registration, that the permissible allocation of the
investment  to foreign  investors  has been  filled,  depriving  the Fund of the
ability to make its desired investment at that time.

Substantial  limitations  may exist in  certain  countries  with  respect to the
Asia-Pacific Equity Fund's ability to repatriate  investment income,  capital or
the  proceeds of sales of  securities  by foreign  investors.  The Fund could be
adversely   affected  by  delays  in,  or  a  refusal  to  grant,  any  required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any  restrictions on investments.  No more than 15% of the Fund's
net assets may be comprised, in the aggregate, of assets that are (i) subject to
material  legal  restrictions  on  repatriation  or (ii)  invested  in  illiquid
securities.  Even where  there is no outright  restriction  on  repatriation  of
capital,  the  mechanics  of  repatriation  may  affect  certain  aspects of the
operations of the Fund.  For example,  funds may be withdrawn  from the People's
Republic of China only in U.S. or Hong Kong dollars and only at an exchange rate
established by the government once each week.

In certain  countries,  banks or other financial  institutions  may be among the
leading companies or have actively traded securities. The 1940 Act restricts the
Asia-Pacific  Equity Fund's  investments  in any equity  securities of an issuer
that, in its most recent fiscal year, derived more than 15% of its revenues from
"securities  related  activities,"  as  defined  by the  rules  thereunder.  The
provisions  may restrict the Fund's  investments  in certain  foreign  banks and
other financial institutions.

FOREIGN  CURRENCY  RISKS.  Currency  risk is the risk that  changes  in  foreign
exchange rates will affect,  favorably or unfavorably,  the U.S. dollar value of
foreign  securities.  In a period when the U.S.  dollar  generally rises against
foreign  currencies,  the returns on foreign stocks for a U.S.  investor will be
diminished.  By contrast,  in a period when the U.S. dollar generally  declines,
the returns on foreign securities will be enhanced.  Unfavorable  changes in the
relationship  between  the U.S.  dollar  and the  relevant  foreign  currencies,
therefore, will adversely affect the value of a Fund's shares.


The  introduction of the euro (a common  currency for the European  Economic and
Monetary  Union) in January  1999  could  have an  adverse  effect of the Fund's
ability to value  holdings  denominated  in local  currencies and on trading and
other administrative systems which affect such securities.


FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Asia-Pacific Equity Fund may
buy and sell securities  denominated in currencies  other than the U.S.  Dollar,
and receive  interest,  dividends and sale proceeds in currencies other than the
U.S. Dollar,  the Fund may enter into foreign currency exchange  transactions to
convert  to  and  from  different  foreign  currencies  and to  convert  foreign
currencies  to and from the U.S.  Dollar.  The Fund  either  enters  into  these
transactions  on a spot (i.e.,  cash) basis at the spot rate  prevailing  in the
foreign currency exchange market, or uses forward foreign currency  contracts to
purchase or sell  foreign  currencies.  Asia-Pacific  Equity Fund may not invest
more than 5% of its assets (taken at market value at the time of  investment) in
forward foreign currency contracts.

A forward  foreign  currency  exchange  contract is an agreement to exchange one
currency  for  another -- for  example,  to  exchange  a certain  amount of U.S.
Dollars for a certain amount of Korean Won -- at a future 

                                      -33-
<PAGE>
date.   Forward  foreign  currency  contracts  are  included  in  the  group  of
instruments that can be characterized as derivatives.  Neither spot transactions
nor forward foreign currency exchange  contracts  eliminate  fluctuations in the
prices of the Fund's  portfolio  securities  or in foreign  exchange  rates,  or
prevent loss if the prices of these securities should decline.

Although these  transactions  tend to minimize the risk of loss due to a decline
in the  value of the  hedged  currency,  at the same time they tend to limit any
potential  gain that might be realized  should the value of the hedged  currency
increase.  The precise matching of the forward contract amounts and the value of
the securities  involved will not generally be possible because the future value
of these securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered  into and the date it matures.  The  projection  of  currency  market
movements  is extremely  difficult,  and the  successful  execution of a hedging
strategy is highly  uncertain.  Use of currency  hedging  techniques may also be
limited by  management's  need to protect  the status of the Fund as a regulated
investment company under the Code.

MIDCAP COMPANY EQUITY  SECURITIES.  MidCap Value Fund will invest  substantially
all of its assets,  and LargeCap Leaders Fund and  Asia-Pacific  Equity Fund may
invest, in the equity  securities of certain midcap companies.  Midcap companies
will  tend to be  smaller,  more  emerging  companies  and  investment  in these
companies  may  involve  greater  risk  than  is  customarily   associated  with
securities  of  larger,  more  established   companies.   Midcap  companies  may
experience  relatively  higher  growth  rates and higher  failure  rates than do
larger  companies.  The trading  volume of  securities  of midcap  companies  is
normally   less   than   that  of   larger   companies   and,   therefore,   may
disproportionately  affect their market price, tending to make them rise more in
response to buying demand and fall more in response to selling  pressure than is
the case with larger companies.

ILLIQUID SECURITIES.  A Fund may invest in an illiquid or restricted security if
the  Portfolio  Manager  believes  that it  presents  an  attractive  investment
opportunity.  Generally,  a  security  is  considered  illiquid  if it cannot be
disposed of within seven days. Its illiquidity  might prevent the sale of such a
security  at a time  when a  Portfolio  Manager  might  wish to sell,  and these
securities  could  have  the  effect  of  decreasing  the  overall  level  of  a
Portfolio's liquidity.  Further, the lack of an established secondary market may
make it more difficult to value illiquid securities,  requiring the Fund to rely
on judgments that may be somewhat  subjective in determining  value, which could
vary from the amount that a Fund could realize upon disposition.

