-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1IBPDetLlw3BZUuCsV8xyKwX9p0kFoFfTEYu170e4YHTlUrooT46vkZcNonfqxx 6EVNqM/l4j6+Wx0HCNOUSw== /in/edgar/work/20000726/0000950147-00-001099/0000950147-00-001099.txt : 20000921 0000950147-00-001099.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950147-00-001099 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20000726 EFFECTIVENESS DATE: 20000726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON GNMA INCOME FUND INC CENTRAL INDEX KEY: 0000059140 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 222013958 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-48906 FILM NUMBER: 679387 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-02401 FILM NUMBER: 679388 BUSINESS ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2018457300 MAIL ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON INCOME FUND INC DATE OF NAME CHANGE: 19810210 485BPOS 1 0001.txt POST-EFFECTIVE AMENDMENT NO. 36 TO FORM N-1A As filed with the Securities and Exchange Commission on July 26, 2000 Securities Act File No. 2-48906 Investment Company Act File No. 811-2401 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM N-1A Registration Statement Under The Securities Act Of 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 36 [X] and/or Registration Statement Under The Investment Company Act Of 1940 Amendment No. 23 [X] (Check appropriate box or boxes) PILGRIM GNMA INCOME FUND, INC. (FORMERLY LEXINGTON GNMA INCOME FUND, 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) 992-0180 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) [X] on July 31, 2000 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [X] This post-effective amendment designated a new effective date for a previously filed post-effective amendment. ================================================================================ PILGRIM(SM) FUNDS FOR SERIOUS INVESTORS Prospectus Classes: A, B and C July 31, 2000 U.S. EQUITY FUND Pilgrim Growth and Income INTERNATIONAL EQUITY FUNDS Pilgrim Global Corporate Leaders Pilgrim International Pilgrim Worldwide Emerging Markets Pilgrim SmallCap Asia Growth Pilgrim Troika Dialog Russia INCOME FUNDS Pilgrim GNMA Income Pilgrim Global Income PRECIOUS METALS FUNDS Pilgrim Gold Pilgrim Silver This prospectus contains important information about investing in the Pilgrim Funds. You should read it carefully before you invest, and keep it for future reference. Please note that your investment: is not a bank deposit, is not insured or guaranteed by the FDIC, the Federal Reserve Board or any other government agency and is affected by market fluctuations. There is no guarantee that the Funds will achieve their objectives. As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities nor has the SEC judged whether the information in this prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. [GRAPHIC] These pages contain a description of each of our funds included in this prospectus, including its objective, investment strategy and risks. OBJECTIVE [GRAPHIC] You'll also find: INVESTMENT STRATEGY HOW THE FUND HAS PERFORMED. A chart that shows [GRAPHIC] the fund's financial performance for the past ten years (or since inception, if shorter). RISKS WHAT YOU PAY TO INVEST. A list of the fees and [GRAPHIC] expenses you pay -- both directly and indirectly -- when you invest in a fund. HOW THE FUND HAS PERFORMED WHAT'S INSIDE An introduction to the Pilgrim Funds 1 Funds at a Glance 2 U.S. EQUITY FUND Pilgrim Growth and Income 4 INTERNATIONAL EQUITY FUNDS Pilgrim Global Corporate Leaders 6 Pilgrim International 8 Pilgrim Worldwide Emerging Markets 10 Pilgrim SmallCap Asia Growth 13 Pilgrim Troika Dialog Russia 16 INCOME FUNDS Pilgrim GNMA Income 18 Pilgrim Global Income 20 PRECIOUS METALS FUNDS Pilgrim Gold 22 Pilgrim Silver 24 What you pay to invest 26 Shareholder guide 29 Management of the Funds 39 Dividends, distributions and taxes 43 More information about risks 44 Financial highlights 47 Where to go for more information Backcover INTRODUCTION TO THE PILGRIM FUNDS Risk is the potential that your investment will lose money or not earn as much as you hope. All mutual funds have varying degrees of risk, depending on the securities they invest in. Please read this prospectus carefully to be sure you understand the principal risks and strategies associated with each of our Funds. You should consult the Statement of Additional Information (SAI) for a complete list of the risks and strategies. [GRAPHIC] If you have any questions about the Pilgrim Funds, please call your financial consultant or us at 1-800-992-0180. This prospectus is designed to help you make informed decisions about your investments. U.S. EQUITY FUNDS Our U.S. Equity Funds focus on long-term growth by investing primarily in domestic equities. They may suit you if you: * are investing for the long-term-- at least several years. * are willing to accept higher risk in exchange for long-term growth. INTERNATIONAL EQUITY FUNDS Pilgrim offers International Equity Funds that emphasize a growth approach to international investing, as well as International Equity Funds that apply the technique of "value investing". These Funds focus on long-term growth by investing primarily in foreign equities. They may suit you if you: * are investing for the long-term -- at least several years * are looking for exposure to international markets * are willing to accept higher risk in exchange for long-term growth. INCOME FUNDS Pilgrim offers both aggressive and conservative Income Funds. They may suit you if you: * want a regular stream of income. Income Funds may suit you if you: * want greater growth potential than a money market fund * are willing to accept more risk than a money market fund. PRECIOUS METALS FUNDS Pilgrim's Precious Metals Funds seek long-term growth. They may suit you if you: * are investing for the long-term -- at least several years * are looking for exposure to international markets and precious metals * are willing to accept higher risk in exchange for long-term growth. [GRAPHIC] If you have any questions, please call 1-800-992-0180. 1 FUNDS AT A GLANCE This table is a summary of the objectives, main investments and risks of each Pilgrim Fund. It is designed to help you understand the differences between the Funds, the main risks associated with each, and how risk and investment objectives relate. This table is only a summary. You should read the complete descriptions of each Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE MAIN INVESTMENTS MAIN RISKS ---- -------------------- ---------------- ---------- U.S. Equity Growth and Income Fund Long-term capital Equity securities of Price volatitlity and other risks Fund Adviser: Pilgrim appreciation, with large, ably managed, that accompany an investment in Investments, Inc. income as a and well-financed U.S. equity securities. secondary objective companies International Global Corporate Leaders Long-term growth Equity securities and Price volatility and other risks Equity Funds Fund Adviser: Pilgrim of capital equity equivalents of that accompany an investment in Investments, Inc. foreign and U.S. [growth-oriented] foreign companies. equities. Sensitive to currency exchange rates, international political and economic conditions and other risks that affect foreign securities. International Fund Adviser: Long-term growth Equity securities and Price volatility and other risks Pilgrim Investments, Inc. of capital equity equivalents of that accompany an investment in companies outside of [growth-oriented] foreign the U.S. equities. Sensitive to currency exchange rates, international political and economic conditions and other risks that affect foreign securities. Worldwide Emerging Markets Long-term growth Equity securities and Price volatility, liquidity and Fund Adviser: Pilgrim of capital equity equivalents of other risks that accompany an Investments, Inc. emerging market investment in equities from companies. emerging countries. Sensitive to currency exchange rates, international political and economic conditions and other risks that affect foreign securities. SmallCap Asia Growth Fund Long-term capital Equity securities and Price volatility, liquidity and Adviser: Pilgrim Investments, appreciation equity equivalents of other risks that accompany an Inc. Sub-Adviser: Crosby companies in the Asia investment in equity securities Asset Management (US) Inc. region having market of issuers in a single region. capitalizations of Sensitive to currency exchange less than $1 billion. rates, international political and economic conditions and other risks that affect foreign securities.
2 Troika Dialog Russia Fund Long-term capital Equity securities of Risk due to extremely volatile Adviser: Pilgrim Investments, appreciation Russian companies. and often illiquid nature of the Inc. Sub-Adviser: Troika Russian securities markets, and Dialog Asset Management volatility due to (Cayman Islands), Ltd. non-diversification of investments. Particularly sensitive to Russian political and economic conditions, currency exchange rates, and other risks that affect funds investing in securities of a single country. Potential for expropriation, dilution, devaluation, default or excessive taxation by the Russian government. Income Funds GNMA Income Fund Adviser: High current income, Mortgage-backed GNMA Credit, interest rate, prepayment Pilgrim Investments, Inc. consistent with Certificates that are and other risks that accompany an liquidity and safety guaranteed as to the investment in government bonds of principal timely payment of and mortgage related investments. principal and interest Generally has less credit risk by the U.S. Government. than the other income funds. Global Income Fund Adviser: High current income, Foreign and domestic Credit, liquidity, interest rate Pilgrim Investments, Inc. with capital high yield, lower and other risks that accompany an appreciation as a rated or unrated debt investment in lower-quality debt secondary objective securities. securities. Particularly sensitive to credit risk during economic downturns. May also present price volatility from foreign securities. May be sensitive to currency exchange rates, inter- national political and economic conditions, and other risks. Precious Metals Gold Fund Adviser: Capital appreciation Gold and securities Price volatility due to Funds Pilgrim Investments, Inc. and a hedge against companies engaged in non-diversification and the loss of buying mining or processing concentration in the gold/precious power of the U.S. gold throughout the metals industry. The market for Dollar world. gold and other precious metals is widely unregulated and is located in foreign countries that of have the potential for instability. Precious metals earn no income, have higher transaction/storage costs, and realize gain only with an increase in market price. Silver Fund Adviser: Maximum total return Securities of Price volatility due to Pilgrim Investments, Inc. from long-term growth companies which are non-diversification and of capital and income engaged in the concentration in stocks in the exploration, mining, silver industry. The market for processing, silver is limited and widely fabrication or unregulated and is located in distribution of foreign countries that have the silver and in silver potential for instability. bullion. Precious metals earn no income, have higher transaction/storage costs, and realize gain only with an increase in market price.
3 - ----------------- ADVISER U.S. EQUITY FUNDS PILGRIM INVESTMENTS, INC. - ----------------- PILGRIM GROWTH AND INCOME FUND OBJECTIVE The Fund's principal investment objective is long-term capital appreciation. Income is a secondary objective. INVESTMENT STRATEGY The Fund will invest at least 65% of its total assets in common stocks of U.S. companies, which may include dividend paying securities and securities convertible into shares of common stock. The Fund seeks to invest in large, ably managed and well financed companies. The investment approach is to identify high quality companies with good earnings and price momentum which sell at attractive valuations. The Fund may invest the remaining 35% of its assets in foreign securities and smaller capitalization companies. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more 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 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. INABILITY TO SELL SECURITIES -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. 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. 4 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GROWTH & INCOME FUND -------------------- 1990 -10.27% 1991 24.87% 1992 12.36% 1993 13.22% 1994 -3.11% 1995 22.57% 1996 26.96% 1997 30.36% 1998 21.42% 1999 13.54% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. Best and worst quarterly performance during this period: 4th quarter 1998: 21.95% 3rd quarter 1990: -14.87% The Fund's year-to-date total return as of June 30, 2000 was up 1.74%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. Average Annual Total Returns Class A (3)(4) S&P 500 Index (5) -------------- ----------------- One year, ended December 31, 1999 15.54% 21.04% Five years, ended December 31, 1999 23.17% 28.56% Ten years, ended December 31, 1999 14.62% 18.21% (3) This table shows the performance of the Class A shares of the Fund. Class B and Class C shares were not offered during the period ended December 31, 1999. (4) Reflects a deduction of sales charge of 5.75%. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization U.S. companies. 5 - -------------------------- ADVISER INTERNATIONAL EQUITY FUNDS PILGRIM INVESTMENTS, INC. - -------------------------- PILGRIM GLOBAL CORPORATE LEADERS FUND OBJECTIVE The Fund's investment objective is to seek long-term growth of capital through investment in equity securities and equity equivalents of foreign and U.S. companies. INVESTMENT STRATEGY The Fund normally invests at least 65% of its total assets in a diversified portfolio of blue chip securities that the adviser believes represent "corporate leaders" in their respective industries. The Fund may invest in the securities of companies and governments of the following regions: * Asia Region (including Japan); * Europe; * Latin America; * Africa; * North America (including U.S. and Canada); and * Other areas and countries as the adviser may decide from time to time. The Fund will normally invest in at least three different countries. The Fund intends to select the countries, currencies and companies that provide the greatest potential for long-term growth. The Fund may invest 35% of its total assets in: * securities of smaller capitalization companies; * debt securities; and * other investments. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more 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 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. INABILITY TO SELL SECURITIES -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. 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. To the extent the Fund invests in emerging market 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. 6 DEBT SECURITIES -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GLOBAL CORPORATE LEADERS FUND ----------------------------- 1990 -16.75% 1991 15.55% 1992 -3.55% 1993 31.88% 1994 1.84% 1995 10.69% 1996 16.43% 1997 6.90% 1998 19.06% 1999 39.06% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. Best and worst quarterly performance during this period: 4th quarter 1999: 25.16% 3rd quarter 1990: -18.32% The Fund's year-to-date total return as of June 30, 2000 was down 4.88%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the MSCI World Index. Average Annual Total Returns Class A (3) MSCI World Index (4) ----------- -------------------- One year, ended December 31, 1999 31.06% 25.34% Five years, ended December 31, 1999 16.54% 20.25% Ten years, ended December 31, 1999 10.35% 11.96% - ---------- (3) Reflects deduction of sales charge of 5.75%. (4) The Morgan Stanley Capital International World (MSCI World) Index is an unmanaged index that measures the performance of over 1,400 securities listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. 7 - -------------------------- ADVISER INTERNATIONAL EQUITY FUNDS PILGRIM INVESTMENTS, INC. - -------------------------- PILGRIM INTERNATIONAL FUND OBJECTIVE The Fund's investment objective is to seek long-term growth of capital through investment in equity securities and equity equivalents of companies outside of the U.S. INVESTMENT STRATEGY The Fund will invest at least 65% of its total assets in securities and equivalents of companies outside of the U.S. The Fund generally invests the remaining 35% of its total assets in a similar manner, but may invest those assets in companies in the United States, in debt securities or other investments. The Fund intends to provide investors with the opportunity to invest in a portfolio of securities of companies and governments located throughout the world. In making the allocation of assets among the various countries and geographic regions, the Fund considers such factors as prospects for relative economic-growth; expected levels of inflation and interest rates; government polices influencing business conditions; the range of investment opportunities available to international investors; and other pertinent financial, tax, social, political and national factors - all in relation to prevailing prices of the securities in each country or region. RISKS You could lose money on an investment in the Fund. The Fund's investments may be affected by the following additional risks: 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 market 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. PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. However, the Fund may also invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more 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 securities in which the Fund invests in. DEBT SECURITIES -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. INABILITY TO SELL SECURITIES -- securities of smaller and foreign companies trade in lower volume and may be less liquid than securities of larger U.S. companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 8 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) INTERNATIONAL FUND ------------------ 1994 5.87% 1995 5.77% 1996 13.57% 1997 1.61% 1998 19.02% 1999 47.85% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. The returns in the bar chart are based upon the performance of the Fund's Class A shares, adjusted to reflect the current Class A expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 27.01% 4th quarter 1997: -10.65% The Fund's year-to-date total return as of June 30, 2000 was up 0.07%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the MSCI EAFE Index. Average Annual Total Returns Class A (3)(4) MSCI EAFE Index (5) -------------- ------------------- One year, ended December 31, 1999 39.95% 27.30% Five years, ended December 31, 1999 15.15% 13.15% Since inception of Class A (6) 13.56% 12.30% - ---------- (3) This table shows the performance of the Class A shares of the Fund. Class B and Class C shares were not offered during the period ended December 31, 1999. (4) Reflects deduction of sales charge of 5.75%. (5) The Morgan Stanley Capital International Europe Australasia Far East (MSCI EAFE) Index is an unmanaged index that measures the performance of securities listed on exchanges in markets in Europe, Australia, and the Far East. (6) Class A commenced operations on January 3, 1994. 9 - -------------------------- ADVISER INTERNATIONAL EQUITY FUNDS PILGRIM INVESTMENTS, INC. - -------------------------- PILGRIM WORLDWIDE EMERGING MARKETS FUND OBJECTIVE * The Fund's investment objective is to seek long-term growth of capital primarily through investment in equity securities and equity equivalents of emerging market companies. INVESTMENT STRATEGY The Fund will invest at least 65% of its total assets according to its investment objective. The Fund's definition of emerging markets includes, but is not limited to, the following: * Africa: Botswana, Egypt, Ghana, Ivory Coast, Kenya, Mauritius, Morocco, Namibia, South Africa, Swaziland, Tunisia, Zambia and Zimbabwe; * Asia: Bahrain, Bangladesh, China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand; * Europe: Croatia, Cyprus, Czech Republic, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Romania, Russia, Slovakia and Slovenia; * The Middle East: Israel, Jordan, Lebanon, Oman and Turkey; * Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Nicaragua, Peru and Venezuela. The Adviser considers an emerging markets company to be any company domiciled in an emerging market country, or any company that derives 50% or more of its total revenue from either goods or services produced or sold in countries with emerging markets. The Fund may invest the remaining 35% of its assets in equity securities without regard to whether the issuer qualifies as an emerging market company, debt securities denominated in the currency of an emerging market country or issued or guaranteed by an emerging market company or the government of an emerging market country, short-term or medium-term debt securities or other types of securities. The Fund's investment approach is to focus on positive returns through long-term capital gains. The investment strategy is based on a "top-down" approach that compares macro trends, such as economics, politics, industry trends, and commodity trends on a relative basis. Countries are grouped regionally and globally and ranked based on their macro scores. Once specific countries are identified as relative outperformers, specific companies are selected as investments. The selection process for selecting individual companies is based on fundamental research, industry themes, and identifying specific catalysts for growth. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund 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, more limited product and market diversification and many are dependent on a few key managers. 10 MARKET TRENDS -- from time to time, the stock market may not favor the securities in which the Fund invests, or may not favor equities at all. RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. Investments in emerging market 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. INABILITY TO SELL SECURITIES -- securities of emerging market companies trade in lower volume and may be less liquid than securities of companies in larger, more established markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. DEBT SECURITIES -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. 11 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) WORLDWIDE EMERGING MARKETS FUND ------------------------------- 1990 -14.44% 1991 24.19% 1992 3.77% 1993 63.37% 1994 -13.81% 1995 -5.93% 1996 7.38% 1997 -11.40% 1998 -29.06% 1999 112.58% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. (3) Prior to June 17, 1991, the Fund operated under a different investment objective. Best and worst quarterly performance during this period: 4th quarter 1999: 78.49% 3rd quarter 1998: -26.18% The Fund's year-to-date total return as of June 30, 2000 was down 21.32%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that two broad measures of market performance -- the MSCI Emerging Markets Free Index and the MSCI EAFE Index. AVERAGE ANNUAL TOTAL RETURNS
Class A (4) MSCI EMF Index (5) MSCI EAFE Index (6) ----------- ------------------ ------------------- One year, ended December 31, 1999 100.36% 66.41% 27.30% Five years, ended December 31, 1999 4.93% 2.00% 13.15% Ten years, ended December 31, 1999 7.04% 11.05% 7.33%
- ---------- (4) Reflects deduction of sales charge of 5.75%. (5) The Morgan Stanley Capital International Emerging Markets Free (MSCI EMF) Index is an unmanaged index that measures the performance of securities listed on exchanges in developing nations throughout the world. (6) The Morgan Stanley Capital International Europe Australasia Far East (MSCI EAFE) Index is an unmanaged index that measures the performance of securities listed on exchanges in markets in Europe, Australia, and the Far East. 12 - -------------------------- ADVISER INTERNATIONAL EQUITY FUNDS PILGRIM INVESTMENTS, INC. - -------------------------- SUB-ADVISER CROSBY ASSET MANAGEMENT (U.S.) INC. PILGRIM SMALL CAP ASIA GROWTH FUND OBJECTIVE The Fund's investment objective is to seek long-term capital appreciation primarily by investing in equity securities and equity equivalents of companies in the Asia Region having market capitalizations of less than $1 billion. INVESTMENT STRATEGY The Fund will normally invest at least 65% of its total assets in equity securities of smaller companies in the Asia Region. The Fund will primarily invest in listed securities but may also invest in unlisted securities. The Fund intends to invest primarily in companies which: * have proven management; * are undervalued and under-researched by the investment community; * are within industry sectors with strong growth prospects; and * which have potential investment returns that are superior to the Asian market as a whole. The Fund may invest 35% of its total assets in: * companies with market capitalizations of $1 billion or more; * companies outside the Asia Region (e.g. Australia or New Zealand); * debt securities; and * other investments. The Fund considers the following countries to be in the Asia Region:(1) Bangladesh India Malaysia Singapore Taiwan China Indonesia Pakistan Sri Lanka Thailand Hong Kong Korea The Philippines Vietnam - ---------- (1) The Fund considers a company to be within the Asia Region if its principal securities' trading market is located in the Asia Region. The Fund will normally invest in at least three different countries. The Fund does not intend to invest in Japanese securities. 13 RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests in small companies, which may be more susceptible to price swings than larger companies because they may have fewer financial resources, more 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 securities in which the Fund invest. 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 market countries, the risks may be greater, partly because emerging market countries may be less politically and economically stable than other countries. It may also be more difficult to buy and sell securities in emerging market countries. RISKS OF THE ASIA-PACIFIC REGION -- the Asia-Pacific region includes countries in various stages of economic, development, including emerging market countries. In 1997 and 1998, securities markets in Asian countries suffered significant downturns and volatility, and currencies lost value in relation to the U.S. dollar. Currency devaluation in any one country may have a significant effect on the entire region. Increased political or social unrest in some or all Asian countries could cause further economic and market uncertainty. RISKS OF CONCENTRATION -- because the Fund concentrates on a single region of the world, the Fund's performance may be more volatile than that of a Fund that invests globally. If Asia-Pacific securities fall out of favor, it may cause the Fund to underperform funds that focus on other types of stocks. INABILITY TO SELL SECURITIES -- securities of smaller and emerging market companies trade in lower volume and may be less liquid than securities of companies in larger, more established markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. HOW THE FUND HAS PERFORMED 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. 14 The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) SMALL CAP ASIA GROWTH FUND -------------------------- 1995 -4.39% 1996 25.50% 1997 -42.32% 1998 -19.41% 1999 57.29% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 2nd quarter 1999: 39.57% 4th quarter 1997: -41.41% The Fund's year-to-date total return as of June 30, 2000 was down 10.50%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that two broad measures of market performance -- the MSCI Far East Free ex Japan Index and the MSCI EAFE Index. AVERAGE ANNUAL TOTAL RETURNS
