As filed with the Securities and Exchange Commission on March 25, 1999
Securities Act File No. 33-91706
Investment Company Act File No. 811-9040
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act Of 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 8 [X]
and/or
Registration Statement Under The Investment Company Act Of 1940 [X]
Amendment No. 9 [X]
(Check appropriate box or boxes)
PILGRIM ADVISORY FUNDS, INC.
(Exact Name of Registrant Specified in Charter)
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 334-3436
James M. Hennessy, Esq. With copies to:
Pilgrim Investments, Inc. Jeffrey S. Puretz, Esq.
40 North Central Avenue, Suite 1200 Dechert Price & Rhoads
Phoenix, AZ 85004 1775 Eye Street, N.W.
(Name and Address of Agent for Service) Washington, D.C. 20006
------------------------
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date
for a previously filed post-effective amendment.
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<PAGE>
Pilgrim
THE VALUE OF INVESTING
CLASSES: A, B, C AND M
This prospectus contains important
information about these funds. You
read it carefully before you invest,
and keep it for future reference.
U.S. EQUITY FUNDS
Pilgrim MagnaCap Fund
Pilgrim LargeCap Leaders Fund
Pilgrim Large Cap Growth Fund
Pilgrim MidCap Value Fund
Pilgrim Mid Cap Growth Fund
Pilgrim Small Cap Growth Fund
Pilgrim Bank and Thrift Fund
INTERNATIONAL EQUITY FUNDS
Pilgrim Worldwide Growth Fund
Pilgrim International Core Growth Fund
Pilgrim International Small Cap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim Asia-Pacific Equity Fund
INCOME FUNDS
Pilgrim Strategic Income Fund
Pilgrim Government Securities Income Fund
Pilgrim High Yield Fund
OTHER FUNDS
Pilgrim Balanced Fund
Pilgrim Convertible Fund
The Securities and Exchange Commission has
not approved or disapproved these securities,
or determined if this prospectus is truthful
or complete. Any representation to the
contrary is a criminal offense.
Prospectus
May 24, 1999
<PAGE>
FUNDS AT A GLANCE
This table is a summary of the objectives, investments and risks of each Pilgrim
Fund. It is designed to help you understand the differences between the Funds,
the risks associated with each, and how risk and investment objectives relate.
This table is only a summary. You should read the complete descriptions of each
Fund's investment objectives, strategies and risks, which begin on page __.
<TABLE>
<CAPTION>
FUND INVESTMENT OBJECTIVE
---- --------------------
<S> <C> <C>
U.S. EQUITY FUNDS MagnaCap Fund Growth of capital, with dividend
Adviser: Pilgrim Investments, Inc. income as a secondary consideration
LargeCap Leaders Fund
Adviser: Pilgrim Investments, Inc. Long-term capital appreciation
LargeCap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
MidCap Value Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Cramer Rosenthal McGlynn LLC Long-term capital appreciation
Mid Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Small Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Bank and Thrift Fund Long-term capital appreciation, with
Adviser: Pilgrim Investments, Inc. income as a secondary objective
INTERNATIONAL EQUITY Worldwide Growth Fund
FUNDS Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
International Core Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
International Small Cap Growth Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Emerging Countries Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: Nicholas-Applegate Capital Mgt. Long-term capital appreciation
Asia-Pacific Equity Fund
Adviser: Pilgrim Investments, Inc.
Sub-adviser: HSBC Asset Management Long-term capital appreciation
INCOME FUNDS Strategic Income Fund
Adviser: Pilgrim Investments, Inc. Maximum Total Return
Government Securities Income Fund High current income, consistent with
Adviser: Pilgrim Investments, Inc. liquidity and preservation of capital
High Yield Fund High current income, with capital
Adviser: Pilgrim Investments, Inc. appreciation as a secondary objective
OTHER FUNDS Balanced Fund
Adviser: Pilgrim Investments, Inc. Long-term capital appreciation and
Convertible Fund current income
Adviser: Pilgrim Investments, Inc.
Sub-Adviser: Nicholas-Applegate Capital Mgt. Total return, consisting of capital
appreciation and current income
</TABLE>
1
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<TABLE>
<CAPTION>
MAIN INVESTMENTS MAIN RISKS
- --------------------------------------- ------------------------------------------------------------
<S> <C>
Equity securities that meet disciplined Price volatility and other risks that accompany an
selection criteria investment in equity securities.
Equity securities of large U.S. Price volatility and other risks that accompany an
companies believed to be leaders in investment in equity securities.
their industry
Equity securities of large U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented equity securities.
Equity securities of medium-sized U.S. Price volatility and other risks that accompany an
companies investment in medium-sized companies. Particularly sensitive
to price swings during periods of economic uncertainty.
Equity securities of medium-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and medium-sized companies.
Particularly sensitive to price swings during periods of
economic uncertainty.
Equity securities of small-sized U.S. Price volatility and other risks that accompany an
companies investment in growth-oriented and small-sized companies.
Particularly sensitive to price swings during periods of
economic uncertainty.
Equity securities of banks and thrifts Price volatility and other risks that accompany an
or their holding or parent companies, investment in equity securities. Susceptible to risks of
and savings accounts of mutual thrifts decline in the price of securities concentrated in the
banking and thrift industries.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries around the world, which may investment in growth-oriented foreign equities. Sensitive to
include the U.S. currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of issuers located in Price volatility and other risks that accompany an
countries outside the U.S. investment in growth-oriented foreign equities. Sensitive to
currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of small-sized Price volatility, liquidity and other risks that accompany
companies located outside the U.S. an investment in foreign, small-sized companies. Sensitive
to currency exchange rates, international political and
economic conditions and other risks that affect foreign
securities.
Equity securities of issuers located in Price volatility, liquidity and other risks that accompany
countries with emerging securities an investment in emerging Sensitive to currency exchange
markets. rates, international political and countries economic
conditions and other risks that affect foreign securities.
Equity securities of companies based in Price volatility and other risks that accompany an
the Asia-Pacific region, excluding investment in foreign equities and in securities of issuers
Australia and Japan in a single region. Sensitive to currency exchange rates,
international political and economic conditions and other
risks that affect foreign securities.
Investment grade and high yield debt Credit, interest rate, prepayment and other risks that
securities. accompany an investment in debt securities, including high
yield debt May be sensitive to credit securities risk during
economic downturns.
Securities issued or guaranteed by the Credit, interest rate, prepayment and other risks that
U.S. Government and certain of its accompany an investment in government bonds and mortgage
agencies or instrumentalities related investments. Generally has less credit risk than the
other income funds.
High yield debt securities Credit, interest rate and other risks that accompany an
investment in lower-quality debt securities. Particularly
sensitive to credit risk during economic downturns.
A mix of equity and debt securities Price volatility and other risks that accompany an
investment in equity securities. Credit, interest rate and
other risks that accompany an investment in debt securities.
Convertible securities of companies of Price volatility and other risks that accompany an
various sizes investment in equity securities. Credit, interest rate,
liquidity and other risks that accompany an investment in
debt securities
</TABLE>
2
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MAGNACAP FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks growth of capital, with dividend income as a secondary
consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Fund is managed with the philosophy that companies that can best meet the
Fund's objectives have paid increasing dividends or have had the capability to
pay rising dividends from their operations. The Fund normally invests at least
65% of its assets in equity securities of companies that meet the following
criteria:
+ CONSISTENT DIVIDENDS. A company must have paid or had the financial
capability from its operations to pay a dividend in 8 out of the last 10
years.
+ SUBSTANTIAL DIVIDEND INCREASES. A company must have increased its dividend
or had the financial capability from its operations to have increased its
dividend at least 100% over the past 10 years.
+ REINVESTED EARNINGS. Dividend payout must be less than 65% of current
earnings.
+ STRONG BALANCE SHEET. Long term debt should be no more than 25% of the
company's total capitalization or a company's bonds must be rated at least
A- or A-3.
+ ATTRACTIVE PRICE. A company's current share price should be in the lower
half of the stock's price/earnings ratio range for the past ten years, or
the ratio of the share price to its anticipated future earnings must be an
attractive value in relation to the average for its industry peer group or
that of the Standard & Poor's 500 Composite Stock Price Index.
The equity securities in which the Fund may invest include common stocks,
convertible securities, and rights or warrants. The remainder of the Fund's
assets may be invested in equity securities that the adviser believes have
growth potential because they represent an attractive value. In selecting
securities for the Fund, preservation of capital is also an important
consideration. Although the Fund normally will be invested as fully as
practicable in equity securities, assets that are not invested in equity
securities may be invested in high quality debt securities. The Fund may invest
up to 5% of its assets, measured at the time of investment, in foreign
securities. When the adviser anticipates unusual market or other conditions, the
Fund may temporarily depart from its principal investment strategies as a
defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in equity securities of larger companies, which
sometimes have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities that meet the Fund's disciplined investment criteria. Rather,
the market could favor growth-oriented stocks or small company stocks, or
may not favor equities at all.
3
<PAGE>
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
22.46% -3.11% 25.28% 8.02% 9.25% 4.15% 35.22% 18.51% 27.73% 16.09%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 18.93% (Q4 1998)
Worst quarter for period in bar chart: -15.99% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASSES B AND M (7/17/95)
------ ------- -------- -------------------------
Class A 9.40% 18.46% 15.13% --
Class B 10.26% -- -- 20.73%
Class M 11.56% -- -- 20.31%
S&P 500 Index 28.58% 23.81% 18.95% __%
* Class C shares of MagnaCap Fund were not offered during the period ended
December 31, 1998.
4
<PAGE>
LARGECAP LEADERS FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in equity securities of
large companies that the adviser believes are leaders in their industries. The
adviser considers whether these companies have a sustainable competitive edge,
and seeks companies it believes sell at reasonable prices relative to their
projected earnings. A company with a market capitalization (outstanding shares
multiplied by price per share) of over $5 billion is considered to be a large
company, although the Fund may also invest to a limited degree in companies that
have a market capitalization between $1 billion and $5 billion. The equity
securities in which the Fund may invest include common stock, convertible
securities, preferred stock, American Depositary Receipts, and warrants. The
Fund normally invests as fully as practicable (at least 80%) in equity
securities. When the adviser anticipates unusual market or other conditions, the
Fund may temporarily depart from its principal investment strategies as a
defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in equity securities of larger companies, which
sometimes have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
5
<PAGE>
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- 21.07% 20.15% 20.08%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 24.58% (Q4 1998)
Worst quarter for period in bar chart: -12.86% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to ____, 1998, the Fund's investment policies were different in that
they emphasized large company value stocks without necessarily emphasizing
industry leaders. Pilgrim Investments has been the Fund's investment adviser
since the Fund commenced operations; however, prior to November 1, 1997, the
Fund was managed by a sub-adviser.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index of the stocks of approximately 500 large-capitalization U.S.
companies. Unlike the bar chart, the table reflects the impact of sales charges.
The Index has an inherent performance advantage over the Fund since it has no
cash in its portfolio, imposes no sales charges and incurs no operating
expenses.
An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A 13.16% 18.67%
Class B 14.33% 19.28%
Class M 15.43% 18.93%
S&P 500 Index 28.58% _____%
* Class C shares of LargeCap Leaders Fund were not offered during the
period ended December 31, 1998.
6
<PAGE>
Adviser: Pilgrim Investments, Inc.
LARGE CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in equity securities
of large U.S. companies. The equity securities in which the Fund may invest
include common and preferred stocks, warrants, and convertible securities. The
Fund may invest the remainder of its assets in corporate debt securities of any
maturity which, at the time of investment, are rated investment grade by a
nationally recognized statistical rating agency, or of comparable quality if
unrated, U.S. Government securities and equity securities of foreign issuers.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
When the sub-adviser anticipates unusual market or other conditions, the Fund
may temporarily depart from its principal investment strategies as a defensive
measure.
The sub-adviser searches for companies it believes are successful and growing
that are managing change advantageously and are poised to exceed growth
expectations. It focuses on a "bottom-up" analysis that evaluates the financial
condition and competitiveness of individual companies. It uses a blend of both
traditional fundamental research and computer intensive systematic disciplines
to uncover signs of "change at the margin"-- positive business developments
which are not yet fully reflected in a company's stock price.
The Fund considers a company to be large if its market capitalization
corresponds at the time of purchase to the upper 90% of the Russell 1000 Growth
Index. As of June 30, 1998, the bottom 10% of the Index included companies with
capitalizations less than $3.9 billion. Capitalization of companies in the Index
will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests primarily in equity securities of
larger companies, which sometimes have more stable prices than smaller
companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company, growth-oriented securities in which the Fund invests. Rather, the
market could favor value stocks or small company stocks, or may not favor
equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
7
<PAGE>
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks, securities depositories, or exchanges than those in the
U.S., and foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- -- -- 59.45%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 37.87% (Q4 1998)
Worst quarter for period in bar chart: -8.50% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 1000 Growth Index, an unmanaged index
consisting of those companies among the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (7/21/97)
------ -------------------------
Class A 51.11% __%
Class B 53.68% __%
Class C 57.34% __%
Russell 1000 Growth Index __% __%
8
<PAGE>
Adviser: Pilgrim Investments, Inc.
MIDCAP VALUE FUND Sub-Adviser: Cramer Rosenthal McGlynn LLC
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests as fully as practicable (at least 80% of its assets)
in equity securities of medium-sized U.S. companies. The Fund considers
companies with market capitalizations between $200 million and $5 billion to be
medium-sized, although the Fund may also invest to a limited degree in companies
that have larger or smaller market capitalizations. The equity securities in
which the Fund may invest include common stock, convertible securities,
preferred stock and warrants. When the sub-adviser anticipates unusual market or
other conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
The Fund is managed with the disciplined investment style that its sub-adviser
employs in managing midcap value portfolios. As a value adviser, the sub-adviser
does not attempt to time market fluctuations; rather it relies on stock
selection to achieve investment results. The sub-adviser uses a "bottom-up"
approach, and seeks companies that are undervalued based on fundamental value
measures, underfollowed or misunderstood by the market and undergoing
fundamental change.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests in medium-sized companies, which are more susceptible to
price swings than larger companies, but usually tend to have less volatile
price swings than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
mid-cap value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or large company stocks, or may not
favor equities at all.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
9
<PAGE>
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
-- -- -- -- -- -- -- 29.56% 21.87% 4.89%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 13.87% (Q1 1998)
Worst quarter for period in bar chart: -13.94% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of two broad
measures of market performance - the Russell Midcap Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index, and the
Russell MidCap Value Index, an unmanaged index consisting of companies in the
Russell Midcap Index with lower book-to-price ratios and lower forecasted growth
values. Unlike the bar chart, the table reflects the impact of sales charges.
The Indices have an inherent performance advantage over the Fund since each has
no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A -1.15% 15.53%
Class B -0.75% 16.07%
Class M 0.63% 15.70%
Russell Midcap Index 10.10% ___%
Russell Midcap Value Index 5.08% ___%
* Class C shares of MidCap Value Fund were not offered during the period
ended December 31, 1998.
10
<PAGE>
Adviser: Pilgrim Investments, Inc.
MID CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of medium-sized U.S. companies.
Under normal conditions, the Fund invests at least 75% of its total assets in
common stocks. It may invest the remainder of its assets in preferred and
convertible securities, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, and securities issued by the U.S. Government and
its agencies and instrumentalities. The Fund may invest up to 20% of its total
assets in foreign securities. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies that are managing change advantageously and poised
to exceed growth expectations. It focuses on a "bottom-up" analysis that
evaluates the financial condition and competitiveness of individual companies.
It uses a blend of both traditional fundamental research and computer intensive
systematic disciplines to uncover what it calls "change at the margin"--positive
business developments which are not yet fully reflected in the company's stock
price.
The Fund considers a company to be medium-sized if it has a market
capitalization corresponding at the time of purchase to the middle 90% of the
Russell Midcap Growth Index. As of June 30, 1998, the middle 90% included
companies with capitalizations between $1.6 billion and $10.7 billion.
Capitalization of companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in medium-sized companies, which are
more susceptible to price swings than larger companies, but usually tend to
have less volatile price swings than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
mid-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
11
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -11.00% 37.64% 15.84% 15.88% 14.14%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 25.53% (Q4 1998)
Worst quarter for period in bar chart: -17.73% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell Midcap Growth Index, an unmanaged index
consisting of the 800 smallest companies in the Russell 1000 Index with higher
than average price-to-book ratios and forecasted growth. Unlike the bar chart,
the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 8.15% 12.20% ___% --
Class B 8.29% -- -- ___%
Class C 12.44% 12.75% ___% --
Russell Midcap
Growth Index ___% ___% ___% ___%
12
<PAGE>
Adviser: Pilgrim Investments, Inc.
SMALL CAP GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of small U.S. companies. Under
normal conditions, the Fund invests at least 75% of its total assets in common
stocks. It may invest the remainder in preferred and convertible securities,
debt securities of any maturity which are rated investment grade by a nationally
recognized statistical rating agency, or of comparable quality if unrated, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may invest up to 20% of its total assets in foreign securities. The
Fund may also use options and futures contracts involving securities, securities
indices, interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser searches for successful, growing companies that are
managing change advantageously and poised to exceed growth expectations. It
focuses on a "bottom-up" analysis that evaluates the financial condition and
competitiveness of individual companies. It uses a blend of both traditional
fundamental research and computer intensive systematic disciplines to uncover
what it calls "change at the margin"--positive business developments which are
not yet fully reflected in the company's stock price.
The Fund considers a company to be small if it has a market capitalization
corresponding at the time of purchase to the middle 90% of the Russell 2000
Growth Index. As of June 30, 1998, the middle 90% included companies with
capitalizations between $255 million and $1.4 billion. Capitalization of
companies in the Index will change with market conditions.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small-cap companies, which are
more susceptible to price swings than larger companies because they have
fewer financial resources, limited product and market diversification and
many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
13
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -4.03% 34.87% 18.27% 11.24% 3.68%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 26.90% (Q4 1998)
Worst quarter for period in bar chart: -23.64% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Russell 2000 Growth Index, an unmanaged index
comprised of smaller U.S. companies with greater-than-average growth orientation
. Unlike the bar chart, the table reflects the impact of sales charges. The
Index has an inherent performance advantage over the Fund since it has no cash
in its portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (12/27/93) CLASS B (5/31/95)
------ ------- -------------------------- -----------------
Class A -1.79% 10.84% ___% --
Class B -1.96% -- -- ___%
Class C 2.12% 11.37% ___% --
Russell 2000
Growth Index -2.60% 11.90% ___% ___%
14
<PAGE>
BANK AND THRIFT FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund primarily seeks long-term capital appreciation; a secondary objective
is income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of national and state-chartered banks (other than
money center banks), thrifts, and the holding or parent companies of such
depository institutions, and in savings accounts of mutual thrifts that may
allow the Fund to participate in stock conversions of the mutual thrift. This
policy may only be changed with approval of the shareholders of the Fund. The
equity securities described above include common stocks, convertible securities
(including convertible preferred stock) and warrants, but do not include
non-convertible preferred stocks or adjustable rate preferred stocks.
The Fund may invest up to 35% of its total assets in equity securities,
including preferred stocks or adjustable rate preferred stocks, of other types
of issuers, including money center banks, other financial services companies,
and companies that are not in financial services industries, and in
nonconvertible debt securities (including certificates of deposit, commercial
paper, notes, bonds or debentures) that are either issued or guaranteed by the
United States Government or an agency thereof or issued by a corporation or
other issuer and rated investment grade or comparable quality by at least one
nationally recognized rating organization. The Fund may invest up to 10% of its
assets in securities of other investment companies. When the adviser anticipates
unusual market or other conditions, the Fund may temporarily depart from its
principal investment strategies as a defensive measure.
The adviser selects securities primarily on the basis of fundamental investment
value and potential for future growth, including securities of institutions that
the adviser believes are well positioned to take advantage of investment
opportunities in the banking and thrift industries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
The Fund invests primarily in small- to medium-sized companies, which are
more susceptible to price swings than larger companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks or large company stocks, or may not favor equities
at all.
+ RISKS OF CONCENTRATION - because the Fund's investments are concentrated in
the banking and thrift industries, the value of the Fund may be subject to
15
<PAGE>
greater volatility than a Fund with a portfolio that is less concentrated.
If securities of banks and thrifts as a group falls out of favor, the Fund
could underperform funds that focus on other types of companies.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
20.79% -18.14% 49.49% 32.36% 7.79% -1.89% 49.69% 41.10% 64.86% -1.83%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 16.43% (Q3 1997)
Worst quarter for period in bar chart: -20.36% (Q3 1990)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
The following table compares the Fund's performance to that of two broad
measures of market performance - the S&P Major Regional Banks Index, an
unmanaged index comprised of major regional banks in the S&P 500 Index, and the
NASDAQ 100 Financial Index, an index of the 100 largest financial companies
traded on NASDAQ. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASS B (10/17/97)
------ ------- -------- ------------------
Class A -7.48% 25.89% 20.90% --
Class B -7.27% -- -- 4.29%
S&P Major Regional
Banks Index 10.42% 23.77% 21.41% __%
NASDAQ 100 Financial
Index -1.09% -- -- __%
* Prior to October 17, 1997, the Fund operated as a closed-end investment
company.
16
<PAGE>
Adviser: Pilgrim Investments, Inc.
WORLDWIDE GROWTH FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located around the world, which may include the U.S. The
Fund may invest up to 50% of its total assets in U.S. issuers.
The Fund normally invests at least 75% of its total assets in common and
preferred stocks, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities, which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may also invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks, or may not favor equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
17
<PAGE>
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- 2.45% 14.74% 17.92% 17.28% 37.34%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 26.87% (Q4 1998)
Worst quarter for period in bar chart: -13.43% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International World Index, an
unmanaged index comprised of more than 1,400 securities listed on exchanges in
the U.S., Europe, Canada, Australia, New Zealand and the Far East. Unlike the
bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 30.16% 16.17% ___% --
Class B 31.68% -- -- ___%
Class C 35.39% 17.78% ___% --
MSCI World Index 24.30% 15.70% ___% ___%
18
<PAGE>
Adviser: Pilgrim Investments, Inc.
INTERNATIONAL CORE GROWTH FUND Sub-Adviser:
Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in countries outside the U.S. The Fund may invest
up to 35% of its total assets in U.S. issuers. The Fund invests in the larger
companies in each country. Generally, this means issuers in each country whose
stock market capitalizations are in the top 75% of publicly traded companies in
that country.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It may invest
the remainder primarily in debt securities of any maturity of foreign companies
and foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser searches for successful, growing companies managing
change advantageously and poised to exceed growth expectations. It focuses on a
"bottom-up" analysis that evaluates the financial conditions and competitiveness
of individual companies worldwide. It uses a blend of both traditional
fundamental research, calling on the expertise of many external analysts in
different countries throughout the world, and computer intensive systematic
disciplines to uncover signs of "change at the margin"--positive business
developments which are not yet fully reflected in a company's stock price. It
gathers financial data on 20,000 companies in over 50 countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in large companies, which sometimes
have more stable prices than smaller companies.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or smaller company stocks, or may not favor equities
at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
19
<PAGE>
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- -- -- -- 20.92%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 17.16% (Q1 1998)
Worst quarter for period in bar chart: -14.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Europe,
Australia, Far East Index, an unmanaged index of major overseas markets. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (2/28/97)
------ -------------------------
Class A 14.60% ___%
Class B 15.31% ___%
Class C 19.20% ___%
MSCI EAFE Index 20.33% ___%
20
<PAGE>
Adviser: Pilgrim Investments, Inc.
INTERNATIONAL SMALL CAP GROWTH FUND Sub-Adviser:
Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of small companies located outside the U.S. The Fund may invest up to
35% of its total assets in U.S. issuers. The Fund emphasizes companies in the
bottom 75% of publicly traded companies as measured by stock market
capitalizations in each country.
The Fund normally invests at least 75% of its total assets in common and
preferred stock, warrants and convertible securities. It may invest the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. The Fund may also use options and futures
contracts involving securities, securities indices, interest rates and foreign
currencies as hedging techniques. When the sub-adviser anticipates unusual
market or other conditions, the Fund may temporarily depart from its principal
investment strategies as a defensive measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, searches for
successful, growing companies managing change advantageously and poised to
exceed growth expectations. It focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and computer intensive systematic disciplines to uncover signs of "change at the
margin"--positive business developments which are not yet fully reflected in a
company's stock price. It gathers financial data on 20,000 companies in over 50
countries.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund invests in small companies, which may be
more susceptible to greater price swings than larger companies because they
may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
small-cap growth securities in which the Fund invests. Rather, the market
could favor value-oriented stocks or large company stocks, or may not favor
equities at all.
21
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- 5.51% 17.58% 13.46% 35.57%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 24.53% (Q1 1998)
Worst quarter for period in bar chart: -15.35% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the
adviser, rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Salomon EPAC Extended Market Index, an unmanaged
index comprised of smaller-capitalization companies in 22 countries excluding
Canada and the United States. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (8/31/94) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 28.42% 14.50% ___% --
Class B 29.83% -- -- ___%
Class C 33.89% 14.90% ___% --
Salomon EPAC
EM Index ___% ___%
22
<PAGE>
Adviser: Pilgrim Investments, Inc.
EMERGING COUNTRIES FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests at least 65% of its total assets in equity securities of
issuers located in countries with emerging securities markets--that is,
countries with securities markets which are, in the opinion of the sub-adviser,
emerging as investment markets but have yet to reach a level of maturity
associated with developed foreign stock markets. These countries include but are
not limited to: Argentina, Brazil, Chile, China, Colombia, the Czech Republic,
Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, South Africa, South
Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in common and preferred stock, warrants and convertible securities. It
invests the remainder primarily in debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also use options and futures contracts involving securities, securities indices,
interest rates and foreign currencies as hedging techniques. When the
sub-adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
The Fund's sub-adviser, Nicholas-Applegate Capital Management, seeks issuers in
the early stages of development, growth companies, cyclical companies, or
companies believed to be undergoing a basic change in operations. The Investment
Adviser currently selects portfolio securities from an investment universe of
approximately 6,000 foreign issuers in over 20 emerging markets.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
This Fund invests in companies that the sub-adviser believes have the
potential for rapid growth, which may give the Fund a higher risk of price
volatility than a fund that emphasizes other styles, such as a
value-oriented style. The Fund may invest in small and medium-sized
companies, which may be more susceptible to greater price swings than
larger companies because they may have fewer financial resources, limited
product and market diversification and many are dependent on a few key
managers.
+ MARKET TRENDS - from time to time, the stock market may not favor the
growth securities in which the Fund invests. Rather, the market could favor
value-oriented stocks or large company stocks, or may not favor equities at
all.
23
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. Investments in emerging markets countries
are generally riskier than other kinds of foreign investments, partly
because emerging market countries may be less politically and economically
stable than other countries. It may also be more difficult to buy and sell
securities in emerging market countries.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -- 6.34% 27.50% 9.44% -22.19%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 15.01% (Q2 1995)
Worst quarter for period in bar chart: -26.06% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, Nicholas-Applegate Capital Management was the adviser,
rather than sub-adviser, to the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Emerging
Markets Free Index, an unmanaged index comprised of companies representative of
the market structure of 22 emerging market countries in Europe, Latin America
and the Pacific Basin. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR CLASSES A AND C (11/28/94) CLASS B (5/31/95)
------ -------------------------- -----------------
Class A -26.28% ___% --
Class B -26.05% -- ___%
Class C -22.98% ___% --
MSCI Emerging
Markets Free Index -25.30% ___% ___%
24
<PAGE>
Adviser: Pilgrim Investments, Inc.
Sub-Adviser: HSBC Asset Management Americas, Inc. and
ASIA-PACIFIC EQUITY FUND HSBC Asset Management Hong Kong Limited
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests in equity securities listed on stock exchanges in
countries in the Asia-Pacific region or issued by companies based in this
region. Asia-Pacific countries in which the Fund invests include, but are not
limited to, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand, but do not include Japan and Australia. The
equity securities in which the Fund may invest include common stock, convertible
securities, preferred stock, warrants, American Depositary Receipts, European
Depositary Receipts and other depositary receipts. When the sub-adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
The Fund is managed using the investment philosophy that the sub-adviser, HSBC
Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Limited
(HSBC), uses in managing private Asia-Pacific portfolios. HSBC bases investment
decisions on a disciplined approach that takes into consideration the following
factors: a macroeconomic overview of the region, specific country analysis,
setting target country weightings, evaluation of industry sectors within each
country, and selection of specific stocks. Decisions on company selection
include analysis of such fundamental factors as absolute rates of change of
earnings growth, earnings growth relative to the market and industry, quality of
earnings and stability of earnings growth, quality of management and product
line, interest rate sensitivity and liquidity of the stock.
The criteria used by the Fund to determine whether an issuer is based in the
Asia-Pacific region are: the country in which the issuer was organized; the
country in which the principal securities market for that issuer is located; the
country in which the issuer derives at least 50% of its revenues or profits from
goods produced or sold, investments made, or services performed; or the country
in which at least 50% of the issuer's assets are located .
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
+ MARKET TRENDS - from time to time, the stock market may not favor the value
securities in which the Fund invests. Rather, the market could favor
growth-oriented stocks, or may not favor equities at all.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment. To the extent the Fund invests in emerging
markets countries, the risks may be greater, partly because emerging market
25
<PAGE>
countries may be less politically and economically stable than other
countries. It may also be more difficult to buy and sell securities in
emerging market countries.
+ RISKS OF CONCENTRATION - because the Fund concentrates on a single region
of the world, the Fund's performance may be more volatile than that of a
Fund that invests globally. If Asia-Pacific securities fall out of favor,
it may cause the Fund to underperform funds that focus on other types of
stocks.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
-- -- -- -- -- -- -- 9.46% -43.73% -15.51%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 23.32% (Q4 1998)
Worst quarter for period in bar chart: -33.22% (Q4 1997)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Morgan Stanley Capital International Far East Free
ex-Japan Index, an unmanaged index of Far East markets excluding Japan. Unlike
the bar chart, the table reflects the impact of sales charges. The Index has an
inherent performance advantage over the Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (9/1/95)
------ ------------------------
Class A -20.37% -19.55%
Class B -20.57% -19.51%
Class M -19.26% -19.47%
MSCI Far East ex-Japan Index -4.82% ___7.80%
26
<PAGE>
STRATEGIC INCOME FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks maximum total return.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 60% of its total assets in
debt securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities that are rated investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. These securities include bonds, notes, mortgage-backed and
asset-backed securities with rates that are fixed, variable or floating. The
Fund may invest up to 40% of its total assets in high yield debt securities
rated below investment grade. The Fund may also invest in participation
interests and assignments in secured floating rate loans and notes, and may
invest up to 10% of its assets in other investment companies, including up to 5%
in Pilgrim Prime Rate Trust, a closed-end investment company that invests in
secured floating rate loans.
The average portfolio duration of the Fund will range from two to eight years.
The Fund may invest up to 30% of its total assets in securities payable in
foreign currencies. The Fund may also use options, futures contracts and
interest rate and currency swaps as hedging techniques. The Fund does not invest
in highly leveraged derivatives, such as swaps, interest-only or principal-only
stripped mortgage-backed securities, or interest rate futures contracts. When
the adviser anticipates unusual market or other conditions, the Fund may
temporarily depart from its principal investment strategies as a defensive
measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities,
including high yield debt securities. You could lose money on an investment in
the Fund. The Fund may be affected by the following risks, among others:
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This is
especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other
income funds, because it may invest in high yield debt securities, which
are considered predominantly speculative with respect to the issuer's
continuing ability to meet interest and principal payments.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. A security whose credit rating has been
lowered may be particularly difficult to sell. Foreign securities and
mortgage-related and asset-backed debt securities may be less liquid than
other debt securities. The Fund could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Fund.
27
<PAGE>
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options, futures contracts
and interest rate and currency swaps to help it achieve its investment
objective. There's always a risk that these techniques could reduce returns
or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund from year to year. The
bar chart does not reflect sales charges. If it did, returns would be lower than
those shown.
YEAR-BY-YEAR TOTAL RETURNS* Plot points for bar chart:
-- -- -- -- -- -- -- 1.77% 9.04% 7.94%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: ___% (Q_ 19__)
Worst quarter for period in bar chart: ___% (Q_ 19__)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Because Class A, Class B and Class C shares were first offered in 1998, the
returns in the bar chart are based upon the performance of Institutional Class
shares of the Fund for prior periods, restated to reflect Class A expenses.
Class A, Class B and Class C shares, after adjustment for class expenses, would
have had substantially similar returns because Institutional Class shares were
invested in the same portfolio of securities. Also, prior to May __, 1999, a
different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers Aggregate Bond Index, an unmanaged
index of fixed income securities. Unlike the bar chart, the table reflects the
impact of sales charges. The Index has an inherent performance advantage over
the Fund since it has no cash in its portfolio, imposes no sales charges and
incurs no operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
1 YEAR SINCE INCEPTION (8/31/95)
------ -------------------------
Institutional Class* ___% ___%
Lehman Aggregate Bond Index ___% ___%
* This table shows performance of the Institutional Class shares of the Fund,
restated to reflect Class A expenses, because Classes A, B and C of the
Fund did not have a full year's performance as of December 31, 1998. See
the footnote to the bar chart above.
28
<PAGE>
GOVERNMENT SECURITIES INCOME FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks high current income, consistent with liquidity and preservation
of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 70% of its total assets in securities issued
or guaranteed by the U.S. Government and the following agencies or
instrumentalities of the U.S. Government: the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct
obligations of the U.S. Treasury and mortgage-backed securities. The Fund may
fall below the 70% threshold due to changes in the value of the Fund's holdings
or the sale of securities to meet redemptions, in which case the Fund will
purchase only U.S. Government securities until the 70% level is restored. The
remainder of the Fund's assets may be invested in securities issued by other
agencies and instrumentalities of the U.S. Government and in instruments
collateralized by securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The foregoing policies are fundamental and may
not be changed without shareholder approval.
The Fund may invest in U.S. Government securities of any maturity; however, the
Fund is expected to have a weighted average maturity of 1 to 3 years. The
adviser determines the composition and weighted average maturity of the Fund's
portfolio on the basis of its judgment of existing market conditions. The Fund
may enter into reverse repurchase agreements, dollar roll transactions or
pairing off transactions. The Fund does not invest in highly leveraged
derivatives, such as swaps, interest-only or principal-only stripped
mortgage-backed securities, or interest rate futures contracts. When the adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in debt securities. You
could lose money on an investment in the Fund. The Fund may be affected by the
following risks, among others:
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. This Fund may be particularly sensitive to
interest rates because it primarily invests in U.S. government securities
and may invest in securities with long terms to maturity. Debt securities
with longer durations tend to be more sensitive to changes in interest
rates, usually making them more volatile than debt securities with shorter
durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund is
subject to less credit risk than the other income funds because it
principally invests in debt securities issued or guaranteed by the U.S.
government, its agencies and government sponsored enterprises.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
29
<PAGE>
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
12.92% 8.03% 11.90% 7.46% 14.71% -3.61% 14.51% 2.56% 7.85% 5.61%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 7.76% (Q2 1989)
Worst quarter for period in bar chart: -2.66% (Q1 1994)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of two broad
measures of market performance - the Lehman Brothers Intermediate Government
Index and the Merrill Lynch Treasuries/Agencies 1-3 Year Index. Unlike the bar
chart, the table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
CLASSES B AND M
1 YEAR 5 YEARS 10 YEARS(1) (7/17/95)
------ ------- -------- ------------------
Class A 0.63% 4.20% 6.56% --
Class B -0.15% -- -- 4.42%
Class M 1.66% -- -- 4.50%
Lehman Interm. Gov't. 8.49% 6.45% 8.34% __%
Merrill Lynch 1-3 Year** 6.98% 5.98% 7.38% __%
* Class C shares of Government Securities Income Fund were not offered during
the period ended December 31, 1998.
** The Fund has started comparing its performance to the Merrill Lynch
Treasuries/Agency 1-3 Year Index because the Fund has recently adopted a
policy of seeking an average portfolio maturity of 1 to 3 years.