Restricted  securities,  including private  placements,  are subject to legal or
contractual  restrictions on resale.  They can be eligible for purchase  without
SEC  registration  by  certain  institutional   investors  known  as  "qualified
institutional  buyers," and under the Fund's procedures,  restricted  securities
could be treated as liquid.  However, some restricted securities may be illiquid
and restricted  securities  that are treated as liquid could be less liquid than
registered  securities traded on established  secondary  markets. A Fund may not
invest more than 15% of its net assets in illiquid  securities,  measured at the
time of  investment.  Each Fund will  adhere  to a more  restrictive  investment
limitation on its  investments in illiquid or restricted  securities as required
by the  securities  laws of those  jurisdictions  where  shares  of the Fund are
registered for sale.

OPTIONS ON SECURITIES. The Funds (except Strategic Income Fund) may purchase put
options on  portfolio  securities  in which they may invest that are traded on a
U.S. exchange or in the over-the-counter market and, for the Asia-Pacific Equity
Fund, on a foreign  securities  exchange.  A Fund may not invest more than 5% of
its  assets  (taken  at  market  value  at the time of such  investment)  in put
options.  Such put options are included in the group of instruments  that can be
characterized  as  derivatives.  A Fund may  purchase  put options on  portfolio
securities at or about the same time that it purchases the  underlying  security
or at a later  time.  By  

                                      -34-
<PAGE>
buying a put, a Fund limits its risk of loss from a decline in the market  value
of the security  until the put  expires.  Any  appreciation  in the value of the
underlying  security,  however,  will be  partially  offset by the amount of the
premium  paid for the put option and any  related  transaction  costs.  Prior to
their expirations, put options may be sold in closing sale transactions.

The purchase of options  involves  certain risks. If a put option purchased by a
Fund is not sold when it has  remaining  value,  and if the market  price of the
underlying  security  remains equal to or greater than the exercise  price,  the
Fund will lose its entire investment in the option.  Also, where a put option is
purchased to hedge against price movements in a particular  security,  the price
of the put option may move more or less than the price of the related  security.
There can be no assurance  that a liquid  market will exist when a Fund seeks to
close  out  an  option  position.   Furthermore,   if  trading  restrictions  or
suspensions  are imposed on the options  markets,  a Fund may be unable to close
out a position.

REPURCHASE AGREEMENTS.  Each Fund may invest any portion of its assets otherwise
invested  in  money  market  instruments  in  U.S.  Government   securities  and
concurrently  enter into repurchase  agreements with respect to such securities.
Such repurchase  agreements will be made only with government securities dealers
recognized  by the Board of  Governors  of the  Federal  Reserve  System or with
member banks of the Federal Reserve System. Under such agreements, the seller of
the security  agrees to repurchase it at a mutually  agreed upon time and price.
The resale price is in excess of the purchase  price and reflects an agreed upon
interest rate for the period of time the agreement is outstanding. The period of
these repurchase  agreements is usually quite short, from overnight to one week,
while the underlying securities generally have longer maturities.

Each Fund will always  receive as collateral  securities  acceptable to it whose
market value is equal to at least 100% of the amount  invested by the Fund,  and
the Fund will make payment for such  securities  only upon physical  delivery or
evidence of book entry transfer to the account of its  Custodian.  If the seller
defaults,  a Fund might incur a loss or delay in the  realization of proceeds if
the value of the collateral  securing the repurchase  agreement  declines and it
might incur disposition costs in liquidating the collateral.

                                      -35-
<PAGE>
                       SUPPLEMENTAL INVESTMENT TECHNIQUES

BORROWING.  A Fund may borrow money from banks solely for temporary or emergency
purposes, but not in an amount exceeding one-third of its total assets. However,
if a Fund borrows money,  its share price may be subject to greater  fluctuation
until the borrowing is paid off. If the Fund makes additional  investments while
borrowings are outstanding, this may be construed as a form of leverage.

SHORT SALES AGAINST THE BOX. MidCap Value Fund is authorized to make short sales
of securities it owns or has the right to acquire at no additional  cost through
conversion or exchange of other  securities it owns  (referred to as short sales
"against the box").  When the Fund makes a short sale,  the proceeds it receives
are retained by the broker until the Fund  replaces  the borrowed  security.  In
order to deliver the security to the buyer,  the Fund must  arrange  through the
broker to borrow the security  and, in so doing,  the Fund becomes  obligated to
replace the security  borrowed at its market  price at the time of  replacement,
whatever  that price may be. If the 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. The Fund's  decision to make a short sale "against the
box" may be a technique to hedge against market risks when the 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 or exchangeable
for such  security.  In such case, any future losses in the Fund's long position
would be reduced by an  offsetting  future gain in the short  position.  No more
than 5% of the Fund's net assets may be used to cover such short  positions.  In
addition, the Fund's ability to enter into short sales may be limited by certain
tax requirements.