MSCI FAR EAST FREE CLASS A (3) (4) EX JAPAN INDEX (5) MSCI EAFE INDEX (6) --------------- ------------------ ------------------- One year, ended December 31, 1999 48.75% 67.83% 27.30% Since inception of Class A (7) -3.66% .47% 13.99%
- ---------- (3) This table shows the performance of the Class A shares of the Fund. Class B shares were not offered during the period ended December 31, 1999. (4) Reflects deduction of sales charge of 5.75%. (5) The Morgan Stanley Capital International (MSCI) Far East Free ex Japan Index is an unmanaged index that measures the performance of securities listed on exchanges in the Far East markets except Japan. (6) The Morgan Stanley Capital International Europe Australasia Far East (MSCI EAFE) Index is an unmanaged index that measures the performance of securities listed on exchanges in markets in Europe, Australia, and the Far East. (7) Class A commenced operations on July 3, 1995. 15 - -------------------------- ADVISER INTERNATIONAL EQUITY FUNDS PILGRIM INVESTMENTS, INC. - -------------------------- SUB-ADVISER TROIKA DIALOG ASSET MANAGEMENT (CAYMAN ISLANDS) LTD. PILGRIM TROIKA DIALOG RUSSIA FUND OBJECTIVE The Fund's investment objective is to seek long-term capital appreciation through investment primarily in equity securities of Russian companies. INVESTMENT STRATEGY The Fund seeks to achieve its objective by investing at least 65% of its total assets in equity securities and equity equivalents of Russian companies. The Fund may invest the other 35% of its total assets in debt securities issued by Russian companies and debt securities issued or guaranteed by the Russian government. The Fund may also invest in the equity securities of issuers outside of Russia which the Fund believes will experience growth in revenue and profits from participation in the development of the economies of the former Soviet Union. When the Fund anticipates unusual markets or other conditions, it may temporarily depart from its goal and invest substantially in high-quality short-term investments. This could help the Fund avoid losses, but may mean lost opportunities. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: RISKS OF INVESTING IN SECURITIES OF RUSSIAN COMPANIES The following risks apply to all mutual funds that invest in securities of Russian companies including Pilgrim Troika Dialog Russia Fund. POLITICAL RISK. Since the breakup of the Soviet Union in 1991, Russia has experienced and continues to experience dramatic political and social change. Russia is undergoing a rapid transition from a centrally-controlled command system to a more market-oriented democratic model. The Fund may be affected unfavorably by political developments, social instability, changes in government policies, and other political and economic developments. MARKET CONCENTRATION AND LIQUIDITY RISK. The Russian securities markets are substantially smaller, less liquid and more volatile than the securities markets in the United States. A few issuers represent a large percentage of market capitalization and trading volume. Due to these factors and despite the Fund's policy on liquidity, it may be difficult for the Fund to buy or sell some securities because of the poor liquidity. LACK OF RELIABLE FINANCIAL INFORMATION. There may not be available reliable financial information which has been prepared and audited in accordance with U.S. or Western European generally accepted accounting principles and auditing standards. UNFAVORABLE ACTIONS. There is the potential for unfavorable action such as expropriation, dilution, devaluation, default or excessive taxation by the Russian government or any of its agencies or political subdivisions with respect to investments in Russian securities by or for the benefit of foreign entities. The Fund's investments will include investments in Russian companies that have characteristics and business relationships common to companies outside of Russia, and as a result, outside economic forces may cause fluctuations in the value of securities held by the Fund. SETTLEMENT AND CUSTODY RISK. Ownership of shares in Russian companies is recorded by the companies themselves and by registrars instead of through a central registration system. It is possible that the Fund's ownership rights could be lost through fraud or negligence. Since the Russian banking institutions and registrars are not guaranteed by the state, the Fund may not be able to pursue claims on behalf of the Fund's shareholders. 16 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 Russian securities fall out of favor, it may cause the Fund to underperform funds that focus on other types of stocks. LOWER QUALITY DEBT SECURITIES -- Junk bonds are highly speculative. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of issuers of securities to make principal and interest payments than with higher-grade debt securities. NON-DIVERSIFICATION RISK -- The Fund is a non-diversified investment company. There is additional risk associated with being non-diversified, since a greater proportion of the Fund's total assets may be invested in a single company. HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) TROIKA DIALOG RUSSIA FUND ------------------------- 1996 -9.01% 1997 67.50% 1998 -82.99% 1999 159.76% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. Best and worst quarterly performance during this period: 4th quarter 1999: 95.36% 3rd quarter 1998: -64.89% The Fund's year-to-date total return as of June 30, 2000 was up 2.67%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that two broad measures of market performance -- the Moscow Times Index and the Russian Trading System Index. AVERAGE ANNUAL TOTAL RETURNS
RUSSIAN TRADING CLASS A (3) (4) MOSCOW TIMES INDEX (5) SYSTEM INDEX (6) --------------- ---------------------- ---------------- One year, ended December 31, 1999 144.82% 243.06% 201.56% Since inception of Class A (7) -10.99% -0.16% -6.85%
- ---------- (3) This table shows the performance of the Class A shares of the Fund. Class B shares were not offered during the period ended December 31, 1999. (4) Reflects deduction of sales charge of 5.75%. (5) The Moscow Times Index is an unmanaged index part of a joint project between S (SKATE) and The Moscow Times newspaper. The index measures the performance of 50 Russian stocks considered to represent the most liquid and most highly capitalized Russian stocks. (6) The Russian Trading System Index is a capitalization weighted index that is calculated in U.S. dollars. The index is comprised of 100 stocks traded on the Russian Trading System. (7) Class A commenced operations on July 3, 1996. 17 - ------------ ADVISER INCOME FUNDS PILGRIM INVESTMENTS, INC. - ------------ PILGRIM GNMA INCOME FUND OBJECTIVE The Fund's investment objective is to seek a high level of current income, consistent with liquidity and safety of principal, through investment primarily in mortgage-backed GNMA ("Ginnie Mae") Certificates that are guaranteed as to the timely payment of principal and interest by the United States Government. INVESTMENT STRATEGY Under normal conditions, the Fund will invest at least 80% of the value of its total assets in Government National Mortgage Association ("GNMA") mortgage-backed securities (also known as "GNMA Certificates"). The remaining assets of the Fund will be invested in other securities issued or guaranteed by the U.S. Government, including U.S. Treasury securities. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PREPAYMENT RISK -- Through investment in GNMA securities, the Fund may expose you to certain risks which may cause you to lose money. Mortgage prepayments are affected by the level of interest rates and other factors, including general economic conditions and the underlying location and age of the mortgage. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of GNMA securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the life of a pool. Because prepayments of principal generally occur when interest rates are declining, it is likely that the Fund may have to reinvest the proceeds of prepayments at lower interest rates than those of their previous investments. If this occurs, the Fund's yields will decline correspondingly. CHANGES IN INTEREST -- 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. 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. Please refer to the statement of additional information for a complete description of GNMA Certificates and Modified Pass Through GNMA Certificates. The Fund intends to use the proceeds from principal payments to purchase additional GNMA Certificates or other U.S. Government guaranteed securities. 18 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GNMA INCOME FUND ---------------- 1990 9.23% 1991 15.75% 1992 5.19% 1993 8.06% 1994 -2.07% 1995 15.91% 1996 5.71% 1997 10.20% 1998 7.52% 1999 0.58% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 3rd quarter 1991: 5.85% 1st quarter 1994: -2.42% The Fund's year-to-date total return as of June 30, 2000 was up 3.85%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Lehman Brothers Mortgage-Backed Securities Index. AVERAGE ANNUAL TOTAL RETURNS LEHMAN BROTHERS MORTGAGE-BACKED CLASS A (3) (4) SECURITIES INDEX (5) --------------- -------------------- One year, ended December 31, 1999 -4.20% 1.86% Five years, ended December 31, 1999 6.83% 7.98% Ten years, ended December 31, 1999 6.95% 7.78% - ---------- (3) This table shows the performance of the Class A shares of the Fund. Class B and Class C shares were not offered during the period ended December 31, 1999. (4) Reflects deduction of sales charge of 4.75%. (5) The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that measures. 19 - ------------ INCOME FUNDS ADVISER - ------------ PILGRIM INVESTMENTS, INC. PILGRIM GLOBAL INCOME FUND OBJECTIVE The Fund's investment objective is to seek high current income. Capital appreciation is a secondary objective. The Fund invests in a combination of foreign and domestic high-yield, lower rated or unrated debt securities. INVESTMENT STRATEGY The Fund invests in a variety of foreign and domestic high yield, lower rated or unrated debt securities. The Fund, under normal conditions, invests substantially all of its assets in lower rated or unrated debt securities of domestic companies, companies in developed foreign countries, and companies in emerging markets. The credit quality of the foreign debt securities which the Fund intends to buy is generally equal to U.S. corporate debt securities known as "junk bonds". The debt securities in which the Fund invests consist of bonds, notes, debentures and other similar instruments. The Fund may invest in debt securities issued by foreign governments, their agencies and instrumentalities, central banks, commercial banks and other corporate entities. The Fund may invest up to 100% of its total assets in domestic and foreign debt securities that are rated below investment grade or are of comparable quality. The Fund may also invest in securities that are in default as to payment of principal and/or interest, and bank loan participations and assignments. The Fund's investment strategy stresses diversification to help reduce the Fund's price volatility. Global fixed income securities are divided into four categories. The categories reflect whether the securities are U.S. dollar denominated or not and whether borrowers are in developed markets or emerging markets. The Fund then seeks to select the best values in each of these four segments. The balance the Fund maintains between these sectors attempts to limit the price volatility. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: CREDIT RISK -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund may be subject to more credit risk than other income funds because it invests in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. This is especially true during periods of economic uncertainty or economic downturns. CHANGES IN INTEREST RATES -- the value of the Fund's investments may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long term maturities. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. 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 in the lowest rating categories, that is unrated, or whose credit rating has been lowered may be particularly difficult to sell. Valuing less liquid securities involves greater exercise of judgment and may be more subjective than valuing securities using market quotes. RISKS OF FOREIGN INVESTING -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. 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. NON-DIVERSIFICATION RISK -- The Fund is a non-diversified investment company. There is additional risk associated with being non-diversified, since a greater proportion of the Fund's total assets may be invested in a single company. 20 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2)(3) GLOBAL INCOME FUND ------------------ 1990 6.62% 1991 10.03% 1992 6.51% 1993 10.90% 1994 -6.52% 1995 20.10% 1996 13.33% 1997 5.00% 1998 8.21% 1999 -0.31% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. (3) Prior to December 31, 1994, the Fund operated under a different investment objective. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 2nd quarter 1995: up 8.76% 1st quarter 1994: down 6.61% The Fund's year-to-date total return as of June 30, 2000 was down 0.54%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Lehman Brothers Global Bond Index. AVERAGE ANNUAL TOTAL RETURNS LEHMAN BROTHERS GLOBAL BOND CLASS A (4) (5) INDEX (6) --------------- --------- One year, ended December 31, 1999 -0.31% -0.99% Five years, ended December 31, 1999 9.04% 7.88% Ten years, ended December 31, 1999 8.51% 8.51% - ---------- (4) This table shows the performance of the Class A shares of the Fund. Class B and Class C shares were not offered during the period ended December 31, 1999. (5) Reflects deduction of sales charge of 4.75%. (6) The Lehman Brothers Global Bond Index is an unmanaged index that measures. 21 - --------------------- PRECIOUS METALS FUNDS ADVISER - --------------------- PILGRIM INVESTMENTS, INC. PILGRIM GOLD FUND OBJECTIVE The Fund's investment objective is to attain capital appreciation and hedge against the loss of buying power of the U.S. Dollar as may be obtained through investment in gold and securities of companies engaged in mining or processing gold throughout the world. INVESTMENT STRATEGY Under normal conditions the Fund will invest at least 65% of the value of its total assets in gold and the equity securities of companies engaged in mining or processing gold ("gold-related securities"). The Fund may also invest in other precious metals, including platinum, palladium and silver. The Fund intends to invest less than half of the value of its assets in gold and other precious metals. The Fund's performance and ability to meet its objective will be largely dependent on the market value of gold. The portfolio manager seeks to maximize on advances and minimize on declines by monitoring and anticipating shifts in the relative values of gold related companies throughout the world. A substantial portion of the Fund's investments will be in the securities of foreign issuers. RISKS You could lose money on an investment in the Fund. The Fund's investments may be affected by the following additional risks: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. PRECIOUS METALS RISK -- the Fund's focus on precious metals and precious metal stocks may expose the investor to additional risks. The market for gold or other precious metals is concentrated in countries that have the potential for instability and the market for gold and other precious metals is widely unregulated. As a result, the price of precious gold and precious metal stocks, and therefore the Fund, may fluctuate significantly. Precious metal investments have the following characteristics: they earn no income; transaction and storage costs may be higher; and the Fund will realize gain only with an increase in the market price. 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, market 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. NON-DIVERSIFICATION RISK -- The Fund is a non-diversified investment company. There is additional risk associated with being non-diversified, since a greater proportion of the Fund's total assets may be invested in a single company. 22 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GOLD FUND --------- 1990 -20.65% 1991 -6.14% 1992 -20.51% 1993 86.96% 1994 -7.28% 1995 -1.89% 1996 7.84% 1997 -42.98% 1998 -6.39% 1999 8.58% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 2nd quarter 1993: 34.36% 4th quarter 1997: -29.07% The Fund's year-to-date total return as of June 30, 2000 was down 16.72%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that two broad measures of market performance -- the S&P 500 Index and Gold Bullion. AVERAGE ANNUAL TOTAL RETURNS S&P 500 GOLD CLASS A (3) INDEX (4) BULLION (5) ----------- --------- ----------- One year, ended December 31, 1999 2.34% 21.04% 0.85% Five years, ended December 31, 1999 -5.45% 28.56% -5.41% Ten years, ended December 31, 1999 -15.01% 18.21% -3.14% - ---------- (3) Reflects deduction of sales charge of 5.75%. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization U.S. companies. (5) Gold Bullion is a commodity traded on the New York Mercantile Exchange. 23 - --------------------- PRECIOUS METALS FUNDS ADVISER - --------------------- PILGRIM INVESTMENTS, INC. PILGRIM SILVER FUND OBJECTIVE The Fund's investment objective is to maximize total return on its assets from long-term growth of capital and income principally through investment in a portfolio of securities which are engaged in the exploration, mining, processing, fabrication or distribution of silver ("silver-related companies") and in silver bullion. INVESTMENT STRATEGY The Fund will seek to achieve its objective through investment in common stocks of established silver-related companies and in silver bullion which have the potential for long-term growth of capital or income, or both. The common stocks of silver-related companies in which the Fund intends to invest may or may not pay dividends. The Fund may also invest in other types of securities of silver-related companies including convertible securities, preferred stocks, bonds, notes and warrants. When the Adviser believes that the return on debt securities will equal or exceed the return on common stocks, the Fund may, in pursuing its objective of maximizing growth and income, substantially increase its holding in debt securities. The securities in which the Fund invests include issues of established silver-related companies domiciled in the United States, Canada and Mexico as well as other silver producing countries throughout the world. At least 80% of the Fund's assets will be invested in established silver-related companies which have been in business more than three years. Approximately 80% of silver is provided as a by-product or co-product of other mining operations, such as gold mining. The Fund has the ability to significantly increase its exposure to silver by increasing its holding of silver bullion. RISKS You could lose money on an investment in the Fund. The Fund's investments may be affected by the following additional risks: PRICE VOLATILITY -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. PRECIOUS METALS RISK -- the Fund's focus on precious metals and precious metal stocks may expose the investor to additional risks. The market for silver is relatively limited, the sources of silver are concentrated in countries that have the potential for instability and the market for silver is widely unregulated. As a result, the price of silver, and therefore the Fund, may fluctuate significantly. Precious metal investments have the following characteristics: they earn no income; transaction and storage costs may be higher; and the Fund will realize gain only with an increase in the market price. 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, market 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. DEBT SECURITIES -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. NON-DIVERSIFICATION RISK -- The Fund is a non-diversified investment company. There is additional risk associated with being non-diversified, since a greater proportion of the Fund's total assets may be invested in a single company. 24 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) SILVER FUND ----------- 1992 -19.01% 1993 76.52% 1994 -8.37% 1995 12.37% 1996 2.38% 1997 -8.05% 1998 -29.64% 1999 8.70% - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as "Class A" shares. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 2nd quarter 1993: 28.47% 4th quarter 1994: -18.60% The Fund's year-to-date total return as of June 30, 2000 was down 16.89%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that two broad measures of market performance -- the S&P 500 Index and Silver Bullion. AVERAGE ANNUAL TOTAL RETURNS S&P 500 SILVER CLASS A (3) INDEX (4) BULLION (5) ----------- --------- ----------- One year, ended December 31, 1999 2.45% 21.04% 6.49% Five years, ended December 31, 1999 -5.28% 28.56% 1.91% Since inception of Class A (6) 1.14% 19.70% 4.08% - ---------- (3) Reflects deduction of sales charge of 5.75%. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization U.S. companies. (5) Silver Bullion is a commodity traded on the New York Stock Exchange. (6) Class A commenced operations on January 2, 1992. 25 WHAT YOU PAY TO INVEST There are two types of fees and expenses when you invest in mutual funds: fees, including sales charges, you pay directly when you buy or sell shares, and operating expenses paid each year by the Fund. The tables that follow show the fees and expenses for each of the Pilgrim Funds. Fees you pay directly CLASS A CLASS B(1) CLASS C(1) ------- ---------- ---------- MAXIMUM SALES CHARGE ON YOUR INVESTMENT (AS A % OF OFFERING PRICE) % Equity Funds and Precious Metals Funds 5.75(2) none none Income Funds 4.75(2) none none MAXIMUM DEFERRED SALES CHARGE (AS A % OF PURCHASE OR SALES PRICE, WHICHEVER IS LESS) Equity Funds and Precious Metals Funds None(3) 5.00(4) 1.00(5) Income Funds None(3) N/A N/A - ---------- (1) Not all Funds offer Classes B and C. Please see page 29. (2) Reduced for purchases of $50,000 and over. Please see page 30. (3) A contingent deferred sales charge of no more than 1% 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. Please see page 30. (4) Imposed upon redemption within 6 years from purchase. The fee has scheduled reductions after the first year. Please see page 30. (5) Imposed upon redemption within 1 year from purchase. OPERATING EXPENSES PAID EACH YEAR BY THE FUNDS(1) (AS A % OF AVERAGE NET ASSETS) CLASS A
DISTRIBUTION TOTAL AND SERVICE FUND MANAGEMENT (12b-1) OTHER OPERATING FEE WAIVER NET FUND FEE FEES EXPENSES EXPENSES BY ADVISER(2) EXPENSES ---- --- ---- -------- -------- ------------- -------- C> Growth and Income % 0.62 0.25 0.25 1.29 -- 1.29 Global Corporate Leaders % 1.00 0.25 0.42 1.67 -- 1.67 International % 1.00 0.25 -- -- -- -- Worldwide Emerging Markets % 1.00 0.25 0.73 1.98 -- 1.98 SmallCap Asia Growth % 1.25 0.25 0.95 2.45 -- 2.45 Troika Dialog Russia % 1.25 0.25 0.25 1.74 -- 1.74 GNMA Income % 0.54 0.25 -- -- -- -- Global Income % 1.00 0.25 -- -- -- -- Gold % 0.96 0.25 0.46 1.66 -- 1.66 Silver % 1.00 0.25 0.55 1.80 -- 1.80
26 WHAT YOU PAY TO INVEST OPERATING EXPENSES PAID EACH YEAR BY THE FUNDS(1) (as a % of average net assets) CLASS B (4)
DISTRIBUTION TOTAL AND SERVICE FUND MANAGEMENT (12b-1) OTHER OPERATING FEE WAIVER NET FUND FEE FEES EXPENSES EXPENSES BY ADVISER(2) EXPENSES ---- --- ---- -------- -------- ------------- -------- Growth and Income % 0.62 1.00 0.25 2.04 -- 2.04 International % 1.00 1.00 0.70 2.70 -- 2.70 SmallCap Asia Growth % 1.25 1.00 0.95 3.20 -- 3.20 GNMA Income % 0.54 1.00 0.38 1.92 -- 1.92 Global Income % 1.00 1.00 0.51 2.51 -- 2.51
CLASS C (4)
DISTRIBUTION TOTAL AND SERVICE FUND MANAGEMENT (12b-1) OTHER OPERATING FEE WAIVER NET FUND FEE FEES EXPENSES EXPENSES BY ADVISER(2) EXPENSES ---- --- ---- -------- -------- ------------- -------- Growth and Income % 0.63 1.00 0.41 2.04 -- 2.04 International % 1.00 1.00 0.70 2.70 -- 2.70 GNMA Income % 0.54 1.00 0.38 1.92 -- 1.92 Global Income % 1.00 1.00 0.51 2.51 -- 2.51
- ---------- (1) These tables show the estimated operating expenses for each Fund by class as a ratio of expenses to average daily net assets. These estimates are based on each Fund's actual operating expenses for its most recent complete fiscal year and fee waivers to which the adviser has agreed for each Fund except Global Corporate Leaders, International, Worldwide Emerging Markets, SmallCap Asia, Troika Dialog Russia, Gold and Silver Funds. For those Funds, estimated operating expenses are based on estimated contractual operating expenses commencing with Pilgrim Investments' Management of these Funds. (2) Pilgrim Investments has entered into expense limitation agreements with each 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. (3) Because Class B shares are new for International, Troika Dialog Russia and SmallCap Asia Growth Funds, their expenses are estimated on Class A expenses. (4) Because Class C shares are new for International Fund, expenses are estimated based on Class A expenses. 27 WHAT YOU PAY TO INVEST EXAMPLES The examples that follow are intended to help you compare the cost of investing in the Pilgrim Funds with the cost of investing in other mutual funds. Each example assumes that you invested $10,000, reinvested all your dividends, the Fund earned an average annual return of 5%, and annual operating expenses remained at the current level. Keep in mind that this is only an estimate -- actual expenses and performance may vary. CLASS A FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---- ------ ------- ------- -------- Growth and Income 699 960 1,242 2,042 Global Corporate Leaders 735 1,071 1,430 2,438 International 762 1,152 1,567 2,719 Worldwide Emerging Markets 764 1,161 1,581 2,749 SmallCap Asia Growth 809 1,295 1,805 3,201 Troika Dialog Russia 742 1,091 1,464 2,509 GNMA Income 589 829 1,038 1,828 Global Income 645 1,003 1,384 2,450 Gold 734 1,068 1,425 2,427 Silver 747 1,109 1,494 2,569 CLASS B
IF YOU SELL YOUR SHARES IF YOU DON'T SELL YOUR SHARES --------------------------------------- -------------------------------------- FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---- ------ ------- ------- -------- ------ ------- ------- -------- Growth and Income 707 940 1,242 2,176 207 640 1,098 2,176 International 773 1,138 1,630 2,851 244 751 1,285 2,566 SmallCap Asia Growth 823 1,286 1,874 3,331 323 986 1,674 3,331 GNMA Income 695 903 1,237 2,048 195 603 1,037 2,048 Global Income 754 1,082 1,535 2,662 254 782 1,335 2,662 CLASS C IF YOU SELL YOUR SHARES IF YOU DON'T SELL YOUR SHARES --------------------------------------- -------------------------------------- FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---- ------ ------- ------- -------- ------ ------- ------- -------- Growth and Income 307 640 1,098 2,369 207 640 1,098 2,369 International 373 838 1,430 3,032 273 838 1,430 3,032 GNMA Income 295 603 1,037 2,243 195 603 1,037 2,243 Global Income 354 782 1,335 2,846 254 782 1,335 2,846