Previously, the Fund's average portfolio maturity was generally longer than
1 to 3 years.
(1) The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would
have been had the Fund adhered to its borrowing restriction.
30
<PAGE>
HIGH YIELD FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income, with capital appreciation as a
secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in high yield debt
securities, including preferred stock and convertible securities, that do not in
the opinion of the adviser involve undue risk relative to their expected return.
High yield securities, which are commonly known as `junk bonds,' are securities
that are rated below investment grade, i.e., rated lower than Baa by Moody's
Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality
if not rated. Generally, the Fund will invest in securities rated lower than B
by Moody's or S&P only when the adviser believes the financial condition of the
issuer or other available protections reduce the risk to the Fund or that there
is greater value in the securities than is reflected in their prevailing market
price. In selecting securities for the Fund, preservation of capital is a
consideration.
The remainder of the Fund's assets may be invested in common stocks, investment
grade preferred stocks, investment grade debt obligations of all types, U.S.
Government securities, warrants, money market instruments (including repurchase
agreements on U.S. Government securities), mortgage related securities,
financial futures and related options, and participation interests and
assignments in floating rate loans and notes. The Fund may also invest up to 10%
of its assets in foreign debt securities of any rating. When the adviser
anticipates unusual market or other conditions, the Fund may temporarily depart
from its principal investment strategies as a defensive measure.
PRINCIPAL RISKS
The Fund is subject to risks associated with investing in lower rated debt
securities. You could lose money on an investment in the Fund. The Fund may be
affected by the following risks, among others:
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than other income funds because it invests in
high yield debt securities, which are considered predominantly speculative
with respect to the issuer's continuing ability to meet interest and
principal payments. This is especially true during periods of economic
uncertainty or economic downturns.
+ CHANGES IN INTEREST RATES - the value of the Fund's investments may fall
when interest rates rise. The Fund may be sensitive to changes in interest
rates because it may invest in debt securities with intermediate and long
terms to maturity. Debt securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them more volatile
than debt securities with shorter durations.
+ PREPAYMENT RISK - the Fund may invest in mortgage related securities, which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Fund will be forced to reinvest this money at lower yields.
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund. A security whose credit rating has been lowered may be particularly
difficult to sell.
31
<PAGE>
+ RISKS OF USING DERIVATIVES - this Fund may use options and financial
futures to help it achieve its investment objective. There's always a risk
that these techniques could reduce returns or increase the Fund's
volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)
Plot points for bar chart:
1.87% -9.49% 29.44% 16.19% 18.52% -1.55% 17.71% 15.76% 14.98% -2.96%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 14.83% (Q1 1991)
Worst quarter for period in bar chart: -7.91% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
The following table compares the Fund's performance to that of a broad measure
of market performance - the Lehman Brothers High Yield Index, an unmanaged index
of high yield bonds. Unlike the bar chart, the table reflects the impact of
sales charges. The Index has an inherent performance advantage over the Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998*
SINCE INCEPTION OF
1 YEAR 5 YEARS 10 YEARS CLASSES B AND M (7/17/95)
------ ------- -------- -------------------------
Class A -7.60% 7.36% 8.88% --
Class B -8.02% -- -- 7.75%
Class M -6.58% -- -- 7.69%
Lehman High
Yield Index 1.87% 8.57% 10.55% __%
* Class C shares of High Yield Fund were not offered during the period ended
December 31, 1998.
32
<PAGE>
BALANCED FUND Adviser: Pilgrim Investments, Inc.
INVESTMENT OBJECTIVE
The Fund seeks a balance of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's adviser actively manages a blended portfolio of equity and debt
securities with an emphasis on overall total return. The Fund normally maintains
40% to 60% of its assets in debt securities of any maturity issued by
corporations or other business entities and the U.S. Government and its agencies
and instrumentalities, and government sponsored enterprises, and will seek a
target allocation of 50%, although this may vary with market conditions. The
remainder will be invested in equity securities, which will be managed in
accordance with the principal investment strategies of the LargeCap Leaders
Fund.
A portion of the Fund's net assets (up to 35%) may be invested in high yield
debt securities rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. The Fund may
also invest in participation interests and assignments in secured floating rate
loans and notes, and may invest up to 10% of its assets in other investment
companies, including up to 5% in Pilgrim Prime Rate Trust, a closed-end
investment company that invests in secured floating rate loans. The Fund may
invest up to 20% of its total assets in foreign securities. The Fund may use
options on securities, securities indices, interest rates and foreign currencies
as a hedging technique. The Fund may invest up to 35% of its net assets in zero
coupon securities. When the adviser anticipates unusual market or other
conditions, the Fund may temporarily depart from its principal investment
strategies as a defensive measure.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Equity securities face market, financial and
other risks, and their values may go up or down, sometimes rapidly and
unpredictably. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher volatility.
+ MARKET TRENDS - from time to time, the stock market may not favor the large
company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not
favor equities at all.
+ CHANGES IN INTEREST RATES - the value of the debt securities held by the
Fund may fall when interest rates rise. The Fund may be sensitive to
changes in interest rates because it may invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer
durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than debt securities with shorter durations.
+ CREDIT RISK - the Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. This Fund may be
subject to more credit risk than the other income funds, because it may
invest in high yield debt securities, which are considered predominantly
speculative with respect to the issuer's continuing ability to meet
interest and principal payments. This is especially true during periods of
economic uncertainty or economic downturns.
33
<PAGE>
+ INABILITY TO SELL SECURITIES - high yield securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S.
investments for many reasons, including changes in currency exchange rates,
unstable political and economic conditions, a lack of adequate company
information, differences in the way securities markets operate, less secure
foreign banks or securities depositories than those in the U.S., and
foreign controls on investment.
+ RISKS OF USING DERIVATIVES - this Fund may use options to help it achieve
its investment objective. There's always a risk that these techniques could
reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -6.29% 23.44% 16.39% 20.50% 23.34%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 14.44% (Q3 1997)
Worst quarter for period in bar chart: -5.88% (Q2 1994)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
The following table compares the Fund's performance to that of a broad measure
of market performance - a composite index consisting of 60% Standard & Poor's
500 Composite Stock Price Index and 40% Lehman Brothers Government/Corporate
Bond Index. Unlike the bar chart, the table reflects the impact of sales
charges. The Indices have an inherent performance advantage over the Fund since
each has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C (4/19/93) CLASS B (5/31/95)
------ ------- ------------------------- -----------------
Class A 16.87% 13.64% ___% --
Class B 17.80% -- -- ___%
Class C 21.52% 14.14% ___% --
Composite Index ___% ___% ___% ___%
34
<PAGE>
Adviser: Pilgrim Investments, Inc.
CONVERTIBLE FUND Sub-Adviser: Nicholas-Applegate Capital Management
INVESTMENT OBJECTIVE
The Fund seeks maximum total return, consisting of capital appreciation and
current income.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. The Fund emphasizes companies with market
capitalizations above $500 million. Through investments in convertible
securities, the Fund seeks to capture the upside performance of the underlying
equities with less downside exposure. The Fund may invest the remainder of its
assets in common and preferred stocks, debt securities of any maturity, and
securities issued by the U.S. Government and its agencies and instrumentalities.
The Fund may also use options and futures contracts involving securities,
securities indices, interest rates and foreign currencies as hedging techniques.
The Fund normally invests a minimum of 25% of its total assets in common and
preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in debt
securities rated below investment grade by a nationally recognized statistical
rating agency, or of comparable quality if unrated. The Fund also may invest up
to 35% of its net assets in zero coupon securities. When the adviser anticipates
unusual market or other conditions, the Fund may temporarily depart from its
principal investment strategies as a defensive measure.
The Fund's sub-adviser evaluates each security's investment characteristics as a
fixed income instrument as well as its potential for capital appreciation. In
evaluating convertibles, the sub-adviser searches for what it calls "change at
the margin" - positive business developments which are not yet fully reflected
in the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
PRINCIPAL RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:
+ PRICE VOLATILITY - the value of the Fund changes as the prices of its
investments go up or down. Convertible securities have investment
characteristics of both equity and debt securities. Equity securities face
market, financial and other risks, and their values may go up or down,
sometimes rapidly and unpredictably. While equities may offer the potential
for greater long-term growth than most debt securities, they generally have
higher volatility. The Fund may invest in small and medium-sized companies,
which may be more susceptible to greater price swings than larger companies
because they may have fewer financial resources, limited product and market
diversification and many are dependent on a few key managers.
+ CHANGES IN INTEREST RATES - the value of the convertible and debt
securities held by the Fund may fall when interest rates rise. The Fund may
be sensitive to changes in interest rates because it may invest in
securities with intermediate and long terms to maturity. Securities with
longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than securities with shorter durations.
35
<PAGE>
+ CREDIT RISK - the Fund could lose money if the issuer of a convertible or
debt security is unable to meet its financial obligations or goes bankrupt.
This is especially true during periods of economic uncertainty or economic
downturns. This Fund may be subject to more credit risk than the other bond
funds, because the convertible securities and debt securities in which it
invests may be lower-rated securities.
+ INABILITY TO SELL SECURITIES - lower rated securities may be less liquid
than higher quality investments. The Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Fund.
+ RISKS OF USING DERIVATIVES - this Fund may use options and futures
contracts to help it achieve its investment objective. There's always a
risk that these techniques may not correlate well with the Fund's
investments and could reduce returns or increase the Fund's volatility.
An investment in the Fund is not a deposit of a bank and is not insured by the
Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing changes in the performance of the Fund's Class A shares from
year to year. The bar chart does not reflect sales charges. If it did, returns
would be lower than those shown.
YEAR-BY-YEAR TOTAL RETURNS (Class A)* Plot points for bar chart:
-- -- -- -- -- -8.23% 21.67% 20.29% 22.58% 20.86%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Best quarter for period in bar chart: 19.73% (Q4 1998)
Worst quarter for period in bar chart: -9.08% (Q3 1998)
The Fund's year-to-date total return as of March 31, 1999 was ___%
* Prior to May __, 1999, a different adviser managed the Fund.
36
<PAGE>
The following table compares the Fund's performance to that of a broad measure
of market performance - the First Boston Convertible Index, an unmanaged index
representing the universe of convertible securities. Unlike the bar chart, the
table reflects the impact of sales charges. The Index has an inherent
performance advantage over the Fund since it has no cash in its portfolio,
imposes no sales charges and incurs no operating expenses. An investor cannot
invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
SINCE INCEPTION OF SINCE INCEPTION OF
1 YEAR 5 YEARS CLASSES A AND C CLASS B
(4/19/93) (5/31/95)
------ ------- ------------------ ------------------
Class A 14.54% 13.52% ___% --
Class B 15.31% -- -- ___%
Class C 19.12% 14.03% ___% --
First Boston
Convertible Index 17.35% 12.97% ___% ___%
37
<PAGE>
FEES AND EXPENSES
The following tables show what it will cost you directly or indirectly to invest
in a Fund.
SHAREHOLDER TRANSACTION FEES (fees paid directly from your investment)
CLASS A CLASS B CLASS C(1) CLASS M(2)
------- ------- ---------- ----------
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price)
EQUITY FUNDS AND CONVERTIBLE
AND BALANCED FUNDS 5.75%(3) None None 3.50%(3)
INCOME FUNDS 4.75%(3) None None 3.25%(3)
Maximum deferred sales charge
(load) (as a percentage of the
lower of original purchase price
or redemption proceeds)
EQUITY FUNDS AND CONVERTIBLE
AND BALANCED FUNDS None(4) 5.00%(5) 1.00%(6) None
INCOME FUNDS None(4) 5.00%(5) 1.00%(6) None
(1) Bank and Thrift Fund and Asia-Pacific Equity Fund do not offer Class C
shares.
(2) Class M shares are offered only by MagnaCap Fund, LargeCap Leaders Fund,
MidCap Value Fund, Asia-Pacific Equity Fund, Government Securities Income
Fund and High Yield Fund.
(3) Reduced for purchases of $50,000 and over. See Shareholder Guide.
(4) A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See Shareholder
Guide.
(5) Imposed upon redemption within 6 years from purchase. The fee has scheduled
reductions after the first year. See Shareholder Guide.
(6) Imposed upon redemption within 1 year from purchase.
38
<PAGE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)1
CLASS A
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 0.30% 0.35% 1.37% -- 1.37%
LargeCap Leaders 1.00 0.25 1.03 2.28 (0.53)% 1.75
Large Cap Growth 0.75 0.35 -- -- -- 1.60
MidCap Value 1.00 0.25 0.53 1.78 (0.03) 1.75
Mid Cap Growth 0.75 0.35 -- -- -- 1.60
Small Cap Growth 1.00 0.35 -- -- -- 1.95
Bank and Thrift 0.72 0.25 0.23 1.20 -- 1.20
Worldwide Growth 1.00 0.35 -- -- -- 1.85
International Core Growth 1.00 0.35 -- -- -- 1.95
International Small Cap Growth 1.00 0.35 -- -- -- 1.95
Emerging Countries 1.25 0.35 -- -- -- 2.25
Asia-Pacific Equity 1.25 0.25 1.30 2.80 (0.80) 2.00
Government Securities Income 0.50 0.25 0.83 1.58 (0.08) 1.50
Strategic Income 0.45 0.35 -- -- -- 0.95
High Yield 0.60 0.25 0.32 1.17 (0.17) 1.00
Balanced 0.75 0.35 -- -- -- 1.60
Convertible 0.75 0.35 -- -- -- 1.60
CLASS B
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
Large Cap Growth 0.75 1.00 -- -- -- 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
Mid Cap Growth 0.75 1.00 -- -- -- 2.25
Small Cap Growth 1.00 1.00 -- -- -- 2.60
Bank and Thrift 0.72 1.00 0.23 1.95 -- 1.95
Worldwide Growth 1.00 1.00 -- -- -- 2.50
International Core Growth 1.00 1.00 -- -- -- 2.60
International Small Cap Growth 1.00 1.00 -- -- -- 2.60
Emerging Countries 1.25 1.00 -- -- -- 2.90
Asia-Pacific Equity 1.25 1.00 1.30 3.55 (0.80) 2.75
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 1.00 -- -- -- 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
Balanced 0.75 1.00 -- -- -- 2.25
Convertible 0.75 1.00 -- -- -- 2.25
</TABLE>
39
<PAGE>
CLASS C3
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
MagnaCap 0.72% 1.00% 0.35% 2.07% -- 2.07%
LargeCap Leaders 1.00 1.00 1.03 3.03 (0.53)% 2.50
Large Cap Growth 0.75 1.00 -- -- -- 2.25
MidCap Value 1.00 1.00 0.53 2.53 (0.03) 2.50
Mid Cap Growth 0.75 1.00 -- -- -- 2.25
Small Cap Growth 1.00 1.00 -- -- -- 2.60
Worldwide Growth 1.00 1.00 -- -- -- 2.50
International Core Growth 1.00 1.00 -- -- -- 2.60
International Small Cap Growth 1.00 1.00 -- -- -- 2.60
Emerging Countries 1.25 1.00 -- -- -- 2.90
Government Securities Income 0.50 1.00 0.83 2.33 (0.08) 2.25
Strategic Income 0.45 1.00 -- -- -- 1.35
High Yield 0.60 1.00 0.32 1.92 (0.17) 1.75
Balanced 0.75 1.00 -- -- -- 2.25
Convertible 0.75 1.00 -- -- -- 2.25
CLASS M
TOTAL ANNUAL
DISTRIBUTION FUND FEE WAIVER
ADVISORY AND SERVICE OTHER OPERATING BY NET
FUND FEES (12B-1) FEES EXPENSES EXPENSES Adviser(2) EXPENSES
- ---- ---- ------------ -------- -------- ---------- --------
MagnaCap 0.72% 0.75% 0.35% 1.82% -- 1.82%
LargeCap Leaders 1.00 0.75 1.03 2.78 (0.53)% 2.25
MidCap Value 1.00 0.75 0.53 2.28 (0.03) 2.25
Asia-Pacific Equity 1.25 0.75 1.30 3.30 (0.80) 2.50
Government Securities Income 0.50 0.75 0.83 2.08 (0.08) 2.00
High Yield 0.60 0.75 0.32 1.67 (0.17) 1.50
</TABLE>
- ----------
(1) Shown as a ratio of expenses to average daily net assets.
(2) Pilgrim Investments has entered into expense limitation agreements with
each of the funds except MagnaCap Fund, Bank and Thrift Fund and Government
Securities Income Fund, under which it will limit expenses of the Fund,
excluding interest, taxes, brokerage and extraordinary expenses, subject to
possible reimbursement to Pilgrim Investments within three years. The
expense limit for each such Fund is shown as "Net Expenses." Pilgrim
Investments has separately agreed to reimburse Government Securities Income
Fund to the extent that total Fund operating expenses, excluding interest,
taxes, brokerage commissions, extraordinary expenses, and distribution fees
in excess of 0.25%, exceed 1.50% of the Fund's average daily net asset on
the first $40 million in net assets and 1.00% of average daily net assets
in excess of $40 million.
(3) Because Class C shares are new for the MagnaCap, LargeCap Leaders, MidCap
Value, Government Securities Income and High Yield Funds, their expenses
are based on Class B expenses.
EXAMPLES
The hypothetical examples below show what your expenses would be if you invested
$10,000 over the time frames indicated, assuming a 5% return each year, that you
reinvest all distributions, and that operating expenses for each Fund remain the
same. The example is for comparison only, and does not represent the Funds'
actual expenses and returns, either past or future.
40
<PAGE>
CLASS A
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $706 $ 984 $1,282 $2,127 $706 $ 984 $1,282 $2,127
LargeCap Leaders 743 1,094 1,469 2,519 743 1,094 1,469 2,519
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 743 1,094 1,469 2,519 743 1,094 1,469 2,519
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Bank and Thrift 690 934 1,197 1,946 690 934 1,197 1,946
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Asia-Pacific Equity 766 1,166 1,591 2,768 766 1,166 1,591 2,768
Government Securities Income 620 927 1,255 2,180 620 927 1,255 2,180
Strategic Income -- -- -- -- -- -- -- --
High Yield 572 778 1,001 1,641 572 778 1,001 1,641
Balanced -- -- -- -- -- -- -- --
CLASS B
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $710 $ 949 $1,314 $2,221 $210 $649 $1,114 $2,221
LargeCap Leaders 753 1,079 1,531 2,652 253 779 1,331 2,652
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 753 1,079 1,531 2,652 253 779 1,331 2,652
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Bank and Thrift 698 912 1,252 2,080 198 612 1,052 2,080
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Asia-Pacific Equity 778 1,153 1,654 2,900 278 853 1,454 2,900
Government Securities Income 728 1,003 1,405 2,396 228 703 1,205 2,396
Strategic Income -- -- -- -- -- -- -- --
High Yield 678 851 1,149 1,864 178 551 949 1,864
Balanced -- -- -- -- -- -- -- --
</TABLE>
41
<PAGE>
CLASS C
<TABLE>
<CAPTION>
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MagnaCap $310 $649 $1,114 $2,400 $210 $649 $1,114 $2,400
LargeCap Leaders 353 779 1,331 2,836 253 779 1,331 2,836
Large Cap Growth -- -- -- -- -- -- -- --
MidCap Value 353 779 1,331 2,836 253 779 1,331 2,836
Mid Cap Growth -- -- -- -- -- -- -- --
Small Cap Growth -- -- -- -- -- -- -- --
Convertible -- -- -- -- -- -- -- --
Worldwide Growth -- -- -- -- -- -- -- --
International Core Growth -- -- -- -- -- -- -- --
International Small Cap Growth -- -- -- -- -- -- -- --
Emerging Countries -- -- -- -- -- -- -- --
Government Securities Income 328 703 1,205 2,585 228 703 1,205 2,585
Strategic Income -- -- -- -- -- -- -- --
High Yield 278 551 949 2,062 178 551 949 2,062
Balanced -- -- -- -- -- -- -- --
CLASS M
Assuming you redeem at the
end of each time period. Assuming you do not redeem.
Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ---- ------ ------- ------- -------- ------ ------- ------- --------
MagnaCap $528 $ 902 $1,301 $2,412 $528 $ 902 $1,301 $2,412
LargeCap Leaders 570 1,029 1,513 2,844 570 1,029 1,513 2,844
MidCap Value 570 1,029 1,513 2,844 570 1,029 1,513 2,844
Asia-Pacific Equity 594 1,101 1,634 3,087 594 1,101 1,634 3,087
Government Securities Income 521 932 1,368 2,577 521 932 1,368 2,577
High Yield 473 784 1,117 2,057 473 784 1,117 2,057
</TABLE>
42
<PAGE>
SHAREHOLDER GUIDE
CHOOSING A SHARE CLASS - PILGRIM PURCHASE OPTIONS(TM)
Depending upon the Fund, you may select from up to four separate classes of
shares: Class A, Class B, Class C and Class M.
CLASS A
+ Front-end sales charge, as described below
+ Distribution and service (12b-1) fees of 0.25% to 0.35%.
CLASS B
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00% o A contingent deferred
sales charge, as described below.
+ Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses. Class B shares acquired initially through Funds
that were part of the Nicholas-Applegate Mutual Funds at the time of
purchase will convert after seven years from the date of original purchase.
CLASS C
+ No front-end sales charge; all your money goes to work for you right away.
+ Distribution and service (12b-1) fees of 1.00%
+ A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
+ No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
+ Not offered by Bank and Thrift Fund and Asia-Pacific Equity Fund.
CLASS M
+ Lower front-end sales charge than Class A, as described below o
Distribution and service (12b-1) fees of 0.75%.
+ No automatic conversion to Class A shares, so annual expenses continue at
the Class M level throughout the life of your investment.
+ Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund,
Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield
Fund.
When choosing between classes, you should carefully consider the ongoing annual
expenses along with the initial sales charge or the contingent deferred sales
charge. The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Higher distribution
fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A or Class M shares.
Orders for Class B shares and Class M shares in excess of $250,000 and
$1,000,000, respectively, will be accepted as orders for Class A shares or
declined. You should discuss which Class of shares is right for you with your
investment professional.
43
<PAGE>
SALES CHARGE CALCULATION
CLASS A
Class A shares of the funds are sold subject to the following sales charge.
<TABLE>
<CAPTION>
EQUITY FUNDS, BALANCED FUND AND
CONVERTIBLE FUND INCOME FUNDS
--------------------------------- -------------------------------
AS A % OF THE AS A % OF NET AS A % OF THE AS A % OF NET
YOUR INVESTMENT OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
- --------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000 5.75% 6.10% 4.75% 4.99%
$50,000 - $99,999 4.50% 4.71% 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63% 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56% 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04% 2.00% 2.04%
$1,000,000 and over See below See below
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE. There is no front-end sales charge if you
purchase Class A shares in an amount of $1 million or more. However, the shares
will be subject to a contingent deferred sales charge if they are redeemed
within one or two years of purchase, depending on the amount of the purchase, as
follows:
PERIOD DURING WHICH
YOUR INVESTMENT CDSC CDSC APPLIES
- --------------- ---- ------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares that were purchased in an amount of $1 million or more
through Funds that were part of the Nicholas-Applegate Mutual Funds at the time
of purchase will be subject to a contingent deferred sales charge of 1% within
one year from the date of purchase.
CLASS B AND CLASS C
Class B and Class C shares are offered at their net asset value per share
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares that you sell within a certain period of
time after you bought them. The amount of the CDSC is based on the lesser of the
net asset value of the shares at the time of purchase or redemption. There is no
CDSC on shares acquired through the reinvestment of dividends and capital gains
distributions. The CDSCs are as follows:
CLASS B DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
- -------------------- ----------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6th year none
44
<PAGE>
CLASS C DEFERRED SALES CHARGE
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
- -------------------- ----------
1st year 1%
After 1st year none
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Funds will first redeem shares in your account that are not subject
to a CDSC, and then will sell shares that have the lowest CDSC.
CLASS M
Class M shares of the funds are sold subject to the following sales charge.
<TABLE>
<CAPTION>
MAGNACAP, LARGECAP LEADERS,
MIDCAP VALUE, AND GOVERNMENT SECURITIES INCOME
ASIA-PACIFIC EQUITY FUNDS AND HIGH YIELD FUNDS
-------------------------------- -------------------------------
AS A % OF THE AS A % OF NET AS A % OF THE AS A % OF NET
YOUR INVESTMENT OFFERING PRICE ASSET VALUE OFFERING PRICE ASSET VALUE
- --------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.25% 3.36%
$50,000 - $99,999 2.50% 2.56% 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52% 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01% 1.00% 1.01%
$500,000 and over none none none none
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCED SALES CHARGES. You may reduce the initial sales charge on a purchase of
Class A or Class M shares of the funds by combining multiple purchases to take
advantage of the breakpoints in the sales charge schedules. You may do this by:
LETTER OF INTENT - lets you purchase shares over a 13 month period and pay the
same sales charge as if the shares had all been purchased at once.
RIGHTS OF ACCUMULATION - lets you add the value of shares of any open-end
Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of
your next purchase for purposes of calculating the sales charge.
COMBINATION PRIVILEGE - shares held by investors in the Pilgrim Funds which
impose a CDSC may be combined with Class A or Class M shares for a reduced sales
charge.
See the Account Application or the Statement of Additional Information for
details, or contact your financial representative or the Shareholder Servicing
Agent for more information.
CDSC WAIVERS. If you notify the Transfer Agent at the time of redemption, the
CDSC for each Class will be waived in the following cases:
+ redemptions following the death or permanent disability of a shareholder if
made within one year of death or the initial determination of permanent
disability. The waiver is available only for shares held at the time of
death or initial determination of permanent disability.
45
<PAGE>
+ for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan,
up to a maximum of 12% per year of a shareholder's account value based on
the value of the account at the time the plan is established and annually
thereafter, provided all dividends and distributions are reinvested and the
total redemptions do not exceed 12% annually.
+ mandatory distributions from a tax-deferred retirement plan or an IRA.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. This
privilege can be used only once per calendar year.
SALES CHARGE WAIVERS. Class A or Class M shares may be purchased without a sales
charge by certain individuals and institutions. For additional information,
contact the Shareholder Servicing Agent, or see the Statement of Additional
Information.
46
<PAGE>
PURCHASING SHARES
You may purchase shares by the following methods. The minimum initial investment
in a Fund is $1,000 ($250 for IRAs), and the minimum for additional investment
in a Fund is $100.
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
------ ------------------ ---------------------
<S> <C> <C>
By contacting your + An investment professional with an authorized firm can help you establish and
investment professional maintain your account.
By mail + Visit or consult an investment + Visit or consult an investment
professional professional.
+ Make your check payable to the + Fill out the Account Additions form
Pilgrim Funds and mail it, along with included on the bottom of your
a completed to the Fund and mail them account statement along with your
Application. Please indicate your check payable to the Fund and mail
investment professional on the New them to the address on the account
Account Application statement.
+ Remember to write your account number
on the check.
By wire + Call the Pilgrim Operations + Wire the funds in the same manner
Department at (800) 336-3436 to described under "Initial Investment."
obtain an account number and indicate
your investment professional on the
account.
+ Instruct your bank to wire funds to
the Fund in the care of: Investors
Fiduciary Trust Co. ABA #101003621
Kansas City, MO credit to:
_______________ (the Fund) A/C
#751-8315; for further credit to:
Shareholder A/C #__________________
(A/C # you received over the
telephone) Shareholder Name:
________________ (Your Name Here)
+ After wiring funds you must complete
the Account Application and send it
to: Pilgrim Funds P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>
The Funds and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Funds reserve the right to liquidate sufficient shares to recover
annual transfer agent fees should you fail to maintain your account value at a
minimum of $1,000.00 ($250.00 for IRA's).
RETIREMENT PLANS. The Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
47
<PAGE>
available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company (`IFTC') acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodial fee annually for the maintenance of such
accounts.
HOW TO REDEEM SHARES
You may redeem shares by the following methods:
METHOD PROCEDURES
------ ----------
By contacting Your + You may redeem by contacting your investment
investment professional. Investment Your professionals may
professional charge for their services in connection with your
redemption request, but neither the Fund nor the
Distributor imposes any such charge.
By Mail + Send a written request specifying the Fund name and
share class, your account number, the name(s) in
which the account is registered, and the dollar
value or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
+ If certificated shares have been issued, the
certificate must accompany the written request.
+ Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. A suggested form of such certification
is provided on the Account Application.
+ A signature guarantee may be required.
By Telephone -- + You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you check the
box on the Account Application which signifies that
you do not wish to use telephone redemptions. To
redeem by telephone, call the Shareholder Servicing
Agent at (800) 992-0180.
+ RECEIVING PROCEEDS BY CHECK:
+ You may have redemption proceeds (up to a maximum
of $100,000) mailed to an address which has been
on record with Pilgrim Funds for at least 30
days.
+ RECEIVING PROCEEDS BY WIRE:
+ You may have redemption proceeds (subject to a
minimum of $5,000) wired to your
pre-designated bank account.
+ You will NOT be able to receive redemption
proceeds by wire unless you check the box on
the Account Application which signifies that
you wish to receive redemption proceeds by
wire and attach a voided check.
+ Under normal circumstances, proceeds will be
transmitted to your bank on the business day
following receipt of your instructions,
provided redemptions may be made.
+ In the event that share certificates have been
issued, you may not request a wire redemption
by telephone.
Under unusual circumstances, a Fund may suspend the right of redemption as
allowed by federal securities laws.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to make periodic withdrawals from your
account in any fixed amount in excess of $100 to yourself, or to anyone else you
properly designate, as long as the account has a current value of at least
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<PAGE>
$10,000. To establish a systematic cash withdrawal, complete the Systematic
Withdrawal Plan section of the Account Application. To have funds deposited to
your bank account, follow the instructions on the Account Application. You may
elect to have monthly, quarterly, semi-annual or annual payments. Redemptions
are normally processed on the fifth day prior to the end of the month, quarter
or year. Checks are then mailed or proceeds are forwarded to your bank account
on or about the first of the following month. You may change the amount,
frequency and payee, or terminate the plan by giving written notice to the
Transfer Agent. A Systematic Withdrawal Plan may be modified at any time by the
Fund or terminated upon written notice by the relevant Fund.
During the withdrawal period, you may purchase additional shares for deposit to
your account if the additional purchases are equal to at least one year's
scheduled withdrawals, or $1,200, whichever is greater. There are no separate
charges to you under this Plan, although a CDSC may apply if you purchased Class
A or B shares. Shareholders who elect to have a systematic cash withdrawal must
have all dividends and capital gains reinvested. As shares of a Fund are
redeemed under the Plan, you may realize a capital gain or loss for income tax
purposes.
PAYMENTS. Normally, payment for shares redeemed will be made within three days
after receipt by the Transfer Agent of a written request in good order. When you
place a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed in a timely fashion, but the Fund will
not release the proceeds until your purchase payment clears. This may take up to
15 days or more. To reduce such delay, purchases should be made by bank wire or
federal funds.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, a Fund could elect to make payment in securities for
redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.
TRANSACTION POLICIES
NET ASSET VALUE. The net asset value (NAV) per share for each Fund and class is
determined each business day as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time). The NAV per share of
each class of each Fund is calculated by taking the value of the Fund's assets
attributable to that class, subtracting the Fund's liabilities attributable to
that class, and dividing by the number of shares of that class that are
outstanding.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations and
short-term debt securities. Portfolio securities for which market quotations are
readily available are stated at market value. Short-term debt securities having
a maturity of 60 days or less are valued at amortized cost, unless the amortized
cost does not approximate market value. Securities prices may be obtained from
automated pricing services. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Directors or Trustees,
although the actual calculations will be made by persons acting under the
supervision of the Board.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable sales
charge. When you sell shares, you receive the NAV minus any applicable deferred
sales charge. Exchange orders are effected at NAV.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV
determined after the order is received in proper form by the Transfer Agent or
Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
49
<PAGE>
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.
EXCHANGES. You may exchange shares of a Fund for shares of the same class of any
other Pilgrim Fund, without paying any additional sales charge. Shares subject
to a CDSC will continue to age from the date that the original shares were
purchased. If you exchange shares of a Fund that at the time you acquired the
shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the
exchange will be subject to the current CDSC structure and conversion rights of
the Fund being acquired, although the shares will continue to age for CDSC and
conversion purposes from the date the original shares were acquired.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Funds are intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice, restrict the
frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
TELEPHONE ORDERS. The Funds and their transfer agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their transfer agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Funds and their transfer agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
SMALL ACCOUNTS. Due to the relatively high cost of handling small investments,
the Funds reserve the right upon 30 days written notice to redeem, at NAV, the
shares of any shareholder whose account (except for IRAs) has a value of less
than $1,000, other than as a result of a decline in the NAV per share.
DISTRIBUTION AND SHAREHOLDER SERVICE FEES
To pay for the cost of promoting the Funds and servicing your shareholder
account, each class of each Fund has adopted a Rule 12b-1 plan which requires
fees to be paid out of the assets of each class. Over time the fees will
50
<PAGE>
increase your cost of investing and may exceed the cost of paying other types of
sales charges. The following table shows the distribution and service fees
associated with investing in each class of shares.
DISTRIBUTION FEE SERVICE FEE
CLASS A
MagnaCap Fund 0.05% 0.25%
LargeCap Leaders, MidCap Value, Bank and
Thrift, Asia-Pacific Equity, Government
Securities Income and High Yield Funds 0.00% 0.25%
Large Cap Growth, Mid Cap Growth, Small
Cap Growth, Convertible, International
Core Growth, Worldwide Growth, International
Small Cap Growth, Emerging Countries,
Strategic Income and Balanced Funds 0.10% 0.25%
CLASS B 0.75% 0.25%
CLASS C 0.75% 0.25%
CLASS M 0.50% 0.25%
MANAGEMENT OF THE FUNDS
ADVISER
Pilgrim Investments, Inc. has overall responsibility for the management of the
Funds. Pilgrim Investments provides or oversees all investment advisory and
portfolio management services for each Fund, and assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Funds, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services.
Organized in December 1994, Pilgrim Investments is registered as an investment
adviser with the Securities and Exchange Commission. As of ________, 1999,
Pilgrim Investments managed over $__ billion in assets. Pilgrim Investments
acquired certain assets of the previous adviser to the Funds in a transaction
that closed on April 7, 1995. Pilgrim Investments is an indirect, wholly owned
subsidiary of Pilgrim America Capital Corporation (NYSE: PFX). Through its
subsidiaries, Pilgrim America Capital Corporation engages in the financial
services business, focusing on providing investment advisory, administrative and
distribution services to open-end and closed-end investment companies and
private accounts.
51
<PAGE>
The following table shows the aggregate annual advisory fee paid by each Fund
for the most recent fiscal year as a percentage of that Fund's average daily net
assets:
FUND ADVISORY FEE
---- ------------
MagnaCap 0.72%
LargeCap Leaders 1.00
Large Cap Growth 0.751
MidCap Value 1.00
Mid Cap Growth 0.75
Small Cap Growth 1.00
Bank and Thrift 0.72
Worldwide Growth 1.00
International Core Growth 1.00
International Small Cap Growth 1.00
Emerging Countries 1.25
Asia-Pacific Equity 1.25
Government Securities Income 0.50
Strategic Income 0.452
High Yield 0.60
Balanced 0.75
Convertible 0.75
(1) Large Cap Growth Fund has not had a full year of operations. The advisory
fee for this Fund is 0.75% on the first $500 million of the Fund's average
net assets, 0.675% on the next $500 million of average net assets, and
0.65% on average net assets in excess of $1 billion.
(2) Strategic Income Fund has not had a full year of operations. The advisory
fee for this Fund is 0.45% on the first $500 million of the Fund's average
net assets, 0.40% on the next $250 million of average net assets, and 0.35%
on average net assets in excess of $750 million.
Pilgrim Investments directly manages the portfolios of the following Funds:
MAGNACAP FUND
This Fund is managed by a team led by Howard N. Kornblue, Senior Vice President
and Senior Portfolio Manager for Pilgrim Investments. Mr. Kornblue has served as
a Portfolio Manager of MagnaCap Fund since 1989. The other individuals on the
team are G. David Underwood, Anuradha Sahai and Robert M. Kloss.