                             INVESTMENT RESTRICTIONS

The Company has adopted the investment restrictions listed below relating to the
investment  of each  Fund's  assets and its  activities.  These are  fundamental
policies  that may not be  changed  without  the  approval  of the  holders of a
majority of the outstanding  voting securities of a Fund (which for this purpose
and under the 1940 Act means the lesser of (i) 67% of the shares  represented at
a meeting at which more than 50% of the  outstanding  shares are  represented or
(ii) more than 50% of the outstanding shares). None of the Funds may:

     (1)  invest in a security if, with respect to 75% of its total assets, more
          than 5% of the total assets (taken at market value at the time of such
          investment)  would be  invested in the  securities  of any one issuer,
          except that this  restriction  does not apply to securities  issued or
          guaranteed    by   the   U.S.    Government   or   its   agencies   or
          instrumentalities;

     (2)  invest in a security if, with  respect to 75% of its assets,  it would
          hold  more  than 10%  (taken  at the time of such  investment)  of the
          outstanding  voting  securities of any one issuer,  except  securities
          issued  or  guaranteed  by the U.S.  Government,  or its  agencies  or
          instrumentalities;

     (3)  invest in a security  if more than 25% of its total  assets  (taken at
          market value at the time of such investment)  would be invested in the
          securities of companies primarily engaged in any one industry,  except
          that  this  restriction  does  not  apply  to  securities   issued  or
          guaranteed by the U.S. Government,  its agencies and instrumentalities
          (or repurchase agreements with respect thereto);

     (4)  lend any funds or other  assets,  except  that a Fund may,  consistent
          with its investment objective and policies:

                                      -36-
<PAGE>
          (a)  invest in debt  obligations,  even  though the  purchase  of such
               obligations may be deemed to be the making of loans;

          (b)  enter into repurchase agreements; and

          (c)  lend its  portfolio  securities  in  accordance  with  applicable
               guidelines  established by the SEC and any guidelines established
               by the Board of Directors;

     (5)  borrow  money or pledge,  mortgage,  or  hypothecate  its assets,  (a)
          except  that a Fund may borrow  from  banks,  but only if  immediately
          after each borrowing and continuing thereafter there is asset coverage
          of 300%; and (b) and except that the following shall not be considered
          a pledge,  mortgage,  or  hypothecation  of a Fund's  assets for these
          purposes: entering into reverse repurchase agreements; transactions in
          options,  futures, options on futures, and forward currency contracts;
          the  deposit  of assets in escrow in  connection  with the  writing of
          covered put and call  options;  and the  purchase of  securities  on a
          "when-issued" or delayed delivery basis;  collateral arrangements with
          respect to initial or variation  margin and other deposits for futures
          contracts,   options  on  futures  contracts,   and  forward  currency
          contracts;

     (6)  issue  senior  securities,  except  insofar as a Fund may be deemed to
          have  issued  a  senior  security  by  reason  of  borrowing  money in
          accordance  with  that  Fund's  borrowing  policies,  and  except  for
          purposes  of  this  investment   restriction,   collateral  or  escrow
          arrangements  with respect to the making of short  sales,  purchase or
          sale of futures  contracts  or related  options,  purchase  or sale of
          forward currency contracts,  writing of stock options,  and collateral
          arrangements  with  respect  to  margin or other  deposits  respecting
          futures contracts, related options, and forward currency contracts are
          not deemed to be an issuance of a senior security;

     (7)  act as an underwriter of securities of other issuers,  except, when in
          connection with the disposition of portfolio securities, a Fund may be
          deemed to be an underwriter under the federal securities laws;

     (8)  purchase  or  sell  real  estate  (other  than  marketable  securities
          representing  interests in, or backed by, real estate or securities of
          companies that deal in real estate or mortgages).

The Funds are also subject to the following  restrictions  and policies that are
not  fundamental  and may,  therefore,  be  changed  by the  Board of  Directors
(without shareholder approval). Unless otherwise indicated, a Fund may not:

     (1)  invest  in  securities  that are  illiquid  if,  as a  result  of such
          investment,  more than 15% of the total  assets of the Fund  (taken at
          market value at the time of such investment) would be invested in such
          securities;

     (2)  invest  in  companies  for  the  purpose  of  exercising   control  or
          management;

     (3)  purchase or sell physical commodities or commodities contracts (which,
          for purposes of this  restriction,  shall not include foreign currency
          or forward foreign currency contracts),  except any Fund may engage in
          interest  rate  futures  contracts,  stock  index  futures  contracts,
          futures contracts based on other financial  instruments or securities,
          and options on such futures contracts;

                                      -37-
<PAGE>
     (4)  invest directly in interests in oil, gas or other mineral  exploration
          or  development  programs or mineral  leases  (other  than  marketable
          securities of companies  engaged in the business of oil, gas, or other
          mineral exploration).

     (5)  invest more than 5% of its total  assets in  warrants,  whether or not
          listed on the New York or American Stock Exchanges,  including no more
          than 2% of its total assets which may be invested in warrants that are
          not listed on those exchanges. Warrants acquired by a Fund in units or
          attached to securities are not included in this restriction;

     (6)  purchase securities of issuers which are restricted from being sold to
          the  public  without  registration  under the  Securities  Act of 1933
          (unless such  securities  are deemed to be liquid under the  Company's
          Liquidity  Procedures)  if by reason  of such  investment  the  Fund's
          aggregate  investment in such securities will exceed 10% to the Fund's
          total assets;

     (7)  invest more than 5% of the value of its total assets in  securities of
          issuers which have been in continuous operation less than three years;

     (8)  invest in puts, calls,  straddles,  spreads or any combination thereof
          if, as a result of such  investment,  more than 5% of the total assets
          of the Fund  (taken  at market  value at the time of such  investment)
          would be invested in such securities;

     (9)  loan portfolio  securities  unless  collateral values are continuously
          maintained at no less than 100% by "marking to market" daily;

     (10) invest in real estate limited partnerships.

Other non-fundamental policies include the following: each Fund may not purchase
securities  on margin;  make short  sales,  except for short sales  "against the
box," or  purchase  or retain in its  portfolio  any  security  if an officer or
Director of the Company or the Investment  Manager or any Portfolio Manager owns
beneficially  more than 1/2 of 1% of the outstanding  securities of such issuer,
and  in  the  aggregate  such  persons  own  beneficially  more  than  5% of the
outstanding securities of such issuer.