28 SHAREHOLDER GUIDE -- CHOOSING A SHARE CLASS PILGRIM PURCHASE OPTIONS(TM) Depending upon the Fund, you may select from up to three separate classes of shares: Class A, Class B, and Class C. CLASS A * Front-end sales charge, as described on the next page. * Distribution and service (12b-1) fees of 0.25%. 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%. * A contingent deferred sales charge, as described on the next page. * Automatic conversion to Class A shares after eight years, thus reducing future annual expenses. * Not offered by Global Corporate Leaders Fund, Worldwide Emerging Markets Fund, Global Technology Fund, Gold Fund and Silver Fund. 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%. * A 1% 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 Global Corporate Leaders Fund, Worldwide Emerging Markets Fund, SmallCap Asia Growth Fund, Troika Dialog Russia Fund, Gold Fund and Silver 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 shares. Orders for Class B shares in excess of $250,000 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. DISTRIBUTION AND SHAREHOLDER SERVICE FEES To pay for the cost of promoting the Funds and servicing your shareholder account, each class of each Fund has adopted a Rule 12b-1 plan which requires fees to be paid out of the assets of each class. Over time the fees will increase your cost of investing and may exceed the cost of paying other types of sales charges. 29 SHAREHOLDER GUIDE -- CHOOSING A SHARE CLASS SALES CHARGE CALCULATION CLASS A (1) Class A shares of the Funds are sold subject to the following sales charge: EQUITY FUNDS AND PRECIOUS METAL FUNDS INCOME FUNDS ----------------------- ----------------------- YOUR INVESTMENT AS A % AS A % - --------------- OF THE AS A % OF THE AS A % OFFERING OF NET OFFERING OF NET PRICE ASSET VALUE PRICE ASSET VALUE ----- ----------- ----- ----------- Less than $50,000 5.75 6.10 4.75 4.99 $50,000 - $99,999 4.50 4.71 4.50 4.71 $100,000 - $249,999 3.50 3.63 3.50 3.63 $250,000 - $499,999 2.50 2.56 2.50 2.56 $500,000 - $1,000,000 2.00 2.04 2.00 2.04 $1,000,000 and over See below See below - ---------- (1) Shareholders that purchased funds that were a part of the Lexington family of funds at the time of purchase are not subject to sales charges for the life of their account. 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 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: 30 CLASS B DEFERRED SALES CHARGE CDSC ON SHARES YEARS AFTER PURCHASE BEING SOLD -------------------- ---------- 1st year 5% 2nd year 4% 3rd year 3% 4th year 3% 5th year 2% 6th year 1% After 6th year none CLASS C DEFERRED SALES CHARGE CDSC ON SHARES YEARS AFTER PURCHASE BEING SOLD -------------------- ---------- 1st year 1% After 1st year none To keep your CDSC as low as possible, each time you place a request to redeem shares the Funds will first redeem shares in your account that are not subject to a CDSC, and then will sell shares that have the lowest CDSC. 31 SHAREHOLDER GUIDE -- CHOOSING A SHARE CLASS SALES CHARGE REDUCTIONS AND WAIVERS REDUCED SALES CHARGES. You may reduce the initial sales charge on a purchase of Class A 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 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 shares for a reduced sales charge. See the Account Application or the Statement of Additional Information for details, or contact your financial representative or the Shareholder Servicing Agent for more information. CDSC Waivers. If you notify the Transfer Agent at the time of redemption, the CDSC for each Class will be waived in the following cases: * redemptions following the death or permanent disability of a shareholder if made within one year of death or the initial determination of permanent disability. The waiver is available only for shares held at the time of death or initial determination of permanent disability. * for Class B shares, redemptions pursuant to a Systematic Withdrawal Plan, up to a maximum of 12% per year of a shareholder's account value based on the value of the account at the time the plan is established and annually thereafter, provided all dividends and distributions are reinvested and the total redemptions do not exceed 12% annually. * mandatory distributions from a tax-deferred retirement plan or an IRA. * If you think you may be eligible for a CDSC waiver, contact your financial representative or the Shareholder Servicing Agent. REINSTATEMENT PRIVILEGE. If you sell Class B or Class C shares of a Pilgrim Fund, you may reinvest some or all of the proceeds in the same share class within 90 days without a sales charge. Reinstated Class B and Class C shares will retain their original cost and purchase date for purposes of the CDSC. This privilege can be used only once per calendar year. If you want to use the Reinstatement Privilege, contact your financial representative or the Shareholder Servicing Agent. Consult the SAI for more information. SALES CHARGE WAIVERS. Class A 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. 32 SHAREHOLDER GUIDE -- HOW TO PURCHASE SHARES The minimum initial investment amounts for the Pilgrim Funds are as follows: * Non-retirement accounts: $1,000 * Retirement accounts: $250 * Pre-Authorized Investment Plan: $100 to open; you must invest at least $100 a month. The minimum additional investment is $100. Make your investment using the table on the right. The Funds and the Distributor reserve the right to reject any purchase order. Please note that cash, travelers checks, third party checks, money orders and checks drawn on non-US banks (even if payment may be effected through a US bank) will not be accepted. The Pilgrim Funds reserve the right to waive minimum investment amounts. The Funds reserve the right to liquidate sufficient shares to recover annual transfer agent fees or to close your account and redeem your shares should you fail to maintain your account value at a minimum of $1,000.00 ($250.00 for IRA's). RETIREMENT PLANS The Funds have available prototype qualified retirement plans for both corporations and for self-employed individuals. They also have available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans and Tax Sheltered Retirement Plans for employees of public educational institutions and certain non-profit, tax-exempt organizations. Investors Fiduciary Trust Company (IFTC) acts as the custodian under these plans. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. IFTC currently receives a $12 custodial fee annually for the maintenance of such accounts. INITIAL ADDITIONAL METHOD INVESTMENT INVESTMENT ------ ---------- ---------- By Contacting An investment professional with an Visit or consult an Your Investment authorized firm can help you investment professional. Professional establish and maintain your account. By Mail Visit or consult an investment Fill out the Account professional. Make your check Additions form included payable to the Pilgrim Funds and on the bottom of your mail it, along with a completed account statement along Application. Please indicate your with your check payable investment professional on the New to the Fund and mail Account Application them to the address on the account statement. Remember to write your account number on the check. 33 By Wire Call the Pilgrim Operations Wire the funds in the Department at (800) 336-3436 to same manner described obtain an account number and under "Initial indicate your investment 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 219368 Kansas City, MO 64121-6368 34 SHAREHOLDER GUIDE -- HOW TO REDEEM SHARES You may redeem shares using the table on the right. Under unusual circumstances, a Fund may suspend the right of redemption as allowed by federal securities laws. Systematic Withdrawal Plan You may elect to make periodic withdrawals from your account on a regular basis. * Your account must have a current value of at least $10,000. * Minimum withdrawal amount is $100. * You may choose from monthly, quarterly, semi-annual or annual payments. For additional information, contact the Shareholder Servicing Agent, see the Account Application or the Statement of Additional Information. PAYMENTS Normally, payment for shares redeemed will be made within three days after receipt by the Transfer Agent of a written request in good order. When you place a request to redeem shares for which the purchase money has not yet been collected, the request will be executed at the next determined net asset value, but the Fund will not release the proceeds until your purchase payment clears. This may take up to 15 days or more. To reduce such delay, purchases should be made by bank wire or federal funds. Each Fund normally intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, a Fund could elect to make payment in securities for redemptions in excess of $250,000 or 1% of its net assets during any 90-day period for any one shareholder. An investor may incur brokerage costs in converting such securities to cash. METHOD PROCEDURES ------ ---------- By Contacting Your You may redeem by contacting your investment Investment Professional professional. Investment professionals may charge for their services in connection with your redemption request, but neither the Fund nor the Distributor imposes any such charge. By Mail Send a written request specifying the Fund name and share class, your account number, the name(s) in which the account is registered, and the dollar value or number of shares you wish to redeem to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-6368 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. 35 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. 36 SHAREHOLDER GUIDE -- 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. Eastern Time). The NAV per share of each class of each Fund is calculated by taking the value of the Fund's assets attributable to that class, subtracting the Fund's liabilities attributable to that class, and dividing by the number of shares of that class that are outstanding. Because foreign securities may trade on days when the Funds do not price shares, the net asset value of a Fund that invests in foreign securities may change on days when shareholders will not be able to purchase or redeem the Fund's shares. In general, assets are valued based on actual or estimated market value, with special provisions for assets not having readily available market quotations, and short-term debt securities, and for situations where market quotations are deemed unreliable. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of Directors or Trustees. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. PRICE OF SHARES When you buy shares, you pay the NAV plus any applicable sales charge. When you sell shares, you receive the NAV minus any applicable deferred sales charge. Exchange orders are effected at NAV. EXECUTION OF REQUESTS Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth above under "How to Purchase Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of Fund shares you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Funds will not be issued unless you request them in writing. TELEPHONE ORDERS The Funds and their transfer agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Funds and their transfer agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Funds and their transfer agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. 37 SHAREHOLDER GUIDE -- TRANSACTION POLICIES 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. The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a gain or loss for federal and state income tax purposes. There is no specific limit on exchange frequency; however, the Funds are intended for long term investment and not as a short-term trading vehicle. The adviser may prohibit excessive exchanges (more than four per year). The adviser also may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges. You will automatically have the ability to request an exchange by calling the Shareholder Service Agent unless you mark the box on the Account Application that indicates that you do not wish to have the telephone exchange privilege. A Fund may change or cancel its exchange policies at any time, upon 60 days' written notice to shareholders. SYSTEMATIC EXCHANGE PRIVILEGE With an initial account balance of at least $5,000 and subject to the information and limitations outlined above, you may elect to have a specified dollar amount of shares systematically exchanged, monthly, quarterly, semi-annually or annually (on or about the 10th of the applicable month), from your account to an identically registered account in the same class of any other open-end Pilgrim Fund. This exchange privilege may be modified at any time or terminated upon 60 days' written notice to shareholders. SMALL ACCOUNTS Due to the relatively high cost of handling small investments, the Funds reserve the right upon 30 days' written notice to redeem, at NAV, the shares of any shareholder whose account (except for IRAs) has a value of less than $1,000, other than as a result of a decline in the NAV per share. 38 MANAGEMENT OF THE FUNDS ADVISER Pilgrim Investments, Inc. ("Pilgrim") serves as the investment adviser to each of the Funds. Pilgrim has overall responsibility for the management of the Funds. Pilgrim 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 is registered as an investment adviser. As of June 30, 2000, Pilgrim managed over $16.6 billion in assets. Pilgrim acquired certain assets of previous advisers to certain of the Funds in separate transactions that closed on April 7, 1995, May 21, 1999 and July 26, 2000. Pilgrim is an indirect wholly-owned subsidiary of ReliaStar Financial Corp. ("ReliaStar") (NYSE: RLR). Through its subsidiaries, ReliaStar offers individuals and institutions life insurance and annuities, employee benefits, products and services, life and health reinsurance, retirement plans, mutual funds, bank products, and personal finance education. Prior to July 26, 2000, Lexington Management Corporation ("Lexington") served as investment adviser to the Funds. On July 26, 2000, ReliaStar acquired Lexington Global Asset Management, Inc., the parent company of Lexington, and it was merged into Pilgrim's parent company, Pilgrim Capital Corporation. Pilgrim's principal address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. Pilgrim receives a monthly fee for its services based on the average daily net assets of each of the Funds. 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 ---- ------------ Growth and Income 0.63% Global Corporate Leaders 1.00% International 1.00% Worldwide Emerging Markets 1.00% SmallCap Asia Growth 1.25% Troika Dialog Russia 1.25% GNMA Income 0.60% Global Income 1.00% Goldfund 1.00% Silver 1.00% 39 Pilgrim Directly Manages the Portfolios of the Following Funds: PILGRIM GROWTH AND INCOME FUND ALAN H. WAPNICK. Mr. Wapnick is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund. Mr. Wapnick is the lead manager for Pilgrim Growth and Income Fund. Mr. Wapnick is Senior Vice President, Director of Domestic Investment Equity Strategy of LMC. Prior to joining LMC in 1986, Mr. Wapnick was an equity analyst with Merrill Lynch, J.&W. Seligman, Dean Witter and most recently Union Carbide Corporation. Mr. Wapnick graduated from Dartmouth College and received an M.B.A. from Columbia University. PILGRIM GLOBAL CORPORATE LEADERS FUND The following individuals share responsibility for the day-to-day management of the Global Corporate Leaders Fund: RICHARD T. SALER. Mr. Saler is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund. He is the lead manager of an investment management team for Pilgrim International Fund. Mr. Saler is Senior Vice President, Director of International Investment Strategy of LMC. Mr. Saler is responsible for international investment analysis and portfolio management at LMC. He has thirteen years of investment experience. Mr. Saler has focused on international markets since first joining LMC in 1986. In 1991 he was a strategist with Nomura Securities and rejoined LMC in 1992. Mr. Saler graduated from New York University with a B.S. Degree in Marketing and from New York University's Graduate School of Business Administration with an M.B.A. in Finance. PHILIP A. SCHWARTZ, CFA. Mr. Schwartz is also a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund and Pilgrim International Fund. Mr. Schwartz is a Vice President at LMC, a Chartered Financial Analyst and a member of the New York Society of Security Analysts. He is responsible for international investment analysis and portfolio management at LMC, and has twelve years of investment experience. Prior to joining LMC in 1993, Mr. Schwartz was Vice President of European Research Sales with Cheuvreux De Virieu in Paris and New York, serving the institutional market. Prior to Cheuvreux, he was affiliated with Olde and Co. and Kidder, Peabody as a stockbroker. Mr. Schwartz earned his B.A. and M.A. Degrees from Boston University. ALAN H. WAPNICK. Please see biography under Pilgrim Growth and Income Fund. PILGRIM INTERNATIONAL FUND The following individuals share responsibility for the day-to-day management of the International Fund: RICHARD T. SALER. Please see biography under Pilgrim Global Corporate Leaders Fund. PHILLIP A. SCHWARTZ, CFA. Please see biography under Pilgrim Global Corporate Leaders Fund. PILGRIM GNMA INCOME FUND DENIS P. JAMISON, CFA. Mr. Jamison manages the Pilgrim GNMA Income Fund, Lexington Money Market Trust and Pilgrim Global Income Fund. Mr. Jamison is Senior Vice President and Director of Fixed Income Strategy of LMC. Mr. Jamison is responsible for fixed-income portfolio management. He is a Chartered Financial Analyst and a member of the New York Society of Security Analysts. Prior to joining LMC in 1981, Mr. Jamison spent nine years at Arnold Bernhard & Company, an investment counseling and financial services organization. At Bernhard, he was a Vice President supervising the security analyst staff and managing investment portfolios. He is a specialist in government, corporate and municipal bonds. Mr. Jamison graduated from the City College of New York with a B.A. in Economics. ROSEANN G. MCCARTHY. Ms. McCarthy is a co-manager of the Pilgrim GNMA Income Fund and the Lexington Money Market Trust. Ms. McCarthy is an Assistant Vice President of LMC. Prior to joining the Fixed Income Department in 1997, she was Mutual Fund Marketing and Research Coordinator. Prior to 1995, Ms. McCarthy was Fund Statistician and a Shareholder Service Representative for the Lexington Funds. Ms. McCarthy is a graduate of Hofstra University with a B.B.A. in Marketing and has an M.B.A. in Finance from Seton Hall University. PILGRIM GLOBAL INCOME FUND DENIS P. JAMISON, CFA. Please see biography under Pilgrim GNMA Income Fund. 40 PILGRIM GOLDFUND JAMES A. VAIL, CFA. Mr. Vail manages the Pilgrim Goldfund and the Pilgrim Silver Fund. Mr. Vail is a Vice President of LMC and is responsible for precious metals analysis and portfolio management at LMC. He is a Chartered Financial Analyst, a member of the New York Society of Security Analysts and has 25 years of investment experience. Prior to joining LMC in 1991, Mr. Vail held investment research positions with Chemical Bank, Oppenheimer & Co., Robert Fleming Inc. and most recently, Beacon Trust Company, where he was a Senior Investment Analyst. Mr. Vail is a graduate of St. Peter's College with a B.S. and holds an M.B.A. in Finance from Seton Hall University. PILGRIM SILVER FUND JAMES A. VAIL, CFA. Please see biography under Pilgrim Goldfund. SUB-ADVISERS PILGRIM SMALL CAP ASIA GROWTH FUND. Crosby Asset Management (US) Inc. (Crosby) is the sub-adviser of the Pilgrim Small Cap Asia Growth Fund. Crosby is located at 32/F Asia Pacific Finance Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong. Crosby is a subsidiary of Crosby Group, Hong Kong. Crosby provides investment advice and management to Pilgrim Small Cap Asia Growth Fund. CHRISTINA LAM. Ms. Lam is the lead manager on a portfolio management team that manages the Pilgrim Small Cap Asia Growth Fund. Ms. Lam is Vice President and Portfolio Manager of the Pilgrim Small Cap Asia Growth Fund. Ms. Lam joined Crosby Asset Management in 1991. She is responsible for the investment management of the listed equity portfolios under the management of Crosby Asset Management. After graduating with a Law Degree with Honors from Warwick University, she qualified as a Barrister from Lincoln's Inn in London. In 1987 she joined Schroder Securities Limited in Hong Kong as an investment analyst, where her coverage included the utilities, industrials and retail sectors and conglomerates. 41 PILGRIM TROIKA DIALOG RUSSIA FUND. Troika Dialog Asset Management (Cayman Islands) Ltd. ("TDAM") is the sub-adviser of Pilgrim Troika Dialog Russia Fund. TDAM is located at Troika Dialog Asset Management (Caymen Islands), Ltd. Romanov Pereulok #4, 103875 Moscow, Russia. TDAM provides investment advice and management to Pilgrim Troika Dialog Russia Fund. TDAM is a majority owned subsidiary of The Bank of Moscow. TIMOTHY D. MCCARTHY is a member of the portfolio management team that manages the Pilgrim Troika Dialog Russia Fund. Mr. McCarthy has a B.S. degree in Economics from the State University of New York at Oneonta and an M.B.A. from the State University of New York at Binghamton. He joined Troika Dialog, Moscow in July, 1998. Prior to May, 1998 he was an Executive Director with Alfa Asset Management, Moscow. From January, 1995 to March, 1997 he was co-founder and director of Capital Regent Securities, a Moscow based investment and advisory firm. From June, 1990 to December, 1994 he was a consultant and senior consultant with Deloitte & Touche Management Consulting in New York. RUBEN VARDANIAN is a member of the portfolio management team that manages the Pilgrim Troika Dialog Russia Fund. Mr. Vardanian is Chairman of the Board of Troika Dialog Asset Management. He is Vice Chairman of the Board of Directors of the Depository Clearing Company, Moscow. He is a member of the expert council of the Federal Securities Commission of Russia and a Director of the Russian Trading System (RTS). He is also Chairman of the Board of Directors of the Russian Capital markets self-regulatory organization (NAUFOR). Mr. Vardanian received a Masters Degree with Distinction from the Finance Department of Moscow State University. He received post-graduate training with Banca CRT in Italy and with the Emerging Markets Division of Merrill Lynch in New York. PAVEL TEPLUKHIN. Dr. Teplukhin is a member of the portfolio management team that manages the Pilgrim Troika Dialog Russia Fund. He is the President of Troika Dialog Asset Management. Dr. Teplukhin received a diploma in Economics and a Doctorate in Economic Analysis and Statistics from Moscow State University. He also received a Master of Science in Economics/ Macroeconomics from the London School of Economics. From 1993 to 1996, Dr. Teplukhin was Economic Adviser to the First Deputy Prime Minister at the Ministry of Finance of the Russian Federation. OLEG LARICHEV is a member of the portfolio management team that manages the Pilgrim Troika Dialog Russia Fund. Mr. Larichev received a Master of Arts in Economics from the New Economic School, Moscow and a Diploma in Computer Graphics from Moscow State University. He has been associated with Troika Dialog, Moscow since September, 1996. Prior to September, 1996 he was an economics expert with the Russian European Center for Economic Policy. Prior to April, 1995 he held part-time positions with the World Bank and the Moscow office of the London School of Economics. 42 DIVIDENDS, DISTRIBUTIONS DIVIDENDS/TAXES 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 (1) SEMI-ANNUALLY(1) QUARTERLY(2) MONTHLY(3) ------------ ---------------- ------------ ---------- Growth and Income Global Corporate Leaders International Worldwide Emerging Markets SmallCap Asia Growth Troika Dialog Russia GNMA Income Global Income Gold Silver - ---------- (1) Distributions normally expected to consist primarily of capital gains. (2) Distributions normally expected to consist on an annual basis of a variable combination of capital gains and ordinary income. (3) Distributions normally expected to consist primarily of ordinary income. Each Fund distributes capital gains, if any, annually. DIVIDEND REINVESTMENT Unless you instruct a Fund to pay you dividends in cash, dividends and distributions paid by a Fund will be reinvested in additional shares of the Fund. You may, upon written request or by completing the appropriate section of the Account Application, elect to have all dividends and other distributions paid on Class A, B or C 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. 43 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 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. MORE INFORMATION ABOUT RISKS All mutual funds involve risk -- some more than others -- and there is always the chance that you could lose money or not earn as much as you hope. 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 SAI. 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. PRINCIPAL RISKS INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign securities, including those resulting from: fluctuations in currency exchange rates; devaluation of currencies; political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; accounting, auditing and financial reporting standards or other regulatory practices and requirements that are not uniform when compared to those applicable to domestic companies; settlement and clearance procedures in some countries that may not be reliable and can result in delays in settlement; higher transaction and custody expenses than for domestic securities; and limitations on foreign ownership of equity securities. Also, securities of many foreign companies may be less liquid and the prices more volatile than those of domestic companies. With certain foreign countries, there is the possibility of expropriation, nationalization, confiscatory taxation and limitations on the use or removal of funds or other assets of the Funds, including the withholding of dividends. Each Fund that invests in foreign securities may enter into foreign currency transactions either on a spot or cash basis at prevailing rates or through forward foreign currency exchange contracts to have the necessary currencies to settle transactions, or to help protect Fund assets against adverse changes in foreign currency exchange rates, or to provide exposure to a foreign currency commensurate with the exposure to securities from that country. 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. 