LARGECAP LEADERS FUND
This Fund is managed by a team led by G. David Underwood, Vice President and
Senior Portfolio Manager for Pilgrim Investments. Mr. Underwood is the Lead
Portfolio Manager of LargeCap Leaders Fund. Prior to joining Pilgrim Investments
in December, 1996, Mr. Underwood served as Director of Funds Management for
First Interstate Capital Management. Mr. Underwood's prior experience includes a
10 year association with Integra Trust Company of Pittsburgh where he served as
Director of Research and Senior Portfolio Manager. The other individuals on the
team are Anuradha Sahai and Robert M. Kloss.
52
<PAGE>
BANK AND THRIFT FUND
Carl Dorf, Senior Vice President and Senior Portfolio Manager of Bank and Thrift
Fund has been managing the Fund's portfolio since January 1991, when he joined
Pilgrim Investments' predecessor. Mr. Dorf is also a Senior Vice President of
Pilgrim Investments.
STRATEGIC INCOME FUND
Robert K. Kinsey, [Title] of Pilgrim Investments, has served as a Portfolio
Manager of Strategic Income Fund since ______, 1999. Mr. Kinsey manages
Strategic Income Fund's assets that are invested in assets other than high yield
debt securities. Prior to joining Pilgrim Investments, Mr. Kinsey was a Vice
President and Fixed Income Portfolio Manager for Federated Investors from
January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a
Principal and Portfolio Manager for Harris Investment Management.
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of Pilgrim
Investments, has served as a Portfolio Manager of Strategic Income Fund since
______, 1999. Mr. Mathews manages Strategic Income Fund's assets that are
invested in high yield debt securities. Mr. Mathews has served as Portfolio
Manager of High Yield Fund since June 1995, and also served as Portfolio Manager
of Government Securities Income Fund from June 1995 through September 1996.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager with Van Kampen American Capital.
GOVERNMENT SECURITIES INCOME FUND
Robert K. Kinsey, whose background is described above, has served as Senior
Portfolio Manager of Government Securities Income Fund since ______, 1999.
Charles G. Ullerich, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Government Securities Income Fund since September 1996 and
served as Assistant Portfolio Manager of that Fund from August 1995 to September
1996. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President of
Treasury Services for First Liberty Bank of Macon, GA since 1991, where he was
Portfolio Manager for a mortgage and treasury securities portfolio.
HIGH YIELD FUND
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of High Yield Fund since June 1995.
BALANCED FUND
Robert K. Kinsey, whose background is described above, has served as Portfolio
Manager of the portion of Balanced Fund's assets that are invested in assets
other than high yield debt securities and equity securities since ______, 1999.
Kevin G. Mathews, whose background is described above, has served as Portfolio
Manager of the high-yield debt portion of Balanced Fund's assets since ______,
1999. The equity portion of Balanced Fund has been managed by the team that
manages LargeCap Leaders Fund, which is described above, since _____, 1999.
SUB-ADVISERS
For the following Funds, Pilgrim Investments has engaged Sub-Advisers to provide
the day-to-day management of the Fund's portfolio. The Sub-Advisers are among
the most respected institutional investment advisers in the world, and have been
selected primarily on the basis of their successful application of a consistent,
well-defined, long-term investment approach over a period of several market
cycles.
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<PAGE>
LARGE CAP GROWTH FUND, MID CAP GROWTH FUND, SMALL CAP GROWTH FUND, INTERNATIONAL
CORE GROWTH FUND, WORLDWIDE GROWTH FUND, INTERNATIONAL SMALL CAP GROWTH FUND,
EMERGING COUNTRIES FUND AND CONVERTIBLE FUND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NACM). Founded in 1984, NACM manages over
$30 billion of discretionary assets for numerous clients, including employee
benefit plans of corporations, public retirement systems and unions, university
endowments, foundations, and other institutional investors and individuals. Each
of the Funds listed above is managed by a team of portfolio managers and
analysts employed by NACM.
MIDCAP VALUE FUND
CRAMER ROSENTHAL MCGLYNN, LLC. (CRM). CRM's predecessor was founded in 1973 to
manage portfolios for a select number of high net worth individuals and their
related foundations, endowment funds, pension plans and other entities, and CRM
currently manages approximately $4 billion for more than 200 individual and
institutional clients. The three founding principals of CRM have each spent over
35 years in the investment business. The firm has managed investments in small
and middle capitalization companies for 25 years. Accounts managed by Cramer
Rosenthal own in the aggregate approximately 17% of the outstanding voting
securities of Pilgrim.
Gerald B. Cramer, Chairman of CRM, Edward D. Rosenthal, Vice Chairman of CRM,
Ronald H. McGlynn, Manager, President and Chief Executive Officer of CRM, Jay B.
Abramson, Executive Vice President and Director of Research of CRM, and Michael
Prober, Portfolio Manager and Research Analyst, are primarily responsible for
portfolio management of MidCap Value Fund. Messrs. Cramer, Rosenthal and McGlynn
founded CRM's predecessor in 1973. Mr. Abramson has been with CRM or its
predecessor for 13 years. Mr. Prober has been with CRM for 6 years.
ASIA-PACIFIC EQUITY FUND
HSBC ASSET MANAGEMENT AMERICAS INC. and HSBC ASSET MANAGEMENT HONG KONG LIMITED
(collectively, HSBC) serve jointly as Sub-Adviser to Asia-Pacific Equity Fund.
The firms are part of HSBC Asset Management, the global investment advisory and
fund management business unit of HSBC Holdings plc (founded as the Hong Kong and
Shanghai Banking Corporation in 1865) which, with headquarters in London, is one
of the world's largest banking and financial organizations. HSBC Asset
Management manages over approximately $49 billion of assets worldwide for a wide
variety of institutional, retail and private clients. HSBC Asset Management has
advisory operations in Hong Kong and Singapore, among other locations. Its
parent company has over a century of operations in local economies throughout
the Asia-Pacific region.
Fredric Lutcher III, Managing Director, Chief Financial Officer, HSBC Americas,
Ian Burden, Chief Investment Officer, HSBC Hong Kong, and Man Wing Chung,
Director, HSBC Hong Kong, are primarily responsible for portfolio management of
Asia-Pacific Equity Fund. Mr. Lutcher joined HSBC in 1997, and has over 20 years
of investment experience. Prior to joining HSBC, Mr. Lutcher was with Merrill
Lynch Asset Management. Mr. Burden has been with HSBC for 17 years, and has 24
years investment experience. Mr. Chung has been with HSBC for 5 years, and has
10 years investment experience.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Funds generally distribute most or all of their net earnings in the form of
dividends. Each Fund pays dividends, if any, as follows:
ANNUALLY SEMI-ANNUALLY QUARTERLY MONTHLY
- -------- ------------- --------- -------
LargeCap Leaders MagnaCap Balanced Strategic Income Fund
Large Cap Growth Convertible Government Securities Income
MidCap Value High Yield
Mid Cap Growth
Small Cap Growth
Bank and Thrift
International Core
Growth
Worldwide Growth
Asia-Pacific Equity
International Small
Cap Growth
Emerging Countries
Each Fund distributes capital gains, if any, annually.
DIVIDEND REINVESTMENT
Unless you instruct a Fund to pay you dividends in cash, dividends and
distributions paid by a Fund will be reinvested in additional shares of the
Fund. You may, upon written request or by completing the appropriate section of
the Account Application, elect to have all dividends and other distributions
paid on Class A, B, C or M shares of a Fund invested in another Pilgrim Fund
which offers the same class shares. If you are a shareholder of Pilgrim Prime
Rate Trust, whose shares are not held in a broker or nominee account, you may,
upon written request, elect to have all dividends invested into a pre-existing
Class A account of any open-end Pilgrim Fund.
TAXES
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in a Fund.
Each Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Funds will not be taxed on
amounts they distribute, most shareholders will be taxed on amounts they
receive. A particular distribution generally will be taxable as either ordinary
income or long-term capital gains. It does not matter how long you have held
your Fund shares or whether you elect to receive your distributions in cash or
reinvest them in additional Fund shares. For example, if a Fund designates a
particular distribution as a long-term capital gains distribution, it will be
taxable to you at your long-term capital gains rate.
Dividends declared by a Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
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<PAGE>
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
YEAR 2000 COMPLIANCE
Like other financial organizations, the Funds could be adversely affected if the
computer systems used by the Investment Manager and the Funds' other service
providers do not properly process and calculate date-related information after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have a negative impact on handling securities trades, payment
of interest and dividends, pricing, and account services. Pilgrim Investments is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Funds' other major
service providers. It is not anticipated that the Funds will directly bear any
material costs associated with Pilgrim Investments' and the Funds' other service
providers efforts to become Year 2000 compliant. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact to the Funds nor can there be any assurance that the Year 2000 Problem
will not have an adverse effect on the companies whose securities are held by
the Funds or on global markets or economies, generally.
MORE INFORMATION ABOUT RISKS
A Fund's risk profile is largely a factor of the principal securities in which
it invests and investment techniques that it uses. The following pages discuss
the risks associated with certain of the types of securities in which the Funds
may invest and certain of the investment practices that the Funds may use. For
more information about these and other types of securities and investment
techniques that may be used by the Funds, see the Statement of Additional
Information.
Many of the investment techniques and strategies discussed in this prospectus
and in the Statement of Additional Information are discretionary, which means
that the adviser or sub-adviser can decide whether to use them or not. The
adviser or sub-adviser of a Fund may also use investment techniques or make
investments in securities that are not a part of the Fund's principal investment
strategy.
INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign
securities, including those resulting from: fluctuations in currency exchange
rates; devaluation of currencies; political or economic developments and the
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; settlement and clearance procedures in
some countries that may not be reliable and can result in delays in settlement;
56
<PAGE>
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Funds, including the withholding of
dividends.
Each Fund that invests in foreign securities may enter in to foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions or to help protect Fund assets against adverse
changes in foreign currency exchange rates. Such efforts could limit potential
gains that might result from a relative increase in the value of such
currencies, and might, in certain cases, result in losses to the Fund.
EMERGING MARKET INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in emerging
market countries. These risks include: high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries; political and social uncertainties; over-dependence on
exports, especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete financial systems; environmental problems; less well developed legal
systems; and less reliable custodial services and settlement practices.
HIGH YIELD SECURITIES. Investments in high yield securities generally provide
greater income and increased opportunity for capital appreciation than
investments in higher quality debt securities, but they also typically entail
greater potential price volatility and principal and income risk. High yield
securities are not considered investment grade, and are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. High yield securities structured as
zero-coupon or pay-in-kind securities tend to be more volatile. The secondary
market in which high yield securities are traded is generally less liquid than
the market for higher grade bonds. At times of less liquidity, it may be more
difficult to value high yield securities.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
the issuer's inability to meet principal and interest payments on the obligation
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit-worthiness of the issuer and
general market liquidity. When interest rates decline, the value of the Funds'
debt securities can be expected to rise, and when interest rates rise, the value
of those securities can be expected to decline. Debt securities with longer
maturities tend to be more sensitive to interest rate movements than those with
shorter maturities.
U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government securities
may be subject to price declines in the securities due to changing interest
rates.
CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. A Fund may be required to redeem or convert a convertible
security before the holder would otherwise choose.
57
<PAGE>
OTHER INVESTMENT COMPANIES. When a Fund invests in other investment companies,
you indirectly pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Fund.
RESTRICTED AND ILLIQUID SECURITIES. If a security is illiquid, the Fund might be
unable to sell the security at a time when the adviser might wish to sell, and
the security could have the effect of decreasing the overall level of the Fund's
liquidity. Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, which could vary from the amount the
Fund could realize upon disposition. Restricted securities, i.e., securities
subject to legal or contractual restrictions on resale, may be illiquid.
However, some restricted securities may be treated as liquid, although they may
be less liquid than registered securities traded on established secondary
markets.
MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization, and may
be prepaid prior to maturity. Like other fixed income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other fixed
income securities. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may have the effect
of shortening or extending the effective maturity of the security beyond what
was anticipated at the time of the purchase. Unanticipated rates of prepayment
on underlying mortgages can be expected to increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Additionally, although mortgages
and mortgage-related securities are generally supported by some form of
government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
INTERESTS IN LOANS. Certain Funds may invest in participation interests or
assignments in secured variable or floating rate loans, which include
participation interests in lease financings. Loans are subject to the risk of
nonpayment of principal or interest. Substantial increases in interest rates may
cause an increase in loan defaults. Although the loans will generally be fully
collateralized at the time of acquisition, the collateral may decline in value,
be relatively illiquid, or lose all or substantially all of its value subsequent
to the Fund's investment. Many loans are relatively illiquid, and may be
difficult to value.
INVESTMENT TECHNIQUES
DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. Some derivatives are sophisticated instruments
that typically involve a small investment of cash relative to the magnitude of
risks assumed. These may include swap agreements, options, forwards and futures.
Derivative securities are subject to market risk, which could be significant for
those that have a leveraging effect. Many of the Funds do not invest in these
types of derivatives, so please check the description of the Fund's policies.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. A risk of using derivatives is that the
adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security, the
hedge might not correlate to the market's movements and may have unexpected or
undesired results, such as a loss or a reduction in gains.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which
involve the purchase by a Fund of a security that the seller has agreed to buy
back. If the seller defaults and the collateral value declines, the Fund might
58
<PAGE>
incur a loss. If the seller declares bankruptcy, the Fund may not be able to
sell the collateral at the desired time.
LENDING PORTFOLIO SECURITIES. In order to generate additional income, certain
Funds may lend portfolio securities in an amount up to 33 1/3% of total Fund
assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower default or fail financially.
BORROWING. Each Fund may borrow for certain types of temporary or emergency
purposes subject to certain limits. Borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the net asset value
of a Fund, and money borrowed will be subject to interest costs. Interest costs
on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A Reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for a Fund depends upon the costs of
the agreements and the income and gains of the securities purchased with the
proceeds received from the sale of the security. If the income and gains on the
securities purchased fail to exceed the costs, net asset value will decline
faster than otherwise would be the case. Reverse repurchase agreements and
dollar rolls, as leveraging techniques, may increase a Fund's yield; however,
such transactions also increase a Fund's risk to capital and may result in a
shareholder's loss of principal.
SHORT SALES. A "short sale" is the sale by a Fund of a security which has been
borrowed from a third party on the expectation that the market price will drop.
If the price of the security rises, the Fund may have to cover its short
position at a higher price than the short sale price, resulting in a loss.
PAIRING OFF TRANSACTIONS. A pairing-off transaction occurs when a Fund commits
to purchase a security at a future date, and then the Fund `pairs-off' the
purchase with a sale of the same security prior to or on the original settlement
date. Whether a pairing-off transaction on a debt security produces a gain
depends on the movement of interest rates. If interest rates increase, then the
money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.
PERCENTAGE INVESTMENT LIMITATIONS Unless otherwise stated, percentage
limitations in this prospectus apply at the time of investment.
FINANCIAL HIGHLIGHTS
The financial highlights tables on the following pages are intended to help you
understand each Fund's financial performance for the past five years or, if
shorter, the period of the Fund's operations. Certain information reflects
financial results for a single share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of each
Fund's independent auditor, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
59
<PAGE>
Pilgrim MagnaCap Fund
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG LLP, independent auditors. The six
month period ended December 31, 1998 is unaudited. For all periods ending prior
to July 1, 1994, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
Six Months
Ended Year Ended June 30,
December 31, -------------------------------------------------------
1998 (Unaudited) 1998 1997 1996 1995(a) 1994
---------------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.07 $ 15.92 $ 16.69 $ 14.03 $ 12.36 $ 12.05
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 0.04 0.10 0.09 0.12 0.15
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gains on investments 0.84 3.02 4.16 2.87 2.29 0.89
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 0.87 3.06 4.26 2.96 2.41 1.04
- --------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.03 0.04 0.10 0.06 0.14 0.14
- --------------------------------------------------------------------------------------------------------------
In excess of net investment income 0.01 0.02 0.02 -- -- --
- --------------------------------------------------------------------------------------------------------------
Realized gains on investments 0.84 1.85 4.91 0.24 0.60 0.59
- --------------------------------------------------------------------------------------------------------------
In excess of realized gains on
investments 0.78 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total distributions 1.66 1.91 5.03 0.30 0.74 0.73
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.28 $ 17.07 $ 15.92 $ 16.69 $ 14.03 $ 12.36
==============================================================================================================
TOTAL RETURN(c): 5.68% 20.53% 30.82% 21.31% 20.61% 9.13%
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $350,703 $348,759 $290,355 $235,393 $211,330 $190,435
- --------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.34%(d) 1.37% 1.46% 1.68% 1.59% 1.53%
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.36%(d) 0.29% 0.64% 0.54% 0.98% 1.16%
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 31% 53% 77% 15% 6% 7%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized.
60
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ------------------------------------------------------- -----------------------------------------------------
Six Months Year Year July 17, Six Months Year Year July 17,
Ended Ended Ended 1995(b) to Ended Ended Ended 1995(b) to
December 31, June 30, June 30, June 30, December 31, June 30, June 30, June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
---------------- -------- -------- ---------- ---------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.86 $ 15.81 $ 16.59 $ 14.22 $ 16.95 $ 15.87 $16.63 $14.22
- -----------------------------------------------------------------------------------------------------------------
(0.01) (0.04) -- 0.06 -- -- 0.02 0.08
- -----------------------------------------------------------------------------------------------------------------
0.80 2.97 4.13 2.61 0.82 2.98 4.16 2.63
- -----------------------------------------------------------------------------------------------------------------
0.79 2.93 4.13 2.67 0.82 2.98 4.18 2.71
- -----------------------------------------------------------------------------------------------------------------
-- -- -- 0.06 -- -- 0.02 0.06
- -----------------------------------------------------------------------------------------------------------------
-- 0.03 -- -- -- 0.05 0.01 --
- -----------------------------------------------------------------------------------------------------------------
0.80 1.85 4.91 0.24 0.82 1.85 4.91 0.24
- -----------------------------------------------------------------------------------------------------------------
0.82 -- -- -- 0.80 -- -- --
- -----------------------------------------------------------------------------------------------------------------
1.62 1.88 4.91 0.30 1.62 1.90 4.94 0.30
- -----------------------------------------------------------------------------------------------------------------
$ 16.03 $ 16.86 $ 15.81 $ 16.59 $ 16.15 $ 16.95 $15.87 $16.63
=================================================================================================================
5.28% 19.76% 29.92% 18.98% 5.43% 20.00% 30.26% 19.26%
- -----------------------------------------------------------------------------------------------------------------
$94,968 $77,787 $37,427 $10,509 $15,247 $14,675 $6,748 $1,961
- -----------------------------------------------------------------------------------------------------------------
2.04%(d) 2.07% 2.16% 2.38%(d) 1.79%(d) 1.82% 1.91% 2.13%(d)
- -----------------------------------------------------------------------------------------------------------------
(0.34)%(d) (0.41)% (0.04)% 0.07%(d) (0.09)%(d) (0.16)% 0.22% 0.32%(d)
- -----------------------------------------------------------------------------------------------------------------
31% 53% 77% 15% 31% 53% 77% 15%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Pilgrim LargeCap Leaders Fund*
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, ------------------------ June 30,
1998 (Unaudited) 1998 1997 1996 (a)
---------------- ---- ---- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $14.70 $ 14.17 $11.77 $10.00
- ------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) (0.12) 0.01 0.06 0.07
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gains on investments 1.31 2.30 2.63 1.87
- ------------------------------------------------------------------------------------------------
Total from investment operations 1.19 2.31 2.69 1.94
- ------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- 0.07
- ------------------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.05 0.01
- ------------------------------------------------------------------------------------------------
Realized gains on investments 0.10 1.59 0.24 0.09
- ------------------------------------------------------------------------------------------------
In excess of realized gains on
investments -- 0.19 -- --
- ------------------------------------------------------------------------------------------------
Total distributions 0.10 1.78 0.29 0.17
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $15.79 $ 14.70 $14.17 $11.77
================================================================================================
TOTAL RETURN(b): 8.15% 17.71% 23.24% 19.56%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $7,005 $ 7,606 $8,961 $2,530
- ------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 1.75%(d) 1.75% 1.75% 1.75%(d)
- ------------------------------------------------------------------------------------------------
Net investment income (loss) after
expense reimbursement (c) (0.34)%(d) 0.03% 0.41% 0.65%(d)
- ------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 2.26%(d) 2.28% 2.33% 5.44%(d)
- ------------------------------------------------------------------------------------------------
Net investment income (loss) prior to
expense reimbursement (c) (0.82)%(d) (0.50)% (0.18)% (3.04)%(d)
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 70% 78% 86% 59%
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses
to 1.50% for all classes of shares.
(d) Annualized.
* Effective November 1, 1997, Pilgrim Investments, Inc. assumed the
portfolio investment responsibilities of the Fund from ARK Asset
Management Company, Inc.
62
<PAGE>
<TABLE>
<CAPTION>
Class B Class M
- -------------------------------------------------- ------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ---------------------- June 30, December 31, --------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a) 1998 (Unaudited) 1998 1997 1996 (a)
- ---------------- ---- ---- -------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14.44 $ 14.04 $ 11.71 $10.00 $14.55 $ 14.10 $11.73 $10.00
-------------------------------------------------------------------------------------------------
(0.18) (0.10) (0.02) 0.06 (0.17) (0.07) -- 0.06
-------------------------------------------------------------------------------------------------
1.28 2.28 2.59 1.81 1.31 2.30 2.62 1.83
-------------------------------------------------------------------------------------------------
1.10 2.18 2.57 1.87 1.14 2.23 2.62 1.89
-------------------------------------------------------------------------------------------------
-- -- -- 0.06 -- -- -- 0.06
-------------------------------------------------------------------------------------------------
-- -- -- 0.01 -- -- 0.01 0.01
-------------------------------------------------------------------------------------------------
0.10 1.59 0.24 0.09 0.10 1.59 0.24 0.09
-------------------------------------------------------------------------------------------------
-- 0.19 -- -- -- 0.19 -- --
-------------------------------------------------------------------------------------------------
0.10 1.78 0.24 0.16 0.10 1.78 0.25 0.16
-------------------------------------------------------------------------------------------------
$ 15.44 $ 14.44 $ 14.04 $11.71 $15.59 $ 14.55 $14.10 $11.73
=================================================================================================
7.68% 16.91% 22.23% 18.85% 7.90% 17.20% 22.58% 19.06%
-------------------------------------------------------------------------------------------------
$15,660 $15,605 $13,611 $1,424 $5,459 $ 5,533 $4,719 $1,240
-------------------------------------------------------------------------------------------------
2.50%(d) 2.50% 2.50% 2.50%(d) 2.25%(d) 2.25% 2.25% 2.25%(d)
-------------------------------------------------------------------------------------------------
(1.09)%(d) (0.72)% (0.35)% (0.25)%(d) (0.84)%(d) (0.47)% (0.10)% 0.06%(d)
-------------------------------------------------------------------------------------------------
3.01%(d) 3.03% 3.08% 5.79%(d) 2.76%(d) 2.78% 2.83% 5.90%(d)
-------------------------------------------------------------------------------------------------
(1.57)%(d) (1.25)% (0.91)% (3.59)%(d) (1.32)%(d) (1.00)% (0.68)% (3.59)%(d)
-------------------------------------------------------------------------------------------------
70% 78% 86% 59% 70% 78% 86% 59%
-------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
Pilgrim Large Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
-------------------------
Year July 21,
Ended 1997 to
March 31, March 31,
1999 1998
--------- ---------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.50
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)
- ----------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 3.29
- ----------------------------------------------------------------------------
Total from investment operations $ 3.26
- ----------------------------------------------------------------------------
Less distributions from:
Net investment income --
- ----------------------------------------------------------------------------
Net realized capital gains (0.03)
- ----------------------------------------------------------------------------
Net asset value, end of period $ 15.73
============================================================================
TOTAL RETURN+: 62.35%(a)
- ----------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 4,742
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement++ 1.60%*
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement++ 4.70%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, after expense reimbursement++ (0.87)%*
- ----------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, before expense reimbursement++ (3.96)%*
- ----------------------------------------------------------------------------
Portfolio turnover** 305.78%
- ----------------------------------------------------------------------------
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
(a) Total return has been linked to the inception of the Institutional Class
and adjusted to reflect the difference in expenses. Had the return not
been linked total return for the fiscal year ended March 31, 1998 would
have been 26.11%, 25.38% and 25.62%, respectively, for Class A, B and C
shares.
64
<PAGE>
Class B Class C
- --------------------- ---------------------
Year July 21, Year July 21,
Ended 1997 to Ended 1997 to
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- --------- --------- --------- ---------
$ 12.50 $ 12.50
- ----------------------------------------------
(0.07) (0.05)
- ----------------------------------------------
3.24 3.24
- ----------------------------------------------
$ 3.17 $ 3.19
- ----------------------------------------------
-- --
- ----------------------------------------------
(0.03) (0.06)
- ----------------------------------------------
$ 15.64 $ 15.63
==============================================
61.08%(a) 61.38%(a)
- ----------------------------------------------
$ 3,187 $ 960
- ----------------------------------------------
2.25%* 2.25%*
- ----------------------------------------------
4.78%* 7.79%*
- ----------------------------------------------
(1.36)%* (1.49)%*
- ----------------------------------------------
(3.88)%* (7.03)%*
- ----------------------------------------------
305.78% 305.78%
- ----------------------------------------------
65
<PAGE>
Pilgrim MidCap Value Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998,
which is unaudited.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996(a)
---------------- ---- ---- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.79 $ 14.64 $ 11.99 $10.00
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03) (0.07) (0.02) 0.13
- ------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments (0.54) 2.71 2.85 1.91
- ------------------------------------------------------------------------------------
Total from investment operations (0.57) 2.64 2.83 2.04
- ------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- 0.05
- ------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.07 --
- ------------------------------------------------------------------------------------
Realized gains on investments -- 0.49 0.11 --
- ------------------------------------------------------------------------------------
In excess of realized gains on
investments 1.17 -- -- --
- ------------------------------------------------------------------------------------
Total distributions 1.17 0.49 0.18 0.05
- ------------------------------------------------------------------------------------
Net asset value, end of period $ 15.05 $ 16.79 $ 14.64 $11.99
====================================================================================
TOTAL RETURN(b): (2.92)% 18.40% 23.89% 20.48%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $22,899 $27,485 $16,985 $2,389
- ------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 1.75%(d) 1.75% 1.75% 1.75%(d)
- ------------------------------------------------------------------------------------
Net investment income (loss) after
expense reibursement (c) (0.27)%(d) (0.53)% (0.13)% 2.00%(d)
- ------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 1.86%(d) 1.78% 1.94% 4.91%(d)
- ------------------------------------------------------------------------------------
Net investment income (loss) prior
to expense reimbursement (c) (0.38)%(d) (0.57)% (0.32)% (1.17)%(d)
- ------------------------------------------------------------------------------------
Portfolio turnover rate 50% 85% 86% 60%
- ------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses
to 1.50% for all classes of shares.
(d) Annualized.
66
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ------------------------------------------------- ------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ----------------------- June 30, December 31, ------------------- June 30,
998 (Unaudited) 1998 1997 1996(a) 1998 (Unaudited) 1998 1997 1996(a)
- --------------- ---- ---- ------- ---------------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.47 $ 14.49 $ 11.94 $10.00 $ 16.52 $ 14.49 $11.93 $ 10.00
- ----------------------------------------------------------------------------------------------------
(0.07) (0.18) (0.05) 0.07 (0.05) (0.15) (0.03) 0.06
- ----------------------------------------------------------------------------------------------------
(0.55) 2.65 2.76 1.90 (0.55) 2.67 2.76 1.91
- ----------------------------------------------------------------------------------------------------
(0.62) 2.47 2.71 1.97 (0.60) 2.52 2.73 1.97
- ----------------------------------------------------------------------------------------------------
-- -- -- 0.03 -- -- -- 0.04
- ----------------------------------------------------------------------------------------------------
-- -- 0.05 -- -- -- 0.06 --
- ----------------------------------------------------------------------------------------------------
-- 0.49 0.11 -- -- 0.49 0.11 --
- ----------------------------------------------------------------------------------------------------
1.17 -- -- -- 1.17 -- -- --
- ----------------------------------------------------------------------------------------------------
1.17 0.49 0.16 0.03 1.17 0.49 0.17 0.04
- ----------------------------------------------------------------------------------------------------
$ 14.68 $ 16.47 $ 14.49 $11.94 $ 14.75 $ 16.52 14.49 11.93
====================================================================================================
(3.28)% 17.40% 22.95% 19.80% (3.15)% 17.76% 23.21% 19.82%
- ----------------------------------------------------------------------------------------------------
$37,168 $40,575 $23,258 $2,123 $12,198 $13,232 $8,378 $ 1,731
- ----------------------------------------------------------------------------------------------------
2.50%(d) 2.50% 2.50% 2.50%(d) 2.25%(d) 2.25% 2.25% 2.25%(d)
- ----------------------------------------------------------------------------------------------------
(1.02)%(d) (1.28)% (0.90)% 1.27%(d) (0.77)%(d) (1.03)% (0.63)% (1.16)%(d)
- ----------------------------------------------------------------------------------------------------
2.61%(d) 2.53% 2.69% 5.32%(d) 2.36%(d) 2.28% 2.44% 4.72%(d)
- ----------------------------------------------------------------------------------------------------
(1.13)%(d) (1.31)% (1.11)% (1.56)%(d) (0.88)%(d) (1.07)% (0.84)% (1.32)%(d)
- ----------------------------------------------------------------------------------------------------
50% 85% 86% 60% 50% 85% 86% 60%
- ----------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
Pilgrim Mid Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year Ended March 31,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.80 $ 18.37 $ 13.61 $ 13.25
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.14) (0.17) (0.18) (0.10)
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.50 0.57 4.94 0.46
- ------------------------------------------------------------------------------------------
Total from investment operations 6.36 0.40 4.76 0.36
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------------------
Realized capital gains (4.53) (1.97) -- --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.63 $ 16.80 $ 18.37 $ 13.61
==========================================================================================
TOTAL RETURN+: 41.81% 1.09% 35.07% 2.72%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $90,619 $76,108 $77,275 $65,292
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.57% 1.60% 1.58% 1.59%
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.66% 1.56% 1.56% 1.63%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.33)% (1.05)% (0.91)% (0.66)%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.41)% (1.01)% (0.89)% (0.70)%
- ------------------------------------------------------------------------------------------
Portfolio turnover** 199.54% 153.20% 114.48% 98.09%
- ------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
68
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------- ----------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- --------------------------- March 31, ----------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.33 $ 16.25 $ 12.50 $ 16.48 $ 18.06 $ 13.45 $ 13.18
- ------------------------------------------------------------------------------------------
(0.25) (0.17) (0.09) (0.28) (0.32) (0.27) (0.17)
- ------------------------------------------------------------------------------------------
6.74 0.25 3.84 6.26 0.62 4.88 0.44
- ------------------------------------------------------------------------------------------
6.49 0.08 3.75 5.98 0.30 4.61 0.27
- ------------------------------------------------------------------------------------------
-- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------
(1.27) -- -- (5.31) (1.88) -- --
- ------------------------------------------------------------------------------------------
$ 21.55 $ 16.33 $ 16.25 $ 17.15 $ 16.48 $ 18.06 $ 13.45
==========================================================================================
40.84% (0.49)% 30.00% 40.95% 0.56% 34.28% 2.05%
- ------------------------------------------------------------------------------------------
$46,806 $29,002 $11,186 $166,849 $157,501 $177,461 $143,390
- ------------------------------------------------------------------------------------------
2.22% 2.25% 2.22%* 2.27% 2.14% 2.14% 2.24%
- ------------------------------------------------------------------------------------------
2.21% 2.66% 3.39%* 2.33% 2.17% 2.14% 2.24%
- ------------------------------------------------------------------------------------------
(1.99)% (1.69)% (1.61)%* (2.01)% (1.59)% (1.47)% (1.30)%
- ------------------------------------------------------------------------------------------
(1.98)% (2.10)% (2.77)%* (2.07)% (1.62)% (1.47)% (1.30)%
- ------------------------------------------------------------------------------------------
199.54% 153.20% 114.48% 199.54% 153.20% 114.48% 98.09%
- ------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
Pilgrim Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
------------------------------------------------
Year Ended March 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.15 $ 17.93 $ 13.06 $ 12.10
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.08) (0.22) (0.20) (0.16)
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 6.91 (0.66) 5.09 1.12
- ---------------------------------------------------------------------------------------------
Total from investment operations 6.83 (0.88) 4.89 0.96
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- ---------------------------------------------------------------------------------------------
Realized capital gains (2.23) (1.90) (0.02) --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.75 $ 15.15 $ 17.93 $ 13.06
=============================================================================================
TOTAL RETURN+: 46.32% (6.26)% 37.48% 7.93%
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $201,943 $121,742 $138,155 $106,725
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.89% 1.72% 1.74% 1.86%
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.90% 1.72% 1.74% 1.84%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.85)% (1.26)% (1.20)% (1.27)%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.86)% (1.26)% (1.20)% (1.25)%
- ---------------------------------------------------------------------------------------------
Portfolio turnover** 91.66% 112.90% 129.59% 100.46%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
70
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- -------------------------------------- ----------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- -------------------------- March 31, ----------------------------------------
1999 1998 1997 1996 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.51 $ 16.69 $ 12.50 $ 14.69 $ 17.62 $ 12.96 $ 12.07
- ---------------------------------------------------------------------------------
(0.27) (0.21) (0.14) (0.38) (0.31) (0.29) (0.22)
- ---------------------------------------------------------------------------------
7.29 (0.97) 4.33 6.84 (0.63) 5.03 1.11
- ---------------------------------------------------------------------------------
7.02 (1.18) 4.19 6.46 (0.94) 4.74 0.89
- ---------------------------------------------------------------------------------
-- -- -- -- -- -- --
- ---------------------------------------------------------------------------------
-- -- -- (2.53) (1.99) (0.08) --
- ---------------------------------------------------------------------------------
$ 22.53 $ 15.51 $ 16.69 $ 18.62 $ 14.69 $ 17.62 $ 12.96
=================================================================================
45.26% (7.07)% 33.52% 45.40% (6.81)% 37.18% 7.37%
- ---------------------------------------------------------------------------------
$55,215 $28,030 $13,626 $225,025 $182,907 $207,332 $157,292
- ---------------------------------------------------------------------------------
2.62% 2.61% 2.58%* 2.57% 2.35% 2.35% 2.44%
- ---------------------------------------------------------------------------------
2.63% 2.73% 3.26%* 2.59% 2.35% 2.35% 2.44%
- ---------------------------------------------------------------------------------
(2.59)% (2.13)% (2.09)%* (2.53)% (1.89)% (1.81)% (1.85)%
- ---------------------------------------------------------------------------------
(2.60)% (2.25)% (2.76)%* (2.55)% (1.89)% (1.81)% (1.85)%
- ---------------------------------------------------------------------------------
91.66% 112.90% 129.59% 91.66% 112.90% 129.59% 100.46%
- ---------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
Pilgrim Bank and Thrift Fund
For the six-month period ended June 30, 1998 and the years ended December 31,
1997, 1996, and 1995, the information in the table below, with the exception of
the information in the row labeled "Total Investment Return at Net Asset Value"
for periods prior to January 1, 1997, have been audited by KPMG LLP, independent
auditors. The six month period ended December 31, 1998 is unaudited. For all
periods ending prior to December 31, 1995, the financial information, with the
exception of the information in the row
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Six Months Ended
------------------------- Year Ended December 31,
December 31, June 30, --------------------------------
1998 (Unaudited) 1998* 1997 1996 1995(b) 1994
---------------- ----- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $27.52 $25.87 $ 17.84 $ 14.83 $ 10.73 $11.87
- ----------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.15 0.11 0.34 0.32 0.31 0.26
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments (2.31) 1.54 10.83 5.18 4.78 (0.53)
- ----------------------------------------------------------------------------------------------------
Total from investment operations (2.16) 1.65 11.17 5.50 5.09 (0.27)
- ----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.15 -- 0.31 0.32 0.31 0.22
- ----------------------------------------------------------------------------------------------------
In excess of net investment income 0.03 -- -- 0.03 0.03 --
- ----------------------------------------------------------------------------------------------------
Realized capital gains -- -- 2.65 2.14 0.65 0.65
- ----------------------------------------------------------------------------------------------------
In excess of net realized
capital gains 0.56 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Tax return of capital -- -- 0.18 -- -- --
- ----------------------------------------------------------------------------------------------------
Total distributions 0.74 0.00 3.14 2.49 0.99 0.87
- ----------------------------------------------------------------------------------------------------
Net asset value, end of year $24.62 $27.52 $ 25.87 $ 17.84 $ 14.83 $10.73
====================================================================================================
Closing market price, end of year -- -- -- $ 15.75 $ 12.88 $ 9.13
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
MARKET VALUE(c) -- -- -- 43.48% 52.81% (8.85)%
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE(d) (7.71)% 6.38% 64.86% 41.10% 49.69% (1.89)%
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year ($millions) $ 493 $ 549 $ 383 $ 252 $ 210 $ 152
- ----------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.34%(e) 1.20%(e) 1.10% 1.01% 1.05% 1.28%
- ----------------------------------------------------------------------------------------------------
Net investment income 1.22%(e) 0.94%(e) 1.39% 1.94% 2.37% 2.13%
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 8% 2% 22% 21% 13% 14%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Effective June 30, 1998, Bank and Thrift Fund changed its year end
to June 30.