                             PORTFOLIO TRANSACTIONS

The Portfolio  Management  Agreements authorize the Portfolio Managers 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 Portfolio Management Agreements,
each Portfolio Manager determines,  subject to the instructions of and review by
the Board of Directors of the Fund,  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 a Portfolio Manager, a better price and
execution can otherwise be obtained by using a broker for the transaction.

In placing  portfolio  transactions,  each  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 Portfolio  Managers will 

                                      -38-
<PAGE>
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  Portfolio  Manager  considers  such  information,  which  is in
addition  to and not in lieu of the  services  required to be  performed  by the
Portfolio Manager,  under its Portfolio  Management  Agreement,  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 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.

Some securities  considered for investment by a Fund may also be appropriate for
other clients served by that Fund's 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 Portfolio  Manager is considered at
or about the same time,  transactions in such securities will be allocated among
the Fund and the Portfolio  Manager's  other clients in a manner deemed fair and
reasonable by the Portfolio Manager.  Although there is no specified formula for
allocating such transactions, the various allocation methods used by a Portfolio
Manager, and the results of such allocations,  are subject to periodic review by
the Board of Directors.

For the fiscal years ended June 30,  1998,  1997 and 1996,  the total  brokerage
commissions paid by each Fund was as follows:  $302,383,  $320,036, and $262,886
for Asia-Pacific  Equity Fund;  $210,161,  $146,795 and $16,687 for MidCap Value
Fund; and $50,835, $56,375 and $8,460 for LargeCap Leaders Fund.

The Funds place no  restrictions on portfolio  turnover.  While any of the Funds
may from time to time sell a  security  it has held for a short  period of time,
none of the Funds has a policy of engaging in  short-term  trading or generating
short-term  gains. The annual rate of the Funds'  portfolio  turnover during the
fiscal year ended June 30, 1997 was 38% for  Asia-Pacific  Equity Fund,  86% for
MidCap Value Fund,  and 86% for LargeCap  Leaders  Fund.  The annual rate of the
Funds' portfolio turnover during the fiscal year ended June 30, 1998 was 81% for
Asia-Pacific  Equity  Fund,  85% for MidCap  Value  Fund,  and 78% for  LargeCap
Leaders Fund.
                                      -39-
<PAGE>
                 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares of the Funds are offered at the net asset value next  computed  following
receipt of the order by the dealer (and/or the  Distributor) or by the Company's
transfer agent,  DST Systems,  Inc.  ("Transfer  Agent"),  plus, for Class A and
Class M  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 and B,
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
Company reserves the right to amend or terminate this practice at any time.

SPECIAL PURCHASES AT NET ASSET VALUE. Class A or Class M shares of the Funds may
be  purchased at net asset value,  without a sales  charge,  by persons who have
redeemed  their  Class A or Class M 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 which  unaffiliated  fund was:  with respect to purchases of the
MidCap  Value Fund,  a mid-cap  fund;  with respect to purchases of the LargeCap
Leaders Fund, a large-cap  fund;  with respect to purchases of the  Asia-Pacific
Equity Fund, a fund investing in 
                                      -40-
<PAGE>
companies based in the Asia-Pacific region; and with respect to Strategic Income
Fund, a strategic income fund.

Class A or Class M Shares of the Funds may also be  purchased at net asset value
by 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 Company (or the other open-end  Pilgrim Funds) the  Distributor  may pay the
selling firm 0.25% of the Offering Price.

Shareholders of Pilgrim General Money Market Shares who acquired their shares by
using all or a portion of the proceeds from the redemption of Class A or Class M
shares of other  open-end  Pilgrim  Funds  distributed  by the  Distributor  may
reinvest such amount plus any shares acquired through  dividend  reinvestment in
Class A or Class M Shares of a Fund at its  current net asset  value,  without a
sales charge.

Officers,  directors  and bona  fide  full-time  employees  of the  Company  and
officers,  directors  and full-time  employees of the  Investment  Manager,  any
Portfolio  Manager,   the  Distributor,   The  Company'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 or Class M 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 Company
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 or M 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.

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 or any  open-end  Pilgrim  Funds which  offers  Class A shares,
Class M 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  (excluding  Pilgrim  General Money
Market Shares) acquired within 90 days before the Letter of Intent is filed will
be counted  towards  completion of the Letter of Intent but will not be entitled
to 
                                      -41-
<PAGE>
a retroactive  downward adjustment of sales charge until the Letter of Intent is
fulfilled.  Any redemptions  made by the shareholder  during the 13-month period
will be subtracted  from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed.  If the Letter of
Intent is not  completed  within the  13-month  period,  there will be an upward
adjustment  of the sales charge as specified  below,  depending  upon the amount
actually purchased (less redemption) during the period.