44 MORE INFORMATION ABOUT RISKS EMERGING MARKETS 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 or unseasonal financial systems; environmental problems; less well developed legal systems; and less reliable custodial services and settlement practices. INABILITY TO SELL SECURITIES -- some securities usually trade in lower volume and may be less liquid than securities of large established companies. These less liquid securities could include securities of small and mid-size U.S. companies, high-yield securities, convertible securities, unrated debt and convertible securities, securities that originate from small offerings, and foreign securities, particularly those from companies in emerging markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 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. One measure of risk for fixed income securities is duration. Duration is one of the tools used by a portfolio manager in selection of fixed income securities. Historically, the maturity of a bond was used as a proxy for the sensitivity of a bond's price to changes in interest rates, otherwise known as a bond's "interest rate risk" or "volatility." According to this measure, the longer the maturity of a bond, the more its price will change for a given change in market interest rates. However, this method ignores the amount and timing of all cash flows from the bond prior to final maturity. Duration is a measure of average life of a bond on a present value basis, which was developed to incorporate a bond's yield, coupons, final maturity and call features into one measure. For point of reference, the duration of a noncallable 7% coupon bond with a remaining maturity of 5 years is approximately 4.5 years, and the duration of a noncallable 7% coupon bond with a remaining maturity of 10 years is approximately 8 years. Material changes in interest rates may impact the duration calculation. U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be subject to varying degrees of credit risk particularly those not backed by the full faith and credit of the United States Government. All U.S. Government securities may be subject to price declines in the securities due to changing interest rates. RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and illiquid securities. If a security is illiquid, the Fund might be unable to sell the security at a time when the adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Restricted securities, i.e., securities subject to legal or contractual restrictions on resale, may be illiquid. However, some restricted securities may be treated as liquid, although they may be less liquid than registered securities traded on established secondary markets. 45 MORE INFORMATION ABOUT RISKS 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 credit risk of nonpayment of principal or interest. Substantial increases in interest rates may cause an increase in loan defaults. Although the loans will generally be fully collateralized at the time of acquisition, the collateral may decline in value, be relatively illiquid, or lose all or substantially all of its value subsequent to the Fund's investment. Many loans are relatively illiquid, and may be difficult to value. DERIVATIVES. Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Some derivatives are sophisticated instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. These may include swap agreements, options, forwards and futures. Derivative securities are subject to market risk, which could be significant for those that have a leveraging effect. Many of the Funds do not invest in these types of derivatives, and some do, 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. TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent that a Fund invests defensively, it likely will not achieve capital appreciation. PORTFOLIO TURNOVER. Each Fund is generally expected to engage in frequent and active trading of portfolio securities to achieve its investment objective. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commissions and other transaction costs, and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of the Fund. 46 OTHER RISKS REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which involve the purchase by a Fund of a security that the seller has agreed to buy back. If the seller defaults and the collateral value declines, the Fund might incur a loss. If the seller declares bankruptcy, the Fund may not be able to sell the collateral at the desired time. LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund may lend portfolio securities in an amount up to 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. Each Fund may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. If the price of the security rises, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. 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 AND RATING LIMITATIONS. Unless otherwise stated, the 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 independent auditors for each Fund, along with the Fund's financial statements, are included in the Fund's annual report, which is available upon request. 47 U.S. EQUITY FUND GROWTH AND INCOME FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Net Asset Value, Beginning of Period $ 21.91 $ 20.27 $ 18.56 $ 15.71 $ 14.36 Net investment income (loss) 0.05 -- 0.05 0.07 0.22 Net realized and unrealized gain (loss) from investment operations 3.33 4.30 5.46 4.08 3.00 Total income (loss) from investment operations Less distributions: 3.38 4.30 5.51 4.15 3.22 Distributions from net investment income (0.05) -- (0.07) (0.13) (0.22) Distributions in excess of net investment income -- -- -- -- -- Distributions from net realized gains (2.86) (2.66) (3.73) (1.17) (1.65) Distributions in excess of net realized gains -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions (2.91) (2.66) (3.80) (1.30) (1.87) Net asset value, end of period $ 22.38 $ 21.91 $ 20.27 $ 18.56 $ 15.71 -------- -------- -------- -------- -------- TOTAL RETURN 15.54% 21.42% 30.36% 26.46% 22.57% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $254,532 $245,790 $228,037 $200,309 $138,901 Ratio of expenses to average net assets, before reimbursement or waiver 0.95% 1.16% 1.17% 1.13% 1.09% Ratio of expenses to average net assets, net of reimbursement or waiver 0.95% 1.16% 1.17% 1.13% 1.09% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 0.21% 0.06% 0.21% 0.43% 1.38% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 0.21% 0.06% 0.21% 0.43% 1.38% Portfolio Turnover Rate 86.31% 63.20% 88.15% 101.12% 159.94%
48 INTERNATIONAL EQUITY FUNDS GLOBAL CORPORATE LEADERS FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Net Asset Value, Beginning of Period $ 9.46 $ 10.59 $ 11.28 $ 11.32 $ 11.17 Net investment income (loss) (0.02) 0.99 0.03 0.01 0.09 Net realized and unrealized gain (loss) from investment operations 3.67 1.02 0.73 1.84 1.10 Total income (loss) from investment operations 3.65 2.01 0.76 1.85 1.19 Less distributions: Distributions from net investment income (0.74) (0.80) (0.09) (0.16) (0.29) Distributions in excess of net investment income -- -- -- -- (0.13) Distributions from net realized gains (0.08) (2.34) (1.36) (1.73) (0.62) Distributions in excess of net realized gains -- -- -- -- -- Total distributions (0.82) (3.14) (1.45) (1.89) (1.04) Net asset value, end of period $ 12.29 $ 9.46 $ 10.59 $ 11.28 $ 11.32 ------- ------- ------- ------- ------- TOTAL RETURN 39.06% 19.06% 6.90% 16.43% 10.69% RATIOS/SUPPLEMENTAL DATA Net asset, end of period (thousands) $19,617 $17,803 $35,085 $37,223 $53,614 Ratio of expenses to average net assets, before reimbursement or waiver 1.96% 2.12% 1.75% 1.90% 1.67% Ratio of expenses to average net assets, net of reimbursement or waiver 1.96% 2.12% 1.75% 1.90% 1.67% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver (0.65)% (0.06)% 0.23% 0.11% 0.48% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver (0.65)% (0.06)% 0.23% 0.11% 0.48% Portfolio Turnover Rate 12.76% 137.33% 177.48% 128.05% 166.35%
49 INTERNATIONAL FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Net Asset Value, Beginning of Period $ 11.61 $ 10.10 $ 10.86 $ 10.60 $ 10.37 Net investment income (loss) (0.01) 0.17 0.07 (0.02) (0.01) Net realized and unrealized gain (loss) from investment operations 5.46 1.74 0.10 1.45 0.61 Total income (loss) from investment operations 5.45 1.91 0.17 1.43 0.60 Less distributions: Distributions from net investment income (0.03) (0.06) (0.13) (0.20) -- Distributions in excess of net investment income -- -- -- -- (0.35) Distributions from net realized gains (3.58) (0.34) (0.80) (0.97) (0.02) Distributions in excess of net realized gains -- -- -- -- -- Total distributions (3.61) (0.40) (0.93) (1.17) (0.37) Net asset value, end of period $ 13.45 $ 11.61 $ 10.10 $ 10.86 $ 10.60 ------- ------- ------- ------- ------- TOTAL RETURN 47.85% 19.02% 1.61% 13.57% 5.77% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $25,304 $24,000 $19,949 $18,891 $17,855 Ratio of expenses to average net assets, before reimbursement or waiver 1.98% 2.25% 2.15% 2.45% 2.46% Ratio of expenses to average net assets, net of reimbursement or waiver 1.98% 1.75% 1.75% 2.45% 2.46% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver (0.21)% (0.16)% 0.13% (0.39)% (0.12)% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver (0.21)% 0.35% 0.53% (0.39)% (0.12)% Portfolio Turnover Rate 143.82% 143.67% 122.56% 113.55% 137.72%
50 WORLDWIDE EMERGING MARKETS FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 -------- ------- -------- -------- -------- Net Asset Value, Beginning of Period $ 7.13 $ 10.18 $ 11.49 $ 10.70 $ 11.47 Net investment income (loss) (0.05) 0.12 0.01 -- 0.08 Net realized and unrealized gain (loss) from investment operations 8.05 (3.08) (1.32) 0.79 (0.76) Total income (loss) from investment operations 8.00 (2.96) (1.31) 0.79 (0.68) Less distributions: Distributions from net investment income (0.03) (0.09) -- -- (0.08) Distributions in excess of net investment income -- -- -- -- (0.01) Distributions from net realized gains -- -- -- -- -- -------- ------- -------- -------- -------- Distributions in excess of net realized gains -- -- -- -- -- Total distributions (0.03) (0.09) -- -- (0.09) Net asset value, end of period $ 15.10 $ 7.13 $ 10.18 $ 11.49 $ 10.70 -------- ------- -------- -------- -------- TOTAL RETURN 112.58% (29.06)% (11.40)% 7.38% (5.93)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $154,994 $65,323 $137,686 $254,673 $265,544 Ratio of expenses to average net assets, before reimbursement or waiver 2.00% 1.85% 1.82% 1.76% 1.88% Ratio of expenses to average net assets, net of reimbursement or waiver 2.00% 1.85% 1.82% 1.76% 1.88% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 0.66% 1.14% 0.09% (0.01)% 0.70% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 0.66% 1.14% 0.09% (0.01)% 0.70% Portfolio Turnover Rate 184.39% 107.19% 112.05% 86.26% 92.85%
51 SMALL CAP ASIA GROWTH FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995(a) ------- ------- ------- ------- ------ Net Asset Value, Beginning of Period $ 5.69 $ 7.06 $ 12.24 $ 9.76 $10.00 Net investment income (loss) (0.10) -- (0.05) (0.05) 0.02 Net realized and unrealized gain (loss) from investment operations 3.36 (1.37) (5.13) 2.54 (0.24) Total income (loss) from investment operations 3.26 (1.37) (5.18) 2.49 (0.22) Less distributions: Distributions from net investment income -- -- -- -- (0.02) Distributions in excess of net investment income -- -- -- (0.01) -- Distributions from net realized gains -- -- -- -- -- Distributions in excess of net realized gains -- -- -- -- -- Total distributions -- -- -- (0.01) (0.02) Net asset value, end of period $ 8.95 $ 5.69 $ 7.06 $ 12.24 $ 9.76 ------- ------- ------- ------- ------ TOTAL RETURN 57.29% (19.41)% (42.32)% 25.50% (4.39)%* RATIOS/SUPPLEMENTAL DATA Net asset, end of period (thousands) $14,392 $18,278 $13,867 $23,796 $8,936 Ratio of expenses to average net assets, before reimbursement or waiver 3.00% 2.86% 2.30% 2.64% 3.51%* Ratio of expenses to average net assets, net of reimbursement or waiver 2.50% 2.50% 2.30% 2.42% 1.75%* Ratio of net investment income (loss)to average net assets, before reimbursement or waiver (1.56)% (0.57)% (0.32)% (0.86)% (1.24)%* Ratio of net investment income (loss)to average net assets, net of reimbursement or waiver (1.05)% (0.21)% (0.32)% (0.64)% 0.52%* Portfolio Turnover Rate 172.89% 193.48% 187.41% 176.49% 40.22%*
- ---------- * Annualized. (a) SmallCap Fund commenced operations on January 2, 1996. (b) Small Cap Asia Growth Fund commenced operations on July 3, 1995. 52 TROIKA DIALOG RUSSIA FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996(b) ------- ------- --------- ---------- Net Asset Value, Beginning of Period $ 2.64 $ 17.50 $ 11.24 $ 12.12 Net investment income (loss) 0.18 0.15 (0.01) (0.05) Net realized and unrealized gain (loss) from investment operations 3.99 (14.70) 7.57 (0.51) Total income (loss) from investment operations 4.17 (14.55) 7.56 (0.56) Less distributions: Distributions from net investment income (0.07) (0.07) -- -- Distributions in excess of net investment income -- -- -- -- Distributions from net realized gains -- (0.24) (1.30) (0.32) Distributions in excess of net realized gains -- -- -- -- Total distributions (0.07) (0.31) (1.30) (0.32) Net asset value, end of period $ 6.74 $ 2.64 $ 17.50 $ 11.24 ------- ------- --------- ---------- TOTAL RETURN 159.76% (82.99)% 67.50% (9.01)%* RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $59,011 $19,147 $ 137,873 $ 13,846 Ratio of expenses to average net assets, before reimbursement or waiver 3.32%# 2.64% 2.89%# 5.07%*# Ratio of expenses to average net assets, net of reimbursement or waiver 2.23%# 1.84% 1.85%# 2.65%*# Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 3.30%# 0.57% (1.14)%# (3.69)%*# Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 4.39%# 1.36% (0.11)%# (1.27)%*# Portfolio Turnover Rate 91.14% 65.76% 66.84% 115.55%
- ---------- * Annualized. # (before, or net of) reimbursement or waiver or redemption fee proceeds. (c) The Fund's commencement of operations was June 3, 1996 with the investment of its initial capital. The Fund's registration statement with the Securities and Exchange Commission became effective on July 3, 1996. Financial results prior to the effective date of the Fund's registration statement are not presented in this Financial Highlights Table. 53 GNMA INCOME FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Net Asset Value, Beginning of Period $ 8.53 $ 8.40 $ 8.12 $ 8.19 $ 7.60 Net investment income (loss) 0.50 0.48 0.51 0.53 0.58 Net realized and unrealized gain (loss) from investment operations (0.45) 0.13 0.29 (0.08) 0.59 Total income (loss) from investment operations 0.05 0.61 0.80 0.45 1.17 Less distributions: Distributions from net investment income (0.50) (0.48) (0.52) (0.52) (0.58) Distributions in excess of net investment income -- -- -- -- -- Distributions from net realized gains -- -- -- -- -- Distributions in excess of net realized gains -- -- -- -- -- Total distributions (0.50) (0.48) (0.52) (0.52) (0.58) Net asset value, end of period $ 8.08 $ 8.53 $ 8.40 $ 8.12 $ 8.19 -------- -------- -------- -------- -------- TOTAL RETURN 0.58% 7.52% 10.20% 5.71% 15.91% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $376,580 $273,591 $158,071 $133,777 $130,681 Ratio of expenses to average net assets, before reimbursement or waiver 0.99% 1.01% 1.01% 1.05% 1.01% Ratio of expenses to average net assets, net of reimbursement or waiver 0.99% 1.01% 1.01% 1.05% 1.01% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 6.04% 5.85% 6.28% 6.56% 7.10% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 6.04% 5.85% 6.28% 6.56% 7.10% Portfolio Turnover Rate 25.10% 54.47% 134.28% 128.76% 30.69%
54 GLOBAL INCOME FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Net Asset Value, Beginning of Period $ 10.36 $ 10.58 $ 11.22 $ 10.75 $ 9.80 Net investment income (loss) 1.16 0.90 1.04 1.01 0.96 Net realized and unrealized gain (loss) from investment operations (1.20) (0.07) (0.50) 0.36 0.95 Total income (loss) from investment operations 0.04 0.83 0.54 1.37 1.91 Less distributions: Distributions from net investment income (0.82) (0.87) (0.91) (0.86) (0.96) Distributions in excess of net investment income -- -- -- -- -- Distributions from net realized gains (0.05) (0.18) (0.27) (0.04) -- ------- ------- ------- ------- Distributions in excess of net realized gains -- -- -- -- -- Total distributions (0.87) (1.05) (1.18) (0.90) (0.96) Net asset value, end of period $ 9.45 $ 10.36 $ 10.58 $ 11.22 $ 10.75 ------- ------- ------- ------- ------- TOTAL RETURN (0.31)% 8.21% 5.00% 13.33% 20.10% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $31,696 $36,407 $23,668 $29,110 $12,255 Ratio of expenses to average net assets, before reimbursement or waiver 1.86% 1.89% 2.17% 2.33% 3.07% Ratio of expenses to average net assets, net of reimbursement or waiver 1.86% 1.50% 1.50% 1.50% 2.75% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 11.52% 10.99% 8.99% 9.49% 9.48% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 11.52% 11.38% 9.66% 10.32% 9.80% Portfolio Turnover Rate 24.56% 45.25% 117.94% 71.83% 164.72%
55 GOLD FUND
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995 ------- ------- ------- -------- -------- Net Asset Value, Beginning of Period $ 3.03 $ 3.24 $ 5.97 $ 6.24 $ 6.37 Net investment income (loss) (0.01) -- -- 0.02 -- Net realized and unrealized gain (loss) from investment operations 0.27 (0.21) (2.52) 0.50 (0.12) Total income (loss) from investment operations 0.26 (0.21) (2.52) 0.52 (0.12) Less distributions: Distributions from net investment income -- -- (0.21) (0.79) (0.01) Distributions in excess of net investment income -- -- -- -- -- Distributions from net realized gains -- -- -- -- -- Distributions in excess of net realized gains -- -- -- -- -- Total distributions -- -- (0.21) (0.79) (0.01) Net asset value, end of period $ 3.29 $ 3.03 $ 3.24 $ 5.97 $ 6.24 ------- ------- ------- -------- -------- TOTAL RETURN 8.58% (6.39)% (42.98)% 7.84% (1.89)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $72,516 $50,841 $53,707 $109,287 $135,779 Ratio of expenses to average net assets, before reimbursement or waiver 1.94% 1.74% 1.65% 1.60% 1.70% Ratio of expenses to average net assets, net of reimbursement or waiver 1.94% 1.74% 1.65% 1.60% 1.70% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver (0.02)% 0.08% 0.17% (0.32)% 0.07% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver (0.02)% 0.08% 0.17% (0.32)% 0.07% Portfolio Turnover Rate 78.55% 28.93% 38.32% 31.04% 40.41%
56 SILVER FUND
PER SHARE OPERATING PERFORMANCE 1999 1998(c) 1998(d) 1997(d) 1996(d) 1995(d) ------- ------- ------- ------- ------- ------- Net Asset Value, Beginning of Period $ 2.73 $ 3.26 $ 3.95 $ 4.46 $ 4.00 $ 3.92 Net investment income (loss) 0.01 (0.01) (0.02) (0.04) (0.03) (0.03) Net realized and unrealized gain (loss) from investment operations 0.23 (0.52) (0.66) (0.43) 0.51 0.11 Total income (loss) from investment operations 0.24 (0.53) (0.68) (0.47) 0.48 0.08 Less distributions: Distributions from net investment income (0.01) -- -- -- -- -- Distributions in excess of net investment income -- -- (0.01) (0.04) (0.02) Distributions from net realized gains -- -- -- -- -- -- Distributions in excess of net realized gains -- -- -- -- -- -- Total distributions (0.01) -- (0.01) (0.04) (0.02) -- Net asset value, end of period $ 2.96 $ 2.73 $ 3.26 $ 3.95 $ 4.46 $ 4.00 ------- ------- ------- ------- ------- ------- TOTAL RETURN 8.70% (16.26)% (17.32)% (10.76)% 12.02% 2.04% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (thousands) $25,413 $25,560 $34,921 $42,035 $73,945 $65,517 Ratio of expenses to average net assets, before reimbursement or waiver 2.11% 2.37%* 1.90% 1.96% 1.73% 1.82% Ratio of expenses to average net assets, net of reimbursement or waiver 2.11% 2.37%* 1.90% 1.96% 1.73% 1.82% Ratio of net investment income (loss) to average net assets, before reimbursement or waiver 0.49% (0.61)%* (0.54)% (0.78)% (0.72)% (0.83)% Ratio of net investment income (loss) to average net assets, net of reimbursement or waiver 0.49% (0.61)%* (0.54)% (0.78)% (0.72)% (0.83)% Portfolio Turnover Rate 29.44% 5.68% 28.78% 18.76% 44.30% 44.22%
- ---------- * Annualized. (e) Six month period ended December 31, 1998. The Fund changed its fiscal year-end from June 30th to December 31st. (f) Fiscal year-end June 30th. 57 WHERE TO GO FOR MORE INFORMATION You'll find more information about the Pilgrim Funds in our: ANNUAL/SEMIANNUAL REPORTS Include a discussion of recent market conditions and investment strategies that significantly affected performance, the financial statements and the auditor's reports (in annual report only). STATEMENT OF ADDITIONAL INFORMATION The SAI contains more detailed information about the Pilgrim Funds. The SAI is legally part of this prospectus (it is incorporated by reference). A copy has been filed with the Securities and Exchange Commission (SEC). Please write or call for a free copy of the current Annual/semiannual reports, the SAI or other Fund information, or to make shareholder inquiries: The Pilgrim Funds 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004 1-800-992-0180 Or visit our website at www.pilgrimfunds.com. This information may also be reviewed or obtained from the SEC. In order to review the information in person, you will need to visit the SEC's Public Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may obtain the information for a fee by contacting the SEC at: Securities and Exchange Commission Public Reference Section Washington, D.C. 20549-0102 or at the e-mail address: publicinfo@sec.gov or obtain the information at no cost by visiting the SEC's Internet website at http://www.sec.gov. When contacting the SEC, you will want to refer to the Fund's SEC file number. The file numbers are as follows: Pilgrim Growth and Income Fund 811-0865 Pilgrim Global Corporate Leaders Fund 811-5113 Pilgrim International Fund 811-8172 Pilgrim Worldwide Emerging Markets Fund 811-1838 Pilgrim SmallCap Asia Growth Fund 811-7287 Pilgrim Troika Dialog Russia Fund 811-7587 Pilgrim GNMA Income Fund 811-2401 Pilgrim Global Income Fund 811-4675 Pilgrim Gold Fund 811-2881 Pilgrim Silver Fund 811-4111 PILGRIM(SM) FUNDS FOR SERIOUS INVESTORS Prospectus Class Q July 31, 2000 U.S. EQUITY FUND Pilgrim Growth and Income INTERNATIONAL EQUITY FUND Pilgrim International INCOME FUNDS Pilgrim GNMA Income Pilgrim Global Income This prospectus contains important information about investing in the Pilgrim Funds. You should read it carefully before you invest, and keep it for future reference. Please note that your investment: is not a bank deposit, is not insured or guaranteed by the FDIC, the Federal Reserve Board or any other government agency and is affected by market fluctuations. There is no guarantee that the Funds will achieve their objectives. As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities nor has the SEC judged whether the information in this prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. These pages contain a description of each of our funds included in this prospectus, including its objective, investment strategy and risks. OBJECTIVE You'll also find: INVESTMENT STRATEGY HOW THE FUND HAS PERFORMED. A chart that shows the fund's financial performance for the past ten years (or since inception, if shorter). RISKS WHAT YOU PAY TO INVEST. A list of the fees and expenses you pay - both directly and indirectly - when you invest in a fund. HOW THE FUND HAS PERFORMED WHAT'S INSIDE An introduction to the Pilgrim Funds 1 Funds at a Glance 2 U.S. EQUITY FUND Pilgrim Growth and Income 3 INTERNATIONAL EQUITY FUNDS Pilgrim International 5 INCOME FUNDS Pilgrim GNMA Income 7 Pilgrim Global Income 9 What you pay to invest 11 Shareholder guide 13 Management of the Funds 19 Dividends, distributions and taxes 21 More information about risks 22 Financial highlights 25 Where to go for more information Backcover INTRODUCTION TO THE PILGRIM FUNDS Risk is the potential that your investment will lose money or not earn as much as you hope. All mutual funds have varying degrees of risk, depending on the securities they invest in. Please read this prospectus carefully to be sure you understand the principal risks and strategies associated with each of our Funds. You should consult the Statement of Additional Information (SAI) for a complete list of the risks and strategies. If you have any questions about the Pilgrim Funds, please call your financial consultant or us at 1-800-992-0180. This prospectus is designed to help you make informed decisions about your investments. U.S. EQUITY FUNDS Our U.S. Equity Funds focus on long-term growth by investing primarily in domestic equities. They may suit you if you: * are investing for the long-term - at least several years. * are willing to accept higher risk in exchange for long-term growth. INTERNATIONAL EQUITY FUNDS Pilgrim offers International Equity Funds that emphasize a growth approach to international investing, as well as International Equity Funds that apply the technique of "value investing". These Funds focus on long-term growth by investing primarily in foreign equities. They may suit you if you: * are investing for the long-term - at least several years * are looking for exposure to international markets * are willing to accept higher risk in exchange for long-term growth. Income Funds Pilgrim offers both aggressive and conservative Income Funds. They may suit you if you: * want a regular stream of income. Income Funds may suit you if you: * want greater growth potential than a money market fund o are willing to accept more risk than a money market fund. [GRAPHIC] If you have any questions, please call 1-800-992-0180. 1 FUNDS AT A GLANCE This table is a summary of the objectives, main investments and risks of each Pilgrim Fund. It is designed to help you understand the differences between the Funds, the main 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 3.
FUND INVESTMENT OBJECTIVE MAIN INVESTMENTS MAIN RISKS ---- -------------------- ---------------- ---------- U.S. Equity Fund Growth and Income Fund Long-term capital Equity securities of Price volatility and Adviser: Pilgrim appreciation, with income large, ably managed, and other risks that Investments, Inc. as a secondary objective well-financed U.S. accompany an investment companies in equity securities. International International Fund Long-term growth of Equity securities and Price volatility and Equity Funds Adviser: Pilgrim capital equity equivalents of other risks that Investments, Inc. companies outside of the accompany an investment U.S. in [growth-oriented] foreign equities. Sensitive to currency exchange rates, international political and economic conditions and other risks that affect foreign securities. Income Funds GNMA Income Fund High current income, Mortgage-backed GNMA Credit, interest rate, Adviser: Pilgrim consistent with liquidity Certificates that are prepayment and other Investments, Inc. and safety of principal guaranteed as to the risks that accompany an timely payment of investment in government principal and interest by bonds and mortgage the U.S. Government. related investments. Generally has less credit risk than the other income funds. Global Income Fund High current income, with Foreign and domestic high Credit, liquidity, Adviser: Pilgrim capital appreciation as a yield, lower rated or interest rate and other Investments, Inc. secondary objective unrated debt securities. risks that accompany an investment in lower-quality debt securities. Particularly sensitive to credit risk during economic downturns. May also present price volatility from foreign securities. May be sensitive to currency exchange rates, international political and economic conditions, and other risks.