(a) From the period October 20, 1997 (initial offering of Class B shares)
through December 31, 1997.
(b) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(c) Total return was calculated at market value without deduction of sales
commissions and assuming reinvestment of all dividends and distributions
during the period.
72
<PAGE>
labeled "Total Investment Return at Net Asset Value", was audited by
another independent auditor. The information in the row labeled "Total
Investment Return at Net Asset Value" has not been audited for periods
prior to January 1, 1997. Prior to October 17, 1997, the Class A
shares were designated as Common Stock and the Fund operated as a
closed-end investment company.
<TABLE>
<CAPTION>
Class B
- ----------------------------------------
Six Months Ended Year
- ------------------------- Ended
December 31, June 30, December 31,
1998 (Unaudited) 1998* 1997(a)
- ---------------- ----- -------
<S> <C> <C> <C>
$27.40 $25.85 $ 25.25
- -------------------------------------
0.06 0.01 0.04
- -------------------------------------
(2.31) 1.54 2.92
- -------------------------------------
(2.25) 1.55 2.96
- -------------------------------------
0.05 -- 0.04
- -------------------------------------
-- -- --
- -------------------------------------
-- -- 2.04
- -------------------------------------
0.56 -- --
- -------------------------------------
-- -- 0.28
- -------------------------------------
0.61 0.00 2.36
- -------------------------------------
$24.54 $27.40 $ 25.85
=====================================
-- -- --
- -------------------------------------
-- -- --
- -------------------------------------
(8.04)% 6.00% 11.88%
- -------------------------------------
$ 396 $ 360 $ 76
- -------------------------------------
2.09%(e) 1.95%(e) 1.89%(e)
- -------------------------------------
0.47%(e) 0.19%(e) 0.99%(e)
- -------------------------------------
8% 2% 22%
- -------------------------------------
</TABLE>
(d) Total return is calculated at net asset value without deduction of sales
commissions and assumes reinvestment of all dividends and distributions
during the period. Total investment returns based on net asset value, which
can be higher or lower than market value, may result in substantially
different returns than total return based on market value. For all periods
prior to January 1, 1997, the total returns presented are unaudited.
(e) Annualized.
73
<PAGE>
Pilgrim Worldwide Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Year Ended March 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.88 $ 16.57 $ 14.29 $ 14.94
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.04 (0.16) (0.07) (0.05)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.33 2.20 2.86 (0.09)
- -------------------------------------------------------------------------------------------
Total from investment operations 5.37 2.04 2.79 (0.14)
- -------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- (0.12) (0.02)
- -------------------------------------------------------------------------------------------
Realized capital gains (2.92) (1.73) (0.39) (0.49)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.33 $ 16.88 $ 16.57 $ 14.29
===========================================================================================
TOTAL RETURN+: 34.55% 12.51% 19.79% (0.90)%
- -------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $38,647 $24,022 $23,481 $22,208
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.86% 1.85% 1.85% 1.85%
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.21% 2.17% 2.17% 2.18%
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (0.69)% (0.93)% (0.35)% (0.42)%
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.04)% (1.18)% (0.61)% (0.75)%
- -------------------------------------------------------------------------------------------
Portfolio turnover** 201.70% 181.81% 132.20% 98.54%
- -------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
74
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ----------------------------------------- ------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- --------------------------- March 31, ------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.02 $ 14.34 $ 12.50 $ 16.92 $ 16.76 $ 14.44 $ 14.86
- ---------------------------------------------------------------------------------------
(0.17) (0.14) (0.05) (0.19) (0.28) (0.21) (0.15)
- ---------------------------------------------------------------------------------------
5.44 1.82 1.89 5.41 2.23 2.92 (0.08)
- ---------------------------------------------------------------------------------------
5.27 1.68 1.84 5.22 1.95 2.71 (0.23)
- ---------------------------------------------------------------------------------------
-- -- -- -- -- (0.01) --
- ---------------------------------------------------------------------------------------
(1.19) -- -- (3.09) (1.79) (0.38) (0.19)
- ---------------------------------------------------------------------------------------
$ 20.10 $ 16.02 $ 14.34 $ 19.05 $ 16.92 $ 16.76 $ 14.44
=======================================================================================
34.03% 11.72% 14.72% 33.72% 11.81% 18.95% (1.49)%
- ---------------------------------------------------------------------------------------
$10,083 $ 5,942 $ 1,972 $84,292 $70,345 $71,155 $71,201
- ---------------------------------------------------------------------------------------
2.51% 2.50% 2.50%* 2.51% 2.50% 2.50% 2.50%
- ---------------------------------------------------------------------------------------
2.70% 4.81% 9.50%* 2.77% 2.61% 2.57% 2.57%
- ---------------------------------------------------------------------------------------
(1.37)% (1.62)% (1.28)%* (1.34)% (1.57)% (0.99)% (1.06)%
- ---------------------------------------------------------------------------------------
(1.57)% (3.87)% (8.12)%* (1.60)% (1.62)% (1.00)% (1.13)%
- ---------------------------------------------------------------------------------------
201.70% 181.81% 132.20% 201.70% 181.81% 132.20% 98.54%
- ---------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
Pilgrim International Core Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
---------------------------------
February 28,
Year Ended March 31, 1997 to
-------------------- March 31,
1999 1998 1997
---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.73 $ 12.50
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02) --
- ---------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.56 0.23
- ---------------------------------------------------------------------------
Total from investment operations 4.54 0.23
- ---------------------------------------------------------------------------
Less distributions from:
Net investment income -- --
- ---------------------------------------------------------------------------
Realized capital gains (0.26) --
- ---------------------------------------------------------------------------
Net assest value, end of period $ 17.01 $ 12.73
===========================================================================
TOTAL RETURN+: 36.10% 1.76%
- ---------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $12,664 $ 2
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.96% 1.95%*
- ---------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 3.02% 4,580%*
- ---------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (0.45)% --
- ---------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (1.51)% (4,577)%*
- ---------------------------------------------------------------------------
Portfolio turnover** 274.21% 75.53%
- ---------------------------------------------------------------------------
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
76
<PAGE>
Class B Class C
- --------------------------------- ---------------------------------
February 28, February 28,
Year Ended March 31, 1997 to Year Ended March 31, 1997 to
- -------------------- March 31, -------------------- March 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
$ 12.68 $ 12.50 $ 12.68 $ 12.50
- ------------------------------------------------------------------
(0.11) -- (0.07) --
- ------------------------------------------------------------------
4.66 0.18 4.55 0.18
- ------------------------------------------------------------------
4.55 0.18 4.48 0.18
- ------------------------------------------------------------------
-- -- -- --
- ------------------------------------------------------------------
(0.13) -- -- --
- ------------------------------------------------------------------
$ 17.10 $ 12.68 $ 17.16 $ 12.68
==================================================================
35.31% 1.44% 35.25% 1.44%
- ------------------------------------------------------------------
$ 7,942 $ 1 $ 3,517 $ 43
- ------------------------------------------------------------------
2.61% 2.59%* 2.61 2.41%*
- ------------------------------------------------------------------
3.04% 16,000%* 5.10% 25.55%*
- ------------------------------------------------------------------
(1.32)% -- (1.27)% (0.07)%*
- ------------------------------------------------------------------
(1.76)% (15,998)%* (3.76)% (291.20)%*
- ------------------------------------------------------------------
274.21% 75.53% 274.21% 75.53%
- ------------------------------------------------------------------
77
<PAGE>
Pilgrim International Small Cap Growth Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
August 31,
Year Ended March 31, 1994 to
---------------------------------- March 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.92 $ 13.15 $ 11.51 $ 12.50
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.15) 0.04 (0.02) --
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.36 1.88 1.79 (0.98)
- ---------------------------------------------------------------------------------------------
Total from investment operations 5.21 1.92 1.77 (0.98)
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- (0.01) (0.13) (0.01)
- ---------------------------------------------------------------------------------------------
Realized capital gains (0.84) (0.14) -- --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.29 $ 14.92 $ 13.15 $ 11.51
=============================================================================================
TOTAL RETURN+: 36.31% 14.67% 15.46% (7.85)%
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $11,183 $ 5,569 $ 1,056 $ 610
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.96% 1.95% 1.95% 1.95%*
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.75% 3.76% 10.06% 9.77%*
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ (1.56)% (1.05)% (0.27)% (0.07)%*
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ (2.35)% (2.82)% (7.75)% (7.89)%*
- ---------------------------------------------------------------------------------------------
Portfolio turnover** 198.37% 206.07% 141.02% 74.88%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
78
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ --------------------------------------------
May 31, August 31,
Year Ended March 31, 1995 to Year Ended March 31, 1994 to
- ------------------------- March 31, ------------------------------- March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.89 $ 13.96 $ 12.50 $ 14.87 $ 13.05 $ 11.32 $ 12.50
- ---------------------------------------------------------------------------------
(0.15) (0.15) (0.02) (0.11) (0.16) 0.01 (0.04)
- ---------------------------------------------------------------------------------
5.56 2.09 1.48 5.09 1.98 1.72 (1.12)
- ---------------------------------------------------------------------------------
5.41 1.94 1.46 4.98 1.82 1.73 (1.16)
- ---------------------------------------------------------------------------------
-- (0.01) -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------
(1.14) -- -- (1.32) -- -- --
- ---------------------------------------------------------------------------------
$ 20.16 $ 15.89 $ 13.96 $ 18.53 $ 14.87 $ 13.05 $ 11.32
=================================================================================
35.73% 13.96% 11.68% 35.63% 13.98% 15.30% (9.25)%
- ---------------------------------------------------------------------------------
$12,033 $ 5,080 $ 1,487 $ 8,014 $ 3,592 $ 933 $ 24
- ---------------------------------------------------------------------------------
2.61% 2.60% 2.60%* 2.61% 2.60% 2.60% 2.61%*
- ---------------------------------------------------------------------------------
2.98% 4.89% 16.15%* 3.38% 3.95% 16.15% 75.37%*
- ---------------------------------------------------------------------------------
(2.20)% (1.66)% (0.64)%* (2.18)% (1.67)% (1.02)% (0.76)%*
- ---------------------------------------------------------------------------------
(2.57)% (3.91)% (13.26)%* (2.95)% (2.99)% (13.95)% (73.52)%*
- ---------------------------------------------------------------------------------
198.37% 206.07% 141.02% 198.37% 206.07% 141.02% 74.88%
- ---------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
Pilgrim Emerging Countries Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
------------------------------------------------
November 28,
Year Ended March 31, 1994 to
--------------------------------- March 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 17.20 $ 14.03 $ 11.00 $12.50
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 (0.06) (0.04) 0.04
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 1.22 3.51 3.15 (1.54)
- ------------------------------------------------------------------------------------------
Total from investment operations 1.25 3.45 3.11 (1.50)
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- (0.02) --
- ------------------------------------------------------------------------------------------
Realized capital gains (1.06) (0.28) (0.06) --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.39 $ 17.20 $ 14.03 $11.00
==========================================================================================
TOTAL RETURN+: 8.06% 24.79% 28.43% (11.98)%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $71,014 $38,688 $ 4,718 $1,197
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 2.26% 2.25% 2.25% 2.25%*
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.48% 3.08% 6.72% 6.15%*
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 0.55% (1.14)% (0.35)% 1.09%*
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 0.33% (2.00)% (3.61)% (4.99)%*
- ------------------------------------------------------------------------------------------
Portfolio turnover** 243.47% 176.20% 118.21% 60.79%
- ------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
80
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ ----------------------------------------------
May 31, November 28,
Year Ended March 31, 1995 to Year Ended March 31, 1994 to
----------------------- March 31, -------------------------------- March 31,
1999 1998 1997 1996 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 17.29 $ 14.02 $ 12.50 $ 16.81 $ 13.71 $ 10.79 $ 12.50
- ---------------------------------------------------------------------------------
(0.07) (0.11) (0.04) (0.12) (0.10) (0.05) --
- ---------------------------------------------------------------------------------
1.26 3.47 1.56 1.26 3.37 2.97 (1.70)
- ---------------------------------------------------------------------------------
1.19 3.36 1.52 1.14 3.27 2.92 (1.70)
- ---------------------------------------------------------------------------------
-- -- -- -- -- -- (0.01)
- ---------------------------------------------------------------------------------
(0.84) (0.09) -- (0.97) (0.17) -- --
- ---------------------------------------------------------------------------------
$ 17.64 $ 17.29 $ 14.02 $ 16.98 $ 16.81 $ 13.71 $ 10.79
=================================================================================
7.47% 24.00% 12.16% 7.47% 23.94% 27.30% (13.64)%
- ---------------------------------------------------------------------------------
$38,796 $24,558 $ 3,557 $36,986 $29,376 $ 4,345 $ 59
- ---------------------------------------------------------------------------------
2.91% 2.90% 2.90%* 2.91% 2.90% 2.90% 2.90%*
- ---------------------------------------------------------------------------------
3.06% 3.66% 7.58%* 3.09% 3.12% 6.23% 242.59%*
- ---------------------------------------------------------------------------------
(0.20)% (1.77)% (1.05)%* (0.26)% (1.75)% (1.06)% (0.04)%*
- ---------------------------------------------------------------------------------
(0.35)% (2.55)% (5.44)%* (0.45)% (1.99)% (4.15)% (239.73)%*
- ---------------------------------------------------------------------------------
243.47% 176.20% 118.21% 243.47% 176.20% 118.21% 60.79%
- ---------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
Pilgrim Asia-Pacific Equity Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Six Months Ten Months
Ended Year Ended June 30, Ended
December 31, ------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a)
---------------- ---- ---- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 4.46 $ 10.93 $ 10.35 $ 10.00
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01 0.03 0.02 0.03
- -------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments and
foreign currency transactions 0.65 (6.50) 0.58 0.34
- -------------------------------------------------------------------------------------
Total from investment operations 0.66 (6.47) 0.60 0.37
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- --
- -------------------------------------------------------------------------------------
In excess of net investment income -- -- 0.02 --
- -------------------------------------------------------------------------------------
Tax return of capital -- 0.02 -- --
- -------------------------------------------------------------------------------------
Total distributions -- 0.02 0.02 --
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 5.12 $ 4.46 $ 10.93 $ 10.35
=====================================================================================
TOTAL RETURN(b): 14.80% (59.29)% 5.78% 3.76%
- -------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $9,692 $11,796 $32,485 $18,371
- -------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (c) 2.00%(d) 2.00% 2.00% 2.00%(d)
- -------------------------------------------------------------------------------------
Net investment income (loss) after
expense reimbursement (c) 0.11%(d) 0.38% 0.00% 0.33%(d)
- -------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (c) 3.47%(d) 2.80% 2.54% 3.47%(d)
- -------------------------------------------------------------------------------------
Net investment income (loss) prior
to expense reimbursement (c) (1.36)%(d) (0.42)% (0.53)% (1.14)%(d)
- -------------------------------------------------------------------------------------
Portfolio turnover rate 51% 81% 38% 15%
- -------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on September 1, 1995.
(b) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.
(c) The Manager has voluntarily agreed to limit other expenses excluding fees,
interest, taxes, brokerage and extraordinary expenses to 1.75% for all
classes of shares.
(d) Annualized.
82
<PAGE>
<TABLE>
<CAPTION>
Class B Class M
- -------------------------------------------------- -------------------------------------------------
Six Months Ten Months Six Months Ten Months
Ended Year Ended June 30, Ended Ended Year Ended June 30, Ended
December 31, ------------------ June 30, December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996 (a) 1998 (Unaudited) 1998 1997 1996 (a)
- ---------------- ---- ---- -------- ---------------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 4.37 $ 10.83 $ 10.31 $ 10.00 $ 4.40 $ 10.86 $ 10.32 $10.00
- ----------------------------------------------------------------------------------------------------
(0.03) (0.03) (0.07) (0.01) (0.03) -- (0.05) --
- ----------------------------------------------------------------------------------------------------
0.66 (6.43) 0.59 0.32 0.66 (6.46) 0.59 0.33
- ----------------------------------------------------------------------------------------------------
0.63 (6.46) 0.52 0.31 0.63 (6.46) 0.54 0.33
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 0.01
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 0.01
- ----------------------------------------------------------------------------------------------------
$ 5.00 $ 4.37 $ 10.83 $ 10.31 $ 5.03 $ 4.40 $ 10.86 $10.32
====================================================================================================
14.42% (59.65)% 5.04% 3.19% 14.32% (59.48)% 5.26% 3.32%
- ----------------------------------------------------------------------------------------------------
$9,173 $ 9,084 $30,169 $17,789 $ 3,894 $ 4,265 $11,155 $6,476
- ----------------------------------------------------------------------------------------------------
2.75%(d) 2.75% 2.75% 2.75%(d) 2.50%(d) 2.50% 2.50% 2.50%(d)
- ----------------------------------------------------------------------------------------------------
(0.64)%(d) (0.39)% (0.79)% (0.38)%(d) (0.39)%(d) (0.07)% (0.55)% (0.16)%(d)
- ----------------------------------------------------------------------------------------------------
4.22%(d) 3.55% 3.29% 4.10%(d) 3.97%(d) 3.30% 3.04% 3.88%(d)
- ----------------------------------------------------------------------------------------------------
(2.11)%(d) (1.19)% (1.33)% (1.73)%(d) (1.86)%(d) (0.88)% (1.09)% (1.86)%(d)
- ----------------------------------------------------------------------------------------------------
51% 81% 38% 15% 51% 81% 38% 15%
- ----------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
Pilgrim Government Securities Income Fund
For the fiscal years ended June 30, 1998, 1997, 1996 and 1995, the information
in the table below has been audited by KPMG LLP, independent auditors. The six
month period ended December 31, 1998 is unaudited. For all periods ended prior
to July 1, 1994, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------------
1998 (Unaudited) 1998 1997 1996 1995(a) 1994
---------------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73 $ 13.96
- --------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.43 0.64 0.69 0.75 0.84 0.84
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments (0.06) 0.30 0.20 (0.32) 0.24 (1.17)
- --------------------------------------------------------------------------------------------------------
Total from investment operations 0.37 0.94 0.89 0.43 1.08 (0.33)
- --------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.39 0.64 0.69 0.75 0.84 0.90
- --------------------------------------------------------------------------------------------------------
In excess of net
investment income -- 0.13 0.04 -- -- --
- --------------------------------------------------------------------------------------------------------
Tax return of capital -- -- 0.04 0.06 -- --
- --------------------------------------------------------------------------------------------------------
Total distributions 0.39 0.77 0.77 0.81 0.84 0.90
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.86 $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73
========================================================================================================
TOTAL RETURN(c): 2.89% 7.63% 7.33% 3.34% 8.96% (2.50)%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $26,944 $23,682 $29,900 $38,753 $43,631 $61,100
- --------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (d) 1.43%(e) 1.50% 1.42% 1.51% 1.40% 1.21%
- --------------------------------------------------------------------------------------------------------
Net investment income after
expense reimbursement (d) 6.02%(e) 5.13% 5.78% 5.64% 6.37% 6.44%
- --------------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (d) -- 1.58% -- 1.57% 1.54% --
- --------------------------------------------------------------------------------------------------------
Net investment income prior to
expense reimbursement (d) -- 5.06% -- 5.74% 6.23% --
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 29% 134% 172% 170% 299% 402%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering of shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(d) The manager has agreed to reimburse the Fund for all gross operating costs
and expenses, excluding any interest, taxes, brokerage commissions,
amortization of organizational expenses, extraordinary expenses, and
certain distribution fees which exceed 1.50% on the first $40 million of
average daily net assets and 1.00% on average daily net assets in excess of
$40 million for any one fiscal year.
(e) Annualized.
84
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- ----------------------------------------------- ----------------------------------------------
Six Months Year Year July 17, Six Months Year Year July 17,
Ended Ended Ended 1995(b) to Ended Ended Ended 1995(b) to
December 31, June 30, June 30, June 30, December 31, June 30, June 30, June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
- ---------------- ---- ---- ---- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.84 $12.68 $12.59 $12.95 $12.88 $12.72 $12.59 $12.95
- ---------------------------------------------------------------------------------------------
0.43 0.60 0.67 0.66 0.43 0.64 0.70 0.68
- ---------------------------------------------------------------------------------------------
(0.11) 0.24 0.11 (0.37) (0.09) 0.23 0.14 (0.36)
- ---------------------------------------------------------------------------------------------
0.32 0.84 0.78 0.29 0.34 0.87 0.84 0.32
- ---------------------------------------------------------------------------------------------
0.34 0.60 0.67 0.65 0.36 0.63 0.70 0.68
- ---------------------------------------------------------------------------------------------
-- 0.08 0.02 -- -- 0.08 -- --
- ---------------------------------------------------------------------------------------------
-- -- -- -- -- -- 0.01 --
- ---------------------------------------------------------------------------------------------
0.34 0.68 0.69 0.65 0.36 0.71 0.71 0.68
- ---------------------------------------------------------------------------------------------
$ 12.82 $12.84 $12.68 $12.59 $12.86 $12.88 $12.72 $12.59
=============================================================================================
2.55% 6.78% 6.38% 2.25% 2.67% 7.02% 6.88% 2.52%
- ---------------------------------------------------------------------------------------------
$16,120 $3,220 $1,534 $ 73 $1,487 $ 224 $ 61 $ 24
- ---------------------------------------------------------------------------------------------
2.18%(e) 2.25% 2.17% 2.26%(e) 1.93%(e) 2.00% 1.92% 2.01%(f)
- ---------------------------------------------------------------------------------------------
5.27%(e) 4.24% 4.92% 4.98%(e) 5.52%(e) 4.29% 5.25% 5.73%(f)
- ---------------------------------------------------------------------------------------------
-- 2.29% -- 2.41%(e) -- 2.05% -- 2.16%(f)
- ---------------------------------------------------------------------------------------------
-- 4.20% -- 4.83%(e) -- 4.24% -- 5.58%(f)
- ---------------------------------------------------------------------------------------------
29% 134% 172% 170% 29% 134% 172% 170%
- ---------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
Pilgrim Strategic Income Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________. Please read in conjunction with the
Trust's 1999 Annual Report.
Class A
-------
July 24,
1998
to
March 31,
1999
----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period
- -------------------------------------------------------------
Income from investment operations:
Net investment income (loss)
- -------------------------------------------------------------
Net realized and unrealized gains (losses) on
securities and foreign currency
- -------------------------------------------------------------
Total from investment operations
- -------------------------------------------------------------
Less distributions from:
Net investment income
- -------------------------------------------------------------
Realized capital gains
- -------------------------------------------------------------
Net asset value, end of period
=============================================================
TOTAL RETURN(a):
- -------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period
- -------------------------------------------------------------
Ratio of expenses to average net assets, after
expense reimbursement
- -------------------------------------------------------------
Ratio of expenses to average net assets, before
expense reimbursement
- -------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, after expense reimbursement
- -------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets, before expense reimbursement
- -------------------------------------------------------------
Portfolio turnover
- -------------------------------------------------------------
* Annualized
(a) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return for less than one year is not annualized.
86
<PAGE>
Class B Class C
------- -------
July 24, July 24,
1998 1998
to to
March 31, March 31,
1999 1999
---- ----
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
=============================================================
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
87
<PAGE>
Pilgrim High Yield Fund
The information in the table below has been audited by KPMG LLP, independent
auditors with the exception of the six month period ended December 31, 1998
which is unaudited.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
Six Eight
Months Months Year
Ended Year Ended June 30, Ended Ended
December 31, ------------------------ June 30, October 31,
1998 (Unaudited) 1998 1997 1996 1995(a)(b) 1994
---------------- ---- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 6.94 $ 6.80 $ 6.36 $ 6.15 $ 5.95 $ 6.47
- ----------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.29 0.61 0.61 0.59 0.35 0.54
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(losses) on investments (0.74) 0.16 0.43 0.16 0.21 (0.51)
- ----------------------------------------------------------------------------------------------------------
Total from investment operation (0.45) 0.77 1.04 0.75 0.56 0.03
- ----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.29 0.63 0.60 0.54 0.36 0.55
- ----------------------------------------------------------------------------------------------------------
In excess of net
investment income 0.03 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions 0.32 0.63 0.60 0.54 0.36 0.55
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.17 $ 6.94 $ 6.80 $ 6.36 $ 6.15 $ 5.95
==========================================================================================================
TOTAL RETURN(d): (6.48)% 11.71% 17.14% 12.72% 9.77% 0.47%
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $127,392 $102,424 $35,940 $18,691 $ 15,950 $16,046
- ----------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (e) 1.00%(f) 1.00% 1.00% 1.00% 2.25%(f) 2.00%
- ----------------------------------------------------------------------------------------------------------
Net investment income after
expense reimbursement (e) 9.28%(f) 9.05% 9.54% 9.46% 8.84%(f) 8.73%
- ----------------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (e) 1.12%(f) 1.17% 1.42% 2.19% 2.35%(f) 2.07%
- ----------------------------------------------------------------------------------------------------------
Net investment income prior to
expense reimbursement (e) 9.16%(f) 8.88% 9.09% 8.27% 8.74%(f) 8.66%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 70% 209% 394% 399% 166% 192%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Effective November 1, 1994, High Yield Fund changed its year end to June
30.
(c) Commencement of offering of shares.
(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(e) Effective July 1, 1995, the Manager voluntarily agreed to waive all or a
portion of its fees and reimburse operating expenses of the Fund, excluding
distribution fees, interest, taxes, brokerage and extraordinary expenses,
so that total operating expenses do not exceed 0.75% for all share classes.
(f) Annualized.
88
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS M
- -------------------------------------------------- ------------------------------------------------
Six Six
Months July 17, Months July 17,
Ended Year Ended June 30, 1995(c) to Ended Year Ended June 30, 1995(c)
December 31, ------------------- June 30, December 31, -------------------- June 30,
1998 (Unaudited) 1998 1997 1996 1998 (Unaudited) 1998 1997 1996
- ---------------- ---- ---- ---- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.92 $ 6.78 $ 6.36 $ 6.20 $ 6.92 $ 6.78 $ 6.36 $ 6.20
-------------------------------------------------------------------------------------------------
0.23 0.58 0.57 0.48 0.28 0.59 0.58 0.50
-------------------------------------------------------------------------------------------------
(0.74) 0.14 0.41 0.14 (0.74) 0.14 0.41 0.14
-------------------------------------------------------------------------------------------------
(0.51) 0.72 0.98 0.62 (0.46) 0.73 0.99 0.64
-------------------------------------------------------------------------------------------------
0.23 0.58 0.56 0.46 0.28 0.59 0.57 0.48
-------------------------------------------------------------------------------------------------
0.02 -- -- -- 0.02 -- -- --
-------------------------------------------------------------------------------------------------
0.25 0.58 0.56 0.46 0.30 0.59 0.57 0.48
-------------------------------------------------------------------------------------------------
$ 6.16 $ 6.92 $ 6.78 $ 6.36 $ 6.16 $ 6.92 $ 6.78 $ 6.36
=================================================================================================
(6.76)% 10.90% 16.04% 10.37% (6.64)% 11.16% 16.29% 10.69%
-------------------------------------------------------------------------------------------------
$233,916 $154,303 $40,225 $ 2,374 $24,140 $19,785 $ 8,848 $ 1,243
-------------------------------------------------------------------------------------------------
1.75%(f) 1.75% 1.75% 1.75%(f) 1.50%(f) 1.50% 1.50% 1.50%(f)
-------------------------------------------------------------------------------------------------
8.53%(f) 8.30% 8.64% 9.02%(f) 8.78%(f) 8.55% 8.93% 9.41%(f)
-------------------------------------------------------------------------------------------------
1.87%(f) 1.92% 2.17% 2.94%(f) 1.62%(f) 1.67% 1.92% 2.69%(f)
-------------------------------------------------------------------------------------------------
8.41%(f) 8.13% 8.18% 8.05%(f) 8.66%(f) 8.38% 8.47% 8.51%(f)
-------------------------------------------------------------------------------------------------
70% 209% 394% 339% 70% 209% 394% 339%
-------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
Pilgrim Balanced Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
--------------------------------------------
Year Ended March 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 15.54 $ 16.16 $ 13.74 $ 13.52
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.26 0.32 0.34 0.21
- ------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 5.70 0.84 2.42 0.22
- ------------------------------------------------------------------------------------------
Total from investment operations 5.96 1.16 2.76 0.43
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.32) (0.34) (0.21)
- ------------------------------------------------------------------------------------------
Realized capital gains (1.70) (1.46) -- --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.53 $ 15.54 $ 16.16 $ 13.74
==========================================================================================
TOTAL RETURN+: 39.34% 6.74% 20.16% 3.22%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 6,675 $ 4,898 $ 5,902 $ 4,980
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.61% 1.60% 1.60% 1.60%
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 2.56% 3.00% 3.30% 2.78%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 3.58% 1.87% 2.16% 1.44%
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 2.63% 0.73% 0.88% 0.26%
- ------------------------------------------------------------------------------------------
Portfolio turnover** 260.03% 212.95% 197.19% 110.40%
- ------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Annualized
** For corresponding Series of the predecessor Master Trust + Computations do
not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
90
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------ ------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- ----------------------- March 31, -------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14.88 $ 14.18 $ 12.50 $ 15.59 $ 16.20 $ 13.76 $ 13.54
- ----------------------------------------------------------------------------------
0.15 0.17 0.12 0.15 0.21 0.24 0.11
- ----------------------------------------------------------------------------------
5.58 0.70 1.68 5.71 0.85 2.44 0.22
- ----------------------------------------------------------------------------------
5.73 0.87 1.80 5.86 1.06 2.68 0.33
- ----------------------------------------------------------------------------------
(0.15) (0.17) (0.12) (0.15) (0.21) (0.24) (0.11)
- ----------------------------------------------------------------------------------
(0.39) -- -- (1.40) (1.46) -- --
- ----------------------------------------------------------------------------------
$ 20.07 $ 14.88 $ 14.18 $ 19.90 $ 15.59 $ 16.20 $ 13.76
==================================================================================
38.79% 6.10% 14.45% 38.35% 6.05% 19.58% 2.47%
- ----------------------------------------------------------------------------------
$ 4,254 $ 2,133 $ 673 $20,784 $16,990 $16,586 $16,470
- ----------------------------------------------------------------------------------
2.26% 2.25% 2.25%* 2.26% 2.25% 2.25% 2.25%
- ----------------------------------------------------------------------------------
2.71% 6.44% 13.05%* 2.68% 2.83% 3.01% 2.60%
- ----------------------------------------------------------------------------------
2.99% 1.25% 1.38%* 2.93% 1.23% 1.53% 0.83%
- ----------------------------------------------------------------------------------
2.54% (2.67)% (8.86)%* 2.51% 0.91% 1.19% 0.48%
- ----------------------------------------------------------------------------------
260.03% 212.95% 197.19% 260.03% 212.95% 197.19% 110.40%
- ----------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
Pilgrim Convertible Fund
For periods prior to July 24, 1998, the information shown below for each class
is based upon the performance of that class' predecessor portfolio. The figures
have been audited by ____________________ with respect to the fiscal year ended
March 31, 1999 and the prior three fiscal years, by another independent auditor
with respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1999 Annual Report.
<TABLE>
<CAPTION>
Class A
-----------------------------------------
Year Ended March 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 16.59 $ 15.68 $ 12.86 $ 14.16
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.44 0.47 0.48 0.49
- -----------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on securities and foreign currency 4.49 1.64 2.82 (0.89)
- -----------------------------------------------------------------------------------------
Total from investment operations 4.93 2.11 3.30 (0.40)
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.44) (0.48) (0.48) (0.49)
- -----------------------------------------------------------------------------------------
Realized capital gains (1.96) (0.72) -- (0.41)
- -----------------------------------------------------------------------------------------
Net asset value, end of period $ 19.12 $ 16.59 $ 15.68 $ 12.86
=========================================================================================
TOTAL RETURN+: 31.04% 13.73% 26.00% (2.64)%
- -----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $47,290 $32,082 $31,712 $31,150
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 1.57% 1.60% 1.60% 1.60%
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
before expense reimbursement++ 1.74% 1.75% 1.76% 1.76%
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, after expense
reimbursement++ 5.64% 2.83% 3.29% 3.71%
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets, before expense
reimbursement++ 5.48% 2.66% 3.12% 3.55%
- -----------------------------------------------------------------------------------------
Portfolio turnover** 159.59% 166.84% 144.97% 125.51%
- -----------------------------------------------------------------------------------------
</TABLE>
- ----------
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from the predecessor Master Trust
92
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------- -------------------------------------------
May 31,
Year Ended March 31, 1995 to Year Ended March 31,
- ------------------------ March 31, -------------------------------------------
1999 1998 1997 1996 1999 1998 1997 1996 1995
- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.60 $ 14.96 $ 12.50 $ 17.05 $ 15.89 $ 13.03 $ 14.28
- -----------------------------------------------------------------------------------
0.32 0.31 0.24 0.34 0.37 0.40 0.41
- -----------------------------------------------------------------------------------
4.65 1.64 2.46 4.60 1.66 2.86 (0.89)
- -----------------------------------------------------------------------------------
4.97 1.95 2.70 4.94 2.03 3.26 (0.48)
- -----------------------------------------------------------------------------------
(0.32) (0.31) (0.24) (0.34) (0.37) (0.40) (0.41)
- -----------------------------------------------------------------------------------
(0.69) -- -- (2.10) (0.50) -- (0.36)
- -----------------------------------------------------------------------------------
$ 20.56 $ 16.60 $ 14.96 $ 19.55 $ 17.05 $ 15.89 $ 13.03
===================================================================================
30.51% 13.01% 21.72% 30.22% 12.91% 25.24% (3.26)%
- -----------------------------------------------------------------------------------
$36,725 $12,740 $ 2,125 $81,561 $62,143 $58,997 $61,792
- -----------------------------------------------------------------------------------
2.22% 2.25% 2.25% 2.22% 2.25% 2.25% 2.25%
- -----------------------------------------------------------------------------------
2.33% 3.19% 7.08%* 2.31% 2.29% 2.28% 2.29%
- -----------------------------------------------------------------------------------
5.04% 2.29% 2.59%* 4.99% 2.18% 2.64% 3.05%
- -----------------------------------------------------------------------------------
4.93% 1.32% (2.22)%* 4.91% 2.11% 2.61% 3.01%
- -----------------------------------------------------------------------------------
159.59% 166.84% 144.97% 159.59% 166.84% 144.97% 125.51%
- -----------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
[BACK COVER]
You can find additional information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports list the holdings of the Funds'
portfolios, describe the Funds' performance, and tell how investment strategies
and performance have responded to recent market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about each Fund's investments, strategies
and risks, and is considered to be part of this prospectus because it is
incorporated by reference.