An investor  acknowledges  and agrees to the following  provisions by completing
the Letter of Intent section of the Shareholder Application in the Prospectus. A
minimum  initial  investment  equal to 25% of the intended  total  investment is
required.  An amount  equal to the  maximum  sales  charge or 5.75% of the total
intended  purchase  will be held in  escrow  at  Pilgrim  Funds,  in the form of
shares,  in the investor's name to assure that the full applicable  sales charge
will be paid if the  intended  purchase is not  completed.  The shares in escrow
will  be  included  in the  total  shares  owned  as  reflected  on the  monthly
statement;  income and capital gain  distributions  on the escrow shares will be
paid  directly by the  investor.  The escrow  shares will not be  available  for
redemption by the investor until the Letter of Intent has been completed, or the
higher sales charge paid. If the total purchases,  less  redemptions,  equal the
amount specified under the Letter, the shares in escrow will be released. If the
total purchases, less redemptions,  exceed the amount specified under the Letter
and is an  amount  which  would  qualify  for a  further  quantity  discount,  a
retroactive price adjustment will be made by the Distributor and the dealer with
whom  purchases  were made  pursuant  to the Letter of Intent (to  reflect  such
further quantity discount) on purchases made within 90 days before, and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional  shares at the applicable  offering price.
If the total  purchases,  less  redemptions,  are less than the amount specified
under the Letter,  the investor will remit to the Distributor an amount equal to
the difference in dollar amount of sales charge  actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such  purchases had been made at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the  redemption of an appropriate  number of shares
in escrow to realize such  difference will be made. If the proceeds from a total
redemption are  inadequate,  the investor will be liable to the  Distributor for
the  difference.  In the event of a total  redemption  of the  account  prior to
fulfillment  of the Letter of Intent,  the  additional  sales charge due will be
deducted from the proceeds of the  redemption  and the balance will be forwarded
to the Investor.  By completing the Letter of Intent section of the  Shareholder
Application,  an investor grants to the  Distributor a security  interest in the
shares in escrow  and  agrees to  irrevocably  appoint  the  Distributor  as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the  purpose of paying  any  additional  sales  charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the  proceeds  as  directed  by the  Distributor.  The  investor  or the
securities  dealer must inform the Transfer Agent or the  Distributor  that this
Letter is in effect each time a purchase is made.

If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent,  the investor must notify the Distributor
in writing.  If, prior to the  completion of the Letter of Intent,  the investor
requests the  Distributor  to  liquidate  all shares held by the  investor,  the
Letter  of  Intent  will be  terminated  automatically.  Under  either  of these
situations,  the total  purchased  may be less than the amount  specified in the
Letter of Intent.  If so,  the  Distributor  will  redeem at NAV to remit to the
Distributor  and the  appropriate  authorized  dealer  an  amount  equal  to the
difference  between the dollar amount of the sales charge  actually paid and the
amount of the sales  charge that would have been paid on the total  purchases if
made at one time.

The  value of  shares  of the Fund  plus  shares  of the  other  open-end  funds
distributed by the Distributor  (excluding  Pilgrim General Money Market Shares)
can be combined  with a current  purchase to determine  the reduced sales charge
and applicable offering price of the current purchase.  The reduced sales charge
apply to quantity  purchases made at one time or on a cumulative  basis over any
period of time by (i) an 
                                      -42-
<PAGE>
investor,  (ii) the  investor's  spouse and children  under the age of majority,
(iii) the  investor's  custodian  accounts  for the benefit of a child under the
Uniform gift to Minors Act, (iv) a trustee or other  fiduciary of a single trust
estate or a single fiduciary account (including a pension, profit-sharing and/or
other employee  benefit plans qualified under Section 401 of the Code), by trust
companies' registered investment advisors,  banks and bank trust departments for
accounts over which they exercise exclusive investment  discretionary  authority
and  which are held in a  fiduciary,  agency,  advisory,  custodial  or  similar
capacity.

The reduced sales charge also apply on a non-cumulative basis, to purchases made
at one time by the customers of a single  dealer,  in excess of $1 million.  The
Letter of Intent option may be modified or discontinued at any time.

Shares of the Fund and other open-end Pilgrim Funds  (excluding  Pilgrim General
Money  Market  Shares)  purchased  and  owned of  record  or  beneficially  by a
corporation,  including  employees of a single employer (or affiliates  thereof)
including shares held by its employees,  under one or more retirement plans, can
be combined  with a current  purchase to determine  the reduced sales charge and
applicable  offering price of the current  purchase,  provided such transactions
are not prohibited by one or more provisions of the Employee  Retirement  Income
Security Act or the Internal  Revenue Code.  Individuals  and  employees  should
consult  with  their  tax  advisors  concerning  the  tax  rules  applicable  to
retirement plans before investing.

REDEMPTIONS.  Payment to  shareholders  for shares  redeemed will be made within
seven days after receipt by the Company's  Transfer Agent of the written request
in proper form,  except that the Company may suspend the right of  redemption or
postpone  the date of payment as to a Fund 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,  the  Company  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 Company
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 a Fund,  other than as a result of a
decline in the net asset value per share. Before the Company 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.

                                      -43-
<PAGE>
The value of shares on  redemption  or  repurchase  may be more or less than the
investor's cost,  depending upon the market value of the portfolio securities at
the time of redemption or repurchase.

Certain  purchases of Class A shares and most Class B 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 and 4% of the amount invested for Class B 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 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 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 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. The waiver will then be granted
subject to confirmation of the shareholder's entitlement.

The  CDSC,  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.

CONVERSION OF CLASS B SHARES. A shareholder's  Class B shares will automatically
convert to Class A shares in the Fund on the first  business day of the month in
which the  eighth  anniversary  of the  issuance  of the Class B shares  occurs,
together  with a pro rata portion of all Class B shares  representing  dividends
and other  distributions  paid in additional  Class B shares.  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 to the
effect that (1) such conversion  will not constitute  taxable events for federal
tax purposes;  and (2) the payment of different dividends on Class A and Class B
shares does not result in the Fund's  dividends  or  distributions  constituting
"preferential  dividends"  under the Internal  Revenue Code of 1986. The Class B
shares so converted  will no longer be subject to the higher  expenses  borne by
Class B shares. The conversion will be effected at the relative net asset values
per share of the two Classes.
                                      -44-
<PAGE>
                          DETERMINATION OF SHARE PRICE

As noted in the Prospectus, the net asset value and offering price of each class
of each Fund's shares will be  determined  once daily as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during
each day on which  that  Exchange  is open for  trading.  As of the date of this
Statement of Additional  Information,  the New York Stock  Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday,  Memorial Day,  Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.