2 U.S. EQUITY FUNDS ADVISER PILGRIM INVESTMENTS, INC. PILGRIM GROWTH AND INCOME FUND OBJECTIVE * The Fund's principal investment objective is long-term capital appreciation. Income is a secondary objective. INVESTMENT STRATEGY The Fund will invest at least 65% of its total assets in common stocks of U.S. companies, which may include dividend paying securities and securities convertible into shares of common stock. The Fund seeks to invest in large, ably managed and well financed companies. The investment approach is to identify high quality companies with good earnings and price momentum which sell at attractive valuations. The Fund may invest the remaining 35% of its assets in foreign securities and smaller capitalization companies. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PRICE VOLATILITY - the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more 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 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. INABILITY TO SELL SECURITIES - securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. 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. 3 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GROWTH & INCOME FUND -------------------- 1990 -10.27% 1991 24.87% 1992 12.36% 1993 13.22% 1994 -3.11% 1995 22.57% 1996 26.96% 1997 30.36% 1998 21.42% 1999 13.54% - ---------- (1) These figures are as of December 31 of each year. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as "Class A" shares. Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1998: up 21.95% 3rd quarter 1990: down 14.87% The Fund's year-to-date total return as of June 30, 2000 was up 1.74%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance - the S&P 500 Index. Average Annual Total Returns CLASS A (3) S&P 500 INDEX (4) ----------- ----------------- One year, ended December 31, 1999 15.54% 21.04% Five years, ended December 31, 1999 23.17% 28.56% Ten years, ended December 31, 1999 14.62% 18.21% - ---------- (3) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund were not offered as of December 31, 1999. See footnote (2) to the bar chart above. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization U.S. companies. 4 INTERNATIONAL EQUITY FUNDS ADVISER PILGRIM INVESTMENTS, INC. PILGRIM INTERNATIONAL FUND OBJECTIVE The Fund's investment objective is to seek long-term growth of capital through investment in equity securities and equity equivalents of companies outside of the U.S. INVESTMENT STRATEGY The Fund will invest at least 65% of its total assets in securities and equivalents of companies outside of the U.S. The Fund generally invests the remaining 35% of its total assets in a similar manner, but may invest those assets in companies in the United States, in debt securities or other investments. The Fund intends to provide investors with the opportunity to invest in a portfolio of securities of companies and governments located throughout the world. In making the allocation of assets among the various countries and geographic regions, the Fund considers such factors as prospects for relative economic-growth; expected levels of inflation and interest rates; government polices influencing business conditions; the range of investment opportunities available to international investors; and other pertinent financial, tax, social, political and national factors - all in relation to prevailing prices of the securities in each country or region. RISKS You could lose money on an investment in the Fund. The Fund's investments may be affected by the following additional risks: 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 market 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. PRICE VOLATILITY - the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. However, the Fund may also invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more 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 securities in which the Fund invests. DEBT SECURITIES - the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. INABILITY TO SELL SECURITIES - securities of smaller and foreign companies trade in lower volume and may be less liquid than securities of larger U.S. companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 5 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) INTERNATIONAL FUND ------------------ 1994 5.87% 1995 5.77% 1996 13.57% 1997 1.61% 1998 19.02% 1999 47.85% - ---------- (1) These figures are as of December 31 of each year. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as "Class A" shares. Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: up 27.01% 4th quarter 1997: down 10.65% The Fund's year-to-date total return as of June 30, 2000 was up 0.07%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance - the MSCI EAFE Index. Average Annual Total Returns CLASS A (3) MSCI EAFE INDEX (4) ----------- ------------------- One year, ended December 31, 1999 47.85% 27.30% Five years, ended December 31, 1999 16.52% 13.15% Since inception of Class A (5) 14.69% 12.30% - ---------- (3) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund were not offered as of December 31, 1999. See footnote (2) to the bar chart above. (4) The Morgan Stanley Capital International Europe Australasia Far East (MSCI EAFE) Index is an unmanaged index that measures the performance of securities listed on exchanges in markets in Europe, Australia, and the Far East. (5) Class A commenced operations on January 3, 1994. 6 INCOME FUNDS ADVISER PILGRIM INVESTMENTS, INC. PILGRIM GNMA INCOME FUND OBJECTIVE The Fund's investment objective is to seek a high level of current income, consistent with liquidity and safety of principal, through investment primarily in mortgage-backed GNMA Certificates that are guaranteed as to the timely payment of principal and interest by the United States Government. INVESTMENT STRATEGY Under normal conditions, the Fund will invest at least 80% of the value of its total assets in Government National Mortgage Association ("GNMA") mortgage-backed securities (also known as "GNMA Certificates"). The remaining assets of the Fund will be invested in other securities issued or guaranteed by the U.S. Government, including U.S. Treasury securities. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: PREPAYMENT RISK - Through investment in GNMA securities, the Fund may expose you to certain risks which may cause you to lose money. Mortgage prepayments are affected by the level of interest rates and other factors, including general economic conditions and the underlying location and age of the mortgage. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of GNMA securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the life of a pool. Because prepayments of principal generally occur when interest rates are declining, it is likely that the Fund may have to reinvest the proceeds of prepayments at lower interest rates than those of their previous investments. If this occurs, the Fund's yields will decline correspondingly. 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. 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. Please refer to the statement of additional information for a complete description of GNMA Certificates and Modified Pass Through GNMA Certificates. The Fund intends to use the proceeds from principal payments to purchase additional GNMA Certificates or other U.S. Government guaranteed securities. 7 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2) GNMA INCOME FUND ---------------- 1990 9.23% 1991 15.75% 1992 5.19% 1993 8.06% 1994 -2.07% 1995 15.91% 1996 5.71% 1997 10.20% 1998 7.52% 1999 0.58% - ---------- (1) These figures are as of December 31 of each year. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as "Class A" shares. Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 3rd quarter 1991: up 5.85% 1st quarter 1994: down 2.42% The Fund's year-to-date total return as of June 30, 2000 was up 3.85%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance - the Lehman Brothers Mortgage-Backed Securities Index. AVERAGE ANNUAL TOTAL RETURNS LEHMAN BROTHERS MORTGAGE CLASS A (3) BACKED SECURITIES INDEX (4) ----------- --------------------------- One year, ended December 31, 1999 0.58% 1.86% Five years, ended December 31, 1999 7.87% 7.98% Ten years, ended December 31, 1999 7.47% 7.78% - ---------- (3) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund were not offered as of December 31, 1999. See footnote (2) to the bar chart above. (4) The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that measures comprised of 520 mortgage backed securities with an average yield of 7.58%. The average coupon of the index is 6.85%. This index is typically used as a benchmark for intermediate-term bond funds. 8 INCOME FUNDS ADVISER PILGRIM INVESTMENTS, INC. PILGRIM GLOBAL INCOME FUND OBJECTIVE The Fund's investment objective is to seek high current income. Capital appreciation is a secondary objective. The Fund invests in a combination of foreign and domestic high-yield, lower rated or unrated debt securities. INVESTMENT STRATEGY The Fund invests in a variety of foreign and domestic high yield, lower rated or unrated debt securities. The Fund, under normal conditions, invests substantially all of its assets in lower rated or unrated debt securities of domestic companies, companies in developed foreign countries, and companies in emerging markets. The credit quality of the foreign debt securities which the Fund intends to buy is generally equal to U.S. corporate debt securities known as "junk bonds". The debt securities in which the Fund invests consist of bonds, notes, debentures and other similar instruments. The Fund may invest in debt securities issued by foreign governments, their agencies and instrumentalities, central banks, commercial banks and other corporate entities. The Fund may invest up to 100% of its total assets in domestic and foreign debt securities that are rated below investment grade or are of comparable quality. The Fund may also invest in securities that are in default as to payment of principal and/or interest, and bank loan participations and assignments. The Fund's investment strategy stresses diversification to help reduce the Fund's price volatility. Global fixed income securities are divided into four categories. The categories reflect whether the securities are U.S. dollar denominated or not and whether borrowers are in developed markets or emerging markets. The Fund then seeks to select the best values in each of these four segments. The balance the Fund maintains between these sectors attempts to limit the price volatility. RISKS You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: CREDIT RISK - the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund may be subject to more credit risk than other income funds because it invests in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. This is especially true during periods of economic uncertainty or economic downturns. CHANGES IN INTEREST RATES - the value of the Fund's investments may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long term maturities. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. 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 in the lowest rating categories, that is unrated, or whose credit rating has been lowered may be particularly difficult to sell. Valuing less liquid securities involves greater exercise of judgment and may be more subjective than valuing securities using market quotes. RISKS OF FOREIGN INVESTING - foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. 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. NON-DIVERSIFICATION RISK - The Fund is a non-diversified investment company. There is additional risk associated with being non-diversified, since a greater proportion of the Fund's total assets may be invested in a single company. 9 HOW THE FUND HAS PERFORMED The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. YEAR BY YEAR TOTAL RETURNS (%)(1)(2)(3) GLOBAL INCOME FUND ------------------ 1990 6.62% 1991 10.03% 1992 6.51% 1993 10.90% 1994 -6.52% 1995 20.10% 1996 13.33% 1997 5.00% 1998 8.21% 1999 -0.31% - ---------- (1) These figures are as of December 31 of each year. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as "Class A" shares. Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. (3) Prior to December 31, 1994, the Fund operated under a different investment objective. BEST AND WORST QUARTERLY PERFORMANCE DURING THIS PERIOD: 2nd quarter 1995: up 8.76% 1st quarter 1994: down 6.61% The Fund's year-to-date total return as of June 30, 2000 was down 0.54%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance - the Lehman Brothers Global Bond Index. AVERAGE ANNUAL TOTAL RETURNS LEHMAN BROTHERS GLOBAL CLASS A (4) BOND INDEX (5) ----------- -------------- One year, ended December 31, 1999 -0.31% -0.99% Five years, ended December 31, 1999 9.04% 7.88% Ten years, ended December 31, 1999 8.51% 8.51% - ---------- (4) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund were not offered as of December 31, 1999. See footnote (2) to the bar chart above. (5) The Lehman Brothers Global Bond Index is an unmanaged index that measures. 10 WHAT YOU PAY TO INVEST There are two types of fees and expenses when you invest in mutual funds: fees, including sales charges, you pay directly when you buy or sell shares, and operating expenses paid each year by the Fund. The table below shows the fees and expenses for Class Q shares of the Pilgrim Funds. FEES YOU PAY DIRECTLY CLASS Q ------- Maximum sales charge on your investment (as a % of offering price) % None Maximum deferred sales charge (as a % of purchase or sales price, whichever is less) None OPERATING EXPENSES PAID EACH YEAR BY THE FUNDS(L) (AS A % OF AVERAGE NET ASSETS)
DISTRIBUTION TOTAL AND SERVICE FUND MANAGEMENT (12b-1) OTHER OPERATING FEE WAIVER NET FUND FEE FEES EXPENSES(2) EXPENSES BY ADVISER(3) EXPENSES ---- --- ---- ----------- -------- ------------- -------- Growth and Income % 0.63 0.25 0.41 1.29 -- 1.29 International % 1.00 0.25 0.70 1.95 -- 1.95 GNMA Income % 0.54 0.25 0.38 1.17 -- 1.17 Global Income % 1.00 0.25 0.51 1.76 -- 1.76
- ---------- (1) These tables show the estimated operating expenses for Class Q shares for each Fund as a ratio of expenses to average daily net assets. These estimates are based on each Fund's actual operating expenses for its most recent complete fiscal year and fee waivers to which the adviser has agreed. (2) Because Class Q shares are new for the Funds, the expenses for each Fund are estimated based on Class A expenses of the Funds. (3) Pilgrim Investments has entered into expense limitation agreements with each Fund [CONFIRM] 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. 11 WHAT YOU PAY TO INVEST EXAMPLES The examples that follow are intended to help you compare the cost of investing in the Pilgrim Funds with the cost of investing in other mutual funds. Each example assumes that you invested $10,000, reinvested all your dividends, the Fund earned an average annual return of 5%, and annual operating expenses remained at the current level. Keep in mind that this is only an estimate - actual expenses and performance may vary. CLASS Q FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---- ------ ------- ------- -------- Growth and Income $ 131 409 708 1,556 International $ 198 612 1,052 2,275 GNMA Income $ 119 372 1,044 1,420 Global Income $ 179 554 954 2,073 12 SHAREHOLDER GUIDE - HOW TO PURCHASE SHARES PURCHASE OF SHARES Class Q Shares are offered at net asset value without a sales charge to qualified retirement plans, financial and other institutions and "wrap accounts." The minimum initial investment is $250,000, and the minimum subsequent investment is $10,000. The Distributor may waive these minimums from time to time. Certain Funds also offer Class A, B, C, M, T and I shares, which have different sales charges and other expenses that may affect their performance. You can obtain more information about these other share classes by calling (800) 992-0180. 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 or to close your account and redeem your shares should you fail to maintain your account value at a minimum of $250,000. If you are a participant in a qualified retirement plan, you should make purchases through your plan administrator or sponsor, who is responsible for transmitting orders. All other purchasers may purchase shares by the methods outlined in the table on the right. DISTRIBUTION AND SHAREHOLDER SERVICE Fees To pay for the cost of servicing your shareholder account, each Fund has adopted a Rule 12b-1 plan for Class Q shares which requires fees to be paid out of the assets of the class. Each Fund pays a service fee at an annual rate of 0.25% of the average daily net assets of the Class Q shares of the Fund. RETIREMENT PLANS You may invest in each Fund through various retirement plans, including IRAs, Simplified Employee Plan (SEP) IRAs, Roth IRAs 403(b) plans, 457 plans, and all qualified retirement plans. For further information about any of the plans, agreements, applications and annual fees, contact the Distributor, your financial consultant or plan sponsor. To determine which retirement plan is appropriate for you, consult your tax adviser. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. INITIAL ADDITIONAL METHOD INVESTMENT INVESTMENT ------ ---------- ---------- By Contacting An investment professional Visit or consult an Your Investment with an authorized firm can investment professional. Professional help you establish and maintain your account. By Mail Visit or consult an investment Fill out the Account Additions professional. Make your check form included on the bottom of payable to the Pilgrim Funds your account statement along and mail it, along with a with your check payable to the completed Application. Please Pilgrim Funds and mail them to indicate your investment the address on the account professional on the New statement. Remember to write Account Application your account number on the check. 13 By Wire Call the Pilgrim Operations Wire the funds in the same Department at (800) 336-3436 manner described under to obtain an account number "Initial Investment." and indicate your investment professional on the account. Instruct your bank to wire funds to the Fund in the care of: Investors Fiduciary Fund 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 219368 Kansas City, MO 64121-6368 14 SHAREHOLDER GUIDE - HOW TO REDEEM SHARES If you are a participant in a qualified retirement plan, you should make redemptions through your plan administrator or sponsor, who is responsible for transmitting orders. All other shareholders may redeem shares by the methods outlined in the table on the right. Under unusual circumstances, a Fund may suspend the right of redemption as allowed by federal securities laws. SYSTEMATIC WITHDRAWAL PLAN You may elect to make periodic withdrawals from your account on a regular basis. * Your account must have a current value of at least $250,000. * Minimum withdrawal amount is $1,000. * You may choose from monthly, quarterly, semi-annual or annual payments. For additional information, contact the Shareholder Servicing Agent, see the Account Application or the SAI. PAYMENTS Normally, payment for shares redeemed will be made within three days after receipt by the Transfer Agent of a written request in good order. When you place a request to redeem shares for which the purchase money has not yet been collected, the request will be executed at the next determined net asset value, but the Fund will not release the proceeds until your purchase payment clears. This may take up to 15 days or more. To reduce such delay, purchases should be made by bank wire or federal funds. Each Fund normally intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, a Fund could elect to make payment in securities for redemptions in excess of $250,000 or 1% of its net assets during any 90-day period for any one shareholder. An investor may incur brokerage costs in converting such securities to cash. METHOD PROCEDURES ------ ---------- By Contacting Your You may redeem by contacting your investment Investment Professional professional. Investment professionals may charge for their services in connection with your redemption request, but neither the Fund nor the Distributor imposes any such charge. By Mail Send a written request specifying the Fund's 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 219368 Kansas City, MO 64121-6368 If certificated shares have been issued, the certificate must accompany the written request. Corporate investors and other associations must have an appropriate certification on file authorizing redemptions. A suggested form of such certification is provided on the Account Application. A signature guarantee may be required. By Telephone - You may redeem shares by telephone on all accounts other than retirement accounts, unless you check 15 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. Expedited Redemption 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. 16 SHAREHOLDER GUIDE - 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. Eastern Time). The NAV per share of each class of each Fund is calculated by taking the value of the Fund's assets attributable to that class, subtracting the Fund's liabilities attributable to that class, and dividing by the number of shares of that class that are outstanding. Because foreign securities may trade on days when the Funds do not price shares, the net asset value of a Fund that invests in foreign securities may change on days when shareholders will not be able to purchase or redeem the Fund's shares. In general, assets are valued based on actual or estimated market value, with special provisions for assets not having readily available market quotations, and short-term debt securities, and for situations where market quotations are deemed unreliable. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of Directors or Trustees. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. PRICE OF SHARES When you buy shares, you pay the NAV plus any applicable sales charge. When you sell shares, you receive the NAV minus any applicable deferred sales charge. Exchange orders are effected at NAV. EXECUTION OF REQUESTS Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth above under "How to Purchase Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of Fund shares you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Funds will not be issued unless you request them in writing. TELEPHONE ORDERS The Funds and their transfer agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Funds and their transfer agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Funds and their transfer agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. 17 SHAREHOLDER GUIDE - TRANSACTION POLICIES 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. The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a gain or loss for federal and state income tax purposes. There is no specific limit on exchange frequency; however, the Funds are intended for long term investment and not as a short-term trading vehicle. The adviser may prohibit excessive exchanges (more than four per year). The adviser also may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges. You will automatically have the ability to request an exchange by calling the Shareholder Service Agent unless you mark the box on the Account Application that indicates that you do not wish to have the telephone exchange privilege. A Fund may change or cancel its exchange policies at any time, upon 60 days' written notice to shareholders. SYSTEMATIC EXCHANGE PRIVILEGE With an initial account balance of at least $5,000 and subject to the information and limitations outlined above, you may elect to have a specified dollar amount of shares systematically exchanged, monthly, quarterly, semi-annually or annually (on or about the 10th of the applicable month), from your account to an identically registered account in the same class of any other open-end Pilgrim Fund. This exchange privilege may be modified at any time or terminated upon 60 days' written notice to shareholders. SMALL ACCOUNTS Due to the relatively high cost of handling small investments, the Funds reserve the right upon 30 days' written notice to redeem, at NAV, the shares of any shareholder whose account (except for IRAs) has a value of less than $1,000, other than as a result of a decline in the NAV per share. 18 MANAGEMENT OF THE FUNDS ADVISER Pilgrim Investments, Inc. ("Pilgrim") serves as the investment adviser to each of the Funds. Pilgrim has overall responsibility for the management of the Funds. Pilgrim 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 is registered as an investment adviser. Pilgrim acquired certain assets of previous advisers to certain of the Funds in separate transactions that closed on April 7, 1995, May 21, 1999 and July 26, 2000. Pilgrim is an indirect wholly-owned subsidiary of ReliaStar Financial Corp. ("ReliaStar") (NYSE: RLR). Through its subsidiaries, ReliaStar offers individuals and institutions life insurance and annuities, employee benefits, products and services, life and health reinsurance, retirement plans, mutual funds, bank products, and personal finance education. Prior to July 26, 2000, Lexington Management Corporation ("Lexington") served as investment adviser to certain of the Funds. On July 26, 2000, ReliaStar acquired Lexington Global Asset Management, Inc., the parent company of Lexington, and Pilgrim Investments was approved as Adviser to the Funds formerly advised by Lexington. As of June 30, 2000, Pilgrim managed over $16.6 billion in assets. Pilgrim's principal address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. Pilgrim receives a monthly fee for its services based on the average daily net assets of each of the Funds. 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 ---- ------------ Growth and Income 0.62 International 1.00 GNMA Income 0.54 Global Income 1.00 19 PILGRIM DIRECTLY MANAGES THE PORTFOLIOS OF THE FOLLOWING FUNDS: PILGRIM GROWTH AND INCOME FUND ALAN H. WAPNICK. Mr. Wapnick is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund. Mr. Wapnick is the lead manager for Pilgrim Growth and Income Fund. Mr. Wapnick is Senior Vice President, Director of Domestic Investment Equity Strategy of Pilgrim. Prior to joining Pilgrim in 1986, Mr. Wapnick was an equity analyst with Merrill Lynch, J.&W. Seligman, Dean Witter and most recently Union Carbide Corporation. Mr. Wapnick graduated from Dartmouth College and received an M.B.A from Columbia University. PILGRIM INTERNATIONAL FUND The following individuals share responsibility for the day-to-day management of the International Fund: RICHARD T. SALER. Mr. Saler is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund. He is the lead manager of an investment management team for Pilgrim International Fund. Mr. Saler is Senior Vice President, Director of International Investment Strategy of Pilgrim. Mr. Saler is responsible for international investment analysis and portfolio management at Pilgrim. He has fourteen years of investment experience. Mr. Saler has focused on international markets since first joining Pilgrim in 1986. In 1991 he was a strategist with Nomura Securities and rejoined Pilgrim in 1992. Mr. Saler graduated from New York University with a B.S. Degree in Marketing and from New York University's Graduate School of Business Administation with an M.B.A. in Finance. PHILIP A. SCHWARTZ, CFA. Mr. Schwartz is also a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund and Pilgrim International Fund. Mr. Schwartz is a Vice President at Pilgrim, a Chartered Financial Analyst and a member of the New York Society of Security Analysts. He is responsible for international investment analysis and portfolio management at Pilgrim, and has thirteen years of investment experience. Prior to joining Pilgrim in 1993, Mr. Schwartz was Vice President of European Research Sales with Cheuvreux De Virieu in Paris and New York, serving the institutional market. Prior to Cheuvreux, he was affiliated with Olde and Co. and Kidder, Peabody as a stockbroker. Mr. Schwartz earned his B.A. and M.A. Degrees from Boston University. ALAN H. WAPNICK. Please see biography under Pilgrim Growth and Income Fund. PILGRIM GNMA INCOME FUND DENIS P. JAMISON, serves as Senior Vice President and Senior Portfolio Manager of Pilgrim. He is a Chartered Financial Analyst and a member of the New York Society of Security Analysts. Prior to joining Pilgrim in 1981, Mr. Jamison spent nine years at Arnold Bernhard & Company, an investment counseling and financial services organization. At Bernhard, he was a Vice President supervising the security analyst staff and managing investment portfolios. He is a specialist in government, corporate and municipal bonds. Mr. Jamieson graduated from the City College of New York with a B.A. in Economics. ROSEANN G. MCCARTHY. Ms. McCarthy is an Assistant Vice President of Pilgrim. Prior to joining the Fixed Income Department in 1997, she was Mutual Fund Marketing and Research Coordinator. Prior to 1995, Ms. McCarthy was Fund Statistician and a Shareholder Service Reporesentative for the Lexington Funds. Ms. McCarthy is a graduate of Hofstra University with a B.B.A. in Marketing and has an M.B.A. in Finance from Seton Hall University. 20 DIVIDENDS, DISTRIBUTIONS DIVIDENDS/TAXES 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(1) SEMI-ANNUALLY(1) QUARTERLY(2) MONTHLY(3) - ----------- ---------------- ------------ ---------- Growth and Income International GNMA Income Global Income - ---------- (1) Distributions normally expected to consist primarily of capital gains. (2) Distributions normally expected to consist on an annual basis of a variable combination of capital gains and ordinary income. (3) Distributions normally expected to consist primarily of ordinary income. Each Fund distributes capital gains, if any, annually. DIVIDEND REINVESTMENT Unless you instruct a Fund to pay you dividends in cash, dividends and distributions paid by a Fund will be reinvested in additional shares of the Fund. You may, upon written request or by completing the appropriate section of the Account Application, elect to have all dividends and other distributions paid on Class Q shares of a Fund invested in another Pilgrim Fund which offers Class Q shares. TAXES The following information is meant as a general summary for U.S. shareholders. Please see the Statement of Additional Information for additional information. You should rely your own tax adviser for advice about the particular federal, state and local tax consequences to you of investing in a Fund. Each Fund will distribute most of its net investment income and net capital gains to its shareholders each year. Although the Funds will not be taxed on amounts they distribute, most shareholders will be taxed on amounts they receive. A particular distribution generally will be taxable as either ordinary income or long-term capital gains. It does not matter how long you have held your Fund shares or whether you elect to receive your distributions in cash or reinvest them in additional Fund shares. For example, if a Fund designates a particular distribution as a long-term capital gains distribution, it will be taxable to you at your long-term capital gains rate. Dividends declared by a Fund in October, November or December and paid during the following January may be treated as having been received by shareholders in the year the distributions were declared. You will receive an annual statement summarizing your dividend and capital gains distributions. 21 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 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. MORE INFORMATION ABOUT RISKS All mutual funds involve risk - some more than others - and there is always the chance that you could lose money or not earn as much as you hope. 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 SAL 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 can decide whether to use them or not. The 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. PRINCIPAL RISKS INVESTMENTS IN FOREIGN SECURITIES. There are certain risks in owning foreign securities, including those resulting from: fluctuations in currency exchange rates; devaluation of currencies; political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; accounting, auditing and financial reporting standards or other regulatory practices and requirements that are not uniform when compared to those applicable to domestic companies; settlement and clearance procedures in some countries that may not be reliable and can result in delays in settlement; higher transaction and custody expenses than for domestic securities; and limitations on foreign ownership of equity securities. Also, securities of many foreign companies may be less liquid and the prices more volatile than those of domestic companies. With certain foreign countries, there is the possibility of expropriation, nationalization, confiscatory taxation and limitations on the use or removal of funds or other assets of the Funds, including the withholding of dividends. Each Fund that invests in foreign securities may enter into foreign currency transactions either on a spot or cash basis at prevailing rates or through forward foreign currency exchange contracts to have the necessary currencies to settle transactions, or to help protect Fund assets against adverse changes in foreign currency exchange rates, or to provide exposure to a foreign currency commensurate with the exposure to securities from that country. 