You may request a free copy of any of these documents by:
CALLING OR WRITING THE FUNDS' SHAREHOLDER SERVICING AGENT AT:
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Telephone: (800) 992-0180
CONTACTING THE SECURITIES AND EXCHANGE COMMISSION:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
The SEC may charge you a fee for this information.
SEC file numbers: 811-9040, 811-4031, 811-1939, 811-4504, 811-7428
<PAGE>
PILGRIM ADVISORY FUNDS, INC.
Pilgrim Asia-Pacific Equity Fund
Pilgrim MidCap Value Fund
Pilgrim LargeCap Leaders Fund
PILGRIM INVESTMENT FUNDS, INC.
Pilgrim MagnaCap Fund
Pilgrim High Yield Fund
PILGRIM BANK AND THRIFT FUND, INC.
Pilgrim Bank and Thrift Fund
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Pilgrim Government Securities Income Fund
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
MAY 24, 1999
This Statement of Additional Information relates to each series (each a "Fund")
of each entity (each a "Company") listed above. A Prospectus for the Funds,
dated May 24, 1999, which provides the basic information you should know before
investing in the Funds, may be obtained without charge from the Funds or the
Funds' Principal Underwriter, Pilgrim Securities, Inc. ("Pilgrim Securities" or
the "Distributor"), at the address listed above. This Statement of Additional
Information is not a prospectus and it should be read in conjunction with the
Prospectus, dated May 24, 1999, which has been filed with the Securities and
Exchange Commission ("SEC"). In addition, the financial statements from the
Funds' June 30, 1998 Annual Report and December 31, 1998 Semi-Annual Report are
incorporated herein by reference. Copies of the Funds' Prospectus and Annual or
Semi-Annual Report may be obtained without charge by contacting Pilgrim Funds at
the address and phone number written above.
TABLE OF CONTENTS
Organization Of The Registrants............................................ 2
Management Of The Funds.................................................... 3
Supplemental Description Of Investments.................................... 17
Investment Restrictions - Advisory Funds................................... 42
Investment Restrictions - Magnacap......................................... 44
Investment Restrictions - High Yield Fund.................................. 45
Investment Restrictions - Bank And Thrift Fund............................. 47
Investment Restrictions - Government Securities Income Fund................ 48
Portfolio Transactions..................................................... 50
Additional Purchase And Redemption Information............................. 52
Determination Of Share Price............................................... 57
Shareholder Information.................................................... 58
Shareholder Services And Privileges........................................ 59
Distributions.............................................................. 61
Tax Considerations......................................................... 61
Calculation Of Performance Data............................................ 67
General Information........................................................ 71
Financial Statements....................................................... 72
-1-
<PAGE>
ORGANIZATION OF THE REGISTRANTS
PILGRIM ADVISORY FUNDS, INC. (the Advisory Funds") is a Maryland corporation
registered as an open-end, diversified management investment company. The
Company currently consists of three separate diversified investment funds,
Pilgrim Asia-Pacific Equity Fund ("Asia-Pacific Equity Fund"), Pilgrim MidCap
Value Fund ("MidCap Value Fund") and Pilgrim LargeCap Leaders Fund ("LargeCap
Leaders Fund"), each with its own investment objective and policies.
On November 16, 1998, the name of Pilgrim Advisory Funds, Inc. was changed from
"Pilgrim America Masters Series, Inc.," and the names of the Funds were changed
from "Pilgrim America Masters Asia-Pacific Equity Fund," "Pilgrim America
Masters MidCap Value Fund," and "Pilgrim America Masters LargeCap Value Fund."
PILGRIM INVESTMENT FUNDS, INC. ("Pilgrim Investment Funds") is a Maryland
corporation registered as an open-end, diversified management investment
company. The Company currently consists of two separate diversified investment
funds: Pilgrim MagnaCap Fund ("MagnaCap Fund") and Pilgrim High Yield Fund (
"High Yield Fund).
On August 18, 1989, shareholders of the High Yield Fund approved a proposal to
reorganize the High Yield Fund from a New York common law trust to a series of
Pilgrim High Yield Trust, a Massachusetts business trust. Effective January 18,
1990, Pilgrim High Yield Trust changed its name to Pilgrim Strategic Investment
Series ("PSIS") and the High Yield Fund became a series of PSIS. Subsequently,
on April 4, 1995, shareholders approved a proposal to reorganize High Yield Fund
from a series of PSIS to a series of the Company, a Maryland corporation,
pursuant to the sale by the former Pilgrim Management Corporation of its name
and its books and records related to the Fund to a subsidiary of Pilgrim America
Capital Corporation (formerly Express America Holdings Corporation). This
reorganization, while having no ramifications with respect to the investment
objectives, policies, or restrictions of the High Yield Fund, did result in a
change of manager and distributor.
On July 14, 1995, Pilgrim Investments name was changed from "Pilgrim Investment
Funds, Inc." to "Pilgrim America Investment Funds, Inc.," MagnaCap Fund's name
was changed from "Pilgrim MagnaCap Fund" to "Pilgrim America MagnaCap Fund," and
High Yield Fund's name was changed from "Pilgrim High Yield Fund" to "Pilgrim
America High Yield Fund." On November 16, 1998, the name of the Pilgrim
Investments became "Pilgrim Investment Funds, Inc.," the name of MagnaCap Fund
became "Pilgrim MagnaCap Fund," and the name of the High Yield Fund became
"Pilgrim High Yield Fund."
PILGRIM BANK AND THRIFT FUND, INC. ("Bank and Thrift Fund") is a Maryland
corporation registered as an open-end, diversified management investment
company. The Bank and Thrift Fund changed its name from "Pilgrim Regional
BankShares, Inc." to "Pilgrim America Bank and Thrift Fund, Inc." in April,
1996. 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. On November 16, 1998, the
name of the Fund became "Pilgrim Bank and Thrift Fund."
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC. (the "Government Securities
Income Fund") is a California corporation registered as an open-end, diversified
management company, which seeks high current income, consistent with liquidity
and preservation of capital.
-2-
<PAGE>
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. Each Company is managed by its Board of Directors. The
Directors and Officers of the Companies 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 Companies or Pilgrim Investments, Inc., the Companies' 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
67) Director. Commissioner of Banking, State of Connecticut (January 1995 -
Present). Mr. Burke was formerly President of Bristol Savings Bank (August
1992 - January 1995) and President of Security Savings and Loan (November
1989 - August 1992). Mr. Burke is also a director and/or trustee of each of
the funds managed by the Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 71)
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
53) 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 50) Chairman, Chief Executive Officer, and President. Chairman,
Chief Executive Officer and President of Pilgrim Group, Inc. ("Pilgrim
Group") (since December 1994); Chairman, Pilgrim Investments, Inc. (since
December 1994); Director, Pilgrim Securities, Inc. ("Pilgrim Securities")
(since December 1994); Chairman, Chief Executive Officer and President of
Pilgrim Bank and Thrift Fund, Inc., Pilgrim Government Securities Income
Fund, Inc. and Pilgrim Investment Funds, Inc. (since April 1995). Chairman
and Chief Executive Officer of Pilgrim Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Pilgrim America Capital Corporation
(formerly, Express America Holdings Corporation) ("Pilgrim Capital") (since
August 1990).
PILGRIM BANK AND THRIFT ONLY:
Walter E. Auch, 6001 North 62nd Place, Paradise Valley, Arizona. (Age 76).
Trustee, Pilgrim Prime Rate Trust and Pilgrim Mutual Funds (formerly
Nicholas-Applegate Mutual Funds); Advisory Officer, Pilgrim Advisory Funds,
Inc., Pilgrim Investment Funds, Inc. and Pilgrim Government Securities
Income Fund, Inc. Director, Geotech Communications, Inc., a mobile radio
communications company (since 1987); Fort Dearborn Fund (since 1987);
-3-
<PAGE>
Brinson Funds (since 1994), Smith Barney Trak Fund (since 1992), registered
investment companies; Pimco Advisors L.P., an investment manager (since
1994); and Banyan Realty Fund (since 1987), Banyan Strategic Land Fund
(since 1987), Banyan Strategic Land Fund II (since 1988), and Banyan
Mortgage Fund (since 1988), real estate investment trusts. Formerly
Chairman and Chief Executive Officer, Chicago Board Options Exchange (1979
to 1986); Senior Executive Vice President, Director and Member of the
Executive Committee, PaineWebber, Inc. (until 1979). Formerly, Trustee,
Nicholas-Applegate Investment Trust (until 1998). [Although Mr. Auch is on
the board of a company a subsidiary of which is a broker-dealer, the Board
has determined pursuant to Rule 2a19-1 that Mr. Auch shall not be
considered to be an "interested person."]
Each Fund pays each Director who is not an interested person a pro rata share,
as described below, of (i) an annual retainer of $25,000; (ii) $2,500 per
quarterly and special Board meeting; (iii) $500 per committee meeting; (iv) $500
per special telephonic meeting; and (v) out-of-pocket expenses. The pro rata
share paid by each Fund is based on the Funds' average net assets as a
percentage of the average net assets of all the funds managed by the Investment
Manager for which the Directors serve in common as directors/trustees.
COMPENSATION OF DIRECTORS. The following table sets forth information regarding
compensation of Directors by each Company and other funds managed by the
Investment Manager for the year ended June 30, 1998. Officers of the Companies
and Directors who are interested persons of the Companies 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.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
AGGREGATE AGGREGATE RETIREMENT COMPENSATION
AGGREGATE COMPENSATION AGGREGATE COMPENSATION BENEFITS ESTIMATED FROM
COMPENSATION FROM COMPENSATION FROM ACCRUED ANNUAL REGISTRANT
FROM PILGRIM FROM GOVERNMENT AS PART BENEFITS AND FUND
ADVISORY INVESTMENT BANK AND SECURITIES OF FUND UPON COMPLEX PAID
NAME OF PERSON, POSITION FUNDS FUNDS THRIFT FUND INCOME FUND EXPENSES RETIREMENT TO DIRECTORS
- ------------------------ ----- ----- ----------- ----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Walter E. Auch(1)(2)
Director................ N/A N/A -- N/A N/A N/A --
Mary A. Baldwin(1)
Director................ $1,879 $6,843 $___ $385 N/A N/A (5 boards)
John P. Burke(1)
Director................ $1,877 $6,868 $___ $386 N/A N/A (5 boards)
Al Burton(1)
Director................ $1,877 $6,868 $___ $386 N/A N/A (5 boards)
Bruce S. Foerster(1)(3)
Former Director......... $1,877 $6,868 $___ $386 N/A N/A (5 boards)
Jock Patton(1)
Director ............... $1,877 $6,868 $___ $386 N/A N/A (5 boards)
Robert W. Stallings(4)
Director and Chairman... $0 $0 $ 0 $ 0 N/A N/A (5 boards)
</TABLE>
- ----------
-4-
<PAGE>
(1) Member of the Audit Committee.
(2) Mr. Auch was elected as a Director of Pilgrim Bank and Thrift Fund, Inc.
and Pilgrim Prime Rate Trust on ____, 1999. While he was a director of
Pilgrim Mutual Funds (formerly Nicholas-Applegate Mutual Funds) prior to
that date, Pilgrim Mutual Funds was not part of the Pilgrim Fund complex
until ______, 1999.
(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
The following individuals serve as officers for each Company:
James R. Reis, EXECUTIVE VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41)
Director, Vice Chairman (since December 1994), and Executive Vice President
(since April 1995), Pilgrim Group, Inc. and Pilgrim Investments; Director
(since December 1994), Vice Chairman (since November 1995) and Assistant
Secretary (since January 1995) of Pilgrim Securities; Executive Vice
President and Assistant Secretary of Pilgrim Prime Rate Trust; Chief
Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December
1993), Pilgrim Capital (formerly Express America Holdings Corporation).
Presently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
Stanley D. Vyner, EXECUTIVE VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49)
Executive Vice President (since August 1996), Pilgrim Group; President and
Chief Executive Officer (since August 1996), Pilgrim Investments; Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
James M. Hennessy, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of Pilgrim Prime Rate Trust. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 41)
Senior Vice President and Chief Financial Officer, Pilgrim Group, Pilgrim
Investments, Pilgrim Securities (since June 1998) and Pilgrim Financial
(since August, 1998). He served in same capacity from January, 1995 -
April, 1997. Chief Financial Officer of Endeaver Group (April, 1997 to
June, 1998).
Robert S. Naka, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35) Vice
President, Pilgrim Investments (since April 1997) and Pilgrim Group, Inc.
(since February 1997). Vice President and Assistant Secretary of Pilgrim
-5-
<PAGE>
Prime Rate Trust. Formerly Assistant Vice President, Pilgrim Group, Inc.
(August 1995 - February 1997). Formerly Operations Manager, Pilgrim Group,
Inc. (April 1992 - April 1995).
Robyn L. Ichilov, VICE PRESIDENT AND TREASURER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 31) 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).
In addition, the following individuals serve as officers for the indicated
Company:
PILGRIM ADVISORY FUNDS, INC., PILGRIM INVESTMENT FUNDS, INC. AND PILGRIM
GOVERNMENT SECURITIES INCOME FUND, INC.
Walter E. Auch, ADVISORY OFFICER
6001 North 62nd Place, Paradise Valley, Arizona. (Age 76). Trustee, Pilgrim
Prime Rate Trust and Pilgrim Mutual Funds (formerly Nicholas-Applegate
Mutual Funds); Director, Pilgrim Bank and Thrift Fund, Inc.; Geotech
Communications, Inc., a mobile radio communications company (since 1987);
Fort Dearborn Fund (since 1987); Brinson Funds (since 1994), Smith Barney
Trak Fund (since 1992), registered investment companies; Pimco Advisors
L.P., an investment manager (since 1994); and Banyan Realty Fund (since
1987), Banyan Strategic Land Fund (since 1987), Banyan Strategic Land Fund
II (since 1988), and Banyan Mortgage Fund (since 1988), real estate
investment trusts. Formerly Chairman and Chief Executive Officer, Chicago
Board Options Exchange (1979 to 1986); Senior Executive Vice President,
Director and Member of the Executive Committee, PaineWebber, Inc. (until
1979). Formerly, Trustee, Nicholas-Applegate Investment Trust (until 1998).
PILGRIM INVESTMENT FUNDS.
Howard N. Kornblue, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 57.) Senior
Vice President, Pilgrim Investments (since August 1995). Formerly Senior
Vice President, Pilgrim Group, Inc. (November 1986 - April 1995).
Kevin G. Mathews, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 40.) Senior
Vice President, Pilgrim Investments (since July 1998). Formerly Vice
President, Pilgrim Investments (August 1995 - July 1998); Vice President,
Van Kampen America Capital (May 1987 - April 1995).
BANK AND THRIFT FUND.
Carl Dorf, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER.
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 58.)
Senior Vice President (since February 1997), Pilgrim Investments, Inc.
Formerly Vice President, Pilgrim Investments, Inc. (August 1995 - February
1997). Formerly Vice President, Pilgrim Bank and Thrift Fund, Inc. (January
1996 - May 1997). Formerly Vice President, Pilgrim Management Corporation
(January 1991 - April 1995).
-6-
<PAGE>
GOVERNMENT SECURITIES INCOME FUND
Charles G. Ullerich, VICE PRESIDENT AND PORTFOLIO MANAGER
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 34.) Vice
President, Pilgrim Investments (since February 1998). Formerly Assistant
Portfolio Manager of Pilgrim Government Securities Income Fund, Inc.
(August 1995 - September 1996) and Vice President, First Liberty Bank
(April 1991 - August 1995).
PRINCIPAL SHAREHOLDERS. As of _________, 1999, 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 _________, 1999, to the knowledge of management, no
person owned beneficially or of record more than 5% of the outstanding shares of
any class of the Funds, except as follows:
[TO BE PROVIDED BY AMENDMENT]
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Funds and has overall responsibility for the management of the Funds. The
Investment Manager serves pursuant to separate Investment Management Agreements
between the Investment Manager and each Company, except that there are separate
agreements for MagnaCap Fund and High Yield Fund. The Investment Management
Agreements require the Investment Manager to oversee the provision of all
investment advisory and portfolio management services for the Funds.
The Investment Manager, which was organized in December 1994, is registered as
an investment adviser with the SEC and serves as investment adviser to
registered investment companies (or series thereof) as well as privately managed
accounts. As of _________, 1999, the Investment Manager had assets under
management of approximately $___ billion. The Investment Manager is a
wholly-owned subsidiary of Pilgrim Group, Inc., which is itself a wholly-owned
subsidiary of Pilgrim America Capital Corporation, a Delaware corporation, the
shares of which are traded on the New York Stock Exchange (NYSE:PFX) and which
is a holding company that through its subsidiaries engages in the financial
services business.
The Investment Management Agreement for Advisory Funds provides that 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"), and shall monitor the Portfolio Managers' investment
programs and results, and coordinate 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 with Advisory Funds. 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 employs 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 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
of the Advisory Funds 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 this Statement of Additional
Information, 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
-7-
<PAGE>
auditors, transfer agents and dividend disbursing agents, accounting agents, and
custodians; the expense of obtaining quotations for calculating each Fund's net
asset value; taxes, if any, and the preparation of each Fund's tax returns; cost
of stock certificates and any other expenses (including clerical expenses) of
issue, sale, repurchase or redemption of shares; fees and expenses of
registering and maintaining the registration of shares of the Funds under
federal and state laws and regulations; 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. MagnaCap Fund,
High Yield Fund and Government Securities Income Fund are also responsible for
the salaries of personnel involved in placing orders for the execution of the
Fund's portfolio transactions. 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.
Each Investment Management Agreement will continue in effect from year to year
so 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 the Fund's outstanding shares voting as a single class; provided, that
in either event the continuance is also approved by at least a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Investment Manager by vote cast in person at a meeting called for the
purpose of voting on such approval.
Each Investment Management Agreement is 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 Fund's outstanding shares voting as a single class, or upon not
less than 60 days' notice by the Investment Manager. The Investment Management
Agreement will terminate automatically in the event of its "assignment" (as
defined in the 1940 Act).
ADVISORY FUNDS. The Investment Manager bears the expense of providing its
services, and pays the fees of each Advisory Fund's Portfolio Manager. For its
services, the MidCap Value Fund and LargeCap Leaders Fund pay the Investment
Manager a monthly fee in arrears equal to 1/12 of 1.00% of each Fund's average
daily net assets during the month (approximately 1.00% on an annual basis), and
the Asia-Pacific Equity Fund pays the Investment Manager a monthly fee in
arrears equal to 1/12 of 1.25% of its Fund's average daily net assets during the
month (approximately 1.25% on an annual basis). 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 with the
Advisory 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 the Funds (which excludes interest, taxes, brokerage
commissions, extraordinary expenses such as litigation, other expenses not
incurred in the ordinary course of each Fund's business, 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
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the 1940 Act) do not exceed: 1.50% for LargeCap Leaders Fund and MidCap Value
Fund; and 1.75% for Asia-Pacific Equity Fund.
The expense limitation agreement provides that these expense limitations shall
continue until June 30, 1999. The Investment Manager may extend, but may not
shorten, the period of these limitations without the consent of the Funds, so
long as the extension is at the same expense limitation amount discussed above.
Each Fund will at a later date reimburse the Investment Manager for management
fees waived and other expenses assumed by the Investment Manager during the
previous 36 months, but only if, after such reimbursement, the Fund's expense
ratio does not exceed the percentage described above. The Investment Manager
will only be reimbursed for fees waived or expenses assumed after the effective
date of the expense limitation agreements. Each expense limitation agreement
will terminate automatically upon termination of the respective investment
management agreement with the Investment Manager, and may be terminated by the
Investment Manager or the Fund upon 90 days written notice.
Prior to the expense limitation agreement described above, the Investment
Manager voluntarily agreed to waive all or a portion of its fee and to reimburse
operating expenses of the Advisory Funds, excluding distribution fees, interest,
taxes, brokerage and extraordinary expenses, to 0.75%. For the fiscal years
ended June 30, 1998, June 30, 1997 and June 30, 1996, the voluntary fee
reduction resulted in a waiver of $________, $________ and $________,
respectively.
PILGRIM INVESTMENT FUNDS. As compensation for the foregoing services, the
Investment Manager is paid monthly a fee equal to 1.00% per annum of the average
daily net assets of the MagnaCap Fund on the first $30 million of net assets.
The annual rate is reduced to 0.75% on net assets from $30 million to $250
million; to 0.625% on net assets from $250 million to $500 million; and to 0.50%
on net assets over $500 million. As of June 30, 1998, the total net assets of
the MagnaCap Fund were approximately $441 million. For the fiscal years ended
June 30, 1998, 1997 and 1996, the MagnaCap Fund paid management fees to the
current Investment Manager of approximately $2,846,061, $2,157,744 and
$1,805,280, respectively.
As compensation for its services, the Investment Manager is paid monthly an
annual fee at the rate of 0.60% of the average daily net asset value of the High
Yield Fund. Prior to April 17, 1998, the Investment Management fee was an annual
fee at a rate of 0.75% on the first $25 million in net assets, 0.625% on net
assets over $25 million up to $100 million, 0.50% on net assets over $100
million up to $500 million, and 0.40% for net assets over $500 million. For the
fiscal years ended June 30, 1998, 1997 and 1996, the High Yield Fund paid
management fees to the current Investment Manager of approximately $977,868,
$332,032 and $127,903, respectively.
The Investment Manager has entered into an expense limitation agreement with the
High Yield Fund, 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 Fund (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%.
The expense limitation agreement provides that the expense limitation shall
continue until June 30, 1999. The Investment Manager may extend, but may not
shorten, the period of the limitation without the consent of the High Yield
Fund, so long as the extension is at the same expense limitation amount
discussed above. The High Yield 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
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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 agreement.
The 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 High Yield Fund upon 90
days written notice.
Prior to the expense limitation agreement described above, the Investment
Manager voluntarily agreed to waive all or a portion of its fee and to reimburse
operating expenses of the High Yield Fund, excluding distribution fees,
interest, taxes, brokerage and extraordinary expenses, to 0.75%. For the fiscal
years ended June 30, 1998, June 30, 1997 and June 30, 1996, the voluntary fee
reduction resulted in a waiver of $269,351, $219,739 and $127,903, respectively.
BANK AND THRIFT FUND. The Bank and Thrift Fund pays the Investment Manager a fee
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. The fees are computed and accrued daily and paid
monthly. For the fiscal years ended December 31, 1995, 1996, 1997 and the six
month period ended June 30, 1998, the Bank and Thrift Fund paid management fees
to the Investment Manager of $1,421,324, $1,746,917, $2,361,103, and $2,446,063,
respectively. Prior to October 17, 1997, the Investment Manager was paid
management fees based on average weekly net assets.
GOVERNMENT SECURITIES INCOME FUND. As compensation for the foregoing services,
the Investment Manager is paid monthly a fee equal to 0.50% per annum of the
average daily net assets of the Government Securities Income Fund on the first
$500 million of net assets. The annual rate is reduced to 0.45% on net assets
from $500 million to $1 billion and to 0.40% on net assets in excess of $1
billion. Pursuant to the terms of the Investment Management Agreement, the
Investment Manager will reimburse the Government Securities Income Fund to the
extent that the gross operating costs and expenses, 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 .25% of the average daily net assets of
these classes, exceed 1.50% of its 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. For
the fiscal years ended June 30, 1998, 1997 and 1996, the Government Securities
Income Fund paid management fees to the current Investment Manager of
approximately $144,487, $170,619 and $208,689, respectively.
PORTFOLIO MANAGERS. The Investment Manager has entered into Portfolio Management
Agreements with Portfolio Managers to provide investment advisory services to
MidCap Value Fund and Asia-Pacific Equity Fund. The Investment Manager
recommended the 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.
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
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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 14% of the outstanding voting
securities of Pilgrim Capital.
The 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.
Each Portfolio Management Agreement is 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 Portfolio
Management Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
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.
DISTRIBUTOR. Shares of each Fund are distributed by Pilgrim Securities, Inc.
("Pilgrim Securities" or the "Distributor") pursuant to a Distribution Agreement
between each Company and the Distributor. Each Distribution Agreement requires
the Distributor to use its best efforts on a continuing basis to solicit
purchases of shares of the Funds. Each 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
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Authorized Dealer may be deemed to be an "underwriter" as that term is defined
under the Securities Act of 1933, as amended. Each Distribution Agreement will
remain in effect for two years and from year to year thereafter only if its
continuance is approved annually by a majority of the Board of 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 for information
on how to purchase and sell shares of the Funds, and the charges and expenses
associated with an investment. The sales charge retained by the Distributor and
the commissions reallowed to selling dealers are not an expense of the Funds and
have no effect on the net asset value of the Funds. The Distributor, like the
Investment Manager, is a wholly-owned subsidiary of Pilgrim Group, Inc., which
is a wholly-owned subsidiary of Pilgrim America Capital Corporation.
ADVISORY FUNDS. 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 Advisory 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 Advisory 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 $44,541 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.
MAGNACAP FUND. For the fiscal years ended June 30, 1998, 1997 and 1996, total
commissions allowed to other dealers were approximately $1,981,777, $1,545,304
and $954,329, respectively. For the fiscal years ended June 30, 1998, 1997 and
1996, the current Distributor retained approximately $145,641, $93,294 and
$23,160 or approximately 7.35%, 6.04% and 2.37% of the total commissions
assessed on shares of the Fund.
HIGH YIELD FUND. During the fiscal years ended June 30, 1998, 1997 and 1996, the
Distributor received commissions, after allowance to dealers on the sale of the
Fund's shares, of $217,320, $100,481 and $1,125, respectively, or approximately
4.55%, 6.28% and 1.09%, respectively, of total commissions assessed on purchases
of the Fund.
BANK AND THRIFT FUND. For the fiscal year ended December 31, 1997, and the
six-month period ended June 30, 1998, total commissions allowed to other dealers
were approximately $2,664,805 and $10,935,047, respectively. For the fiscal year
ended December 31, 1997, and the six-month period ended June 30, 1998, the
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Distributor retained approximately $202,290 and $1,042,387 or approximately
7.59% and 9.53% of the total commissions assessed on shares of the Fund.
GOVERNMENT SECURITIES INCOME FUND. For the fiscal years ended June 30, 1996,
1997 and 1998, total commissions allowed to other dealers under the Fund's
underwriting arrangements were approximately $128,009, $107,900 and $118,851,
respectively. For the fiscal years ended June 30, 1998, 1997 and 1996, the
current Distributor retained approximately $3,178, $1,965, and $56 or
approximately 2.67%, 1.82% and 0.04%, respectively, of the total commissions
assessed on shares of the Fund.
RULE 12b-1 PLANS. Each 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 Funds intend to operate the Rule 12b-1 Plans in
accordance with their terms and the National Association of Securities Dealers,
Inc. rules concerning sales charges. Under the Rule 12b-1 Plans, the Distributor
may be entitled to payment each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, Class C, Class M and Class Q shares
in amounts not to exceed the following: with respect to Class A shares at an
annual rate of up to 0.35% of the average daily net assets of the Class A shares
of each Advisory Fund and Bank and Thrift Fund, 0.30% of the average daily net
assets of the Class A shares of MagnaCap Fund, and 0.25% of the average daily
net assets of the Class A shares of High Yield Fund and Government Securities
Income Fund; with respect to Class B shares at an annual rate of up to 1.00% of
the average daily net assets of the Class B shares of a Fund; with respect to
Class C shares at an annual rate of up to 1.00% of the average daily net assets
of the Class C shares of a Fund; 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 a
Fund; and with respect to Class Q shares at an annual rate of up to 0.25% of the
average daily net assets of the Class Q shares of a Fund. The Board of Directors
has approved under the Rule 12b-1 Plans payments of the following amounts to the
Distributor each month in connection with the offering, sale, and shareholder
servicing of each Class of shares as follows: (i) with respect to Class A shares
of each Fund other than MagnaCap Fund at an annual rate equal to 0.25% of the
average daily net assets of the Class A shares of the Fund; (ii) with respect to
Class A shares of MagnaCap Fund at an annual rate equal to 0.30% of the average
daily net assets of the Class A shares of the Fund; (iii) 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; (iv) with respect to Class C shares at an annual rate
of up to 1.00% of the average daily net assets of the Class shares of a Fund;
(v) with respect to Class M shares at an annual rate equal to 0.75% of the
average daily net assets of the Class M shares of a Fund; and (v) with respect
to Class Q shares at an annual rate equal to 0.25% of the average daily net
assets of the Class Q shares of a Fund.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C, Class M and Class Q
shares of the Funds, including payments to dealers for selling shares of the
Funds and for servicing shareholders of these classes of the Funds. Activities
for which these fees may be used include: promotional activities; preparation
and distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; interest on
accrued distribution expenses; and costs of administering the Rule 12b-1 Plans.
No more than 0.75% per annum of a Fund's average net assets may be used to
finance distribution expenses, exclusive of shareholder servicing payments, and
no Authorized Dealer may receive shareholder servicing payments in excess of
0.25% per annum of a Fund's average net assets held by the Authorized Dealer's
clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis
to Authorized Dealers for both distribution and shareholder servicing at the
annual rate of 0.25%, 0.25%, 1.00%, 0.65% and 0.25% of a Fund's average daily
net assets of Class A, Class B, Class C, Class M and Class Q shares,
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respectively, that are registered in the name of that Authorized Dealer as
nominee or held in a shareholder account that designates that Authorized Dealer
as the dealer of record. Rights to these ongoing payments begin to accrue in the
13th month following a purchase of Class A, B or C shares and in the 1st month
following a purchase of Class M [and Class Q] shares.
The Distributor will be reimbursed for its actual expenses incurred under a Rule
12b-1 Plan with respect to Class A shares of MagnaCap Fund, High Yield Fund and
Government Securities Income Fund. 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 each other Fund and Class B, Class C,
Class M and Class Q shares of each Fund that offers the class, the Distributor
will receive payment without regard to actual distribution expenses it incurs.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of a Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plans
also recognize that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers that have sold or may sell
significant amounts of shares during specified periods of time. Such
compensation and incentives may include, but are not limited to, cash,
merchandise, trips and financial assistance to dealers in connection with
pre-approved conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and lodging)
incurred by sales personnel and members of their families, or other invited
guests, to various locations for such seminars or training programs, seminars
for the public, advertising and sales campaigns regarding one or more of the
Funds or other funds managed by the Investment Manager and/or other events
sponsored by dealers. In addition, the Distributor may, at its own expense, pay
concessions in addition to those described above to dealers that satisfy certain
criteria established from time to time by the Distributor. These conditions
relate to increasing sales of shares of the Funds over specified periods and to
certain other factors. These payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to (1) 0.30%
of the value of the Funds' shares sold by the dealer during a particular period,
and (2) 0.10% of the value of the Funds' shares held by the dealer's customers
for more than one year, calculated on an annual basis.
The Rule 12b-1 Plans have been approved by the Board of Directors of each Fund,
including all of the Directors who are not interested persons of the Company as
defined in the 1940 Act, and by each Fund's shareholders. Each Rule 12b-1 Plan
must be renewed annually by the Board of Directors, including a majority of the
Directors 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
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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 (the Funds did not offer Class C
or Class Q shares during the fiscal year ended June 30, 1998):
Distribution Expenses 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
Total .................................. 346,426 265,348 125,302
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
Total .................................. 317,687 467,187 149,500
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
Total .................................. 99,660 206,989 76,655
MAGNACAP FUND
Advertising ............................ $ 55,294 $ 12,599 $ 2,100
Printing ............................... 149,499 34,063 5,677
Salaries & Commissions ................. 1,632,478 371,957 61,993
Broker Servicing ....................... 328,369 74,818 12,470
Miscellaneous .......................... 87,012 19,826 3,304
Total .................................. 2,252,652 513,263 85,544
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HIGH YIELD FUND ........................ $ 14,027 $ 21,230 $ 2,654
Advertising ............................ 37,925 57,400 7,175
Printing ............................... 462,836 700,508 87,563
Salaries & Commissions ................. 83,230 125,969 15,746
Broker Servicing ....................... 21,913 33,165 4,146
Miscellaneous .......................... 619,931 938,272 117,284
Total .................................. 1,239,862 1,876,544 234,568
BANK AND THRIFT FUND
Advertising ............................ $ 29,701 $ 29,363 N/A
Printing ............................... 6,425 109,808
Salaries & Commissions ................. 238,896 1,050,227
Broker Servicing ....................... 14,053 241,620
Miscellaneous .......................... 4,352 64,980
Total .................................. 293,427 1,495,998
GOVERNMENT SECURITIES INCOME FUND
Advertising ............................ $ 6,061 $ 836 $ 70
Printing ............................... 16,386 2,260 188
Salaries & Commissions ................. 170,071 23,458 1,955
Broker Servicing ....................... 35,924 4,955 413
Miscellaneous .......................... 9,393 1,296 108
Total .................................. 237,835 32,805 2,734
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no longer be able to avail themselves of any automatic
investment or other service then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder Servicing
Agent for the Funds. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. Each Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian out-of-pocket fees, proxy solicitation costs, and the compensation
of 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.
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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.
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.
COMMON STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES. Each Fund
(other than Government Securities Income Fund) may 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.
These 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 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.
MIDCAP COMPANY EQUITY SECURITIES. MidCap Value Fund will invest substantially
all of its assets, and LargeCap Leaders Fund, Asia-Pacific Equity Fund, and Bank
and Thrift 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.
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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 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
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undergone substantial change since the 1980's and will probably change in the
next few years.
U.S. GOVERNMENT SECURITIES. The Funds may invest in U.S. Government securities
which 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.
CORPORATE DEBT SECURITIES. Each Fund may invest in corporate debt securities.
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.
BANKING INDUSTRY OBLIGATIONS. Each Fund may invest in banking industry
obligations, including certificates of deposit, bankers' acceptances, and fixed
time deposits. The Funds 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. Each Fund
will only make commitments to purchase such securities with the intention of
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actually acquiring the securities, but the Fund may sell these securities before
the settlement date if it is deemed advisable as a matter of investment
strategy.
When the time comes to pay for the securities acquired on a delayed delivery
basis, a Fund will meet its obligations from the available cash flow, sale of
the securities held in the segregated 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). Depending on market conditions, the Funds could
experience fluctuations in share price as a result of delayed delivery or
when-issued purchases.
HIGH YIELD SECURITIES. High Yield Fund may invest in high yield securities,
which are debt securities that are rated lower than Baa by Moody's Investors
Service or BBB by Standard & Poor's Corporation, or of comparable quality if
unrated. 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.
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. Also, their yields
and market values tend to fluctuate more than higher-rated securities.
Fluctuations in value do not affect the cash income from the securities, but are
reflected in a 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.
The yields earned on high yield securities generally are related to the quality
ratings assigned by recognized rating agencies. 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.
The medium- to lower-rated and unrated securities in which the 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
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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 Funds defaults, the Funds 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 Funds' 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 Funds 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.
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 a
Fund'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 Funds owns illiquid or restricted high yield securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. 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.
ZERO COUPON AND PAY-IN-KIND SECURITIES. The Funds may invest in zero coupon and
pay-in-kind securities, which do not pay interest in cash. In the event of a
default, the Funds may receive no return on its investment. The market prices of
zero-coupon or pay-in-kind securities 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.
TAXATION. Special tax considerations are associated with investing in high yield
securities structured as zero coupon or pay-in-kind securities. The Funds report
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
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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 Funds' 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 Funds' portfolio and carefully evaluates whether to dispose
of or retain high yield securities whose credit ratings have changed. The Funds
may retain a security whose rating has been changed.
CONGRESSIONAL PROPOSALS. New laws and proposed new laws may have a negative
impact on the market for high yield securities. As examples, recent legislation
requires federally-insured savings and loan associations to divest themselves of
their investments in high yield securities and pending proposals are designed to
limit the use of, or tax and eliminate other advantages of, high yield
securities. Any such proposals, if enacted, could have a negative effect on the
Funds' net asset values.
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 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
Advisory Funds will not engage in any other type of options transactions.