Portfolio  securities  listed or traded on a  national  securities  exchange  or
included  in the  NASDAQ  National  Market  System  will be  valued  at the last
reported sale price on the valuation  day.  Securities  traded on an exchange or
NASDAQ for which there has been no sale that day and other securities  traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation  day.  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 Directors as the primary market.  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 Directors  of the Company.  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.

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
M 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 SERVICES AND PRIVILEGES

As discussed in the Prospectus, the Company provides 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 Company. The minimum investment  requirements may be
waived by the Company 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.

                                      -45-
<PAGE>
For  investors  purchasing  shares of a Fund  under a  tax-qualified  individual
retirement or pension plan or under a group plan through a person designated for
the  collection and remittance of monies to be invested in shares of a Fund on a
periodic basis, the Company 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  Company.  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.  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  Company.  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.  It is  advisable  for an  investor  considering  the  funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant.

TELEPHONE  REDEMPTION AND EXCHANGE  PRIVILEGES.  As discussed in the Prospectus,
the  telephone   redemption  and  exchange  privileges  are  available  for  all
shareholder accounts; however, retirement accounts may not utilize the telephone
redemption privilege.  The telephone privileges may be modified or terminated at
any time.  The privileges are subject to the conditions and provisions set forth
below and in the Prospectus.

     1.   Telephone  redemption  and/or exchange  instructions  received in good
          order  before  the  pricing of a Fund on any day on which the New York
          Stock Exchange is open for business (a

                                      -46-
<PAGE>
          "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 $50,000.

          (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 and  deposited  into your account  before
          any transaction may be processed.

     8.   If a  portion  of the  shares  to be  exchanged  are held in escrow in
          connection with a Letter of Intent, the smallest number of full shares
          of the Pilgrim Fund to be  purchased  on the exchange  having the same
          aggregate  net asset  value as the  shares  being  exchanged  shall be
          substituted  in the escrow  account.  Shares held in escrow may not be
          redeemed until the Letter of Intent has expired and/or the appropriate
          adjustments have been made to the account.

     9.   Shares may not be exchanged  and/or redeemed unless an exchange and/or
          redemption  privilege is offered  pursuant to the Funds'  then-current
          prospectus.
                                      -47-
<PAGE>
     10.  Proceeds of a redemption  may be delayed up to 15 days or longer until
          the check used to purchase the shares being  redeemed has been paid by
          the bank upon which it was drawn.

                                  DISTRIBUTIONS

As noted in the Prospectus,  shareholders have the privilege of reinvesting both
income dividends and capital gains  distributions,  if any, in additional shares
of the respective class of the Fund at the then current net asset value, with no
sales  charge.  Alternatively,  a  shareholder  can elect at any time to receive
dividends and/or capital gains  distributions 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
incident to an investment in a Fund.

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 

                                      -48-
<PAGE>
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  will 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. Generally, dividends and distributions are taxable
to shareholders, whether received in cash or reinvested in shares of a Fund. Any
distributions  that are not from a Fund's  investment  company taxable income or
net capital gain may be characterized as a return of capital to shareholders or,
in some cases, as capital gain. Shareholders will be notified annually as to the
federal  tax status of  dividends  and  distributions  they  receive and any tax
withheld thereon.

Dividends,  including capital gain dividends,  declared in October, November, or
December with a record date in such month and paid during the following  January
will be treated as having been paid by a Fund and  received by  shareholders  on
December 31 of the  calendar  year in which  declared,  rather than the calendar
year in which the dividends are actually received.

Distributions by a Fund reduce the net asset value of the Fund shares.  Should a
distribution  reduce the net asset value below a shareholder's  cost basis,  the
distribution  nevertheless  may be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment  standpoint,
it may constitute a partial return of capital.  In particular,  investors should
be careful to  consider  the tax  implication  of buying  shares just prior to a
distribution by a Fund. The price of shares  purchased at that time includes the
amount of the forthcoming  distribution,  but the distribution will generally be
taxable to them.

ORIGINAL ISSUE DISCOUNT.  Certain of the debt  securities  acquired by the Funds
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 Funds,  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.

Some of the debt  securities  may be purchased by the Funds 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 
                                      -49-
<PAGE>
disposition  of  debt  securities  denominated  in a  foreign  currency  and  on
disposition  of  certain  financial  contracts  and  options,  gains  or  losses
attributable to fluctuations in the value of foreign  currency  between the date
of acquisition of the security or contract and the date of disposition  also are
treated as ordinary gain or loss. These gains and losses,  referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of a
Fund's net investment  income to be distributed to its  shareholders as ordinary
income.

PASSIVE  FOREIGN  INVESTMENT  COMPANIES.  A Fund may invest in stocks of foreign
companies  that are  classified  under the Code as  passive  foreign  investment
companies ("PFICs"). In general, a foreign company is classified as a PFIC if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is  investment-type  income.  Under the PFIC rules,  an "excess
distribution"  received  with  respect to PFIC  stock is treated as having  been
realized ratably over the period during which a Fund held the PFIC stock. A Fund
itself will be subject to tax on the portion, if any, of the excess distribution
that is allocated to that Fund's  holding  period in prior taxable years (and an
interest  factor  will be  added  to the tax,  as if the tax had  actually  been
payable in such prior  taxable  years)  even  though  the Fund  distributes  the
corresponding income to shareholders. Excess distributions include any gain from
the sale of PFIC stock as well as certain  distributions from a PFIC. All excess
distributions are taxable as ordinary income.