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. 22 MORE INFORMATION ABOUT RISKS EMERGING MARKETS 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 or unseasonal financial systems; environmental problems; less well developed legal systems; and less reliable custodial services and settlement practices. INABILITY TO SELL SECURITIES - SOME securities usually trade in lower volume and may be less liquid than securities of large established companies. These less liquid securities could include securities of small and mid-size U.S. companies, high-yield securities, convertible securities, unrated debt and convertible securities, securities that originate from small offerings, and foreign securities, particularly those from companies in emerging markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 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. One measure of risk for fixed income securities is duration. Duration is one of the tools used by a portfolio manager in selection of fixed income securities. Historically, the maturity of a bond was used as a proxy for the sensitivity of a bond's price to changes in interest rates, otherwise known as a bond's "interest rate risk" or "volatility." According to this measure, the longer the maturity of a bond, the more its price will change for a given change in market interest rates. However, this method ignores the amount and timing of all cash flows from the bond prior to final maturity. Duration is a measure of average life of a bond on a present value basis, which was developed to incorporate a bond's yield, coupons, final maturity and call features into one measure. For point of reference, the duration of a noncallable 7% coupon bond with a remaining maturity of 5 years is approximately 4.5 years, and the duration of a noncallable 7% coupon bond with a remaining maturity of 10 years is approximately 8 years. Material changes in interest rates may impact the duration calculation. U.S. GOVERNMENT SECURITIES. Some U.S. Government agency securities may be subject to varying degrees of credit risk particularly those not backed by the full faith and credit of the United States Government. All U.S. Government securities may be subject to price declines in the securities due to changing interest rates. 23 MORE INFORMATION ABOUT RISKS RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted and illiquid securities. If a security is illiquid, the Fund might be unable to sell the security at a time when the adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Restricted securities, i.e., securities subject to legal or contractual restrictions on resale, may be illiquid. However, some restricted securities may be treated as liquid, although they may be less liquid than registered securities traded on established secondary markets. MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a mortgage-backed security may have maturities of up to 30 years, the actual average life of a mortgage-backed security typically will be substantially less because the mortgages will be subject to normal principal amortization, and may be prepaid prior to maturity. Like other fixed income securities, when interest rates rise, the value of a mortgage-backed security generally will decline; however, when interest rates are declining, the value of mortgage-backed securities with prepayment features may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market's perception of the creditworthiness of the issuers of mortgage-related securities owned by a Fund. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. INTERESTS IN LOANS. Certain Funds may invest in participation interests or assignments in secured variable or floating rate loans, which include participation interests in lease financings. Loans are subject to the credit risk of nonpayment of principal or interest. Substantial increases in interest rates may cause an increase in loan defaults. Although the loans will generally be fully collateralized at the time of acquisition, the collateral may decline in value, be relatively illiquid, or lose all or substantially all of its value subsequent to the Fund's investment. Many loans are relatively illiquid, and may be difficult to value. DERIVATIVES. Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Some derivatives are sophisticated instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. These may include swap agreements, options, forwards and futures. Derivative securities are subject to market risk, which could be significant for those that have a leveraging effect. Many of the Funds do not invest in these types of derivatives, and some do, 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. TEMPORARY DEFENSIVE STRATEGIES. When the adviser or sub-adviser to a Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent that a Fund invests defensively, it likely will not achieve capital appreciation. PORTFOLIO TURNOVER. Each Fund is generally expected to engage in frequent and active trading of portfolio securities to achieve its investment objective. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commissions and other transaction costs, and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of the Fund. 24 OTHER RISKS REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, which involve the purchase by a Fund of a security that the seller has agreed to buy back. If the seller defaults and the collateral value declines, the Fund might incur a loss. If the seller declares bankruptcy, the Fund may not be able to sell the collateral at the desired time. LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund may lend portfolio securities in an amount up to 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. Each Fund may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. If the price of the security rises, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. 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 AND RATING LIMITATIONS. Unless otherwise stated, the 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 independent auditors for each Fund, along with the Fund's financial statements, are included in the Fund's annual report, which is available upon request. 25 WHERE TO GO FOR MORE INFORMATION You'll find more information about the Fund in our: ANNUAL/SEMIANNUAL REPORTS Include a discussion of recent market conditions and investment strategies that significantly affected performance, the financial statements and the auditor's reports (in annual report only). STATEMENT OF ADDITIONAL INFORMATION The SAI contains more detailed information about the Fund. The SAI is legally part of this prospectus (it is incorporated by reference). A copy has been filed with the Securities and Exchange Commission (SEC). Please write or call for a free copy of the current Annual/semiannual reports, the SAI or other Fund information, or to make shareholder inquiries: The Pilgrim Funds, 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004 1-800-992-0180 Or visit our website at www.pilgrimfunds.com. This information may also be reviewed or obtained from the SEC. In order to review the information in person, you will need to visit the SEC's Public Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may obtain the information for a fee by contacting the SEC at: Securities and Exchange Commission Public Reference Section Washington, D.C. 20549-0102 or at the e-mail address: publicinfo@sec.gov or obtain the information at no cost by visiting the SEC's Internet website at http://www.sec.gov. When contacting the SEC, you will want to refer to the Fund's SEC file number. The file numbers is as follows: Pilgrim Growth and Income Fund 811-0865 Pilgrim International Fund 811-8172 Pilgrim GNMA Income Fund 811-2401 Pilgrim Global Income Fund 811-4675 STATEMENT OF ADDITIONAL INFORMATION 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 (800) 992-0180 July 31, 2000 PILGRIM GLOBAL CORPORATE LEADERS FUND, INC. PILGRIM GNMA INCOME FUND, INC. PILGRIM GOLD FUND, INC. PILGRIM GROWTH AND INCOME FUND, INC. PILGRIM INTERNATIONAL FUND, INC. PILGRIM SILVER FUND, INC. PILGRIM SMALLCAP ASIA GROWTH FUND, INC. PILGRIM TROIKA DIALOG RUSSIA FUND, INC. PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC. PILGRIM GLOBAL INCOME FUND LEXINGTON MONEY MARKET TRUST (each a "Fund" and collectively the "Funds") This Statement of Additional Information ("SAI") relates to each investment company listed above. Prospectuses for the Funds, dated July 31, 2000, which provide 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 Prospectuses, dated July 31, 2000, which have been filed with the Securities and Exchange Commission ("SEC"). In addition, the financial statements from the Funds' December 31, 1999 Annual Reports are incorporated herein by reference. Copies of the Funds' Prospectuses and Annual or Semi-Annual Reports may be obtained without charge by contacting the Pilgrim Funds at the address and phone number written above. TABLE OF CONTENTS HISTORY OF THE FUNDS...................................................... 1 MANAGEMENT OF THE FUNDS................................................... 3 EXPENSE LIMITATION AGREEMENTS............................................. 15 RULE 12b-1 PLANS.......................................................... 16 SUPPLEMENTAL DESCRIPTION OF INVESTMENTS................................... 20 INVESTMENT RESTRICTIONS................................................... 41 PORTFOLIO TRANSACTIONS.................................................... 61 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 67 DETERMINATION OF SHARE PRICE.............................................. 73 SHAREHOLDER INFORMATION................................................... 76 SHAREHOLDER SERVICES AND PRIVILEGES....................................... 76 DISTRIBUTIONS............................................................. 79 TAX CONSIDERATIONS........................................................ 79 CALCULATION OF PERFORMANCE DATA........................................... 86 GENERAL INFORMATION....................................................... 89 FINANCIAL STATEMENTS...................................................... 90 -i- HISTORY OF THE FUNDS PILGRIM GLOBAL CORPORATE LEADERS FUND, INC. Pilgrim Global Corporate Leaders Fund, Inc. ("Global Corporate Leaders Fund") is a corporation organized under the laws of the State of Maryland on March 11, 1987 under the name of Lexington Global Fund, Inc. The Fund is a diversified, open-end management investment company. The Fund's name was changed on May 5, 1998 from Lexington Global Fund, Inc. to Lexington Global Corporate Leaders Fund, Inc., and on July 26, 2000, to Pilgrim Global Corporate Leaders Fund, Inc. PILGRIM GNMA INCOME FUND, INC. Pilgrim GNMA Income Fund, Inc. ("GNMA Income Fund") is a corporation organized under the laws of the State of Maryland on August 15, 1973 under the name of Lexington GNMA Income Fund, Inc. The Fund is a diversified, open-end management investment company. The name of the Fund was changed on July 26, 2000 from Lexington GNMA Income Fund, Inc. to Pilgrim GNMA Income Fund, Inc. PILGRIM GOLD FUND, INC. Pilgrim Gold Fund, Inc. ("Gold Fund") is a corporation formed under the laws of the State of Maryland on May 11, 1988 under the name of Lexington Goldfund, Inc. The Fund was originally organized as a Delaware corporation on December 3, 1975. The Fund is a non-diversified, open-end management investment company. The name of the Fund was changed on July 26, 2000 from Lexington Goldfund, Inc. to Pilgrim Gold Fund, Inc. PILGRIM GROWTH AND INCOME FUND, INC. Pilgrim Growth and Income Fund, Inc. ("Growth and Income Fund") is a corporation organized under the laws of the State of Maryland on April 30, 1991 under the name of Lexington Growth and Income Fund, Inc. The Fund was originally organized as a New Jersey Corporation on February 11, 1959. The Fund is an open-end, diversified management investment company. The name of the Fund was changed on July 26, 2000 from Lexington Growth and Income Fund, Inc. to Pilgrim Growth and Income Fund, Inc. PILGRIM INTERNATIONAL FUND, INC. Pilgrim International Fund, Inc. ("International Fund") is a corporation organized under the laws of the State of Maryland on November 23, 1993 under the name of Lexington International Fund, Inc. The Fund is an open-end, diversified management investment company. The name of the Fund was changed on July 26, 2000 from Lexington International Fund, Inc. to Pilgrim International Fund, Inc. PILGRIM SILVER FUND, INC. Pilgrim Silver Fund, Inc. ("Silver Fund") is a corporation formed under the laws of the State of Maryland on January 3, 1992 under the name of Lexington Silver Fund, Inc. The Fund is a non-diversified, open-end management investment company. The name of the Fund was changed on July 26, 2000 from Lexington Silver Fund, Inc. to Pilgrim Silver Fund, Inc. -1- PILGRIM SMALLCAP ASIA GROWTH FUND, INC. Pilgrim SmallCap Asia Growth Fund, Inc. ("SmallCap Asia Growth Fund") is a corporation organized under the laws of the State of Maryland on April 18, 1995 under the name of Crosby Small Cap Asia Growth Fund, Inc. The Fund is an open-end, diversified management investment company. The name of the Fund was changed on May 3, 1999 from Lexington Crosby Small Cap Asia Growth Fund, Inc. to Lexington Small Cap Asia Growth Fund, Inc. and on July 26, 2000 to Pilgrim SmallCap Asia Growth Fund, Inc. PILGRIM TROIKA DIALOG RUSSIA FUND, INC. Pilgrim Troika Dialog Russia Fund, Inc. ("Russia Fund") is a corporation organized under the laws of the State of Maryland on November 20, 1995. The Fund is a non-diversified, open-end management investment company. The name of the Fund was changed on April 2, 1996 from Lexington Russia Fund, Inc. to Lexington Troika Dialog Russia Fund, Inc., and on July 26, 2000, to Pilgrim Troika Dialog Russia Fund, Inc. PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC. Pilgrim Worldwide Emerging Markets Fund, Inc. ("Worldwide Emerging Markets Fund") is a corporation organized under the laws of the State of Maryland on January 22, 1969 under the name of Lexington Growth Fund, Inc. The Fund is a diversified, open-end management investment company. The name of the Fund was changed on June 14, 1991 from Lexington Growth Fund, Inc. to Lexington Worldwide Emerging Markets Fund, Inc., and on July 26, 2000, to Pilgrim Worldwide Emerging Markets Fund, Inc. PILGRIM GLOBAL INCOME FUND Pilgrim Global Income Fund (the "Global Income Fund") is a trust formed under the laws of the Commonwealth of Massachusetts on February 24, 1983. The Fund is a non-diversified, open-end management investment company. The name of the Fund was changed from Lexington Tax Exempt Bond Trust to Lexington Ramirez Global Income Fund, and to Lexington Global Income Fund, and on July 26, 2000 to Pilgrim Global Income Fund. LEXINGTON MONEY MARKET TRUST Lexington Money Market Trust (the "Money Market Trust") is an organization commonly referred to as a business trust formed under the laws of the Commonwealth of Massachusetts on June 30, 1977 under the name of Banner Redi-Resources Trust. The name of the Fund was changed on March 2, 1979 from Banner Redi-Resources Trust to "Lexington Money Market Trust". -2- MANAGEMENT OF THE FUNDS BOARD OF DIRECTORS/TRUSTEES Each Fund is managed by its Directors/Trustees ("Board of Directors" and "Board of Trustees" are used interchangeably in this SAI). The Directors/Trustees and Officers of the Funds are listed below. An asterisk (*) has been placed next to the name of each Director/Trustee who is an "interested person," as that term is defined in the Investment Company Act of 1940 Act ("1940 Act"), by virtue of that person's affiliation with the Funds, or the Funds' adviser ("Pilgrim Investments" or the "Investment Manager"). Unless otherwise noted, the mailing address of the Directors/Trustees is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The Board of Directors/Trustees governs each Fund and is responsible for protecting the interests of shareholders. The Directors/Trustees are experienced executives who oversee the Funds' activities, review contractual arrangements with companies that provide services to the Funds, and review each Fund's performance. Set forth below is information regarding the Directors/Trustees of the Funds.
Position(s) With Name, Age and the Fund** Principal Occupation During Past 5 Years - ------------- ---------- ---------------------------------------- Al Burton Director/Trustee President of Al Burton Productions for more than (Age 72) the last five years. Mr. Burton is also a Director, Trustee or Advisory board member of each of the Funds managed by Pilgrim. Paul S. Doherty Director/Trustee President, of Doherty, Wallace, Pillsbury and (Age 66) Murphy, P.C., Attorneys. Formerly a Director of Tambrands, Inc. (1993-1998). Mr. Doherty is also a Director or Trustee of each of the Funds managed by Pilgrim. Robert B. Goode Director/Trustee Retired. Mr. Goode was formerly Chairman, American (Age 69) Direct Business Insurance Agency, Inc. (1996 - 2000). Mr. Goode is also a Director or Trustee of each of the Funds managed by Pilgrim. Alan L. Gosule Director/Trustee Partner and Chairman of the Tax Department of (Age 59) Clifford Chance Rogers & Wells (since 1991). Mr. Gosule is a Director of F.L. Putnam Investment Management Co., Inc., Simpson Housing Limited Partnership, Home Properties of New York, Inc., CORE Cap, Inc. and Colonnade Partners. Mr. Gosule is also a Director or Trustee of each of the Funds managed by Pilgrim. Walter H. May Director/Trustee Retired. Mr. May was formerly Managing Director (Age 63) and Director of Marketing for Piper Jaffray, Inc. Mr. May is also a Director or Trustee of each of the Funds managed by Pilgrim. Jock Patton Director/Trustee Private Investor. Director of Hypercom Corporation (Age 54) (since January 1999), and JDA Software Group, Inc. (since January 1999). Mr. Patton is also a Director of Buick of Scottsdale, Inc., National Airlines, Inc., BG Associates, Inc., BK Entertainment, Inc., Arizona Rotorcraft, Inc. and Director and Chief Executive Officer of Rainbow Multimedia Group, Inc. Mr. Patton was formerly Director of Stuart Entertainment, Inc., Director of Artisoft, Inc. (August 1994-July 1998); and a President and Co-owner of StockVal, Inc. (April 1993 - June 1997). Mr. Patton is also a Director, Trustee, or a member of the Advisory board of each of the Funds managed by Pilgrim.
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Position(s) With Name, Age and the Fund** Principal Occupation During Past 5 Years - ------------- ---------- ---------------------------------------- David W.C. Putnam Director/Trustee President, Clerk and Director of F.L. Putnam (Age 60) Securities Company, Inc. and its affiliates (since 1978). Mr. Putnam is Director of Anchor Investment Management Corporation and President and Director/Trustee of Anchor Capital Accumulation Trust, Anchor International Bond Trust, Anchor Gold and Currency Trust, Anchor Resources and Commodities Trust and Anchor Strategic Assets Trust. Mr. Putnam was formerly Director of Trust Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is also a Director or Trustee of each of the Funds managed by Pilgrim. John R. Smith Director/Trustee President of New England Fiduciary Company (since (Age 76) 1991). Mr. Smith is Chairman of Massachusetts Educational Financing Authority (since 1987), Vice Chairman of Massachusetts Health and Education Authority (since 1979) and Vice-Chairman of MHI, Inc. (Massachusetts Non-Profit Energy Purchasers Consortium) (since 1996). Mr. Smith is also a Director or Trustee of each of the Funds managed by Pilgrim. *Robert W. Stallings Director/Trustee/ Chairman, Chief Executive Officer and President of (Age 51) Chairman Pilgrim Group, Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim Investments, Inc. (since December 1994); Chairman, Pilgrim Securities, Inc. ("Pilgrim Securities") (since December 1994); President and Chief Executive Officer of Pilgrim Funding, Inc. (since November 1999); and President and Chief Executive Officer of Pilgrim Capital Corporation and its predecessors (since August 1991). Mr. Stallings is also a Director, Trustee, or a member of the Advisory Board of each of the Pilgrim Funds. *John G. Turner Director/Trustee Chairman and Chief Executive Officer of ReliaStar (Age 60) Financial Corp. and ReliaStar Life Insurance Co. (since 1993); Chairman of ReliaStar Life Insurance Company of New York (since 1995); Chairman of Northern Life Insurance Company (since 1992). Mr. Turner was formerly Director of Northstar Investment Management Corporation and affiliates (1993 to 1999) and President of ReliaStar Financial Corp. and ReliaStar Life Insurance Co. (1989-1991). Mr. Turner is also Chairman of each of the Funds managed by Pilgrim. David Wallace Director/Trustee Chairman of FECO Engineered Systems, Inc. Mr. (Age 76) Wallace is President and Trustee of the Robert R. Young Foundation; Governor of the New York Hospital, Trustee of Greenwit Hospital and Director of UMC Electronics and Zurn Industries, Inc. Mr. Wallace was formerly Chairman of Lone Star Industries and Putnam Trust Company, Chairman and Chief Executive Officer of Todd Shipyards, Bangor Punta Corporation, and National Securities & Research Corporation. Mr. Wallace is also a Director or Trustee of each of the Funds managed by Pilgrim.
-4- In addition, the following individuals serve as Advisory Board Members to certain of the Pilgrim Funds.
Position(s) With Name, Age the Fund** Principal Occupation During Past 5 Years ---------- -------- ---------------------------------------- Mary A. Baldwin, Ph.D. Advisory Board Member Realtor, Caldwell Bankers Success Realty (Age 60) (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 an Advisory Board Member of each of the Funds managed by Pilgrim Investments. S.M.S. Chada Advisory Board Member Secretary, Ministry of External Affairs, New (Age 61) Delhi, India; Head of Foreign Service Institute, New Delhi, India; Special Envoy of the Government of India; Director, Special Unit for Technical Cooperation among Developing countries, United Nations Development Program, New York. Mr. Chada is an Advisory Board Member of Global Corporate Leaders, International, SmallCap Asia Growth, Russia and Global Income Funds. Andrew M. McCosh Advisory Board Member Professor or the Organisation of Industry and (Age 58) Commerce, Department of Business Studies, The University of Edinburgh, Scotland. Mr. McCosh is an Advisory Board Member of Global Corporate Leaders, International, SmallCap Asia Growth, Russia and Global Income Funds.
COMPENSATION OF DIRECTORS/TRUSTEES The Funds pay each Director/Trustee who is not an interested person a pro rata share, as described below, of (i) an annual retainer of $20,000; (ii) $5,000 per quarterly Board meeting; (iii) $500 per committee meeting; (iv) $500 per special or telephonic meeting; and (v) out-of-pocket expenses. The pro rata share paid by the Funds is based on each Fund's average net assets as a percentage of the average net assets of all the funds managed by the Investment Manager for which the Directors/Trustees serve in common as Directors/Trustees. The Funds pay each Advisory Board Member a fee of $15,000 annually, plus reasonable travel expenses. Prior to July 26, 2000, the Funds had a different compensation structure in place. The following table sets forth information regarding compensation of Directors/Trustees by the Funds for the fiscal year ended December 31, 1999. Officers of the Funds and Directors/Trustees who are interested persons of the Funds do not receive any compensation from the Fund or any other funds managed by the Investment Manager. In the column headed "Total Compensation from Registrants and Fund Complex Paid to Director/Trustee," the number in parentheses indicates the total number of boards in the fund complex on which the Director/Trustee served during that fiscal year. -5- COMPENSATION TABLE
AGGREGATE AGGREGATE AGGREGATE COMPENSATION AGGREGATE AGGREGATE COMPENSATION COMPENSATION AGGREGATE FROM GLOBAL COMPENSATION COMPENSATION FROM GROWTH FROM COMPENSATION NAME OF PERSON, CORPORATE FROM GNMA FROM GOLD AND INCOME INTERNATIONAL FROM SILVER POSITION (1) LEADERS FUND INCOME FUND FUND FUND FUND FUND ------------ ------------ ----------- ---- ---- ---- ---- S.M.S. Chadha $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600 Robert M. DeMichele $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Beverly C. Duer $ 1,946 $1,946 $2,196 $1,946 $1,946 $1,946 Barbara R. Evans $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Richard M. Hisey 0 $ 0 $ 0 $ 0 $ 0 $ 0 Jerard F. Maher $ 1,488 $1,488 $1,738 $1,488 $1,488 $1,488 Andrew M. McCosh $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600 Donald B. Miller $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600 Francis Olmstead* $ 1,464 $1,463 $1,464 $1,464 $1,464 $1,464 John G. Preston $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600 Allen H. Stowe $ 0 $1,600 0 0 0 $ 0 Margaret W. Russell* $ 1,243 $1,243 $1,243 $1,243 $1,243 $1,243 Philip C. Smith* $ 1,326 $1,326 $1,326 $1,326 $1,326 $1,326 Francis A. Sunderland* $ 1,246 $1,247 $1,246 $1,246 $1,246 $1,246 AGGREGATE AGGREGATE COMPENSATION AGGREGATE COMPENSATION TOTAL FROM COMPENSATION FROM AGGREGATE AGGREGATE COMPENSATION SMALLCAP FROM TROIKA WORLDWIDE COMPENSATION COMPENSATION FROM FUND NAME OF PERSON, ASIA GROWTH DIALOG EMERGING FROM GLOBAL FROM MONEY COMPLEX POSITION (1) FUND RUSSIA FUND MARKETS FUND INCOME FUND MARKET TRUST TO DIRECTORS ------------ ---- ----------- ------------ ----------- ------------ ------------ S.M.S. Chadha $1,600 $1,600 $1,600 $1,600 $1,600 $24,006 (15 boards) Robert M. DeMichele $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 (15 boards) Beverly C. Duer $1,946 $1,946 $1,946 $1,946 $ 1,946 $29,656 (15 boards) Barbara R. Evans $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 (15 boards) Richard M. Hisey $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 (8 boards) Jerard F. Maher $1,488 $1,488 $1,488 $1,488 $1,488 $22,976 (15 boards) Andrew M. McCosh $1,600 $1,600 $1,600 $1,600 $ 1,600 $24,006 (15 boards) Donald B. Miller $1,600 $1,600 $1,600 $1,600 $1,600 $24,006 (15 boards) Francis Olmstead* $1,464 N/A $1,463 $1,464 $ 1,463 $16,800 (N/A) John G. Preston $1,600 $1,600 $1,600 $1,600 $1,600 $24,006 (15 boards) Allen H. Stowe 0 $1,600 $1,600 $ 0 $1,600 $12,712 (8 boards) Margaret W. Russell* $1,243 $1,243 $1,243 $1,243 $1,243 $18,000 (N/A) Philip C. Smith* $1,326 $1,326 $1,326 $1,326 $1,326 $19,200 (N/A) Francis A. Sunderland* $1,246 $1,246 $1,246 $1,246 $1,246 $16,800 (N/A)
- -------- * Retired prior to July 26, 2000. -6- The following table shows the annual benefits payable to certain Directors/Trustees who are eligible for benefits under the Funds' Retirement Plan for Eligible Directors/Trustees, effective September 12, 1995, and amended and restated on April 18, 2000 (the "Retirement Plan"). The Retirement Plan applies to individuals who were Directors/Trustees of the Funds prior to July 26, 2000. The Retirement Plan was amended by the Directors/Trustees on April 18, 2000 to, among other things, eliminate the age a Director/Trustee must attain in order to receive retirement benefits. As amended, a Director/Trustee would be eligible for retirement benefits upon completion of ten continuous or non-forfeited years of service, as defined in the Retirement Plan, and service has terminated due to death, disability or voluntary or involuntary termination other than for "cause," as defined in the Retirement Plan. Messrs. Duer, Maher, Miller and Stowe were not nominated to serve as Directors/Trusteess of the Funds after the completion of the Lexington Acquisition. Therefore, their service was terminated and their benefits will commence with the closing of the Lexington Acquisition and will continue for ten years, in accordance with the terms of the Retirement Plan. DATE BENEFITS NAME OF DIRECTOR/TRUSTEE ANNUAL BENEFIT EXPECTED TO END - ------------------------ -------------- --------------- Beverley C Duer $21,750 July 2010 Jerard F Maher* $18,000 July 2010 Donald B Miller $21,750 July 2010 Francis Olmsted $16,800 October 1, 2005 Margaret W Russell $18,000 April 1, 2008 Philip C Smith $19,200 October 1, 2006 Allen H Stowe* $18,000 July 2010 Francis a Sunderland $16,800 April 1, 2006 - ---------- * Messrs. Maher and Stowe are eligible to receive benefits under the Retirement Plan as a result of their prior service as a Trustee of another fund. In addition, Mr. Chadha and Mr. McCosh will be eligible for retirement benefits after six years of service, provided that if the Retirement Plan is terminated during that period for reasons other than for "cause," as defined in the Retirement Plan, they will be eligible to receive retirement benefits as if they had completed 10 years of service. OFFICERS Unless otherwise noted, the mailing address of the Officers is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The following individuals serve as Officers for the Funds: James R. Reis, Executive Vice President and Assistant Secretary. (Age 42) Director, Vice Chairman (since December 1994), Executive Vice President (since April 1995), and Director of Structured Finance (since April 1998), Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994) and Vice Chairman (since November 1995) of Pilgrim Securities; Executive Vice President, Assistant Secretary and Chief Credit Officer of Pilgrim Prime Rate Trust; Executive Vice President and Assistant Secretary of each of the other Pilgrim Funds. Chief Financial Officer (since December 1993), Vice Chairman and Assistant Secretary (since April 1993) and former President (May 1991 - December 1993), Pilgrim Capital (formerly Express America Holdings Corporation). Presently serves or has served as an officer or director of other affiliates of Pilgrim Capital. -7- Stanley D. Vyner, Executive Vice President. (Age 49) President and Chief Executive Officer (since August 1996), Pilgrim Investments; Executive Vice President of most of the other Pilgrim Funds (since July 1996). Formerly Chief Executive Officer (November 1993 - December 1995) HSBC Asset Management Americas, Inc., and Chief Executive Officer, and Actuary (May 1986 - October 1993) HSBC Life Assurance Co. James M. Hennessy, Executive Vice President and Secretary. (Age 50) Executive Vice President and Secretary (since April 1998), Pilgrim Capital (formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim Securities and Pilgrim Investments; Executive Vice President and Secretary of each of the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim Capital (April 1995 - April 1998); Senior Vice President, Express America Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills Securities Corp. (January 1990 - June 1992). Michael J. Roland, Senior Vice President and Principal Financial Officer. (Age 41) Senior Vice President and Chief Financial Officer, Pilgrim Group, Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice President and Principal Financial Officer of each of the other Pilgrim Funds. He served in same capacity from January, 1995 - April, 1997. Formerly, Chief Financial Officer of Endeaver Group (April, 1997 to June, 1998). Robert S. Naka, Senior Vice President and Assistant Secretary. (Age 36) Senior Vice President, Pilgrim Investments (since November 1999) and Pilgrim Group, Inc. (since August 1999). Senior Vice President and Assistant Secretary of each of the other Pilgrim Funds. Formerly Vice President, Pilgrim Investments (April 1997 - October 1999), Pilgrim Group, Inc. (February 1997 - August 1999). 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. (Age 32) Vice President, Pilgrim Investments (since August 1997), Accounting Manager (since November 1995). Vice President and Treasurer of most of the other Pilgrim Funds. Formerly Assistant Vice President and Accounting Supervisor for PaineWebber (June 1993 - April 1995). CODE OF ETHICS The Funds have adopted a Code of Ethics governing personal trading activities of all Directors/Trustees and Officers of the Funds and persons who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by the Funds or obtain information pertaining to such purchase or sale. The Code is intended to prohibit fraud against the Funds that may arise from personal trading. Personal trading is permitted by such persons subject to certain restrictions; however they are generally required to pre-clear all security transactions with the Funds' Compliance Officer or her designee and to report all transactions on a regular basis. Sub-Advisers have adopted their own Code of Ethics to govern the personal trading activities of their personnel. -8- PRINCIPAL SHAREHOLDERS As of ____, 2000, the Directors and Officers as a group owned less than 1% of any class of the Funds' outstanding shares. As of that date, to the knowledge of management, no person owned beneficially or of record more than 5% of the outstanding Class A shares of the Funds, except as follows below. As of ____, 2000, there were no outstanding B, C, or Q shares of the Funds.