Asia-Pacific Equity Fund may 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 Advisory Funds will not engage in any
other type of forward contracts or futures contracts.
The High Yield Fund may write covered call options; purchase call options; and
engage 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.
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.
OPTIONS. Each Advisory 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 put option gives the Fund the right to sell a security it
holds at a specified price. An Advisory Fund may not invest more than 5% of its
assets (taken at market value at the time of such investment) in put options. An
Advisory 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
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
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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.
High Yield Fund may write only covered call option contracts. 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. 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. 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 Funds may purchase and
sell options in the over-the-counter market ("OTC Options"). The Funds' ability
to close option positions established in the over-the-counter market may be more
limited than in the case of exchange-traded options.
In order to close out a position, High Yield Fund will make a "closing purchase
transaction"-- the purchase of a call 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. High Yield Fund may purchase options only to
close out a position. The 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
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 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. High Yield 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 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 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 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 Fund
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might pay more to repurchase the OTC Option contract than the Fund would pay to
close out a similar exchange traded option.
A 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, High Yield Fund expects that options written by it will be conducted
on recognized securities exchanges.
In determining net asset value, the current market value of any option written
by a Fund is subtracted from net asset value. If the current market value of the
option exceeds the premium received by the Funds, 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. High Yield 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. The Fund could 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. Hedging is accomplished
when an investor takes a position in the 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 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 Fund may wish to purchase in the future by
purchasing futures contracts.
High Yield 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 High Yield 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
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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 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 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 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 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. High Yield 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 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 a 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.
RISKS RELATING TO OPTIONS AND FUTURES CONTRACTS. 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
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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. 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. High Yield 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 Fund would continue to be required to make daily margin payments.
In this situation, if the Fund have 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
options on futures contracts will cause the Funds 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 return of the Fund for
the period may be less than if it had not engaged in the hedging transaction.
The use of futures contracts 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 a 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
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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 a 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 a 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. Government Securities Income Fund may invest up to
100% of its assets and High Yield Fund may invest up to 35% of its assets 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
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.
Government Securities Income Fund will purchase only U.S. Government Agency
Mortgage-Backed Securities. These securities are obligations issued or
guaranteed by the U.S. Government or by one of its agencies or
instrumentalities, including but not limited to GNMA, FNMA or FHLMC. Although
their close relationship with the U.S. Government is believed to make them
high-quality securities with minimal credit risks, the U.S. Government is not
obligated by law to support either FNMA or FHLMC. However, historically there
have not been any defaults of FNMA or FHLMC issues. Mortgage-backed securities
consist of interests in underlying mortgages with maturities of up to thirty
years. However, due to early unscheduled payments of principal on the underlying
mortgages, the securities have a shorter average life and, therefore, less
volatility than a comparable thirty-year bond.
The prices of high coupon U.S. Government Agency Mortgage-Backed Securities do
not tend to rise as rapidly as those of traditional fixed-rate securities at
times when interest rates are decreasing, and tend to decline more slowly at
times when interest rates are increasing. The Government Securities Income Fund
may purchase such securities at a premium, which means that a faster principal
prepayment rate than expected will reduce the market value of and income from
such securities, while a slower prepayment rate will tend to increase the market
value of and income from such securities.
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High Yield Fund may also purchase mortgage-backed securities issued by
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers that 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.
High Yield Fund expect 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 Funds' investment
objectives, policies and restrictions, consider making investments in such new
types of securities.
Other types of mortgage-related securities in which the High Yield Fund may
invest 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
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 Funds) 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 Funds
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. 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
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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. 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.
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
Funds may purchase are the "modified pass-through" type.
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 bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the prepayment
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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.
SUBORDINATED MORTGAGE SECURITIES. High Yield 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
Funds 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 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.
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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 Funds by investing in subordinated residential mortgage securities is
potential losses resulting from defaults by the borrowers under the underlying
mortgages. The Funds 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 Funds seek 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
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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.
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.
ZERO COUPON AND PAY-IN-KIND SECURITIES. High Yield 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.
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Pay-in-kind securities are securities that pay interest or dividends through the
issuance of additional securities. High Yield 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 Funds until the cash payment date or the
securities mature. Under certain circumstances, the Funds 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
Advisory Funds, High Yield Fund and MagnaCap 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.
FOREIGN AND EMERGING MARKET 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. 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 a Fund is uninvested and no return is earned thereon. The
inability of the Funds to make intended security purchases due to settlement
problems could cause the Funds to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Funds due to subsequent declines in value of the
portfolio security or, if the Funds have 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
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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 the Funds will use reasonable efforts to obtain the best available
price and the most favorable execution with respect to all transactions and the
Investment Manager or Portfolio Manager will consider the full 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, or may
impose other taxes. 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 Funds on these investments. However, these foreign
withholding taxes are not expected to have a significant impact on the 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.
INTERNATIONAL DEBT SECURITIES. High Yield Fund may invest in debt obligations
(which may be denominated in U.S. dollar or in non-U.S. currencies) of any
rating 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 American Depository Receipts. No more than 10% of the Fund's total
assets, at the time of purchase, will be invested in securities of foreign
issuers. These investments may include debt obligations such as bonds (including
sinking fund and callable bonds), debentures and notes, together with preferred
stocks, pay-in-kind securities, and zero coupon securities.
In determining whether to invest in debt obligations of foreign issuers, the
Fund will consider the relative yields of foreign and domestic high yield
securities, the economies of foreign countries, the condition of such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. Dollar. These factors are
judged on the basis of fundamental economic criteria (e.g., relative inflation
levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. Subsequent foreign
currency losses may result in the Fund having previously distributed more income
in a particular period than was available from investment income, which could
result in a return of capital to shareholders. The Fund's portfolio of foreign
securities may include those of a number of foreign countries, or, depending
upon market conditions, those of a single country.
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Investments in securities of issuers in non-industrialized countries generally
involve more risk and may be considered highly speculative. Although a portion
of the Fund's investment income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars and absorb the cost of currency fluctuations and the cost of
currency conversions. Investment in foreign securities involves considerations
and risks not associated with investment in securities of U.S. issuers. For
example, foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered under the Securities Act of
1933, as amended, the issuer does not have to comply with the disclosure
requirements of the Securities Exchange Act of 1934, as amended. The values of
foreign securities investments will be affected by incomplete or inaccurate
information available to the Investment Manager as to foreign issuers, changes
in currency rates, exchange control regulations or currency blockage,
expropriation or nationalization of assets, application of foreign tax laws
(including withholding taxes), changes in governmental administration or
economic or monetary policy. In addition, it is generally more difficult to
obtain court judgments outside the United States.
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, 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
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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 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.
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
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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 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.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in an illiquid or
restricted security if the Investment Manager or Portfolio Manager believes that
it presents an attractive investment opportunity, except that MagnaCap Fund may
not invest in restricted securities. Generally, a security is considered
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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 Fund's liquidity. Further, the lack of an established
secondary market may make it more difficult to value illiquid securities,
requiring the Funds 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.
Each Fund (except MagnaCap Fund) may purchase restricted securities (I.E.,
securities the disposition of which may be subject to legal restrictions) and
securities that may not be readily marketable. Because of the nature of these
securities, a considerable period of time may elapse between the Funds' decision
to dispose of these securities and the time when the Funds are able to dispose
of them, during which time the value of the securities could decline. The
expenses of registering restricted securities (excluding securities that may be
resold by the Funds pursuant to Rule 144A) may be negotiated at the time such
securities are purchased by the Funds. When registration is required before the
securities may be resold, a considerable period may elapse between the decision
to sell the securities and the time when the Funds would be permitted to sell
them. Thus, the Funds may not be able to obtain as favorable a price as that
prevailing at the time of the decision to sell. The Funds may also acquire
securities through private placements. Such securities may have contractual
restrictions on their resale, which might prevent their resale by the Funds at a
time when such resale would be desirable. Securities that are not readily
marketable will be valued by the Funds in good faith pursuant to procedures
adopted by the Company's Board of Directors.
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 Funds' 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. The Funds 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 Funds are
registered for sale.
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.
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 a repurchase agreement, the
Funds acquire a debt instrument for a relatively short period (usually not more
than one week) subject to the obligation of the seller to repurchase and the
Funds to resell such debt instrument at a fixed 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
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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. The instruments
held as collateral are valued daily, and as the value of instruments declines,
the Fund will require additional collateral. 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." The Investment Manager will
monitor the value of the collateral to ensure that it meets or exceeds the
repurchase price. In all cases, the Investment Manager must find the
creditworthiness of the other party to the transaction satisfactory before
execution. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL TRANSACTIONS. The Government
Securities Income Fund may enter into reverse repurchase agreement transactions.
Such transactions involve the sale of U.S. Government securities held by the
Fund, with an agreement that the Fund will repurchase such securities at an
agreed upon price and date. The Fund will employ reverse repurchase agreements
when necessary to meet unanticipated net redemptions so as to avoid liquidating
other portfolio investments during unfavorable market conditions. At the time it
enters into a reverse repurchase agreement, the Fund will place in a segregated
custodial account cash and/or liquid assets having a dollar value equal to the
repurchase price. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act"). Reverse repurchase
agreements, together with other permitted borrowings, may constitute up to 33
1/3% of the Fund's total assets. Under the 1940 Act, the Fund is required to
maintain continuous asset coverage of 300% with respect to borrowings and to
sell (within three days) sufficient portfolio holdings to restore such coverage
if it should decline to less than 300% due to market fluctuations or otherwise,
even if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint. Leveraging by means of borrowing may exaggerate the
effect of any increase or decrease in the value of portfolio securities or the
Fund's net asset value, and money borrowed will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
In order to enhance portfolio returns and manage prepayment risks, Government
Securities Income Fund may engage in dollar roll transactions with respect to
mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar roll
transaction, Government Securities Income Fund sells a mortgage security held in
the portfolio to a financial institutional such as a bank or broker-dealer, and
simultaneously agrees to repurchase a substantially similar security (same type,
coupon and maturity) from the institution at a later date at an agreed upon
price. The mortgage securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. 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 Government Securities Income
Fund enters into a dollar roll transaction, cash and/or liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
repurchased, are segregated with its custodian at the trade date. These
securities are marked daily and are maintained until the transaction is settled.
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Whether a reverse repurchase agreement or dollar-roll transaction produces a
gain for a Fund depends upon the "costs of the agreements" (e.g., a function of
the difference between the amount received upon the sale of its securities and
the amount to be spent upon the purchase of the same or "substantially the same"
security) and the income and gains of the securities purchased with the proceeds
received from the sale of the mortgage security. If the income and gains on the
securities purchased with the proceeds of the agreements exceed the costs of the
agreements, then a Fund's net asset value will increase faster than otherwise
would be the case; conversely, if the income and gains on such securities
purchased fail to exceed the costs of the structure, net asset value will
decline faster than otherwise would be the case. Reverse repurchase agreements
and dollar-roll transactions, as leveraging techniques, may increase a Fund's
yield in the manner described above; however, such transactions also increase a
Fund's risk to capital and may result in a shareholder's loss of principal.
PARTICIPATION INTERESTS. High Yield Fund may invest in participation interests,
subject to the limitation on its net assets that may be invested in illiquid
investments. Participation interests provide the Fund an undivided interest in a
loan made by a bank or other financial institution in the proportion that the
Fund's participation interest bears to the total principal amount of the loan.
No more than 5% of the Fund's net assets can be invested in participation
interests of the same issuing bank. The Fund must look to the creditworthiness
of the borrowing corporation, which is obligated to make payments of principal
and interest on the loan. In the event the borrower fails to pay scheduled
interest or principal payments, the Fund would experience a reduction in its
income and might experience a decline in the net asset value of its shares. In
the event of a failure by the bank to perform its obligations in connection with
the participation agreement, the Fund might incur certain costs and delays in
realizing payment or may suffer a loss of principal and/or interest.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
MagnaCap Fund, Government Securities Income Fund, and High Yield 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 Pilgrim Investments, Inc. (the "Investment Manager"). The borrower at all
times during the loan must maintain with the Fund cash or cash equivalent
collateral or provide to the Funds 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 Funds any interest paid
on such securities, and the Funds 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.
Loans are subject to termination at the option of the Funds or the borrower at
any time. The Funds may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. 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.
DIVERSIFICATION. Each Fund is diversified, which means that it meets the
following requirements: at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the Fund's total assets and
to not more than 10% of the outstanding voting securities of such issuer.
PAIRING-OFF TRANSACTIONS. Government Securities Income Fund engages in a
pairing-off transaction when the Fund commits to purchase a security at a future
date ("delayed delivery" or "when issued"), and then prior to the predetermined
settlement date, 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, cash and/or liquid
assets equal to the value of the outstanding purchase commitments will be
segregated from general investible funds and marked to the market daily.
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When the time comes to pay for the securities acquired on a delayed delivery
basis, Government Securities Income 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 Government Securities
Income 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. Consequently, the Fund
will experience a gain. However, if interest rates increase, than 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. Consequently, the Fund will experience a loss.
BORROWING. Each Advisory Fund may borrow money from banks solely for temporary
or emergency purposes, but not in an amount exceeding one-third of the value of
its total assets. Magna Fund and High Yield Fund may borrow from banks solely
for temporary or emergency purposes, but not in an amount exceeding 5% of the
value of its total assets. Bank and Thrift Fund may borrow, only in an amount up
to 15% of its total assets to obtain such short-term credits as are necessary
for the clearance of securities transactions. Government Securities Income Fund
may borrow money from banks solely for temporary or emergency purposes, but not
in an amount in excess of 10% of the value of its total assets.
For the Government Securities Income Fund , no additional investment may be made
while any such borrowings are in excess of 5% of total assets. For purposes of
this investment restriction, the Fund's entry into reverse repurchase agreements
and dollar-rolls and delayed delivery transactions, including those relating to
pair-offs, shall not constitute borrowings. Such borrowings, together with
reverse repurchase agreements, may constitute up to 33% of the Fund's total
assets. The Government Securities Income Fund may not mortgage, pledge or
hypothecate its assets, except to the extent necessary to secure permitted
borrowings and to the extent related to the deposit of assets in escrow in
connection with the Fund's purchasing of securities on a forward commitment or
delayed delivery basis, entering into reverse repurchase agreements and engaging
in dollar-roll transactions.
Under the Investment Company Act of 1940, each Fund is required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint.
When a Fund borrows money, its share price may be subject to greater fluctuation
until the borrowing is paid off. If a Fund makes additional investments while
borrowings are outstanding, this may be construed as a form of leverage.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of portfolio securities or the Fund's net asset value, and
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.
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
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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 - ADVISORY FUNDS
Advisory Funds have adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
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:
(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
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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 Advisory 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;
(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;
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(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.
INVESTMENT RESTRICTIONS - MAGNACAP FUND
MagnaCap Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund MAY NOT:
(1) Engage in the underwriting of securities of other issuers.
(2) Invest in "restricted securities" which cannot in the absence of an
exemption be sold without an effective registration statement under the
Securities Act of 1933, as amended.
(3) Engage in the purchase and sale of interests in real estate, commodities or
commodity contracts (although this does not preclude marketable securities
of companies engaged in these activities).
(4) Engage in the making of loans to other persons, except (a) through the
purchase of a portion of an issue of publicly distributed bonds, debentures
or other evidences of indebtedness customarily purchased by institutional
investors or (b) by the loan of its portfolio securities in accordance with
the policies described under "Lending of Portfolio Securities."
(5) Borrow money except from banks for temporary or emergency purposes, and
then not in excess of 5% of the value of its total assets.
(6) Mortgage, pledge or hypothecate its assets in any manner, except in
connection with any authorized borrowings and then not in excess of 10% of
the value of its total assets.
(7) Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of its portfolio
transactions.
(8) Effect short sales, or purchase or sell puts, calls, spreads or straddles.
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(9) Buy or sell oil, gas, or other mineral leases, rights or royalty contracts,
or participate on a joint or joint and several basis in any securities
trading account.
(10) Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
(11) Invest more than 25% of the value of its total assets in any one industry.
(12) Purchase or retain in its portfolio any security if an Officer or Director
of the Fund or its investment 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.
(13) Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies or investment techniques, and except for
purposes of this investment restriction, collateral, escrow, or margin or
other deposits with respect to the making of short sales, the purchase or
sale of futures contracts or related options, purchase or sale of forward
foreign currency contracts, and the writing of options on securities are
not deemed to be an issuance of a senior security.
The Fund is 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. The Fund will limit its investments in warrants, valued at
the lower of cost or market, to 5% of its net assets. Included within that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on the New York or American Stock Exchange. The Fund will not engage
in the purchase or sale of real estate or real estate limited partnerships. The
Fund also will not make loans to other persons unless collateral values are
continuously maintained at no less than 100% by "marking to market" daily. The
Fund also may not invest more than 5% of its total assets in securities of
companies which, including predecessors, have not had a record of at least three
years of continuous operations, and may not invest in any restricted securities.
INVESTMENT RESTRICTIONS - HIGH YIELD FUND
High Yield Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(1) Issue senior securities. Good faith hedging transactions and similar
investment strategies will not be treated as senior securities for purposes
of this restriction so long as they are covered in accordance with
applicable regulatory requirements and are structured consistent with
current SEC interpretations.
(2) Underwrite securities of other issuers.
(3) Invest in commodities except that the Fund may purchase and sell futures
contracts, including those relating to securities, currencies, indexes and
options on futures contracts or indexes and currencies underlying or
related to any such futures contracts.
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(4) Make loans to persons except (a) through the purchase of a portion of an
issue of publicly distributed bonds, notes, debentures and other evidences
of indebtedness customarily purchased by institutional investors, (b) by
the loan of its portfolio securities in accordance with the policies
described under "Lending of Portfolio Securities," or (c) to the extent the
entry into a repurchase agreement is deemed to be a loan.
(5) Purchase the securities of another investment company or investment trust,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
(6) Purchase any securities on margin or effect a short sale of a security.
(This restriction does not preclude the Fund from obtaining such short-term
credits as may be necessary for the clearance of purchases and sales of its
portfolio securities.)
(7) Buy securities from or sell securities to its investment adviser or
principal distributor or any of their affiliates or any affiliates of its
Directors, as principal.
(8) Buy, lease or hold real property except for office purposes. (This
restriction does not preclude investment in marketable securities of
companies engaged in real estate activities.)
(9) As to 75% of the value of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer (other than
the United States Government) or acquire more than 10% of the outstanding
voting securities of any one issuer; but as to the remaining 25% of its
total assets, it retains freedom of action.
(10) Borrow money except from banks for temporary or emergency purposes and not
for investment purposes, and then only in amounts not in excess of 5% of
the value of its total assets.
(11) Invest in the securities of any company that, including its predecessors,
has not been in business for at least three years.
(12) Invest more than 25% of the value of its total assets in any one industry.
(13) Invest in securities of any one issuer for the purpose of exercising
control or management.
The Fund is 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. Notwithstanding the restrictions above, the High Yield
Fund will not, so long as its shares are registered for sale in the State of
South Dakota: (i) have more than 10% of its total assets invested in securities
of issuers that the Fund is restricted from selling to the public without
registration under the Securities Act of 1933, as amended; (ii) have more than
10% of its total assets invested in real estate investment trusts or investment
companies; (iii) have more than 5% of its assets invested in options, financial
futures or stock index futures, other than hedging positions or positions that
are covered by cash or securities; (iv) have more than 5% of its assets invested
in equity securities of issuers that are not readily marketable and securities
of issuers that have been in operation for less than three years; and (v) invest
any part of its total assets in real estate or interests in real estate,
excluding readily marketable securities and real estate used for office
purposes; commodities, other than precious metals not to exceed 10% of the
Fund's total assets; commodity futures contracts or options other than as
permitted by investment companies qualifying for an exemption from the
definition of commodity pool operator; or interests in commodity pools or oil,
gas or other mineral exploration or development programs.
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The High Yield Fund will not, so long as its shares are registered for sale in
the State of Texas, invest in oil, gas or other mineral leases or in real estate
limited partnerships. The Fund will limit its investments in warrants, valued at
the lower of cost or market, to 5% of its net assets. Included within that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on the New York or American Stock Exchange. The Fund will not make
loans unless collateral values are continuously maintained at no less than 100%
by "marking to market" daily.
The High Yield Fund will not, so long as its shares are registered for sale in
the State of Ohio: (i) purchase or retain securities of any issuer if the
officers or directors of the Fund, its adviser or manager owning beneficially
more than one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer, or (ii)
borrow, pledge, mortgage or hypothecate its assets in excess of 1/3 of total
Fund assets. The Fund will only borrow money for emergency or extraordinary
purposes.
INVESTMENT RESTRICTIONS - BANK AND THRIFT FUND
Bank and Thrift Fund has adopted the following investment restrictions as
fundamental policies that cannot be changed without approval by the holders of a
majority of its outstanding shares, which means the lesser of (1) 67% of the
Fund's shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the Fund's outstanding shares. The Fund may not:
(1) Invest more than 25% of its total assets in any industry or group of
related industries other than the banking and thrift industries, except for
temporary or defensive positions.
(2) Borrow, except that it may borrow in an amount up to 15% of its total
assets to obtain such short-term credits as are necessary for the clearance
of securities transactions.
(3) Invest in repurchase agreements maturing in more than 7 days, if as a
result of such investment more than 10% of the Fund's total assets would be
invested in such repurchase agreements.
(4) Purchase securities for which there are legal or contractual restrictions
on resale, if as a result of such purchase more than 10% of the Fund's
total assets would be invested in such securities.
(5) Invest more than 5% of the value of its net assets in marketable warrants
to purchase common stock.
(6) Purchase securities of any one issuer, other than U.S. Government
securities, if immediately after such purchase more than 5% of the value of
the Fund's total assets would be invested in such issuer or the Fund would
own more than 10% of the outstanding voting securities of an issuer or more
than 10% of any class of securities of an issuer, except that up to 25% of
the Fund's total assets may be invested without regard to the restrictions
in this Item 6. For this purpose, all outstanding bonds and other evidences
of indebtedness shall be deemed within a single class regardless of
maturities, priorities, coupon rates, series, designations, conversion
rights, security or other differences.
(7) Act as an underwriter of securities of other issuers, except, to the extent
that it may be deemed to act as an underwriter in certain cases when
disposing of restricted securities (See also Item 4 above.).
(8) Purchase or sell real estate, commodities, commodity futures contracts, or
oil or gas exploration or development programs; or sell short, or write,
purchase, or sell straddles, spreads or combinations thereof.
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(9) Make loans, except that the Fund may purchase or hold Debt Securities in
accordance with its investment policies and objectives.
(10) Purchase securities on margin or hypothecate, mortgage or pledge any of its
assets except for the purpose of securing borrowings permitted by Item 2
above and then only in an amount up to 15% of the value of the Fund's total
assets at the time of borrowing.
The following investment restrictions are not fundamental and may be changed by
the Board of Directors without shareholder approval. Appropriate notice will be
given of any changes in these restrictions made by the Board of Directors. The
Fund may not:
(11) Participate on a joint or joint and several basis in any trading account in
securities.
(12) Purchase securities of any issuer for the purposes of exercising control or
management, except in connection with a merger, consolidation, acquisition
or reorganization.
(13) Invest more than 5% of the Fund's total assets in securities of any issuer
which, together with its predecessors, has been in continuous operation
less than three years.
(14) Purchase or retain the securities of any issuer if those officers or
Directors of the Fund or officers or Directors of the Investment Manager
who each own beneficially more than 1/2 of 1% of the securities of that
issuer together own more than 5% of the securities of such issuer.
(15) Invest in illiquid securities if, as a result, more than 15% of the Fund's
net assets would be invested in such securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in a percentage from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing restrictions.
INVESTMENT RESTRICTIONS - GOVERNMENT SECURITIES INCOME FUND
Government Securities Income Fund has adopted the following investment
restrictions as fundamental policies that cannot be changed without approval by
the holders of a majority of its outstanding shares, which means the lesser of
(1) 67% of the Fund's shares present at a meeting at which the holders of more
than 50% of the outstanding shares are present in person or by proxy, or (2)
more than 50% of the Fund's outstanding shares. The Fund MAY not:
(1) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies, some of which may be subject to
repurchase agreements. There is no limit on the amount of the Fund's assets
that may be invested in the securities of any one issuer of such
obligations.
(2) Make loans to others, except (a) through the purchase of debt securities in
accordance with its investment objective and policies, (b) to the extent
the entry into a repurchase agreement is deemed to be a loan or (c) by the
loan of its portfolio securities in accordance with the policies described
under "Investment Objective and Policies."
(3) (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total assets (at
the lower of cost or fair market value). No additional investment may be
made while any such borrowing are in excess of 5% of total assets. For
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purposes of this investment restriction, the entry into reverse repurchase
agreements, dollar-rolls and delayed delivery transactions, including those
relating to pair-offs, shall not constitute borrowing.
(b) Mortgage, pledge or hypothecate any of its assets except to the extent
necessary to secure permitted borrowing and to the extent related to the
deposit of assets in escrow in connection with (i) the purchase of
securities on a forward commitment or delayed delivery basis, and (ii)
reverse repurchase agreements and dollar-rolls.
(c) Borrow money, including the entry into reverse repurchase agreements
and dollar roll transactions and purchasing securities on a delayed
delivery basis, if, as a result of such borrowing, more than 33-1/3 of the
total assets of the Fund, taken at market value at the time of such
borrowing, is derived from borrowing. For purposes of this limitation, a
delay between purchase and settlement of a security that occurs in the
ordinary course for the market on which the security is purchased or issued
is not considered a purchase of a security on a delayed delivery basis.
(4) Purchase securities on margin, sell securities short or participate on a
joint or joint and several basis in any securities trading account. (Does
not preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
(5) Underwrite any securities, except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities held in its
portfolio.
(6) Buy or sell interests in oil, gas or mineral exploration or development
programs, or purchase or sell commodities, commodity contracts or real
estate. (Does not preclude the purchase of GNMA mortgage-backed
certificates.)
(7) Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any of the Officers and Directors of the Fund or its Investment
Manager own beneficially more than 1/2 of 1%, and such Officers and
Directors holding more than 1/2 of 1% together own beneficially more than
5%, of the issuer's securities.
(8) Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
(9) Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies or investment techniques, and except for
purposes of this investment restriction, collateral, escrow, or margin or
other deposits with respect to the making of short sales, the purchase or
sale of futures contracts or related options, purchase or sale of forward
foreign currency contracts, and the writing of options on securities are
not deemed to be an issuance of a senior security.
The Fund is 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. The Fund will not invest more than 5% of the net assets of
the Fund 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 the
Fund in units or attached to securities are not included in this restriction.
The Fund will not, so long as its shares are registered in the State of Texas,
invest in oil, gas, or other mineral leases or real estate limited partnership
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interests. The Fund will not make loans to others, unless collateral values are
continuously maintained at no less than 100% by "marking to market" daily.
PORTFOLIO TRANSACTIONS
Each Investment Management Agreement and Portfolio Management Agreement
authorizes the Investment Manager or Portfolio Manager to select the brokers or
dealers that will execute the purchase and sale of investment securities for
each Fund. In all purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Investment Management Agreements and Portfolio
Management Agreements, each Investment Manager or Portfolio Manager determines,
subject to the instructions of and review by the Board of Directors of the Fund,
which securities are to be purchased and sold by the Funds and which brokers are
to be eligible to execute portfolio transactions of the Fund. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of an Investment Manager
or Portfolio Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, each Investment Manager or Portfolio Manager
will use its best efforts to choose a broker capable of providing the brokerage
services necessary to obtain the most favorable price and execution available.
The full range and quality of brokerage services available will be considered in
making these determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors. With respect to Bank and
Thrift Fund, such other Factors would include firm's ability to engage in
transactions in shares of banks and thrifts that are not listed on an organized
stock exchange. The Investment Managers or Portfolio Manager will seek to obtain
the best commission rate available from brokers that are believed to be capable
of providing efficient execution and handling of the orders. In those instances
where it is reasonably determined that more than one broker can offer the
brokerage services needed to obtain the most favorable price and execution
available, consideration may be given to those brokers that supply research and
statistical information to a Fund, the Investment Manager, and/or the Portfolio
Manager, and provide other services in addition to execution services. Each
Investment Manager or Portfolio Manager considers such information, which is in
addition to and not in lieu of the services required to be performed by the
Investment Manager or Portfolio Manager to be useful in varying degrees, but of
indeterminable value. Consistent with this policy, portfolio transactions may be
executed by brokers affiliated with the Pilgrim Group or any of the Investment
Managers or Portfolio Managers, so long as the commission paid to the affiliated
broker is reasonable and fair compared to the commission that would be charged
by an unaffiliated broker in a comparable transaction. The placement of
portfolio brokerage with broker-dealers who have sold shares of a Fund is
subject to rules adopted by the National Association of Securities Dealers, Inc.
("NASD") Provided the Fund's officers are satisfied that the Fund is receiving
the most favorable price and execution available, the Fund may also consider the
sale of the Fund's shares as a factor in the selection of broker-dealers to
execute its portfolio transactions.
While it will continue to be the Funds' general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for a Fund, the Fund may also give weight to the
ability of a broker to furnish brokerage and research services to the Fund, the
Investment Manager or the Portfolio Manager, even if the specific services were
not imputed to the Fund and were useful to the Investment Manager and/or
Portfolio Manager in advising other clients. In negotiating commissions with a
broker, the Fund may therefore pay a higher commission than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission has been determined in good faith by the
Investment Manager or Portfolio Manager to be reasonable in relation to the
value of the brokerage and research services provided by such broker.
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Purchases of securities for a Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers which specialize in the types of securities which the
Fund will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by a Fund may also be appropriate for
other clients served by that Fund's Investment Manager or Portfolio Manager. If
the purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Investment
Manager or Portfolio Manager is considered at or about the same time,
transactions in such securities will be allocated among the Fund and the
Investment Manager's or Portfolio Manager's other clients in a manner deemed
fair and reasonable by the Investment Manager or Portfolio Manager. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by a Investment Manager or Portfolio Manager, and the
results of such allocations, are subject to periodic review by the Board of
Directors. To the extent any of Funds seek to acquire the same security at the
same time, one or more of the Funds may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price for
such security. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a specific
Fund is concerned.
Each Fund does not intend to effect any transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with the Investment
Manager, except for any sales of portfolio securities that may legally be made
pursuant to a tender offer, in which event the Investment Manager will offset
against its management fee a part of any tender fees that may be legally
received and retained by an affiliated broker-dealer.
Brokerage commissions paid by each Fund for each of the last three fiscal years
are as follows:
BROKERAGE COMMISSIONS FOR THE FISCAL YEARS ENDED JUNE 30,
--------------------- -----------------------------------------
1996 1997 1998
---- ---- ----
Asia-Pacific Equity Fund $262,886 $320,036 $302,383
MidCap Value Fund $210,161 $146,795 $ 16,687
LargeCap Leaders Fund $ 8,460 $ 56,375 $ 50,835
MagnaCap Fund $113,000 $600,000 $456,000
High Yield Fund $ 0 $ 0 $ 0
Government Securities Income Fund $ 0 $ 0 $ 0
For Bank and Thrift Fund, for the years ended December 31, 1995, 1996, 1997, and
the six month period ended June 30, 1998, the total brokerage commissions paid
by the Fund amounted to approximately $49,000, $85,000, $90,000, and $316,000,
respectively.
PORTFOLIO TURNOVER
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 turnover rate may vary greatly from year to year as well
as within a year, and may also be affected by cash requirements for redemptions,
short-term interest rate volatility, the necessity of maintaining a Fund as a
regulated investment company under the Internal Revenue Code in order to receive
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favorable tax treatment and other special market conditions. The following table
shows the portfolio turnover rates for the Funds for each of the last two fiscal
years:
PORTFOLIO TURNOVER FOR THE FISCAL YEARS ENDED*
------------------ ---------------------------
1997 1998
---- ----
Asia-Pacific Equity Fund 38% 81%
MidCap Value Fund 86% 85%
LargeCap Leaders Fund 86% 78%
MagnaCap Fund 77% 53%
High Yield Fund 394% 209%
Bank and Thrift Fund 22% 2%**
Government Securities Income Fund 172% 134%
* The Fiscal years of each Fund ends as of June 30, except the fiscal year
for Bank and Thrift Fund prior to June 30, 1998 ended on December 31.
** For the six-month period ended June 30, 1998.
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, B and
C, at net asset value, which at the time of investment would have been subject
to the imposition of a contingent deferred sales charge if liquidated. The
Distributor may, from time to time, at its discretion, allow the selling dealer
to retain 100% of such sales charge, and such dealer may therefore be deemed an
"underwriter" under the Securities Act of 1933, as amended. The Distributor, at
its expense, may also provide additional promotional incentives to dealers in
connection with sales of shares of the Funds and other funds managed by the
Investment Manager. In some instances, such incentives may be made available
only to dealers whose representatives have sold or are expected to sell
significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families to locations
within or outside of the United States, merchandise or other items. Dealers may
not use sales of the Fund's shares to qualify for the incentives to the extent
such may be prohibited by the laws of any state.
Certain investors may purchase shares of the Funds with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by a Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Portfolio Manager intends to retain the security in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
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
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be used once per calendar year. Payment must accompany the request and the
purchase will be made at the then current net asset value of the Fund. Such
purchases may also be handled by a securities dealer who may charge a
shareholder for this service. If the shareholder has realized a gain on the
redemption, the transaction is taxable and any reinvestment will not alter any
applicable Federal capital gains tax. If there has been a loss on the redemption
and a subsequent reinvestment pursuant to this privilege, some or all of the
loss may not be allowed as a tax deduction depending upon the amount reinvested,
although such disallowance is added to the tax basis of the shares acquired upon
the reinvestment.
Any person who can document that Fund shares were purchased with proceeds from
the redemption (within the previous 90 days) of shares from any unaffiliated
mutual fund on which a sales charge was paid or which were subject at any time
to a CDSC, and the Distributor has determined in its discretion that the
unaffiliated fund invests primarily in the same types of securities as the
Pilgrim Fund purchased.
Class A or Class M Shares of the Funds may also be purchased at net asset value
by any charitable organization or any state, county, or city, or any
instrumentality, department, authority or agency thereof that has determined
that a Fund is a legally permissible investment and that is prohibited by
applicable investment law from paying a sales charge or commission in connection
with the purchase of shares of any registered management investment company ("an
eligible governmental authority"). If an investment by an eligible governmental
authority at net asset value is made though a dealer who has executed a selling
group agreement with respect to the 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, any service provider to a Fund 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.
Class A or Class M shares may also be purchased without a sales charge by (i)
shareholders who have authorized the automatic transfer of dividends from the
same class of another Pilgrim Fund distributed by the Distributor or from
Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies
and bank trust departments investing in Class A shares on their own behalf or on
behalf of their clients, provided that the aggregate amount invested in any one
or more Funds, during the 13 month period starting with the first investment,
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equals at least $1 million; (iii) broker-dealers, who have signed selling group
agreements with the Distributor, and registered representatives and employees of
such broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles, aunts,
siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv)
broker-dealers using third party administrators for qualified retirement plans
who have entered into an agreement with the Pilgrim Funds or an affiliate,
subject to certain operational and minimum size requirements specified from
time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or
broker-dealer charges an account management fee (`wrap accounts'); and (vi) any
registered investment company for which Pilgrim Investments, Inc. serves as
adviser.
Shares of the MagnaCap Fund are acquired at net asset value by Investors
Fiduciary Trust Company, Kansas City, Missouri, as Custodian for Pilgrim
Investment Plans, a unit investment trust for the accumulation of shares of the
Fund. As of September 30, 1998, less than 2% of the Fund's then total
outstanding shares were held by said Custodian for the account of such plan
holders.
The Funds may terminate or amend the terms of these sales charge waivers at any
time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION. An investor may immediately
qualify for a reduced sales charge on a purchase of Class A or Class M shares of
any of the Funds which offers Class A shares, 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 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.
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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 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.
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
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affect any CDSC which may be imposed upon the redemption of shares of a Fund
which imposes a CDSC.