A Fund may be able to elect  alternative  tax  treatment  with  respect  to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross  income its share of the  earnings of a PFIC
on a current basis,  regardless of whether any  distributions  are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. Alternatively, another
election is available  that involves  marking to market the Funds' PFIC stock at
the end of each taxable year with the result that  unrealized  gains are treated
as  though  they  were  realized  and  are  reported  as  ordinary  income;  any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are  reported as  ordinary  loss to the extent of any net  mark-to-market  gains
included in income in prior years.

FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign
countries  may be  subject to  withholding  and other  income or  similar  taxes
imposed  by such  countries.  If more  than 50% of the  value of a Fund's  total
assets at the close of its  taxable  year  consists  of  securities  of  foreign
corporations,  that Fund will be eligible and intends to elect to "pass through"
to the Fund's  shareholders  the amount of foreign income and similar taxes paid
by that Fund.  Pursuant  to this  election,  a  shareholder  will be required to
include in gross income (in addition to taxable dividends actually received) his
pro rata share of the foreign taxes paid by a Fund, and will be entitled  either
to deduct (as an itemized  deduction)  his pro rata share of foreign  income and
similar  taxes in  computing  his  taxable  income or to use it as a foreign tax
credit against his U.S. federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions,  but such a  shareholder  may be  eligible  to claim the foreign tax
credit (see below).  Each  shareholder will be notified within 60 days after the
close of the relevant  Fund's taxable year whether the foreign taxes paid by the
Fund will "pass through" for that year.

Generally,  a credit for foreign taxes is subject to the limitation  that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through  election is made, the source of a
Fund's income flows through to its  shareholders.  With respect to a Fund, gains
from the sale of  securities  will be treated as derived  from U.S.  sources and
certain currency  fluctuation  gains,  including  fluctuation gains from foreign
currency denominated debt securities, receivable and payable, will be treated as
ordinary  income  derived from U.S.  sources.  The limitation on the foreign tax
credit is applied  separately to foreign  source  passive income (as 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 
                                      -50-
<PAGE>
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 the Fund,  if the option is
sold,  any  resulting  gain or loss will be a capital gain or loss,  and will be
short-term or long term, depending upon the holding period of the option. If the
option  expires,  the  resulting  loss is a capital  loss and is  short-term  or
long-term,  depending  upon the holding  period of the option.  If the option is
exercised, the cost of the option, in the case of a call option, is added to the
basis of the purchased  security  and, in the case of a put option,  reduces the
amount realized on the underlying security in determining gain or loss.

Certain  options  and  financial  contracts  in which the Funds may  invest  are
"section 1256  contracts."  Gains or losses on section 1256 contracts  generally
are  considered  60%  long-term  and 40%  short-term  capital  gains  or  losses
("60/40");  however,  foreign  currency  gains or losses  (as  discussed  below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss.  Also,  section 1256  contracts  held by a Fund at the end of each taxable
year  (and  on  certain   other  dates  as   prescribed   under  the  Code)  are
"marked-to-market"  with the result that unrealized  gains or losses are treated
as though they were realized.

Generally,  the  hedging  transactions  undertaken  by  a  Fund  may  result  in
"straddles" for U.S. federal income tax purposes.  The straddle rules may affect
the  character  of gains (or losses)  realized by a Fund.  In  addition,  losses
realized by a Fund on  positions  that are part of the  straddle may be deferred
under the straddle  rules,  rather than being taken into account in  calculating
the  taxable  income for the  taxable  year in which the  losses  are  realized.
Because  only a few  regulations  implementing  the  straddle  rules  have  been
promulgated,  the tax  consequences  to a Fund of hedging  transactions  are not
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.

                                      -51-
<PAGE>
Notwithstanding  any of the foregoing,  a Fund may recognize gain (but not loss)
from a constructive  sale of certain  "appreciated  financial  positions" if the
Fund enters into a short sale, notional principal  contract,  futures or forward
contract  transaction with respect to the appreciated  position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests  (including options,  futures and forward contracts
and short sales) in stock, partnership interests,  certain actively traded trust
instruments and certain debt  instruments.  Constructive sale treatment does not
apply to certain  transactions  closed in the 90-day period ending with the 30th
day after the close of the Fund's taxable year, if certain conditions are met.

Requirements  relating  to each  Fund's  tax  status as a  regulated  investment
company  may  limit  the  extent  to  which a Fund  will be  able to  engage  in
transactions in options and foreign currency forward contracts.

SHORT SALES  AGAINST THE BOX. If a Fund sells short  "against  the box,"  unless
certain  constructive  sale rules  (discussed  above)  apply,  it may  realize a
capital gain or loss upon the closing of the sale.  Such gain or loss  generally
will be long- or short-term  depending upon the length of time the Fund held the
security which it sold short.  In some  circumstances,  short sales may have the
effect of reducing an otherwise  applicable  holding period of a security in the
portfolio. Were that to occur, the affected security would again have to be held
for the requisite  period before its disposition to avoid treating that security
as having  been sold within the first three  months of its holding  period.  The
constructive sale rule, however, alters this treatment by treating certain short
sales  against  the box and other  transactions  as a  constructive  sale of the
underlying  security held by the Fund, thereby requiring current  recognition of
gain, as described  more fully under "Options and Hedging  Transactions"  above.
Similarly,  if a  Fund  enters  into a  short  sale  of  property  that  becomes
substantially  worthless, the Fund will recognize gain at that time as though it
had  closed  the short  sale.  Future  Treasury  regulations  may apply  similar
treatment  to  other   transactions   with  respect  to  property  that  becomes
substantially worthless.