CLASS AND TYPE OF PERCENTAGE PERCENTAGE FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF FUND ---- ---------------- --------- -------- -------
-9- INVESTMENT MANAGER The Investment Manager for the Funds is Pilgrim Investments, Inc. ("Pilgrim Investments" or the "Investment Manager"). Prior to July 26, 2000, Lexington Management Corporation ("LMC") served as investment adviser to the Funds. On July 26, 2000, Lexington Global Asset Managers, Inc, the indirect parent of LMC, was acquired by ReliaStar Financial Corp., the indirect parent of Pilgrim Investments, Inc. The Investment Manager, subject to the authority of the Directors/Trustees of the Funds, serves as investment manager to the Funds and has overall responsibility for the management of each Fund's portfolio pursuant to an Investment Management Agreement between the Investment Manager and each Fund, subject to the delegation of certain responsibilities to Crosby Asset Management (US), Inc. as the Sub-Adviser for SmallCap Asia Growth Fund and Troika Asset Management (Cayman Islands), Ltd. as Sub-Adviser for the Russia Fund. The Investment Management Agreements require the Investment Manager to oversee the provision of all investment advisory and portfolio management services for the Funds. Each Fund's Investment Management Agreement requires the Investment Manager to provide, subject to the supervision of the Board of Directors/Trustees, investment advice and investment services to the Fund and to furnish advice and recommendations with respect to investment of the Fund's assets and the purchase or sale of its portfolio securities. The Investment Manager also provides investment research and analysis. Each Investment Management Agreement provides that the Investment Manager is not subject to liability to the Fund for any act or omission in the course of, or connected with, rendering services under the Investment Management Agreement, except by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties under the Investment Management Agreement. After an initial two year term, each Investment Management Agreement continues 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 Agreements will terminate automatically in the event of its "assignment" (as defined in the 1940 Act). -10- Subject to the expense reimbursement provisions described in this Statement of Additional Information, other expenses incurred in the operation of the Funds are borne by the Funds, including, without limitation, investment advisory fees; brokerage commissions; interest; legal fees and expenses of attorneys; fees of independent auditors, transfer agents and dividend disbursing agents, accounting agents, and custodians; the expense of obtaining quotations for calculating each Fund's net asset value; taxes, if any, and the preparation of each Fund's tax returns; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; fees and expenses of registering and maintaining the registration of shares of the Funds under federal and state laws and regulations; 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/Trustees of the Funds who are not employees of the Investment Manager or any Sub-Adviser, or their affiliates; membership dues in trade associations; insurance premiums; and extraordinary expenses such as litigation expenses. Pilgrim Investments, Inc. is registered as an investment adviser with the SEC and serves as an investment adviser to registered investment companies (or series thereof), as well as privately managed accounts. As of May 31, 2000, the Investment Manager had assets under management of approximately $15.9 billion. Pilgrim Investments, Inc. is a wholly-owned subsidiary of ReliaStar Financial Corp. (NYSE:RLR). Through its subsidiaries, ReliaStar Financial Corp. offers individuals and institutions life insurance and annuities, employee benefits products and services, life and health reinsurance, retirement plans, mutual funds, bank products and personal finance education. On April 30, 2000, ReliaStar Financial Corp. ("ReliaStar") entered into an agreement (the "Transaction") to be acquired by ING Groep N.V. ("ING"). ING is a global financial institution active in the field of insurance, banking and asset management. Headquartered in Amsterdam, it conducts business in more than 60 countries, and has almost 90,000 employees. ING seeks to provide a full range of integrated financial services to private, corporate, and institutional clients through a variety of distribution channels. As of December 31, 1999, ING had total assets of approximately $471.8 billion and assets under management of approximately $330.3 billion. Completion of the Transaction is contingent upon, among other things, approval by the Directors/Trustees of the Pilgrim Funds and certain Fund shareholder and regulatory approvals. The closing of the Transaction is expected to occur during the third quarter of 2000. ING's principal executive offices are located at Strawinskylaan 2631, 1077 ZZ Amsterdam, P.O. Box 810, 1000 AV Amsterdam, the Netherlands. -11- INVESTMENT MANAGER FEES The Investment Manager bears the expense of providing its services and pays the fees of the Sub-Adviser (if any). For its services, each Fund pays the Investment Manager a monthly fee in arrears equal to a percentage of each Fund's average daily net assets during the month. The annual investment management fees for the Funds are as follows.
FUND NAME ADVISER FEE --------- ----------- Pilgrim Global Corporate Leaders Fund, Inc. 1.00% Pilgrim GNMA Income Fund, Inc. 0.60% on the first $150 million, 0.50% on the next $250 million, 0.45% on the next $400 million, 0.40% thereafter. Pilgrim Gold Fund, Inc. 1.00% on the first $50 million and 0.75% thereafter. Pilgrim Growth and Income Fund, Inc. 0.75% on the first $100 million, 0.60% on the next $50 million, 0.50% on the next $100 million and 0.40% thereafter. Pilgrim International Fund, Inc. 1.00% Pilgrim Silver Fund, Inc. 1.00% on the first $30 million and 0.75% thereafter. Pilgrim SmallCap Asia Growth Fund, Inc. 1.25% Pilgrim Troika Dialog Russia Fund, Inc. 1.25% Pilgrim Worldwide Emerging Markets Fund, Inc. 1.00% Pilgrim Global Income Fund 1.00% Lexington Money Market Trust 0.50% on the first $500 million and 0.45% thereafter.
The total amount of advisory fees paid by each Fund (except for the Silver Fund) for the fiscal years ended December 31, 1997, 1998, and 1999 were as follows: TOTAL ADVISORY FEES PAID DURING FISCAL YEAR ENDED DECEMBER 31
1999 1998 1997 ---------- ---------- ---------- Pilgrim Global Corporate Leaders Fund, Inc. $ 176,043 $ 249,333 $ 378,573 Pilgrim GNMA Income Fund, Inc. $1,844,256 $1,224,048 $ 859,774 Pilgrim Gold Fund, Inc. $ 583,491 $ 552,235 $ 769,527 Pilgrim Growth and Income Fund, Inc. $1,498,729 $1,466,333 $1,403,527 Pilgrim International Fund, Inc.* $ 224,416 $ 217,864 $ 210,897 Pilgrim SmallCap Asia Growth Fund, Inc.** $ 167,228 $ 185,265 $ 207,247 Pilgrim Troika Dialog Russia Fund, Inc. $ 444,970 $ 796,381 $1,307,946 Pilgrim Worldwide Emerging Markets Fund, Inc. $ 785,431 $ 991,861 $2,373,753 Pilgrim Global Income Fund*** $ 334,433 $ 317,877 $ 212,446 Lexington Money Market Trust $ 422,726**** $ 455,434 $ 455,446
- ---------- * Does not reflect LMC reimbursement to Lexington International Fund, Inc. of $109,634 in 1998. ** Does not reflect LMC reimbursement to Lexington Small Cap Asia Growth Fund, Inc. of $67,545, $53,928 and $36,717, in 1999, 1998 and 1997, respectively. *** Does not reflect LMC reimbursement to Lexington Global Income Fund of $125,346 in 1998 and $141,233 in 1997. **** Does not reflect LMC reimbursement to Lexington Money Market Fund of $9,546 in 1999. The total amount of advisory fees paid by the Silver Fund for fiscal years ended June 30, 1997 and June 30, 1998 were $462,896 and $630,181, respectively. For the six months ended December 31, 1998, the advisory fees paid by the Silver Fund were $150,258. In 1999, the Silver Fund paid $261,004 in advisory fees. -12- SUB-ADVISORY AGREEMENTS The Investment Management Agreements for the Funds provide that the Investment Manager, with the approval of the Fund's Board of Directors/Trustees, may select and employ investment advisers to serve as a Sub-Adviser for any Fund ("Sub-Adviser"), and shall monitor the Sub-Advisers' investment programs and results, and coordinate the investment activities of the Sub-Advisers to ensure compliance with regulatory restrictions. 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 Sub-Advisers, executive salaries and expenses of the Directors/Trustees and Officers of the Funds who are employees of the Investment Manager or its affiliates. The Sub-Advisers pay all of their expenses arising from the performance of their obligations under the sub-advisory agreements (the "Sub-Advisory Agreements"). A Sub-Advisory Agreement may be terminated without payment of any penalties by the Investment Manager, the Directors/Trustees, on behalf of the Fund, or the shareholders of the Fund upon 60 days' prior written notice. Otherwise, the Sub-Advisory Agreement will remain in effect for two years and will, thereafter, continue in effect from year to year, subject to the annual approval of the appropriate Board of Directors/Trustees, or the vote of a majority of the outstanding voting securities, and the vote, cast in person at a meeting duly called and held, of a majority of the Directors/Trustees, who are not parties to the Sub-Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any such Party. Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and Crosby Asset Management (US), Inc. ("Crosby"), Crosby acts as Sub-Adviser to the SmallCap Asia Growth Fund. In this capacity, Crosby, subject to the supervision and control of Pilgrim Investments and the Board of Directors of the Fund, manages the Fund's portfolio investments, consistently with its investment objective, and executes any of the Fund's investment policies that it deems appropriate to utilize from time to time. As compensation to Crosby for its services, the Investment Manager pays Crosby an annual fee equal to 0.625% of the Fund's average daily net assets. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by Pilgrim Investments. Crosby's address is 32/F Asia Pacific Finance Tower, Citibank Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong. Crosby has advised the Board of Directors of SmallCap Asia Growth Fund that it no longer intends to provide investment advisory services to investment companies and that it is anticipated that the portfolio manager for the Fund will become an employee of Insinger Asset Management N.V. ("Insinger"). The Board of Directors and shareholders of the Fund have approved a new Sub-Advisory Agreement between Pilgrim Investments and Insinger on behalf of the Fund, to become effective upon the receipt by Insinger of all necessary governmental authorizations to provide advisory services in the Asia region. Under the new Sub-Advisory Agreement with Insinger, Insinger will provide the same services as Crosby provides under the current Sub-Advisory Agreement. In addition, the fee to be paid to Insinger will be the same as the sub-advisory fee paid to Crosby. -13- Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and Troika Dialog Asset Management (Cayman Islands), Ltd. ("Troika Dialog"), Troika Dialog act as Sub-Adviser to the Russia Fund. In this capacity, Troika Dialog, subject to the supervision and control of Pilgrim Investments and the Board of Directors of the Fund, manages the Fund's portfolio investments, consistent with its investment objective, and executes any of the Fund's investment policies that it deems appropriate to use from time to time. As compensation to Troika Dialog for its services, Pilgrim Investments pays Troika Dialog an annual fee equal to 0.625% of the Fund's average daily net assets. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by Pilgrim Investments. Troika Dialog is a majority-owned subsidiary of the Bank of Moscow. It's address is Romanov Pereulok No. 4, 103875, Moscow, Russia. The total amounts of sub-advisory fees paid by SmallCap Asia Growth Fund for fiscal years ended December 31, 1997, 1998 and 1999, were $45,931, $41,168 and $83,626, respectively, and the total amounts of sub-advisory fees paid by Russia Fund for the fiscal years ended December 31, 1997, 1998 and 1999 were $653,973, $398,191, and $222,485, respectively. ADMINISTRATION Pilgrim Group, Inc. serves as Administrator for the Funds, pursuant to an Administrative Services Agreement. Subject to the supervision of the Board of Directors/Trustees, the Administrator provides the overall business management and administrative services necessary to conduct properly the Funds' business, except for those services performed by the Investment Manager under the Investment Management Agreements, the Custodian for the Funds under the Custodian Agreements, the Transfer Agent for the Funds under the Transfer Agency Agreements, and such other service providers as may be retained by the Funds from time to time. The Administrator acts as liaison among these service providers to the Funds. The Administrator is also responsible for ensuring that the Funds operate in compliance with applicable legal requirements and for monitoring the Investment Manager for compliance with requirements under applicable law and with the investment policies and restrictions of each Fund. The Administrator is an affiliate of the Investment Manager. For its services under the Administration Services Agreement, Pilgrim Group, Inc. receives an annual fee equal to 0.10% of each Fund's average daily net assets. Prior to July 26, 2000, LMC acted as administrator to the Funds and performed certain administrative and internal accounting services, including but not limited to, maintaining general ledger accounts, regulatory compliance, preparing financial information for semiannual and annual reports, preparing registration statements, calculating net asset values, providing shareholder communications, supervising the Custodian and Transfer Agent and providing facilities for such services. The Funds reimbursed LMC for its actual cost in providing such services, facilities and expenses. Prior to July 26, 2000 the adviser performed certain accounting, shareholder servicing and other administrative services and was reimbursed by the Funds for the costs of performing such services. -14- EXPENSE LIMITATION AGREEMENTS The Investment Manager has entered into an expense limitation agreement with the Funds, pursuant to which the Investment Manager has agreed to waive or limit its fees. In connection with this agreement and certain U.S. tax requirements, the Investment Manager will 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 the Funds' business, and expenses of any counsel or other persons or services retained by the Funds' directors who are not "interested persons" (as defined in the 1940 Act) of the Investment Manager do not exceed:
Maximum Operating Expense Limit (as a percentage of average net assets) -------------------------------------------- Name of Fund Class A Class B Class C Class Q ------------ ------- ------- ------- ------- Pilgrim Growth and Income Fund, Inc. 2.75% 3.50% 3.50% 2.75% Pilgrim Global Corporate Leaders Fund, Inc. 2.75% N/A N/A N/A Pilgrim International Fund, Inc. 2.75% 3.50% 3.50% 2.75% Pilgrim Worldwide Emerging Markets Fund, Inc. 2.75% N/A N/A N/A Pilgrim SmallCap Asia Growth Fund, Inc. 2.75% 3.50% N/A N/A Pilgrim Troika Dialog Russia Fund, Inc. 3.35% 4.10% N/A N/A Pilgrim GNMA Income Fund, Inc. 1.29% 2.04% 2.04% 1.29% Pilgrim Global Income Fund 2.75% 3.50% 3.50% 2.75% Lexington Money Market Trust 1.00% N/A N/A N/A Pilgrim Gold Fund, Inc. 2.75% N/A N/A N/A Pilgrim Silver Fund, Inc. 2.75% N/A N/A N/A
The Funds 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, each 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. The expense limitation agreement provides that these expense limitations shall continue until July 26, 2002. Thereafter, the agreement will automatically renew for one-year terms unless the Investment Manager provides written notice of the termination of the agreement to the Funds at least 30 days prior to the end of the then-current term. In addition, the agreement will terminate upon termination of the Investment Management Agreement, or it may be terminated by the Funds, without payment of any penalty, upon ninety (90) days' prior written notice to the Investment Manager at its principal place of business. Prior to July 26, 2000, the Funds voluntarily limited expenses of the Funds to the following amounts: -15- FUND NAME CURRENT EXPENSE CAP --------- ------------------- Pilgrim Global Corporate Leaders Fund, Inc. 2.50% Pilgrim GNMA Income Fund, Inc. 1.04% Pilgrim Gold Fund, Inc. 2.75% Pilgrim Growth and Income Fund, Inc. 2.75% Pilgrim International Fund, Inc. 2.75% Pilgrim Silver Fund, Inc. 2.50% Pilgrim SmallCap Asia Growth Fund, Inc. 2.50% Pilgrim Troika Dialog Russia Fund, Inc. 3.35% Pilgrim Worldwide Emerging Markets Fund, Inc. 2.75% Pilgrim Global Income Fund 2.75% Lexington Money Market Trust 1.00% DISTRIBUTOR Shares of the Funds are distributed by Pilgrim Securities pursuant to a Distribution Agreement between each Fund and the Distributor. Each Distribution Agreement requires the Distributor to use its best efforts on a continuing basis to solicit purchases of shares of each Fund. The Funds 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 re-allowed to an authorized dealer ("Authorized Dealer"). If 90% or more of the sales commission is re-allowed, such Authorized Dealer may be deemed to be an "underwriter" as that term is defined under the Securities Act of 1933, as amended. Each Distribution Agreement will remain in effect for two years and from year to year thereafter only if its continuance is approved annually by a majority of the Board of Directors/Trustees who are not parties to such agreement or "interested persons" of any such party and must be approved either by votes of a majority of the Board of Directors/Trustees or a majority of the outstanding voting securities of the Fund. 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 re-allowed 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 subsidiary of ReliaStar. Prior to July 26, 2000, the distributor for the Funds was Lexington Funds Distributor, Inc. ("LFD"). RULE 12b-1 PLANS Each Fund (with the exception of the Lexington Money Market Trust) has a distribution or shareholder service plan pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1 Plans") applicable to all classes of shares offered by each Fund. The Funds intend to operate the Rule 12b-1 Plans in accordance with their terms and the National Association of Securities Dealers, Inc. rules concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be entitled to payment each month in connection with the offering, sale, and shareholder servicing of Class A, Class B, Class C, and Class Q shares in the following amounts: 0.25% of average daily net assets for Class A shares, 1.00 % of average daily net assets for Class B shares, 1.00% of average daily net assets for Class C shares and 0.25% of average daily net assets for Class Q shares. These fees may be used to cover the expenses of the Distributor primarily intended to result in the sale of Class A, Class B, Class C and Class Q shares of the Funds, including payments to dealers for selling shares of the Funds and for servicing shareholders of these classes of the Funds. Activities for which these fees may be used include: promotional activities; preparation and distribution of advertising materials and sales literature; expenses of -16- 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 each 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 rates that are based on the average daily net assets of shares that are registered in the name of that Authorized Dealer as nominee or held in a shareholder account that designates the Authorized Dealer as the dealer of record. The rates, on an annual basis, are as follows: 0.25% for Class A, 0.25% for Class B, and 1.00% for Class C. Rights to these ongoing payments begin to accrue in the 13th month following a purchase of Class A, B or C shares. With respect to each 12b-1 Plan, the Distributor shall 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. 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 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/Trustees of each Fund, including all of the Directors/Trustees who are not interested persons of the Funds as defined in the 1940 Act. The Rule 12b-1 Plans must be renewed annually by the Board of Directors/Trustees, including a majority of the Directors/Trustees who are not interested persons of the Funds and who have no direct or indirect financial interest in the operation of the Rule 12b-1 Plans, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such Directors/Trustees be committed to the Directors/Trustees who are not interested persons. Each Rule 12b-1 Plan and any distribution or service agreement may be terminated as to a Fund at any time, without any penalty, by such Directors/Trustees or by a vote of a majority of each 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. -17- In approving each Rule 12b-1 Plan, the Board of Directors/Trustees has determined that differing distribution arrangements in connection with the sale of new shares of a Fund is necessary and appropriate in order to meet the needs of different potential investors. Therefore, the Board of Directors/Trustees, including those Directors/Trustees who are not interested persons of the Funds, concluded that, in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Rule 12b-1 Plans as tailored to each class of the Funds, will benefit the 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 each Fund's outstanding shares, and all material amendments to a Plan or any distribution or service agreement shall be approved by the Directors/Trustees who are not interested persons of the Fund, 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/Trustees at least quarterly on the monies reimbursed to it under a 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 a Rule 12b-1 Plan should be continued. Prior to July 26, 2000, the Gold, Growth and Income, International, Russia, Worldwide Emerging Markets and Global Income Funds each had a reimbursement style 12b-1 Plan, which provided that the Funds pay distribution fees, including payments to Lexington Funds Distributor, Inc. (the Funds' former distributor), at an annual rate not to exceed 0.25% of their average daily net assets for distribution services. Under this 12b-1 Plan, the Funds, either directly or through the Investment Manager, would make payments periodically (i) to the distributor or to select broker/dealers, (ii) to other persons who have entered into shareholder processing and service agreements with the investment manager or with the distributor, with respect to Fund shares owned by shareholders for which such broker-dealers were the dealer or holder of record, or (iii) for expenses associated with distribution of Fund shares, including the compensation of the sales personnel of the distributor. Payments were also made for any advertising and promotional expenses relating to selling efforts, including but not limited to the incremental costs of printing prospectuses, statements of additional information, annual reports and other periodic reports for distribution to persons who are not shareholders of the Fund; the costs of preparing and distributing any other supplemental sales literature; costs of radio, television, newspaper and other advertising; telecommunications expenses, including the cost of telephones, telephone lines and other communications equipment, incurred by or for the Distributor in carrying out its obligations under the Distribution Agreement. The following table shows the expenses incurred by the Funds for distribution-related activities under the Rule 12b-1 Plans during the fiscal year ended December 31, 1999. NAME OF THE FUND AGGREGATE AMOUNT PAID ---------------- --------------------- Pilgrim Global Corporate Leaders Fund, Inc. N/A Pilgrim GNMA Income Fund, Inc. N/A Pilgrim Gold Fund, Inc. $ 75,410 Pilgrim Growth and Income Fund, Inc. $102,040 Pilgrim International Fund, Inc. $ 17,424 Pilgrim Silver Fund, Inc. N/A Pilgrim SmallCap Asia Growth Fund, Inc. N/A Pilgrim Troika Dialog Russia Fund, Inc. $ 61,804 Pilgrim Worldwide Emerging Markets Fund, Inc. $196,336 Pilgrim Global Income Fund $40,884 Lexington Money Market Trust N/A -18- Total distribution expenses incurred by the Distributor for the costs of promotion and distribution of each Fund shares for the fiscal period ended December 31, 1999 were as follows: PILGRIM GLOBAL CORPORATE LEADERS FUND, INC. Advertising..................................................... N/A Printing........................................................ N/A Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... N/A PILGRIM GNMA INCOME FUND, INC. Advertising..................................................... N/A Printing........................................................ N/A Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... N/A PILGRIM GOLD FUND, INC. Advertising..................................................... $ 15,836 Printing........................................................ 4,525 Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... 55,049 TOTAL........................................................... $ 75,410 PILGRIM GROWTH AND INCOME FUND, INC. Advertising..................................................... $ 78,571 Printing........................................................ 23,469 Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... $102,040 PILGRIM INTERNATIONAL FUND, INC. Advertising..................................................... $ 122 Printing........................................................ N/A Payments to Brokers or Dealers.................................. 5,105 Miscellaneous................................................... 12,198 TOTAL........................................................... $ 17,427 PILGRIM SILVER FUND, INC. Advertising..................................................... N/A Printing........................................................ N/A Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... N/A PILGRIM SMALLCAP ASIA GROWTH FUND, INC. Advertising..................................................... N/A Printing........................................................ N/A Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... N/A -19- PILGRIM TROIKA DIALOG RUSSIA FUND, INC. Advertising..................................................... N/A Printing........................................................ $ 62,000 Payments to Brokers or Dealers.................................. N/A Miscellaneous................................................... N/A TOTAL........................................................... $ 62,000 PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC. Advertising..................................................... $ 42,408.50 Printing........................................................ N/A Payments to Brokers or Dealers.................................. 135,276 Miscellaneous................................................... 18,652 TOTAL........................................................... $196,336 PILGRIM GLOBAL INCOME FUND Advertising..................................................... $ 82 Printing........................................................ N/A Payments to Brokers or Dealers.................................. 34,547 Miscellaneous................................................... 6,133 TOTAL........................................................... $ 40,884 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/Trustees who are not affiliated with the Investment Manager. Most Fund expenses are allocated proportionately among all of the outstanding shares of that Fund. However, where applicable, the Rule 12b-1 Plan fees for each class of shares are charged proportionately only to the outstanding shares of that class. For the Lexington Money Market Trust, Fund expenses are allocated proportionately among all of the outstanding shares of the Fund. 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," and "More Information About Risks." Additional information concerning the characteristics and risks of certain of the Funds' investments are set forth below. There can be no assurance that any of the Funds will achieve their investment objectives. -20- COMMON STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES Each Fund (except GNMA Income Fund, Global Income Fund, and Money Market Trust) 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. Each Fund (other than GNMA Income Fund, Global Income Fund, and Money Market Trust) 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. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth at market value, if converted into the underlying common stock). The credit standing of the issuer and other factors may also affect the investment value of a convertible security. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. The market value of convertible debt securities tends to vary inversely with the level of interest rates. The value of the security declines as interest rates increase and increases as interests rates decline. Although under normal market conditions longer term debt securities have greater yields than do shorter term debt securities of similar quality, they are subject to greater price fluctuations. A convertible security may be subject to redemption at the option of the issuer at a price established in the instrument governing the convertible security. If a convertible security held by a Fund is called for redemption, the Fund must permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Fund's entire investment therein). PREFERRED STOCK Each Fund (other than Global Income Fund, GNMA Income Fund, and Money Market Trust) may invest in preferred stock. Preferred stock, unlike common stock, offers a stated dividend rate payable from a corporation's earnings. Such preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline. Dividends on some preferred stock may be "cumulative," requiring all or a portion of prior unpaid dividends to be paid before dividends are paid on the issuer's common stock. Preferred stock also generally has a preference over common stock on the distribution of a corporation's assets in the event of -21- liquidation of the corporation, and may be "participating," which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stocks on the distribution of a corporation's assets in the event of a liquidation are generally subordinate to the rights associated with a corporation's debt securities. AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS The Funds (other than Global Income Fund, GNMA Income Fund, and Money Market Trust) 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. U.S. GOVERNMENT SECURITIES The Funds may invest in fixed-rate and floating- or variable-rate U.S. government securities. The U.S. Government guarantees payments of interest and principal of U.S. Treasury bills, notes and bonds, mortgage-related securities and other securities issued by the U.S. government. Other securities issued by U.S. government agencies or instrumentalities are supported only by the credit of the agency or instrumentality, for example those issued by the Federal Home Loan Bank, whereas others, such as those issued by the FNMA, Farm Credit System and Student Loan Marketing Association, have an additional line of credit with the U.S. Treasury. Short-term U.S. government securities generally are considered to be among the safest short-term investments. However, the U.S. government does not guarantee the net asset value of the Funds' shares. With respect to U.S. government securities supported only by the credit of the issuing agency or instrumentality or by an additional line of credit with the U.S. Treasury, there is no guarantee that the U.S. government will provide support to such agencies or instrumentalities. Accordingly, such U.S. government securities may involve risk of loss of principal and interest. Each Fund may invest in the following types of money market instruments (i.e., debt instruments with less than 12 months remaining until maturity) denominated in U.S. dollars or other currencies: (a) obligations issued or guaranteed by the U.S. or foreign governments, their agencies, instrumentalities or municipalities; (b) obligations of international organizations designed or supported by multiple foreign governmental entities to promote economic reconstruction or development; (c) finance company obligations, corporate commercial paper and other short-term commercial obligations; (d) bank obligations (including certificates of deposit, time deposits, demand deposits and bankers' acceptances), subject to the restriction that the Fund may not invest more than 25% of its total assets in bank securities; (e) repurchase agreements with respect to the foregoing; and (f) other substantially similar short-term debt securities with comparable characteristics. 