REDEMPTIONS. Payment to shareholders for shares redeemed will be made within
seven days after receipt by the Fund's Transfer Agent of the written request in
proper form, except that a Fund may suspend the right of redemption or postpone
the date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of a Fund's shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, each 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, each Fund 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 the Fund, other than as a result of a
decline in the net asset value per share. Before the Fund redeems such shares
and sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares in the account is less than the minimum amount and will
allow the shareholder 30 days to make an additional investment in an amount that
will increase the value of the account to at least $1,000 before the redemption
is processed. This policy will not be implemented where a Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may be
subject to a CDSC. 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. For Class C Shares, the Distributor may pay out of its own
assets a commission of 1.00% of the amount invested for Class C shares of any
Equity Fund and the Convertible, Balanced and High Yield Funds and 0.75% of the
amount invested for Class C shares of any Income Fund other than High Yield
Fund.
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.
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The CDSC or redemption fee will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii) in connection
with mandatory distributions from an Individual Retirement Account ("IRA") or
other qualified retirement plan. The CDSC or redemption fee will be waived in
the case of a redemption of shares following the death or permanent disability
of a shareholder if the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available for total or
partial redemptions of shares owned by an individual or an individual in joint
tenancy (with rights of survivorship), but only for redemptions of shares held
at the time of death or initial determination of permanent disability. The CDSC
or redemption fee will also be waived in the case of a total or partial
redemption of shares in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The waiver does not apply in the case of
a tax-free rollover or transfer of assets, other than one following a separation
from services. The shareholder must notify the Fund either directly or through
the Distributor at the time of redemption that the shareholder is entitled to a
waiver of CDSC or redemption fee. The waiver will then be granted subject to
confirmation of the shareholder's entitlement. The CDSC or redemption fee, which
may be imposed on Class A shares purchased in excess of $1 million, will also be
waived for registered investment advisors, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients. These
waivers may be changed at any time.
REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim
Fund, you may reinvest some or all of the proceeds in the same share class
within 90 days without a sales charge. Reinstated Class B and Class C shares
will retain their original cost and purchase date for purposes of the CDSC. The
amount of any CDSC also will be reinstated. To exercise this privilege, the
written order for the purchase of shares must be received by the Transfer Agent
or be postmarked within 90 days after the date of redemption. This privilege can
be used only once per calendar year. If a loss is incurred on the redemption and
the reinstatement privilege is used, some or all of the loss may not be allowed
as a tax deduction.
CONVERSION OF CLASS B SHARES. 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, if the
Investment Manager deems it advisable to obtain such advice, to the effect that
(1) such conversion will not constitute taxable events for federal tax purposes;
and (2) the payment of different dividends on Class A and Class B shares does
not result in the Fund's dividends or distributions constituting "preferential
dividends" under the Internal Revenue Code of 1986. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of each class
of each Fund's shares will be determined once daily as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during
each day on which that Exchange is open for trading. As of the date of this
Statement of Additional Information, the New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. Portfolio securities underlying traded call options written by
the High Yield Fund will be valued at their market price as determined above;
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however, the current market value of the option written by the High Yield Fund
will be subtracted from net asset value. In cases in which securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market.
Short-term obligations maturing in less than 60 days will generally be valued at
amortized cost. The mortgage securities held in a Fund's portfolio will be
valued at the mean between the most recent bid and asked prices as obtained from
one or more dealers that make markets in the securities when over-the counter
market quotations are readily available. Securities for which quotations are not
readily available and all other assets will be valued at their respective fair
values as determined in good faith by or under the direction of the Board of
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.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of a
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of a Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to a Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Directors.
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, Class C
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 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.
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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.).
Each 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. Each 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.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds provide a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of a Fund
on a regular basis. Such a Program may be started with an initial investment
($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no
obligation to continue. The Program may be terminated without penalty at any
time by the investor or the Funds. The minimum investment requirements may be
waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
For investors purchasing shares of a Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of a Fund on a
periodic basis, the Fund may, in lieu of furnishing confirmations following each
purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.
All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of a fund will not be issued
unless the shareholder requests them in writing.
SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS. For self-employed individuals and
corporate investors that wish to purchase shares of a Fund, there is available
through the Fund a Prototype Plan and Custody Agreement. The Custody Agreement
provides that Investors Fiduciary Trust Company, Kansas City, Missouri, will act
as Custodian under the Plan, and will furnish custodial services for an annual
maintenance fee of $12.00 for each participant, with no other charges. (This fee
is in addition to the normal Custodian charges paid by the Funds.) The annual
contract maintenance fee may be waived from time to time. For further details,
including the right to appoint a successor Custodian, see the Plan and Custody
Agreements as provided by the 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
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certain dollar amounts of earned income, and an additional amount if there is a
non-working spouse. Simple IRA plans that employers may establish on behalf of
their employees are also available. Roth IRA plans that enable employed and
self-employed individuals to make non-deductible contributions, and, under
certain circumstances, effect tax-free withdrawals, are also available. Copies
of a model Custodial Account Agreement are available from the Distributor.
Investors Fiduciary Trust Company, Kansas City, Missouri, will act as the
Custodian under this model Agreement, for which it will charge the investor an
annual fee of $12.00 for maintaining the Account (such fee is in addition to the
normal custodial charges paid by the Funds). Full details on the IRA are
contained in an IRS required disclosure statement, and the Custodian will not
open an IRA until seven (7) days after the investor has received such statement
from the 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. Section 403(b) plans are arrangements by a public school organization
or a charitable, educational, or scientific organization that is described in
Section 501(c)(3) of the Internal Revenue Code under which employees are
permitted to take advantage of the federal income tax deferral benefits provided
for in Section 403(b) of the Code. It is advisable for an investor considering
the funding of any retirement plan to consult with an attorney or to obtain
advice from a competent retirement plan consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES. As discussed in the Prospectus,
the telephone redemption and exchange privileges are available for all
shareholder accounts; however, retirement accounts may not utilize the telephone
redemption privilege. The telephone privileges may be modified or terminated at
any time. The privileges are subject to the conditions and provisions set forth
below and in the Prospectus.
1. Telephone redemption and/or exchange instructions received in good
order before the pricing of a Fund on any day on which the New York
Stock Exchange is open for business (a "Business Day"), but not later
than 4:00 p.m. eastern time, will be processed at that day's closing
net asset value. For each exchange, the shareholder's account may be
charged an exchange fee. There is no fee for telephone redemption;
however, redemptions of Class A and Class B shares may be subject to a
contingent deferred sales charge (See "Redemption of Shares" in the
Prospectus).
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
3. Pilgrim Funds will not permit exchanges in violation of any of the
terms and conditions set forth in the Funds' Prospectus or herein.
4. Telephone redemption requests must meet the following conditions to be
accepted by Pilgrim Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on
the registration. This address cannot reflect any change within
the previous sixty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
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(d) The maximum amount which can be liquidated and sent to the
address of record at any one time is $100,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
5. If the exchange involves the establishment of a new account, the
dollar amount being exchanged must at least equal the minimum
investment requirement of the Pilgrim Fund being acquired.
6. Any new account established through the exchange privilege will have
the same account information and options except as stated in the
Prospectus.
7. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141
and deposited into your account before any transaction may be
processed.
8. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares
of the Pilgrim Fund to be purchased on the exchange having the same
aggregate net asset value as the shares being exchanged shall be
substituted in the escrow account. Shares held in escrow may not be
redeemed until the Letter of Intent has expired and/or the appropriate
adjustments have been made to the account.
9. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Funds' then-current
prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by
the bank upon which it was drawn.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting both
income dividends and capital gains distributions, if any, in additional shares
of a respective class of a Fund at the then current net asset value, with no
sales charge. The Funds' management believes that most investors desire to take
advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and its shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and shareholders are
advised to consult their own tax advisers with respect to the particular
federal, state, local and foreign tax consequences to them of an investment in
the Funds. This discussion is based on the Internal Revenue Code of 1986, as
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amended (the "Code"), Treasury Regulations issued thereunder, and judicial and
administrative authorities as in effect on the date of this Statement of
Additional Information, all of which are subject to change, which change may be
retroactive.
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, each Fund
must, among other things: (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (c) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, a Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes to
its shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, each Fund intends to make
distributions in accordance with the calendar year distribution requirement.
DISTRIBUTIONS. Dividends of investment company taxable income (including net
short-term capital gains) are taxable to shareholders as ordinary income.
Distributions of investment company taxable income may be eligible for the
corporate dividends-received deduction to the extent attributable to a Fund's
dividend income from U.S. corporations, and if other applicable requirements are
met. However, the alternative minimum tax applicable to corporations may reduce
the benefit of the dividends-received deduction. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) designated by a Fund as capital gain dividends are not eligible for the
dividends-received deduction and will generally be taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been held by a shareholder, and are not eligible for the dividends-received
deduction. Net capital gains from assets held for one year of less will be taxed
as ordinary income. Generally, dividends and distributions are taxable to
shareholders, whether received in cash or reinvested in shares of a Fund. Any
distributions that are not from a Fund's investment company taxable income or
net capital gain may be characterized as a return of capital to shareholders or,
in some cases, as capital gain. Shareholders will be notified annually as to the
federal tax status of dividends and distributions they receive and any tax
withheld thereon.
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Dividends, including capital gain dividends, declared in October, November, or
December with a record date in such month and paid during the following January
will be treated as having been paid by a Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by a Fund reduce the net asset value of the Fund shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by a Fund. The price of shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will generally be
taxable to them.
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by a Fund may be
treated as debt securities that were originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount that accrues on a debt security in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code. If the High Yield Fund
invests in certain high yield original issue discount securities issued by
corporations, a portion of the original issue discount accruing on the
securities may be eligible for the deduction for dividends received by
corporations. In such event, properly designated dividends of investment company
taxable income received from the High Yield Fund by its corporate shareholders,
to the extent attributable to such portion of accrued original issue discount,
may be eligible for this deduction for dividends received by corporations.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to
fluctuations in foreign currency exchange rates which occur between the time a
Fund accrues income or other receivable or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
receivable or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain financial contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains and losses, may increase or
decrease the amount of a Fund's net investment income to be distributed to its
shareholders as ordinary income.
PASSIVE FOREIGN INVESTMENT COMPANIES. A Fund may invest in stocks of foreign
companies that are classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign company is classified as a PFIC if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which a Fund held the PFIC stock. A Fund
itself will be subject to tax on the portion, if any, of the excess distribution
that is allocated to that Fund's holding period in prior taxable years (and an
interest factor will be added to the tax, as if the tax had actually been
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payable in such prior taxable years) even though the Fund distributes the
corresponding income to shareholders. Excess distributions include any gain from
the sale of PFIC stock as well as certain distributions from a PFIC. All excess
distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. Alternatively, another
election is available that involves marking to market the Funds' PFIC stock at
the end of each taxable year with the result that unrealized gains are treated
as though they were realized and are reported as ordinary income; any
mark-to-market losses, as well as loss from an actual disposition of PFIC stock,
are reported as ordinary loss to the extent of any net mark-to-market gains
included in income in prior years.
FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign
countries may be subject to withholding and other income or similar taxes
imposed by such countries. If more than 50% of the value of an Advisory Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, that Advisory Fund will be eligible and intends to elect to "pass
through" to the Fund's shareholders the amount of foreign income and similar
taxes paid by that Fund. Pursuant to this election, a shareholder will be
required to include in gross income (in addition to taxable dividends actually
received) his pro rata share of the foreign taxes paid by an Advisory Fund, and
will be entitled either to deduct (as an itemized deduction) his pro rata share
of foreign income and similar taxes in computing his taxable income or to use it
as a foreign tax credit against his U.S. federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions, but such a shareholder may be eligible to claim
the foreign tax credit (see below). Each shareholder will be notified within 60
days after the close of the relevant Advisory Fund's taxable year whether the
foreign taxes paid by the Advisory Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of an
Advisory Fund's income flows through to its shareholders. With respect to an
Advisory Fund, gains from the sale of securities will be treated as derived from
U.S. sources and certain currency fluctuation gains, including fluctuation gains
from foreign currency denominated debt securities, receivable and payable, will
be treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by a Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund. The foreign tax credit limitation rules do not apply to certain
electing individual taxpayers who have limited creditable foreign taxes and no
foreign source income other than passive investment-type income. The foreign tax
credit is eliminated with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Fund are held by the Fund or the
shareholders, as the case may be, for less than 16 days (46 days in the case of
preferred shares) during the 30-day period (90-day period for preferred shares)
beginning 15 days (45 days for preferred shares) before the shares become
ex-dividend. Foreign taxes may not be deducted in computing alternative minimum
taxable income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by a Fund will be treated as United States
source income.
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OPTIONS AND HEDGING TRANSACTIONS. The taxation of equity options (including
options on narrow-based stock indices) and over-the-counter options on debt
securities is governed by Code Section 1234. Pursuant to Code Section 1234, with
respect to a put or call option that is purchased by a Fund, if the option is
sold, any resulting gain or loss will be a capital gain or loss, and will be
short-term or long term, depending upon the holding period of the option. If the
option expires, the resulting loss is a capital loss and is short-term or
long-term, depending upon the holding period of the option. If the option is
exercised, the cost of the option, in the case of a call option, is added to the
basis of the purchased security and, in the case of a put option, reduces the
amount realized on the underlying security in determining gain or loss.
Certain options and financial contracts in which the Funds may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by a Fund at the end of each taxable
year (and on certain other dates as prescribed under the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, notional principal contract, futures or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options, futures and forward contracts
and short sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-day period ending with the 30th
day after the close of the Fund's taxable year, if certain conditions are met.
Requirements relating to each Fund's tax status as a regulated investment
company may limit the extent to which a Fund will be able to engage in
transactions in options and foreign currency forward contracts.
SHORT SALES AGAINST THE BOX. If a Fund sells short "against the box," unless
certain constructive sale rules (discussed above) apply, it may realize a
capital gain or loss upon the closing of the sale. Such gain or loss generally
will be long- or short-term depending upon the length of time the Fund held the
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security which it sold short. In some circumstances, short sales may have the
effect of reducing an otherwise applicable holding period of a security in the
portfolio. Were that to occur, the affected security would again have to be held
for the requisite period before its disposition to avoid treating that security
as having been sold within the first three months of its holding period. The
constructive sale rule, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully under "Options and Hedging Transactions" above.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future Treasury regulations may apply similar
treatment to other transactions with respect to property that becomes
substantially worthless.
OTHER INVESTMENT COMPANIES. It is possible that by investing in other investment
companies, a Fund may not be able to meet the calendar year distribution
requirement and may be subject to federal income and excise tax. The
diversification and distribution requirements applicable to each Fund may limit
the extent to which each Fund will be able to invest in other investment
companies.
SALE OR OTHER DISPOSITION OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, which generally may be eligible
for reduced Federal tax rates, depending on the shareholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in a Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING. Each Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish a Fund with the shareholder's correct taxpayer
identification number or social security number and to make such certifications
as a Fund may require, (2) the IRS notifies the shareholder or a Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
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FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United States, is
a nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder. If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) upon the gross amount of the dividend. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund, capital gain dividends and amounts retained by the
Fund that are designated as undistributed capital gains. If the income from the
Fund is effectively connected with a U.S. trade or business carried on by a
foreign shareholder, then ordinary income dividends, capital gain dividends and
any gains realized upon the sale of shares of the Fund will be subject to U.S.
federal income tax at the rates applicable to U.S. citizens or domestic
corporations.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund, including the
applicability of foreign taxes.
OTHER TAXES. Distributions also may be subject to state, local and foreign
taxes. U.S. tax rules applicable to foreign investors may differ significantly
from those outlined above. This discussion does not purport to deal with all of
the tax consequences applicable to shareholders. Shareholders are advised to
consult their own tax advisers for details with respect to the particular tax
consequences to them of an investment in a Fund.
CALCULATION OF PERFORMANCE DATA
Each Fund may, from time to time, include "total return" in advertisements or
reports to shareholders or prospective investors. Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in a Fund over periods of 1, 5 and 10 years
(up to the life of the Fund), calculated pursuant to the following formula which
is prescribed by the SEC:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, a Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
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Prior to October 17, 1997, the Bank and Thrift Fund operated as a closed-end
investment company. Upon conversion of the Fund to an open-end investment
company on October 17, 1997, all outstanding shares of Common Stock of the Fund
were designated as Class A shares. Performance information for the period prior
to October 17, 1997 reflects the performance of the Fund as a closed-end fund.
Performance information presented by the Fund for all periods is restated to
reflect the current maximum front-end sales load payable by the Class A shares
of the Fund. Performance information for the period prior to October 17, 1997
has not been adjusted to reflect annual Rule 12b-1 fees of Class A shares plus
additional expenses incurred in connection with operating as an open-end
investment company. Performance would have been lower if adjusted for these
charges and expenses. Performance information for all periods after October 17,
1997 reflects Class A's annual Rule 12b-1 fees and other expenses associated
with open-end investment companies.
Government Securities Income Fund earned income and realized capital gains as a
result of entering into reverse repurchase agreements during the six-month
period from July to December 1992 that caused the Fund to exceed its 10%
investment restriction on borrowing. Therefore, the Fund's performance was
higher than it would have been had the Fund adhered to its borrowing
restriction.
Quotations of yield for a Fund will be based on all investment income per share
earned during a particular 30-day period (including dividends and interest),
less expenses accrued during the period ("net investment income") and are
computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b
2[(--- +1)6 -1]
cd
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
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The High Yield Fund may also from time to time advertise its yield based on a
30-day or 90-day period ended on a date other than the most recent balance sheet
included in the Fund's Registration Statement, computed in accordance with the
yield formula described above, as adjusted to conform with the differing period
for which the yield computation is based. Any quotation of performance stated in
terms of yield (whether based on a 30-day or 90-day period) will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
A Fund may also publish a distribution rate in sales literature and in investor
communications preceded or accompanied by a copy of the current Prospectus. The
current distribution rate for a Fund is the annualization of the Fund's
distribution per share divided by the maximum offering price per share of a Fund
at the respective month-end. The current distribution rate may differ from
current yield because the distribution rate may contain items of capital gain
and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures
will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load.
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return will always
show a calculation that includes the effect of the maximum sales charge but may
also show total return without giving effect to that charge. Because these
additional quotations will not reflect the maximum sales charge payable, these
performance quotations will be higher than the performance quotations that
reflect the maximum sales charge.
Total returns and yields are based on past results and are not necessarily a
prediction of future performance.
PERFORMANCE COMPARISONS. In reports or other communications to shareholders or
in advertising material, a Fund may compare the performance of its Class A,
Class B, Class C and Class 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 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. Prior to October
17, 1997, the Bank and Thrift Fund was rated as a closed-end fund, which had a
different fee structure. Fee structures are incorporated into certain ratings.
If the Fund had been rated using the fee structure of an open-end fund, ratings
for those periods may have been different.
The average annual total returns, including sales charges, for each class of
shares of each Fund for the one-five-and ten-year periods ended December 31,
1998, if applicable, and for classes that have not been in operation for ten
years, the average annual total return from for the period from commencement of
operations to December 31, 1998, is as follows:
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SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION(1)
------ ------ ------- ------------
ASIA-PACIFIC EQUITY FUND(1)
Class A -20.37% N/A N/A -19.55%
Class B -20.57% N/A N/A -19.51%
Class M -19.26% N/A N/A -19.47%
LARGECAP LEADERS FUND(1)
Class A 13.16% N/A N/A 18.67%
Class B 14.33% N/A N/A 19.28%
Class M 15.43% N/A N/A 18.93%
MIDCAP VALUE FUND(1)
Class A -1.15% N/A N/A 15.53%
Class B -0.75% N/A N/A 16.07%
Class M 0.63% N/A N/A 15.70%
MAGNACAP FUND(2)
Class A 9.40% 18.46% 15.13% N/A
Class B 10.26% N/A N/A 20.73%
Class M 11.56% N/A N/A 20.31%
HIGH YIELD FUND(3)
Class A -7.60% 7.36% 8.88% N/A
Class B -8.02% N/A N/A 7.75%
Class M -6.58% N/A N/A 7.69%
BANK AND THRIFT FUND(4)
Class A -7.48% 25.89% 20.90% N/A
Class B -7.27% N/A N/A 4.29%
GOVERNMENT SECURITIES INCOME FUND(5)
Class A 0.63% 4.20% 6.56% N/A
Class B -0.15% N/A N/A 4.42%
Class M 1.66% N/A N/A 4.50%
1 Class A, B and M shares of Asia-Pacific Equity Fund, the LargeCap Leaders
Fund, and MidCap Value Fund commenced on September 1, 1995.
2 Class B and M shares of MagnaCap Fund commenced operations on July 17,
1995.
3 Class B and M shares of High Yield commenced operations on July 17, 1995.
4 Class B shares of Bank and Thrift Fund commenced operations on October 20,
1997.
5 Class B and M shares of Government Securities Income commenced operations
on July 17, 1995. Government Securities Income Fund earned income and
realized capital gains as a result of entering into reverse repurchase
agreements during the six-month period from July to December 1992 that
caused the Fund to exceed its 10% investment restriction on borrowing.
Therefore, the Fund's performance was higher than it would have been had
the Fund adhered to its borrowing restriction.
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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.
GENERAL INFORMATION
CAPITALIZATION AND VOTING RIGHTS. The authorized capital stock of the Advisory
Funds consists of 1,000,000,000 shares having par value of $.01 per share. The
authorized capital stock of Pilgrim Investment Funds, Inc. consists of
500,000,000 shares of $.10 par value each, of which 200,000,000 shares are
classified as shares of MagnaCap Fund, 200,000,000 shares are classified as
shares of Pilgrim High Yield Fund, and 100,000,000 are not classified. The
authorized capital stock of Pilgrim Bank and Thrift Fund, Inc. consists of
100,000,000 shares of common stock having a par value of $0.00/per share.
Holders of shares of the Advisory Funds and Bank and Thrift Fund have one vote
for each share held, and a proportionate fraction of a vote for each fraction of
a share held. The authorized capital stock of Pilgrim Government Securities
Income Fund, Inc. consists of 5,000,000 shares. All shares when issued are fully
paid, non-assessable, and redeemable. Shares have no preemptive rights. All
shares have equal voting, dividend and liquidation rights. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of 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. Generally, there will not be annual meetings
of shareholders.
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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 1940 Act. The Board of Directors may create
additional series (or classes of series) of shares without shareholder approval.
Any series or class of shares may be terminated by a vote of the shareholders of
such series or class entitled to vote or by the Directors of the Company by
written notice to shareholders of such series or class. Shareholders may remove
Directors from office by votes cast at a meeting of shareholders or by written
consent.
CUSTODIAN. The cash and securities owned by each Fund are held by Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of a Fund's portfolio securities.
LEGAL COUNSEL. Legal matters for each Company are passed upon by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS. KPMG LLP, 725 South Figueroa Street, Los Angeles,
California 90017, acts as independent auditors for each Fund.
OTHER INFORMATION. Each 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 each Company's Registration Statement filed with the
SEC and copies of this information may be obtained from the SEC upon payment of
the prescribed fee or examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statement audited by independent
certified public accountants.
FINANCIAL STATEMENTS
The financial statements from the Funds' June 30, 1998 Annual Report and
December 31, 1998 Semi-Annual Report are incorporated herein by reference.
Copies of the Funds' Annual Report and Semi-Annual Report may be obtained
without charge by contacting Pilgrim Funds at Suite 1200, 40 North Central
Avenue, Phoenix, Arizona 85004, (800) 992-0180.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Form of Articles of Incorporation(3)
(2) Form of Articles Supplementary designating Pilgrim America
Strategic Income Fund(3)
(3) Form of Amendment to Articles of Incorporation
(b) Form of Amended and Restated Bylaws(1)
(c) Specimen security(2)
(d) (1) Form of Investment Management Agreement(3)
(2) Form of Supplement to Investment Management Agreement
relating to Strategic Income Fund(3)
(3) Form of Portfolio Management Agreement with HSBC Asset
Management Americas Inc. and HSBC Asset Management Hong Kong
Limited relating to Asia-Pacific Equity Fund(3)
(4) Form of Portfolio Management Agreement with Cramer Rosenthal
McGlynn, LLC(3)
(e) (1) Form of Underwriting Agreement(3)
(2) Form of Amended and Restated Underwriting Agreement
(3) Form of Selling Group Agreement(3)
(4) Form of Service Agreement with broker-dealers(3)
(f) Not Applicable
(g) (1) Form of Custody Agreement(3)
(2) Form of Recordkeeping Agreement(3)
(h) (1) Form of Service Agreement with Pilgrim America Group, Inc.(3)
(2) Form of Supplement to Service Agreement(3)
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(3) Form of Expense Limitation Agreement(4)
(i) Opinion and Consent of Dechert Price & Rhoads(3)
(j) Consent of Independent Auditors
(k) Not Applicable
(l) Form of Investment Letter(3)
(m) (1) Form of Service and Distribution Plan for Class A Shares(3)
(2) Form of Service and Distribution Plan for Class B Shares
(3) Form of Service and Distribution Plan for Class M Shares(3)
(4) Form of Service and Distribution Plan for Class C Shares
(n) Financial Data Schedules
(o) Form of Multiple Class Plan Adopted Pursuant to Rule 18f-3(3)
- ----------
(1) Incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A as filed on October 30, 1996.
(2) Incorporated by reference to Pre-effective Amendment No. 1 to the
Registration Statement on Form N-1A as filed on June 22, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A as filed on August 14, 1998.
(4) Incorporated by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A as filed on October 27, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VII of the Fund's Articles of Incorporation, Article VI of the Fund's
Bylaws, the Investment Management Agreement filed as Exhibit (d)(1), and the
Underwriting Agreement filed as Exhibit (e)(1) provide for indemnification.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Fund in the successful defense of any action, suit or proceeding)
is asserted by such a director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Investment Manager in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-48282) filed
under the Investment Advisers Act of 1940 and is incorporated herein by
reference thereto.
Information as to the directors and officers of HSBC Asset Management
Americas Inc., together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by the directors and
officers of HSBC Asset Management Americas Inc. in the last two years, is
included in its application for registration as an investment adviser on Form
ADV (File No. 801-25999) filed under the Investment Advisers Act of 1940 and is
incorporated herein by reference thereto.
Information as to the directors and officers of HSBC Asset Management Hong
Kong Limited, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by the directors and
officers of HSBC Asset Management Hong Kong Limited in the last two years, is
included in its application for registration as an investment adviser on Form
ADV (File No. 801-29922) filed under the Investment Advisers Act of 1940 and is
incorporated herein by reference thereto.
Information as to the directors and officers of CRM Advisors, LLC, together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by the directors and officers of CRM Advisors,
LLC in the last two years, is included in its application for registration as an
investment adviser on Form ADV (File No. 801-49528) filed under the Investment
Advisers Act of 1940 and is incorporated herein by reference thereto.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Pilgrim Investment Funds, Inc.; Pilgrim Government Securities Income
Fund, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim Prime Rate Trust and
Pilgrim Mutual Funds.
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(b) Information as to the directors and officers of the Distributor,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Distributor in the last two years, is included in its application for
registration as a broker-dealer on Form BD (File No. 8-48020) filed under the
Securities Exchange Act of 1934 and is incorporated herein by reference thereto.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of (a) the Registrant, (b) Pilgrim
Group, Inc., (c) Pilgrim Investments, Inc., (d) the Portfolio Managers, (e) the
Custodians and (e) the Transfer Agent. The address of each is as follows:
(a) Pilgrim Advisory Funds, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(b) Pilgrim Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(c) Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(d) HSBC Asset Management Americas Inc.
250 Park Avenue
New York, New York 10177
HSBC Asset Management Hong Kong Limited
Citibank Tower
3 Garden Road, 10th Floor
Hong Kong
Cramer Rosenthal McGlynn, LLC
520 Madison Avenue
New York, New York 10022
(e) Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105
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(f) Investors Fiduciary Trust Company
c/o DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141
ITEM 29. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix and State of
Arizona on the 24th day of March, 1999.
PILGRIM ADVISORY FUNDS, INC.
By: /s/ Robert W. Stallings
-------------------------------------
Robert W. Stallings
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert W. Stallings
- --------------------------- Director, President and March 24, 1999
Robert W. Stallings Chief Executive Officer
(Principal Executive Officer)
- --------------------------- Director March 24, 1999
Mary A. Baldwin *
- --------------------------- Director March 24, 1999
John P. Burke *
- --------------------------- Director March 24, 1999
Al Burton *
- --------------------------- Director March 24, 1999
Jock Patton *
- --------------------------- Principal Financial Officer March 24, 1999
Michael J. Roland *
* By: /s/ Robert W. Stallings
-----------------------
Robert W. Stallings
Attorney-in-Fact**
** Powers of Attorney for the Directors are incorporated by reference to
Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A
as filed on September 29, 1997. The Power of Attorney for Michael J. Roland
is incorporated by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A as filed on August 14, 1998.
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EXHIBIT LIST
Exhibit Number Name of Exhibit
- -------------- ---------------
(e)(2) Form of Amended and Restated Underwriting Agreement
(j) Consent of Independent Auditors
(m)(2) Form of Service and Distribution Plan for Class B Shares
(m)(4) Form of Service and Distribution Plan for Class C Shares
(n)(EDGAR Exhibit 27) Financial Data Schedules
PILGRIM ADVISORY FUNDS, INC.
PILGRIM ASIA-PACIFIC EQUITY FUND
PILGRIM MIDCAP VALUE FUND
PILGRIM LARGECAP LEADERS FUND
PILGRIM STRATEGIC INCOME FUND
40 N. CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
November 30, 1998
Pilgrim Securities, Inc.
40 N. Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: Amended and Restated Underwriting Agreement
Gentlemen:
Pilgrim Advisory Funds, Inc. is a Maryland corporation operating as an
open-end management investment company (hereinafter referred to as the
"Company"). The Company is registered as such under the Investment Company Act
of 1940, as amended (the "1940 Act"), and its shares are registered under the
Securities Act of 1933, as amended (the "1933 Act"). The Company consists of
four separate series: Pilgrim Asia-Pacific Equity Fund, Pilgrim LargeCap Leaders
Fund, Pilgrim MidCap Value Fund and Pilgrim Strategic Income Fund (the "Funds").
The Company on behalf of the Funds desires to offer and sell the authorized but
unissued shares of the Funds to the public in accordance with applicable federal
and state securities laws.
You have informed us that Pilgrim Securities, Inc. is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934 and is
a member in good standing of the National Association of Securities Dealers,
Inc. You have indicated your desire to act as the exclusive selling agent and
principal underwriter for the shares of the Funds. We have been authorized by
the Company to execute and deliver this Agreement to you by a resolution of our
Board of Directors (the "Directors") adopted at a meeting of the Directors, at
which a majority of Directors, including a majority of our Directors who are not
otherwise interested persons of our investment manager or its related
organizations, were present and voted in favor of the said resolution approving
this Amended and Restated Underwriting Agreement. This Amended and Restated
Underwriting Agreement is intended to apply to all Shares of the Funds issued
before or after this amendment.
<PAGE>
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for distribution of the shares (other than sales made directly by the
Company without sales charge) and agree that we will deliver to you such shares
as you may sell. You agree to use your best efforts to promote the sale of the
shares, but you are not obligated to sell any specific number of the shares.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind the Company or the Funds by your actions, conduct
or contracts, except that you are authorized to accept orders for the purchase
or repurchase of the shares as our agent. You may appoint sub-agents or
distribute the shares through dealers (or otherwise) as you may determine
necessary or desirable from time to time. This Agreement shall not, however, be
construed as authorizing any dealer or other person to accept orders for sale or
repurchase on our behalf or to otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares of the Funds shall be offered at a price
equivalent to their net asset value plus, as appropriate, a variable percentage
of the public offering price as a sales load, as set forth in the Funds'
Prospectus. On each business day on which the New York Stock Exchange is open
for business, we will furnish you with the net asset value of the shares, which
shall be determined and become effective as of the close of business of the New
York Stock Exchange on that day. The net asset value so determined shall apply
to all orders for the purchase of the shares received by dealers prior to such
determination, and you are authorized in your capacity as our agent to accept
orders and confirm sales at such net asset value; PROVIDED THAT, such dealers
notify you of the time when they received the particular order and that the
order is placed with you prior to your close of business on the day on which the
applicable net asset value is determined. To the extent that our Shareholder
Servicing and Transfer Agent (collectively, "Agent") and the Custodian(s) for
any pension, profit-sharing, employer or self-employed plan receive payments on
behalf of the investors, such Agent and Custodian(s) shall be required to record
the time of such receipt with respect to each payment, and the applicable net
asset value shall be that which is next determined and effective after the time
of receipt by them. In all events, you shall forthwith notify all of the dealers
comprising your selling group and the Agent and Custodian(s) of the effective
net asset value as received from us. Should we at any time calculate our net
asset value more frequently than once each business day, you and we will follow
procedures with respect to such additional price or prices comparable to those
set forth above in this Section 3.
4. SALES COMMISSION.
(a) In respect of each Class of Shares other than Class B Shares:
(i) You shall be entitled to receive a sales commission on the
sale of shares of the Funds in the amounts and according to the procedures set
forth in the Funds' Prospectus then in effect under the 1933 Act (including any
supplements or amendments thereto).
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(ii) In addition to the payments of the sales commissions to you
provided for in paragraph 4(a), you may also receive reimbursement for expenses
or a maintenance or trail fee as may be required by and described in the
distribution plans adopted by the Funds pursuant to Rule 12b-1 under the 1940
Act (the "Distribution Plans").
(b) In respect of the Class B Shares of each Fund, the following
provisions shall apply:
(i) In consideration of your services as principal underwriter of
the Funds' Class B Shares pursuant to this Underwriting Agreement and our
distribution plan pursuant to Rule 12b-1 under the 1940 Act in respect of such
shares (the "Class B Distribution Plan"), we agree: (I) to pay to you monthly in
arrears your "Allocable Portion" (as hereinafter defined) of a fee (the
"Distribution Fee") which shall accrue daily in an amount equal to the product
of (A) the daily equivalent of 0.75% per annum multiplied by (B) the net asset
value of the Class B Shares of each Fund outstanding on such day, and (II) to
withhold from redemption proceeds your Allocable Portion of the Contingent
Deferred Sales Charges ("CDSCs") and to pay the same over to you or at your
direction.
(ii) The Allocation Schedule attached hereto as Schedule A and
each of the provisions set forth in clauses (I) through (V) of the second
sentence of Section 1(A) of the Class B Distribution Plan as in effect on the
date hereof, together with the related definitions, are hereby incorporated
herein by reference with the same force and effect as if set forth herein in
their entirety.
(c) You may allow appointed sub-agents or dealers such commissions or
discounts (not exceeding the total sales commission) as you shall deem
advisable, so long as any such commissions or discounts are set forth in the
Funds' then current Prospectus, to the extent required by the applicable federal
and state securities laws.
5. PAYMENT OF SHARES. At or prior to the time of delivery of any of our
shares you will pay or cause to be paid to the Custodian, for our account, an
amount in cash equal to the net asset value of such shares. In the event that
you pay for shares sold by you prior to your receipt of payment from purchasers,
you are authorized to reimburse yourself for the net asset value of such shares
from the offering price of such shares when received by you.
6. REGISTRATION OF SHARES. No shares shall be registered on our books until
(i) receipt by us of your written request therefor; (ii) receipt by the
Custodian and Agent of a certificate signed by an officer of the Company stating
the amount to be received therefor; and (iii) receipt of payment of that amount
by the Custodian. We will provide for the recording of all shares purchased in
unissued form in "book accounts", unless a request in writing for certificates
is received by the Agent, in which case certificates for shares in such names
and amounts as is specified in such writing will be delivered by the Agent, as
soon as practicable after registration thereof on the books.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase shares for your
own account for purposes of resale to the public, but you may purchase shares
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for your own investment account upon your written assurance that the purchase is
for investment purposes only and that the shares will not be resold except
through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell the Class A and Class M
shares at net asset value, without a sales charge as appropriate, pursuant to a
uniform offer described in the Funds' current Prospectus (i) to our Directors
and officers, our investment manager or your company or affiliated companies
thereof, (ii) to the bona fide, full time employees or sales representatives of
any of the foregoing who have acted as such for at least ninety (90) days, (iii)
to any trust, pension, profit-sharing, or other benefit plan for such persons,
or (iv) to any other person set forth in the Funds' then current Prospectus;
PROVIDED that such sales are made in accordance with the rules and regulations
under the 1940 Act and that such sales are made upon the written assurance of
the purchaser that the purchases are made for investment purposes only, not for
the purpose of resale to the public and that the shares will not be resold
except through redemption by us.