OTHER INVESTMENT COMPANIES. It is possible that by investing in other investment
companies,  a Fund  may  not be  able to meet  the  calendar  year  distribution
requirement   and  may  be  subject  to  federal  income  and  excise  tax.  The
diversification and distribution  requirements applicable to each Fund may limit
the  extent  to which  each  Fund  will be able to  invest  in other  investment
companies.

SALE 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 
                                      -52-
<PAGE>
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.

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.

                             SHAREHOLDER INFORMATION

Certificates  representing  shares of a  particular  Fund will not  normally  be
issued to  shareholders.  The Transfer  Agent will  maintain an account for each
shareholder upon which the registration and transfer of shares are recorded, and
any  transfers  shall  be  reflected  by  bookkeeping  entry,  without  physical
delivery.

The Transfer Agent will require that a shareholder  provide requests in writing,
accompanied  by  a  valid  signature   guarantee  form,  when  changing  certain
information  in an account (i.e.,  wiring  instructions,  telephone  privileges,
etc.).

The Company  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 Company 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.

                         CALCULATION OF PERFORMANCE DATA

Each Fund may, from time to time,  include "total return" in  advertisements  or
reports to shareholders or prospective  investors.  Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical  investment in a Fund over periods of 1, 5 and 10 years
(up to the life of the Fund), calculated pursuant to the following formula which
is prescribed by the SEC:

                                      -53-
<PAGE>
                                         n
                                 P(1 + T)  = ERV
Where:
         P =      a hypothetical initial payment of $1,000,
         T =      the average annual total return,
         n =      the number of years, and
         ERV =    the ending  redeemable value of a hypothetical  $1,000 payment
                  made at the beginning of the period.

All total return figures assume that all dividends are reinvested when paid.

From time to time,  a Fund may  advertise  its average  annual total return over
various periods of time. These total return figures show the average  percentage
change  in value of an  investment  in the Fund from the  beginning  date of the
measuring  period.  These  figures  reflect  changes  in the price of the Fund's
shares and assume that any income dividends  and/or capital gains  distributions
made by the Fund  during  the  period  were  reinvested  in  shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other  periods  as well  (such as from  commencement  of the Fund's
operations, or on a year-by-year basis).

Quotations of yield for a Fund will be based on all investment  income per share
earned during a particular  30-day period  (including  dividends and  interest),
less  expenses  accrued  during the period  ("net  investment  income")  and are
computed by dividing net  investment  income by the maximum  offering  price per
share on the last day of the period, according to the following formula:

                                    a - b     6
                                 2[(----- + 1)  - 1]
                                      cd
where
         a =      dividends and interest earned during the period,
         b =      expenses accrued for the period (net of reimbursements),
         c =      the  average  daily  number of shares  outstanding  during the
                  period that were entitled to receive dividends, and
         d =      the  maximum  offering  price per share on the last day of the
                  period.

ADDITIONAL  PERFORMANCE  QUOTATIONS.  Advertisements of total return will always
show a calculation  that includes the effect of the maximum sales charge but may
also show total  return  without  giving  effect to that charge.  Because  these
additional  quotations will not reflect the maximum sales charge payable,  these
performance  quotations  will be higher  than the  performance  quotations  that
reflect the maximum sales charge.

Total returns 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, and  Class M 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 

                                      -54-
<PAGE>
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.

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  Managers,  Pilgrim  Capital,
Pilgrim Group, Inc. or affiliates of the Company,  the Investment  Manager,  the
Portfolio  Managers,  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 the 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; and (vi) information regarding
rights  offerings  conducted  by  closed-end  funds  managed  by the  Investment
Manager.
                                      -55-
<PAGE>

The average  annual total  returns for each class of shares of each Fund for the
one-year  period  ended June 30,  1998 and for the period of  September  1, 1995
(commencement  of operations) to June 30, 1998 (assuming  deduction of any sales
load charge) is as follows:

                                         ONE YEAR      SINCE INCEPTION
                                         --------      ---------------
           LargeCap Leaders Fund
               Class A                    10.98%            18.97%
               Class B                    11.91%            19.83%
               Class M                    13.11%            19.39%
       
           MidCap Value Fund
               Class A                    11.62%            19.76%
               Class B                    12.40%            20.60%
               Class M                    13.60%            20.06%
       
           Asia-Pacific Equity Fund
               Class A                   -61.55%           -26.27%
               Class B                   -61.67%           -26.14%
               Class M                   -60.89%           -26.07%

                               GENERAL INFORMATION

CUSTODIAN.  The cash and  securities  owned by each  Fund are held by  Investors
Fiduciary  Trust Company,  801  Pennsylvania,  Kansas City,  Missouri  64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.

LEGAL COUNSEL.  Legal matters for the Company are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.

INDEPENDENT  AUDITORS.  KPMG Peat Marwick LLP, 725 South  Figueroa  Street,  Los
Angeles, California 90017, acts as independent auditors for the Company.

OTHER  INFORMATION.  The  Company  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 Company by any  governmental  agency.  The
Prospectus  and this  Statement of  Additional  Information  omit certain of the
information  contained  in the  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.

                              FINANCIAL STATEMENTS

The  financial  statements  for  the  fiscal  year  ended  June  30,  1998,  are
incorporated herein by reference,  from the Funds' Annual Report to Shareholders
dated June 30, 1998.  Copies of the Funds' Annual Report may be 

                                      -56-
<PAGE>
obtained  without  charge by  contacting  the  Company at Suite  1200,  40 North
Central Avenue, Phoenix, Arizona 84005, (800) 992-0180.

                                      -57-


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