9. ALLOCATION OF EXPENSES.
(a) We will pay the following expenses in connection with the sales
and distribution of shares of the Funds:
(i) expenses pertaining to the preparation of our audited and
certified financial statements to be included in any amendments
("Amendments") to our Registration Statement under the 1933 Act,
including the Prospectuses and Statements of Additional Information
included therein;
(ii) expenses pertaining to the preparation (including legal
fees) and printing of all Amendments or supplements filed with the
Securities and Exchange Commission, including the copies of the
Prospectuses and Statements of Additional Information included in such
Amendments and the first ten (10) copies of the definitive
Prospectuses and Statements of Additional Information or supplements
thereto, other than those necessitated by or related to your
(including your "Parents") activities where such amendments or
supplements result in expenses which we would not otherwise have
incurred;
(iii) expenses pertaining to the preparation, printing, and
distribution of any reports or communications, including Prospectuses
and Statements of Additional Information, which are sent to our
existing shareholders;
(iv) filing and other fees to federal and state securities
regulatory authorities necessary to register and maintain registration
of the shares; and
(v) expenses of the Agent, including all costs and expenses in
connection with the issuance, transfer and registration of the shares,
including but not limited to any taxes and other governmental charges
in connection therewith.
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<PAGE>
(b) Except to the extent that you are entitled to reimbursement under
the provisions of any of the Distribution Plans for the Funds, you will pay the
following expenses:
(i) expenses of printing additional copies of the Prospectus and
Statement of Additional Information and any amendments or supplements
thereto which are necessary to continue to offer our shares to the
public;
(ii) expenses pertaining to the preparation (excluding legal
fees) and printing of all amendments and supplements to our
Registration Statement if the Amendment or supplement arises from or
is necessitated by or related to your (including your "Parent")
activities where those expenses would not otherwise have been incurred
by us; and
(iii) expenses pertaining to the printing of additional copies,
for use by you as sales literature, of reports or other communications
which have been prepared for distribution to our existing shareholders
or incurred by you in advertising, promoting and selling our shares to
the public.
10. FURNISHING OF INFORMATION. We will furnish to you such information with
respect to our company and its shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained when so signed will be true and correct. We will also furnish
you with such information and will take such action as you may reasonably
request in order to qualify our shares for sale to the public under the Blue Sky
Laws or in jurisdictions in which you may wish to offer them. We will furnish
you at least annually with audited financial statements of our books and
accounts certified by independent public accountants, and with such additional
information regarding our financial condition, as you may reasonably request
from time to time.
11. CONDUCT OF BUSINESS. Other than the currently effective Prospectus and
Statement of Additional Information, you will not issue any sales material or
statements except literature or advertising which conforms to the requirements
of federal and state securities laws and regulations and which have been filed,
where necessary, with the appropriate regulatory authorities. You will furnish
us with copies of all such material prior to their use and no such material
shall be published if we shall reasonably and promptly object.
You shall comply with the applicable federal and state laws and regulations
where our shares are offered for sale and conduct your affairs with us and with
dealers, brokers or investors in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If shares are tendered to
us for redemption or are repurchased by us within seven (7) business days after
your acceptance of the original purchase order for such shares, you will
immediately refund to us the full amount of any sales commission (net of
allowances to dealers or brokers) allowed to you on the original sale, and will
promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of
the balance of sales commissions reallowed by you. We shall notify you of such
tender for redemption within ten (10) days of the day on which notice of such
tender for redemption is received by us.
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<PAGE>
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be
deemed to be exclusive, and you may render similar services and act as an
underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall remain in effect until April 7,
1999, and shall continue annually thereafter for successive one (1) year periods
if approved at least annually (i) by a vote of a majority of the outstanding
voting securities of the Funds or by a vote of the Directors of the Company, and
(ii) by a vote of a majority of the Directors of the Company who are not
interested persons or parties to this Agreement (other than as Directors of the
Company), cast in person at a meeting called for the purpose of voting on this
Agreement.
15. TERMINATION. This Agreement: (i) may be terminated at any time without
the payment of any penalty, either by vote of the Directors of the Company or by
a vote of a majority of the outstanding voting securities of each Fund, on sixty
(60) days' written notice to you; (ii) shall terminate immediately in the event
of its assignment; and (iii) may be terminated by you on sixty (60) days'
written notice to us.
16. SUSPENSION OF SALES. We reserve the right at all times to suspend or
limit the public offering of the shares upon written notice to you, and to
reject any order in whole or in part.
17. MISCELLANEOUS. This Agreement shall be subject to the laws of the State
of Maryland and shall be interpreted and construed to further and promote the
operation of the Company as an open-end investment company. As used herein, the
terms "Net Asset Value," "Offering Price," "Investment Company," "Open-End
Investment Company," "Assignment," "Principal Underwriter," "Interested Person,"
"Parents," and "Majority of the Outstanding Voting Securities," shall have the
meanings set forth in the 1933 Act and the 1940 Act, as applicable, and the
rules and regulations promulgated thereunder.
18. LIABILITY. Nothing contained herein shall be deemed to protect you
against any liability to us or to our shareholders to which you would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed counterparts hereof and returning
such counterparts to us, whereupon this shall constitute a binding agreement as
of the date first above written.
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<PAGE>
Very truly yours,
PILGRIM ADVISORY FUNDS, INC.
(on behalf of Pilgrim Asia Pacific Equity
Fund, Pilgrim MidCap Value Fund, Pilgrim
LargeCap Leaders Fund and Pilgrim Strategic
Income Fund)
By:
-------------------------------------
Title:
----------------------------------
Agreed to and Accepted:
PILGRIM SECURITIES, INC.
By:
-------------------------------------
Title:
----------------------------------
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<PAGE>
SCHEDULE A
to the Underwriting Agreement
UNDERWRITING AGREEMENT ALLOCATION PROCEDURES
CDSCs and Distribution Fees related to Shares of each separate series of
Pilgrim Advisory Funds, Inc. (each a "Fund") shall be allocated by such Fund
among Pilgrim Securities, Inc. ("PSI") and any replacement principal underwriter
for Shares of such Fund (the "Successor Distributor") in accordance with this
Schedule A.
Defined terms used in this Schedule A and not otherwise defined herein
shall have the meaning assigned to them in the Underwriting Agreement for Shares
of each Fund to which this Schedule A is attached. As used herein the following
terms shall have the meanings indicated.
"COMMISSION SHARE" means, in respect of any Fund, each Share of such Fund
which is issued under circumstances which would normally give rise to an
obligation of the holder of such Share to pay a CDSC upon redemption of such
Share (including, without limitation, any Share of such Fund issued in
connection with a Free Exchange) and any such Share shall continue to be a
Commission Share of such Fund prior to the redemption (including a redemption in
connection with a Free Exchange) or conversion of such Share, even though the
obligation to pay the CDSC may have expired or conditions for waivers thereof
may exist.
"DATE OF ORIGINAL ISSUANCE" means in respect of any Commission Share, the
date with reference to which the amount of the CDSC payable on redemption
thereof, if any, is computed.
"FREE EXCHANGE" means an exchange of a Commission Share of one Fund for a
Commission Share of another Fund under circumstances where the CDSC which would
have been payable in respect of a redemption of the exchanged Commission Share
on the date of such exchange is waived and the Commission Share issued in such
exchange is treated as a continuation of the investment in the Commission Share
exchanged for purposes of determining the CDSC payable if such Commission Share
issued in the exchange is thereafter redeemed.
"FREE SHARE" means, in respect of any Fund, each Share of such Fund, other
than a Commission Share, including, without limitation, any Share issued in
connection with the reinvestment of dividends or capital gains.
"INCEPTION DATE" means, in respect of any Fund, the first date on which
such Fund issued Shares.
"NET ASSET VALUE" means, (i) with respect to any Fund, as of the date any
determination thereof is made, the net asset value of such Fund computed in the
manner such value is required to be computed by such Fund in its reports to its
shareholders, and (ii) with respect to any Share of such Fund as of any date,
the quotient obtained by dividing: (A) the net asset value of such Fund (as
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computed in accordance with clause (i) above) allocated to Shares of such Fund
(in accordance with the constituent documents for such Fund) as of such date, by
(B) the number of Shares of such Fund outstanding on such date.
"OMNIBUS SHARE" means, in respect of the Fund, a Commission Share or Free
Share sold by one of the Selling Agents listed on Exhibit I to this Schedule. If
PSI and its Transferees reasonably determine that the Transfer Agent is able to
track all Commission Shares and Free Shares sold by any of the Selling Agents
listed on Exhibit I (taking into account all information provided to the
Transfer Agent by such Selling Agent on a schedule sufficient to enable the
Transfer Agent to Complete all required reports involving such information in a
timely manner), in the same manner as Commission Shares and Free Shares are
currently tracked in respect of Selling Agents not listed on Exhibit I, then
Exhibit I shall be amended to delete such Selling Agent from Exhibit I so that
Commission Shares and Free Shares sold by such Selling Agent will no longer be
treated as Omnibus Shares.
"SHARE" means, in respect of any Fund, each Class B share of such Fund.
PART I: ATTRIBUTION OF SHARES
Shares of each Fund, which are outstanding from time to time, shall be
attributed to PSI and any Successor Distributor in accordance with the following
rules;
(1) COMMISSION SHARES OTHER THAN OMNIBUS SHARES:
(a) Commission Shares (excluding Omnibus Shares) attributed to PSI shall be
Commission Shares (excluding Omnibus Shares) the Date of Original Issuance of
which occurred on or after the Inception Date of such Fund and on or prior to
the last day on which PSI acts as principal underwriter of Shares for such Fund.
(b) Commission Shares (excluding Omnibus Shares) attributable to the
Successor Distributor shall be Commission Shares (excluding Omnibus Shares) the
Date of Original Issuance of which occurs on or after the first day on which
such Successor Distributor acts as principal underwriter of Shares for such Fund
and on or prior to the last day such Successor for Distributor acts as principal
underwriter of Shares for such Fund.
(c) A Commission Share (other than an Omnibus Share) of a particular Fund
(the "ISSUING FUND") issued in consideration of the investment of proceeds of
the redemption of a Commission Share of another Fund (the "REDEEMING FUND") in
connection with a Free Exchange, is deemed to have a Date of Original Issuance
identical to the Date of Original Issuance of the Commission Share of the
Redeeming Fund and any such Commission Share will be attributed to PSI or the
Successor Distributor based upon such Date of Original Issuance in accordance
with Part I(a) and (b) above.
(d) A Commission Share (other than an Omnibus Share) redeemed (other than
in connection with a Free Exchange) or converted to a Class A share is
attributable to PSI or Successor Distributor based upon the Date of Original
Issuance in accordance with Part I(a), (b) and (c) above.
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(2) FREE SHARES OTHER THAN OMNIBUS SHARES:
Free Shares (excluding Omnibus Shares) of a Fund outstanding on any date
shall be attributed to PSI or a Successor Distributor, as the case may be, in
the same proportion that the Commission Shares (excluding Omnibus Shares) of
such Fund outstanding on such date are attributed to it on such date; PROVIDED
that if PSI reasonably determines that the Transfer Agent or the Selling Agent
is able to produce monthly reports which track the Date of Original Issuance for
the Commission Shares related to such Free Shares, then the Free Shares shall be
allocated pursuant to clause 1(a), (b) and (c) above.
(3) OMNIBUS SHARES:
Omnibus Shares of the Fund outstanding on any date shall be attributed to
PSI or a Successor Distributor, as the case may be, in the same proportion that
the Commission Shares which are not Omnibus Shares of the Fund outstanding on
such date are attributed to it on such date; PROVIDED that if PSI and its
transferees reasonably determine that the Transfer Agent is able to produce
monthly reports which track the Date of Original Issuance for the Omnibus
Shares, then the Omnibus Shares shall be allocated pursuant to clause 1(a), (b)
and (c) above.
PART II: ALLOCATION OF CDSCS
(1) CDSCS RELATED TO THE REDEMPTION OF COMMISSION SHARES OTHER THAN OMNIBUS
SHARES:
CDSCs in respect of the redemption of Commission Shares which are not
Omnibus Shares shall be allocated to PSI or Successor Distributor depending upon
whether the related redeemed Commission Share is attributable to PSI or
Successor Distributor, as the case may be, in accordance with Part I above.
(2) CDSCS RELATED TO THE REDEMPTION OF OMNIBUS SHARES:
CDSCs in respect of the redemption of Omnibus Shares shall be allocated to
PSI or a Successor Distributor in the same proportion that CDSCs related to the
redemption of Commission Shares are allocated to each thereof; PROVIDED, that if
PSI and its transferees reasonably determine that the Transfer Agent is able to
produce monthly reports which track the Date of Original Issuance for the
Omnibus Shares, then the CDSCs in respect of the redemption of Omnibus Shares
shall be allocated among PSI and any Successor Distributors depending on whether
the related redeemed Omnibus Share is attributable to PSI or a Successor
Distributor, as the case may be, in accordance with Part I above.
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<PAGE>
PART III: ALLOCATION OF DISTRIBUTION FEES
Assuming that the Distribution Fee remains constant over time and among
Funds so that Part IV hereof does not become operative:
(1) The portion of the aggregate Distribution Fees accrued in respect of
all Shares of all Funds during any calendar month allocable to PSI or a
Successor Distributor is determined by multiplying the total of such
Distribution Fees by the following fraction:
(A + C) /2
----------
(B + D) /2
where:
A = The aggregate net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the beginning of such calendar month
B = The aggregate Net Asset Value of all Shares of all Funds at the beginning
of such calendar month
C = The aggregate Net Asset Value of all Shares of all Funds attributed to
PSI or such Successor Distributor, as the case may be, and outstanding at
the end of such calendar month
D = The aggregate Net Asset Value of all Shares of all Funds at the end of
such calendar month
(2) If PSI reasonably determines that the Fund or its transfer agent is
able to produce automated monthly reports which allocate the average Net Asset
Value of the Commission Shares (or all Shares if available) of all Funds among
PSI and each Successor Distributor in a manner consistent with the methodology
detailed in Part I and Part III(1) above, the portion of the Distribution Fees
accrued in respect of all such Shares of all Funds during a particular calendar
month will be allocated to PSI or each Successor Distributor by multiplying the
total of such Distribution Fees by the following fraction:
(A)/(B)
where:
A = Average Net Asset Value of all such Shares of all Funds for such calendar
month attributed to PSI or such Successor Distributor, as the case may be
B = Total average Net Asset Value of all such Shares of all Funds for such
calendar month
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<PAGE>
PART IV: ADJUSTMENT OF PSI'S SHARE AND SUCCESSOR DISTRIBUTORS' SHARES
If the terms of any Underwriting Agreement, any Plan, any Prospectus,
the Conduct Rules or any other applicable law change the rate at which
Distribution Fees or Service Fees are computed with reference to the Net Asset
Value of Shares of any Fund, these allocation procedures must be revised in
light of such changes in a manner which carries out the intent of these
allocation procedures.
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<PAGE>
EXHIBIT I
To Schedule A
to the Pilgrim Advisory Funds, Inc.
Amended and Restated Underwriting Agreement
SELLING AGENTS
Merrill Lynch
INDPENDENT AUDITOR'S CONSENT
The Boards of Directors
Pilgrim Advisory Funds, Inc.
Pilgrim Investment Funds, Inc.
Pilgrim Bank and Thrift Fund, Inc.
Pilgrim Government Securities Income Fund, Inc.
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Financial Highlights" in the
prospectuses and "Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG LLP
Los Angeles, California
March 25, 1999
Amended and Restated
Service and Distribution Plan for
PILGRIM ADVISORY FUNDS, INC.
Pilgrim Asia-Pacific Equity Fund
Pilgrim MidCap Value Fund
Pilgrim LargeCap Leaders Fund
Pilgrim Strategic Income Fund
Class B Shares
<PAGE>
SERVICE AND DISTRIBUTION PLAN
WHEREAS, the Pilgrim Advisory Funds, Inc. (the "Company") engages in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, shares of common stock of the Company are currently divided into
four series, PILGRIM ASIA-PACIFIC EQUITY FUND, PILGRIM MIDCAP VALUE FUND,
PILGRIM LARGECAP LEADERS FUND and PILGRIM STRATEGIC INCOME FUND (the "Funds");
WHEREAS, shares of common stock of the Funds are divided into classes of
shares, one of which is designated Class B;
WHEREAS, the Company employs Pilgrim Securities, Inc. as distributor of the
securities of which it is the issuer and may from time to time retain, pursuant
to the terms of a distribution agreement with such person (each, an
"Underwriting Agreement") other persons to so act pursuant to the Plan (each
such person so acting from time to time, the "Distributor"); and
WHEREAS, the Company and the Distributor have entered into an Underwriting
Agreement pursuant to which the Company has employed the Distributor in such
capacity during the continuous offering of shares of the Company; and
WHEREAS, the Company wishes to amend and restate the Plan as set forth
hereinafter, such amendments to be effective with respect to Class B shares of
issued prior to or after the date hereof.
NOW, THEREFORE, the Company hereby adopts this Plan on behalf of the Funds
with respect to its Class B shares, in accordance with Rule 12b-l under the Act,
on the following terms and conditions:
1. A. Each Fund shall pay to each Distributor, as compensation for acting
as principal distributor in respect of the Class B Shares (as hereinafter
defined) of the Fund its "Allocable Portion" (as hereinafter defined) of a fee
(the "Distribution Fee"), which shall accrue daily at the rate of 0.75% per
annum of the Fund's average daily net assets attributable to Class B Shares of
the Fund and be payable monthly or at such other intervals as the Directors
shall determine, subject to any applicable restriction imposed by rules of the
National Association of Securities Dealers, Inc. ("NASD")
The Underwriting Agreement between the Company and each Distributor
relating to the Class B Shares shall provide that:
(I) the Distributor will be deemed to have performed all services
required to be performed in order to be entitled to receive its
Allocable Portion (as defined below) of the Distribution Fee
payable in respect of the Class B Shares upon the settlement date
of each sale of a "Commission Share" (as defined in the Allocation
Schedule attached to the Underwriting Agreement) taken into
account in determining such Distributor's Allocable Portion of
such Distribution Fee;
<PAGE>
(II) notwithstanding anything to the contrary in this Plan or the
Underwriting Agreement, each Fund's obligation to pay such
Distributor its Allocable Portion of the Distribution Fee payable
shall not be terminated or modified (including, without
limitation, by change in the rules applicable to the conversion of
Class B Shares into shares of another class) for any reason
(including a termination of the Underwriting Agreement between
such Distributor and the Fund) except:
(a) to the extent required by a change in the Investment
Company Act of 1940 (the "Act"), the rules and regulations
under the Act, the Conduct Rules of the NASD or other
applicable law, in each case enacted or promulgated after
December 10, 1998,
(b) on a basis which does not alter the Distributor's Allocable
Portion of the Distribution Fee computed with reference to
Commission Shares the Date of Original Issuance (as defined
in the Allocation Schedule attached to the Underwriting
Agreement) of which occurs on or prior to the adoption of
such termination or modification and with respect to Free
Shares (as defined in the Allocation Schedule) which would
be attributed to such Distributor under the Allocation
Schedule with reference such Commission Shares,
(c) in connection with a "Complete Termination" (as hereinafter
defined) of the Plan; or
(d) on a basis, determined by the Board of Directors of the
Company, including a majority of those who are not
"interested persons" of the Company (as such term is
defined in the Act), acting in good faith, so long as from
and after the effective date of such modification or
termination, neither the Company or any Affected Fund (as
hereinafter defined) nor Pilgrim Securities, Inc. or any
successor sponsor of the Affected Funds or any affiliate of
any of the foregoing, pay, directly or indirectly, a fee,
trailer fee, or expense reimbursement to any person for the
provision of shareholder services to the holders of Class B
Shares;
(III) the Funds will not take any action to waive or change any CDSC in
respect of the Class B Shares the Date of Original Issuance (as
defined in the Allocation Schedule attached to the Underwriting
Agreement) of which occurs, on or prior to the taking of such
action except as provided in the Funds' prospectus or statement of
additional information on the date such Commission Share was
issued, without the consent of such Distributor and its
Transferees;
-2-
<PAGE>
(IV) notwithstanding anything to the contrary in this Distribution Plan
or the Underwriting Agreement, neither the termination of such
Distributor's role as principal distributor of the Class B Shares,
nor the termination of such Underwriting Agreement nor the
termination of this Plan will terminate such Distributor's right
to its Allocable Portion of the CDSCs; and
(V) notwithstanding anything to the contrary in the Distribution Plan
or the Underwriting Agreement, such Distributor may assign, sell
or pledge (collectively, "Transfer") its rights to its Allocable
Portion of the Distribution Fees and CDSCs and, upon receipt of
notice of such Transfer, each Fund shall pay to the assignee,
purchaser or pledgee (collectively with their subsequent
transferees, "Transferees"), as third party beneficiaries of such
Underwriting Agreement, such portion of such Distributor's
Allocable Portion of the Distribution Fees or CDSCs in respect of
the Class B Shares so sold or pledged, and except as provided in
(II) above and notwithstanding anything of the contrary set forth
in this Plan or in the Underwriting Agreement, each Fund's
obligation to pay such Distributor's Allocable Portion of the
Distribution Fees and CDSCs payable in respect of the Class B
Shares shall be absolute and unconditional and shall not be
subject to dispute, offset, counterclaim or any defense
whatsoever, at law or equity, including, without limitation, any
of the foregoing based on the insolvency or bankruptcy of such
Distributor.
For purposes of this Plan, the term "Allocable Portion" of Distribution
Fees or CDSCs payable in respect of the Class B Shares as applied to any
Distributor shall mean the portion of such Distribution Fees or CDSCs payable in
respect of such Class B Shares allocated to such Distributor in accordance with
the Allocation Schedule (attached to the Underwriting Agreement as it relates to
the Class B Shares). For purposes of this Plan and each Distribution Agreement,
the term "Complete Termination" of the Plan means a termination of this Plan and
every other distribution plan of the Funds for Class B shares, each successor
trust or fund, and each trust or fund acquiring a substantial portion of the
assets of the Funds (collectively, the "Affected Funds") involving the complete
cessation of the payment of Distribution Fees in respect of all current Class B
shares of each Affected Fund and each future class of shares of each Affected
Fund which has substantially similar characteristics to the shares of the
current Class B shares of the Funds, including the manner of payment and amount
of sales charge, contingent deferred sales charge or other similar charges borne
directly or indirectly by the holders of such shares (all such classes of shares
"Class B Shares").
B. The Funds shall pay to the Distributor, as the distributor of the Class
B shares of the Funds, a service fee at the rate of 0.25% on an annualized basis
of the average daily net assets of the Funds' Class B shares, provided that, at
-3-
<PAGE>
any time such payment is made, whether or not this Plan continues in effect, the
making thereof will not cause the limitation upon such payments established by
this Plan to be exceeded. Such fee shall be calculated and accrued daily and
paid at such intervals as the Board of Directors shall determine, subject to any
applicable restriction imposed by rules of the NASD.
2. The amount set forth in paragraph 1.A. of this Plan shall be paid for
the Distributor's services as distributor of the shares of the Funds in
connection with any activities or expenses primarily intended to result in the
sale of the Class B shares of the Funds, including, but not limited to, payment
of compensation, including incentive compensation, to securities dealers (which
may include the Distributor itself) and other financial institutions and
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services include, among other things, processing new shareholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in providing information and answering
questions concerning the Funds and their transactions with the Funds. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Funds. In addition, this Plan hereby authorizes payment by the Fund's of the
cost of printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Distribution expenses also include an allocation of overhead of the Distributor
and accruals for interest on the amount of distribution expenses that exceed
distribution fees and contingent deferred sales charges received by the
Distributor. Payments under the Plan are not tied exclusively to actual
distribution and service expenses, and the payments may exceed distribution and
service expenses actually incurred.
The amount set forth in paragraph 1.B. of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Directors
of the Company and (b) those Directors of the Company who are not "interested
persons" of the Company (as defined in the Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-l Directors"), cast in person at a meeting (or
meetings) called for the purpose of voting on this Plan and such related
agreements.
4. After approval as set forth in paragraph 3, this Plan shall take effect.
The Plan shall continue in full force and effect as to the Class B shares of the
Funds for so long as such continuance is specifically approved at least annually
in the manner provided for approval of this Plan in paragraph 3.
-4-
<PAGE>
5. The Distributor shall provide to the Directors of the Company, and the
Directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without payment
of any penalty, by vote of the Directors of the Company, by vote of a majority
of the Rule 12b-l Directors, or by a vote of a majority of the outstanding
voting securities of Class B shares of the Funds on not more than 30 days'
written notice to any other party to the Plan.
7. This Plan may not be amended to increase materially the amount of
distribution fee (including any service fee) provided for in paragraph 1 hereof
unless such amendment is approved by a vote of the shareholders of the Class B
shares of each of the Funds, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Directors
who are not interested persons (as defined in the Act) of the Company shall be
committed to the discretion of the Directors who are not such interested
persons.
9. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof, for a period of
not less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
10. The provisions of this Plan are severable as to each series, and any
action to be taken with respect to this Plan shall be taken separately for each
series affected by the matter.
Last revised: November 30, 1998
-5-
Service and Distribution Plan for
PILGRIM ADVISORY FUNDS, INC.
Class C Shares
<PAGE>
SERVICE AND DISTRIBUTION PLAN
WHEREAS, Pilgrim Advisory Funds, Inc. (the "Company") engages in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, shares of common stock of the Company are currently divided into
the series listed on Schedule A hereto (the "Funds"), which Schedule can be
amended to add or remove series by an amended schedule;
WHEREAS, shares of common stock of the Funds are divided into classes of
shares, one of which is designated Class C;
WHEREAS, the Company employs Pilgrim Securities, Inc. (the "Distributor")
as distributor of the securities of which it is the issuer; and
WHEREAS, the Company and the Distributor have entered into an Underwriting
Agreement pursuant to which the Company has employed the Distributor in such
capacity during the continuous offering of shares of the Company.
NOW, THEREFORE, the Company hereby adopts this Plan on behalf of the Funds
with respect to its Class C shares, in accordance with Rule 12b-l under the Act,
on the following terms and conditions:
1. A. Each Fund shall pay to the Distributor, as the distributor of the
Class C shares of the Fund, a fee for distribution of the shares at the rate of
0.75% on an annualized basis of the average daily net assets of the Fund's Class
C shares, provided that, at any time such payment is made, whether or not this
Plan continues in effect, the making thereof will not cause the limitation upon
such payments established by this Plan to be exceeded. Such fee shall be
calculated and accrued daily and paid monthly or at such intervals as the Board
of Directors shall determine, subject to any applicable restriction imposed by
rules of the National Association of Securities Dealers, Inc.
B. In addition to the amount provided in 1.A. above, the Funds shall pay
to the Distributor, as the distributor of the Class C shares of the Funds, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Funds' Class C shares, provided that, at any time such payment is
made, whether or not this Plan continues in effect, the making thereof will not
cause the limitation upon such payments established by this Plan to be exceeded.
Such fee shall be calculated and accrued daily and paid monthly or at such
intervals as the Board of Directors shall determine, subject to any applicable
restriction imposed by rules of the NASD.
2. The amount set forth in paragraph 1.A. of this Plan shall be paid for
the Distributor's services as distributor of the shares of the Funds in
connection with any activities or expenses primarily intended to result in the
sale of the Class C shares of the Funds, including, but not limited to, payment
of compensation, including incentive compensation, to securities dealers (which
may include the Distributor itself) and other financial institutions and
<PAGE>
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services may include, among other things, processing new shareholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in providing information and answering
questions concerning the Funds and their transactions with the Funds. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Funds. In addition, this Plan hereby authorizes payment by the Fund's of the
cost of printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Distribution expenses also include an allocation of overhead of the Distributor
and accruals for interest on the amount of distribution expenses that exceed
distribution fees and contingent deferred sales charges received by the
Distributor. Payments under the Plan are not tied exclusively to actual
distribution and service expenses, and the payments may exceed distribution and
service expenses actually incurred.
The amount set forth in paragraph 1.B. of this Plan may be used by the
Distributor to pay securities dealers (which may include the Distributor itself)
and other financial institutions and organizations for servicing shareholder
accounts, including a continuing fee which may accrue immediately after the sale
of shares.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Company's
Board of Directors and (b) those Directors of the Company who are not
"interested persons" of the Company (as defined in the Act) and who have no
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the "Rule 12b-l Directors"), cast in person at a
meeting (or meetings) called for the purpose of voting on this Plan and such
related agreements.
4. After approval as set forth in paragraph 3, and any other approvals
required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take
effect at the time specified by the Company's Board of Directors. The Plan shall
continue in full force and effect as to the Class C shares of the Funds for so
long as such continuance is specifically approved at least annually in the
manner provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Directors of the Company, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
6. This Plan may be terminated as to each Fund at any time, without
payment of any penalty, by vote of the Directors of the Company, by vote of a
majority of the Rule 12b-l Directors, or by a vote of a majority of the
outstanding voting securities of Class C shares of the Funds on not more than 30
days' written notice to any other party to the Plan.
7. This Plan may not be amended to increase materially the amount of
distribution fee (including any service fee) provided for in paragraph 1 hereof
unless such amendment is approved by a vote of the shareholders of the Class C
-2-
<PAGE>
shares of each of the Funds, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Company
shall be committed to the discretion of the Directors who are not such
interested persons.
9. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof, for a period of
not less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
10. The provisions of this Plan are severable as to each Fund, and any
action to be taken with respect to this Plan shall be taken separately for each
Fund affected by the matter.
Last revised: ______________, 1999
-3-
<PAGE>
SCHEDULE A
Pilgrim LargeCap Leaders Fund
Pilgrim Mid Cap Value Fund
Pilgrim Asia-Pacific Equity Fund
Pilgrim Strategic Income Fund
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 944689
<NAME> PILGRIM ADVISORY FUNDS, INC.
<SERIES>
<NUMBER> 011
<NAME> PILGRIM ASIA-PACIFIC EQUITY FUND CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 23842
<INVESTMENTS-AT-VALUE> 23536
<RECEIVABLES> 65
<ASSETS-OTHER> 61
<OTHER-ITEMS-ASSETS> 506
<TOTAL-ASSETS> 24168
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1409
<TOTAL-LIABILITIES> 1409
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55775
<SHARES-COMMON-STOCK> 1894
<SHARES-COMMON-PRIOR> 2648
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 210
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 32283
<ACCUM-APPREC-OR-DEPREC> (523)
<NET-ASSETS> 9692
<DIVIDEND-INCOME> 181
<INTEREST-INCOME> 74
<OTHER-INCOME> 0
<EXPENSES-NET> 282
<NET-INVESTMENT-INCOME> (27)
<REALIZED-GAINS-CURRENT> (7603)
<APPREC-INCREASE-CURRENT> 11565
<NET-CHANGE-FROM-OPS> 3935
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14219
<NUMBER-OF-SHARES-REDEEMED> 14973
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2386)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 183
<OVERDIST-NET-GAINS-PRIOR> 24680
<GROSS-ADVISORY-FEES> 149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 458
<AVERAGE-NET-ASSETS> 11208
<PER-SHARE-NAV-BEGIN> 4.46
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.12
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 944689
<NAME> PILGRIM ADVISORY FUNDS, INC.
<SERIES>
<NUMBER> 012
<NAME> PILGRIM ASIA-PACIFIC EQUITY FUND CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 23842
<INVESTMENTS-AT-VALUE> 23536
<RECEIVABLES> 65
<ASSETS-OTHER> 61
<OTHER-ITEMS-ASSETS> 506
<TOTAL-ASSETS> 24168
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1409
<TOTAL-LIABILITIES> 1409
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55775
<SHARES-COMMON-STOCK> 1833
<SHARES-COMMON-PRIOR> 2079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 210
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 32283
<ACCUM-APPREC-OR-DEPREC> (523)
<NET-ASSETS> 9173
<DIVIDEND-INCOME> 181
<INTEREST-INCOME> 74
<OTHER-INCOME> 0
<EXPENSES-NET> 282
<NET-INVESTMENT-INCOME> (27)
<REALIZED-GAINS-CURRENT> (7603)
<APPREC-INCREASE-CURRENT> 11565
<NET-CHANGE-FROM-OPS> 3935
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 903
<NUMBER-OF-SHARES-REDEEMED> 1149
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2386)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 183
<OVERDIST-NET-GAINS-PRIOR> 24680
<GROSS-ADVISORY-FEES> 149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 458
<AVERAGE-NET-ASSETS> 8704
<PER-SHARE-NAV-BEGIN> 4.37
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 0.66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.00
<EXPENSE-RATIO> 2.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 944689
<NAME> PILGRIM ADVISORY FUNDS, INC.
<SERIES>
<NUMBER> 013
<NAME> PILGRIM ASIA-PACIFIC EQUITY FUND CLASS M
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 23842
<INVESTMENTS-AT-VALUE> 23536
<RECEIVABLES> 65
<ASSETS-OTHER> 61
<OTHER-ITEMS-ASSETS> 506
<TOTAL-ASSETS> 24168
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1409
<TOTAL-LIABILITIES> 1409
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55775
<SHARES-COMMON-STOCK> 774
<SHARES-COMMON-PRIOR> 969
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 210
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 32283
<ACCUM-APPREC-OR-DEPREC> (523)
<NET-ASSETS> 3894
<DIVIDEND-INCOME> 181
<INTEREST-INCOME> 74
<OTHER-INCOME> 0
<EXPENSES-NET> 282
<NET-INVESTMENT-INCOME> (27)
<REALIZED-GAINS-CURRENT> (7603)
<APPREC-INCREASE-CURRENT> 11565
<NET-CHANGE-FROM-OPS> 3935
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 253
<NUMBER-OF-SHARES-REDEEMED> 448
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2386)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 183
<OVERDIST-NET-GAINS-PRIOR> 24680
<GROSS-ADVISORY-FEES> 149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 458
<AVERAGE-NET-ASSETS> 3808
<PER-SHARE-NAV-BEGIN> 4.40
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 0.66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.03
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 944689
<NAME> PILGRIM ADVISORY FUNDS, INC.
<SERIES>
<NUMBER> 021
<NAME> PILGRIM MIDCAP VALUE FUND CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 65669
<INVESTMENTS-AT-VALUE> 72736
<RECEIVABLES> 380
<ASSETS-OTHER> 80
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 73196
<PAYABLE-FOR-SECURITIES> 641
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 291
<TOTAL-LIABILITIES> 932
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 65936
<SHARES-COMMON-STOCK> 1522
<SHARES-COMMON-PRIOR> 1637
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 266
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 474
<ACCUM-APPREC-OR-DEPREC> 7068
<NET-ASSETS> 22899
<DIVIDEND-INCOME> 352
<INTEREST-INCOME> 175
<OTHER-INCOME> 0
<EXPENSES-NET> 794
<NET-INVESTMENT-INCOME> (266)
<REALIZED-GAINS-CURRENT> 1098
<APPREC-INCREASE-CURRENT> (3831)
<NET-CHANGE-FROM-OPS> (2999)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1682
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 179
<NUMBER-OF-SHARES-REDEEMED> 399
<SHARES-REINVESTED> 105
<NET-CHANGE-IN-ASSETS> (9027)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3768
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 357
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 833
<AVERAGE-NET-ASSETS> 22771
<PER-SHARE-NAV-BEGIN> 16.79
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> (0.54)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.17
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.05
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 944689
<NAME> PILGRIM ADVISORY FUNDS, INC.
<SERIES>
<NUMBER> 022
<NAME> PILGRIM MIDCAP VALUE FUND CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
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