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 "Junk Bonds" below. Debt obligations that are deemed investment grade carry a rating of at least Baa from Moody's or BBB from Standard and Poor's, or a comparable rating from another rating agency or, if not rated by an agency, are determined by the Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have speculative characteristics and changes in economic circumstances are more likely to lead to a weakened capacity to make interest and principal payments than higher rated bonds. With respect to the International, and Worldwide Emerging Markets Funds, when the Funds' portfolio manager believes that debt securities will provide capital appreciation through favorable changes in relative foreign exchange rates, in relative interest rate levels or in the creditworthiness of issuers, the Funds may invest primarily in debt securities. -22- The Russia Fund and Worldwide Emerging Markets Fund may invest (up to 35% of its total assets in the case of the Russia Fund) in Short-Term and Medium-Term Debt Securities. The Short-Term and Medium-Term Debt Securities in which the Funds may invest are foreign and domestic debt securities, including short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) obligations issued by the U.S. Government, foreign governments, foreign and domestic corporations and banks, and repurchase agreements. The Global Income Fund, under normal circumstances, invests substantially all of its assets in debt securities of issuers in the United States, developed foreign countries, and emerging markets. The Gold Fund and Silver Fund may invest in debt securities of companies engaged in mining and processing gold and silver. These debt securities can be expected to be comparable to that of other debt obligations and generally will not react to fluctuations in the price of gold and silver. An investment in the debt instruments of these companies, therefore, cannot be expected to provide the hedge against inflation that may be provided through investments in equity securities of companies engaged in such activities and can be expected to fluctuate inversely with prevailing interest rates. JUNK BONDS The Gold Fund and Silver Fund may invest in high yield, lower rated debt securities known as "junk bonds." Junk bonds are debt obligations rated below investment grade and non-rated securities of comparable quality. Junk bonds are considered speculative and thus pose a greater risk of default than investment grade securities. Investments of this type are subject to greater risk of loss of principal and interest, but in general provide higher yields than higher rated debt obligations. Bonds issued by companies domiciled in emerging markets are usually rated below investment grade. BRADY BONDS AND ZERO COUPON BONDS The Global Income Fund may invest in "Brady Bonds" and zero coupon bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with a debt restructuring plan. Investors should recognize that Brady Bonds have been issued only recently and, accordingly, do not have a long payment history. Zero coupon bonds pay income only at maturity. The prices of these bonds are highly sensitive to changes in market interest rates. The original issue discount on the zero coupon bonds must be included ratably in the income of the Fund as the income accrues even though payment has not been received. The Fund nevertheless intends to distribute an amount of cash equal to the currently accrued original issue discount, and this may require liquidating securities at times they might not otherwise do so and may result in capital loss. See "Tax Matters" in this Statement of Additional Information. SAMURAI BONDS AND YANKEE BONDS Subject to its respective fundamental investment restrictions, the Pilgrim Global Income Fund may invest in yen-denominated bonds sold in Japan by non-Japanese issuers ("Samurai bonds"), and may invest in dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee bonds"). It is the policy of the Fund to invest in Samurai or Yankee bond issues only after taking into account considerations of quality and liquidity, as well as yield. SHORT SALES AND SHORT SALES "AGAINST THE BOX" The Global Income Fund is authorized to make short sales of securities, although it has no current intention of doing so. A short sale is a transaction in which a Fund sells a security in anticipation that the market price of that security will decline. The Fund may make short sales as a form of hedging to offset potential declines in long positions in securities it owns and in order -23- to maintain portfolio flexibility. The Fund only may make short sales "against the box." In this type of short sale, at the time of the sale, the Fund owns the security it has sold short or has the immediate and unconditional right to acquire the identical security at no additional cost. In a short sale, the seller does not immediately deliver the securities sold and does not receive the proceeds from the sale. To make delivery to the purchaser, the executing broker borrows the securities being sold short on behalf of the seller. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, the Fund will deposit in a separate account with its custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities at no cost. The Pilgrim Global Income Fund could close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short. The Global Income Fund might make a short sale "against the box" in order to hedge against market risks when the Investment Manager believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into or exchangeable for such security, or when the Investment Manager wants to sell the security the Fund owns at a current attractive price, but also wishes to defer recognition or gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code. The Gold Fund and Silver Fund may invest in debt securities of companies engaged in mining and processing gold and silver. These debt securities can be expected to be comparable to that of other debt obligations and generally will not react to fluctuations in the price of gold and silver. An investment in the debt instruments of these companies, therefore, cannot be expected to provide the hedge against inflation that may be provided through investments in equity securities of companies engaged in such activities and can be expected to fluctuate inversely with prevailing interest rates. GNMA CERTIFICATES GNMA Income Fund may invest in GNMA certificates. GNMA Certificates are Government National Mortgage Association ("GNMA") mortgage-backed securities representing part ownership of a pool of mortgage loans. GNMA is a U.S. Government corporation within the Department of Housing and Urban Development. Such loans are initially made by lenders such as mortgage bankers, commercial banks and savings and loan associations and are either insured by the Federal Housing Administration (FHA) or Farmers' Home Administration (FMHA) or guaranteed by the Veterans Administration (VA). A GNMA Certificate represents an interest in a specific pool of such mortgages which, after being approved by GNMA, is offered to investors through securities dealers. Once approved by GNMA, the timely payment of interest and principal on each certificate is guaranteed by the full faith and credit of the United States Government. GNMA Certificates differ from bonds in that principal is scheduled to be paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. The GNMA Income Fund will purchase "modified pass through" type GNMA Certificates, which entitle the holder to receive all interest and principal payments owed on the mortgages in the pool (net of issuers' and GNMA fees), regardless of whether or not the mortgagor has made such payment. The Fund will use principal payments to purchase additional GNMA Certificates or other government guaranteed securities. The balance of the Fund's assets will be invested in other securities issued or guaranteed by the U.S. Government, including U.S. Treasury bills, note or bonds. The Fund may also invest in repurchase agreements secured by such U.S. Government securities or GNMA Certificates. -24- GNMA Certificates are created by an "issuer", which is an FHA approved mortgage banker who also meets criteria imposed by GNMA. The issuer assembles a pool of FHA, FMHA, or VA insured or guaranteed mortgages which are homogeneous as to interest rate, maturity and type of dwelling. Upon application by the issuer, and after approval by GNMA of the pool, GNMA provides its commitment to guarantee timely payment of principal and interest on the GNMA Certificates backed by the mortgages included in the pool. The GNMA Certificates, endorsed by GNMA, are then sold by the issuer through securities dealers. GNMA is authorized under the Federal National Housing Act to guarantee timely payment of principal and interest on GNMA Certificates. This guarantee is backed by the full faith and credit of the United States. GNMA may borrow U.S. Treasury funds to the extent needed to make payments under its guarantee. When mortgages in the pool underlying GNMA Certificates are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through to the certificate holders. Accordingly, the life of the GNMA Certificate is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life of a particular GNMA certificate but FHA statistics indicate that 25 to 30 year single family dwelling mortgages have an average life of approximately 12 years. The majority of GNMA certificates are backed by mortgages of this type, and accordingly the generally accepted practice has developed to treat GNMA certificates as 30 year securities which prepay fully in the 12th year. GNMA certificates bear a nominal "coupon rate" which represents the effective FHA-VA mortgage rate at the time of issuance, less 0.5% which constitutes the GNMA and issuer's fees. For providing its guarantees, GNMA receives an annual fee of 0.06% of the outstanding principal on certificates backed by single family dwelling mortgages, and the issuer receives an annual fee of 0.44% for assembling the pool and for passing through monthly payments of interest and principal. Payments to holders of GNMA certificates consist of the monthly distributions of interest and principal less the GNMA and issuer's fees. The actual yield to be earned by a holder of a GNMA certificate is calculated by dividing such payments by the purchase price paid for the GNMA certificate (which may be at a premium or a discount from the face value of the certificate). Monthly distributions of interest, as contrasted to semi-annual distributions which are common for other fixed interest investments, have the effect of compounding and thereby raising the effective annual yield earned on GNMA certificates. Because of the variation in the life of the pools of mortgages which back various GNMA certificates, and because it is impossible to anticipate the rate of interest at which future principal payments may be reinvested, the actual yield earned from a portfolio of GNMA certificates, such as that in which the Fund is invested, will differ significantly from the yield estimated by using an assumption of a 12 year life for each GNMA certificate included in such a portfolio as described. The actual rate of prepayment for any GNMA certificate does not lend itself to advance determination, although regional and other characteristics of a given mortgage pool may provide some guidance for investment analysis. Also, secondary market trading of outstanding GNMA certificates tends to be concentrated in issues bearing the current coupon rate. GNMA Income Fund may purchase construction loan securities which are issued to finance building costs. The funds are disbursed as needed or in accordance with a prearranged plan. The securities provide for the timely payment to the registered holder of interest at the specified rate plus scheduled installments of principal. Upon completion of the construction phase, the construction loan securities are terminated, and project loan securities are issued. It is the Fund's policy to record these GNMA certificates on trade date, and to segregate assets to cover its commitments on trade date as well. -25- GNMA CERTIFICATES -- WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS GNMA Certificates may at times be purchased or sold on a delayed delivery basis or on a when-issued basis. These transactions arise when GNMA Certificates are purchased or sold by the GNMA Income Fund with payment and delivery taking place in the future, in order to secure what is considered to be an advantageous price and yield to the Fund. No payment is made until delivery is due, often a month or more after the purchase. The Settlement date on such transactions will take place no more than 120 days from the trade date. When the Fund engages in when-issued and delayed delivery transactions, the Fund relies on the buyer or seller, as the case may be, to consummate the sale. Failure of the buyer or seller to do so may result in the Fund missing the opportunity of obtaining a price considered to be advantageous. While when-issued GNMA Certificates may be sold prior to the settlement date, the Fund intends to purchase such securities with the purpose of actually acquiring them unless a sale appears desirable for investment reasons. At the time the Fund makes the commitment to purchase a GNMA Certificate on a when-issued basis, it will record the transaction and reflect the value of the security in determining its net asset value. The Fund does not believe that its net asset value or income will be adversely affected by its purchase of GNMA Certificates on a when-issued basis. The Fund may invest in when-issued securities without other conditions. Such securities either will mature or be sold on or about the settlement date. The Fund may earn interest on such account or securities for the benefit of shareholders. COMMERCIAL BANK OBLIGATIONS The Global Income Fund may invest in commercial bank obligations. Obligations of foreign branches of U.S. banks and of foreign banks are obligations of the issuing bank and may be general obligations of the parent bank. Such obligations, however, may be limited by the terms of a specific obligation and by government regulation. As with investment in non-U.S. securities in general, investments in the obligations of foreign branches of U.S. banks and of foreign banks may subject the Global Income Fund to investment risks that are different in some respect from those of investments in obligations of domestic issuers. Although the Global Income Fund typically will acquire obligations issued and supported by the credit of U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion, this $1 billion figure is not a fundamental investment policy or restriction of the Fund. For the purposes of calculation with respect to the $1 billion figure, the assets of a bank will be deemed to include the assets of its U.S. and non-U.S. branches. SETTLEMENT TRANSACTIONS When the Funds (with the exception of GNMA Income and Growth and Income Funds and Lexington Money Market Trust) enter into contracts for purchase or sale of a portfolio security denominated in a foreign currency, they may be required to settle a purchase transaction in the relevant foreign currency or receive the proceeds of a sale in that currency. In either event, the Funds will be obligated to acquire or dispose of such foreign currency as is represented by the transaction by selling or buying an equivalent amount of United States dollars. Furthermore, the Funds may wish to "lock in" the United States dollar value of the transaction at or near the time of a purchase or sale of portfolio securities at the exchange rate or rates then prevailing between the United States dollar and the currency in which the foreign security is denominated. Therefore, the Funds may, for a fixed amount of United States dollars, enter into a forward foreign exchange contract for the purchase or sale of the amount of foreign currency involved in the underlying securities transaction. In so doing, the Funds will attempt to insulate themselves against possible losses resulting from a change in the relationship between the United States dollar and the foreign currency during the period between the date a security is purchased or sold and the date on which payment is made or received. This process is known as "transaction hedging". To effect the translation of the amount of foreign currencies involved in the purchase and sale of foreign securities and to effect the "transaction hedging" described above, the Funds may purchase or sell foreign currencies on a -26- "spot" (i.e. cash) basis or on a forward basis whereby the Funds purchases or sells a specific amount of foreign currency, at a price set at the time of the contract, for receipt of delivery at a specified date which may be any fixed number of days in the future. Such spot and forward foreign exchange transactions may also be utilized to reduce the risk inherent in fluctuations in the exchange rate between the United States dollar and the relevant foreign currency when foreign securities are purchased or sold for settlement beyond customary settlement time (as described below). Neither type of foreign currency transaction will eliminate fluctuations in the prices of the Funds' portfolio or securities or prevent loss if the price of such securities should decline. PORTFOLIO HEDGING Some or all of the Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets, and Global Income Funds' portfolio will be denominated in foreign currencies. As a result, in addition to the risk of change in the market value of portfolio securities, the value of the portfolio in United States dollars is subject to fluctuations in the exchange rate between such foreign currencies and the United States dollar. When, in the opinion of the Investment Manager it is desirable to limit or reduce exposure in a foreign currency in order to moderate potential changes in the United States dollar value of the portfolio, the Funds may enter into a forward foreign currency exchange contract by which the United States dollar value of the underlying foreign portfolio securities can be approximately matched by an equivalent United States dollar liability. This technique is known as "portfolio hedging" and moderates or reduces the risk of change in the United States dollar value of the Funds' portfolios only during the period before the maturity of the forward contract (which will not be in excess of one year). The Global Corporate Leaders, GNMA Income, Gold Fund, Growth and Income, International, Silver, SmallCap Asia, Russia, Worldwide Emerging Markets, and Global Income Funds may hedge against changes in financial markets, currency rates and interest rates. The Funds may hedge with "derivatives." Derivatives are instruments whose value is linked to, or derived from, another instrument, like an index or a commodity. Hedging transactions involve certain risks. Although the Funds may benefit from hedging, unanticipated changes in interest rates or securities prices may result in greater losses for the Funds than if they did not hedge. If the Funds do not correctly predict a hedge, they may lose money. In addition, the Funds pay commissions and other costs in connection with hedging transactions. The Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets, and Global Income Funds, for hedging purposes only, may also enter into forward foreign currency exchange contracts to increase its exposure to a foreign currency that the Investment Manager expects to increase in value relative to the United States dollar. The Funds will not attempt to hedge all of its foreign portfolio positions and will enter into such transactions only to the extent, if deemed appropriate by the Investment Manager or Sub-Adviser. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. The Funds will not enter into forward foreign currency exchange transactions for speculative purposes. The Funds intend to limit transactions as described in this paragraph to not more than 70% of total Fund assets. RISKS ASSOCIATED WITH HEDGING TRANSACTIONS. Hedging transactions have special risks associated with them, including possible default by the Counterparty to the transaction, illiquidity and, to the extent the Investment Manager's view as to certain market movements is incorrect, the risk that the use of a hedging transaction could result in losses greater than if it had not been used. Use of call options could result in losses to the Funds, force the sale or purchase of portfolio securities at inopportune times or for prices lower than current market values, or cause the Funds to hold a security it might otherwise sell. -27- Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Funds if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Funds are engaging in portfolio hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to the Funds if they are unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. In addition, the Funds pay commissions and other costs in connection with such investments. Losses resulting from the use of hedging transactions will reduce the Funds' net asset value, and possibly income, and the losses can be greater than if hedging transactions had not been used. RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted outside the U.S., hedging transactions may not be regulated as rigorously as in the U.S., may not involve a clearing mechanism and related guarantees, and will be subject to the risk of government actions affecting trading in, or the price of, foreign securities, currencies and other instruments. The value of positions taken as part of non-U.S. hedging transactions also could be adversely affected by: (1) other complex foreign political, legal and economic factors; (2) lesser availability of data on which to make trading decisions than in the U.S.; (3) delays in the Funds' ability to act upon economic events occurring in foreign markets during non-business hours in the U.S.; (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the U.S.; and (5) lower trading volume and liquidity. OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES The Funds (with the exception of the GNMA Income and Global Income Funds and the Lexington Money Market Trust) may purchase put options on particular securities (or on currencies in which those securities are denominated) in order to protect against a decline in the market value of the underlying security below the exercise price less the premium paid for the option (or an adverse movement in the applicable currency relative to the U.S. dollar). Prior to expiration, most options are expected to be sold in a closing sale transaction. Profit or loss from the sale depends upon whether the amount received is more or less than the premium paid plus transaction costs. The Global Income Fund also may purchase put options at a time when the Fund does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the Fund seek to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the Fund will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction cost, unless the put option is sold in a closing sale transaction. The Russia Fund will not purchase options on securities, securities indices or currencies or related options (including options on futures) if the sum of initial margin deposits and premiums paid for any such option or options would exceed 5% of its total assets, and it will not enter into options with respect to more than 25% of its total assets. The Global Income and the Russia Funds may purchase call options on debt securities that they intend to purchase (or on currencies in which those securities are denominated) in order to limit the risk of a substantial increase in the market price of such security (or an adverse movement in the applicable currency). The Global Income Fund also may purchase call options on underlying -28- securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options also may be purchased at times to avoid realizing losses that would result in a reduction of the Fund's current return. For example, where the Fund has written a call option on an underlying security or currency having a current market value below the price at which such security or currency was purchased by the Fund, an increase in the market price could result in the exercise of the call option written by the Fund and the realization of a loss on the underlying security or currency with the same exercise price and expiration date as the option previously written. The Global Corporate Leaders Fund, International Fund, and Global Income Fund may purchase put and call options on stock indices in order to hedge against risks of stock market or industry wide stock price fluctuations. The Global Income Fund will not enter into options on securities, securities indices or currencies or related options (including options on futures) if the sum of initial margin deposits and premiums paid for any such option or options would exceed 5% of its total assets, and it will not enter into options with respect to more than 25% of its total assets. COVERED PUT AND CALL OPTIONS Options may be used as a means of participating in an anticipated price change of a security on a more limited basis than would be possible if the security itself were purchased. The Russia and Global Income Funds may write put options. The Funds would write put options only on a covered basis, which means that the Funds would either (i) set aside cash, U.S. government securities or other liquid, high-grade debt securities in an amount not less than the exercise price at all times while the put option is outstanding (the rules of the Options Clearing Corporation currently require that such assets be deposited in escrow to secure payment of the exercise price), (ii) sell short the security or currency underlying the put option at the same or higher price than the exercise price of the put option, or (iii) purchase a put option, if the exercise price of the purchased put option is the same or higher than the exercise price of the put option sold by the Funds. The Funds generally would write covered put options in circumstances where the Investment Manager and the Sub-Adviser, as applicable, wish to purchase the underlying security or currency for the Funds' portfolio at a price lower than the current market price of the security or currency. In such event, the Funds would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price they are willing to pay. Since the Funds also would receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. The Global Corporate Leaders, International, SmallCap Asia Growth, Russia, and Global Income Funds may write call options only on securities owned by the Funds or securities which the Funds have the right to acquire without additional consideration. Since it can be expected that a call option will be exercised if the market value of the underlying security increases to a level greater than the exercise price, this strategy will generally be used when the Investment Manager believes that the call premium received by the Funds plus anticipated appreciation in the price of the underlying security, up to the exercise price of the call, will be greater than the appreciation in the price of the security. The Global Corporate Leaders, International, SmallCap Asia Growth, Russia, and Global Income Funds intend to limit transactions as described in this paragraph to those where the sum of initial margin deposits and premiums paid does not exceed 5% of its total assets. The Russia Fund and Global Corporate -29- Leaders Fund will not write options in excess of 25% of its total assets. The Fund will cause its custodian to segregate cash, U.S. Government Securities or other high grade liquid debt obligations having a value sufficient to meet the Fund's obligations under the call options. FUTURES, SWAPS AND OPTIONS ON FUTURES An interest rate futures contract is an agreement to purchase or sell debt securities, usually U.S. government securities, at a specified date and price. For example, the fund may sell interest rate futures contracts (i.e., enter into a futures contract to sell the underlying debt security) in an attempt to hedge against an anticipated increase in interest rates and a corresponding decline in debt securities it owns. Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, the Troika Dialog Russia and Worldwide Emerging Market Funds will have collateral assets equal to the purchase price of the portfolio securities represented by the underlying interest rate futures contracts it has an obligation to purchase. The Funds may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of each Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. Equity swaps allow the parties to exchange the dividend income or other components of return on an equity investment (e.g., a group of equity securities or an index) for a component of return on another non-equity or equity investment. Equity swap transactions may be volatile and may present the Funds with counterparty risks. Global Income Fund may enter into interest rate or currency futures contracts ("Futures" or "Futures Contracts") as a hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Fund. The Fund's hedging may include sales of Futures as an offset against the effect of expected increases in interest rates or currency exchange rates, and purchases of Futures as an offset against the effect of expected declines in interest rates or currency exchange rates. The Global Income Fund will not enter into Futures Contracts for speculation and the Fund only will enter into Futures Contracts which are traded on national futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal interest rate and currency Futures exchanges in the United States are the Board of Trade of the City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are exchanged in London at the London International Financial Futures Exchange. The Fund's Futures transactions will be entered into for traditional hedging purposes; that is, Futures Contracts will be sold to protect against a decline in the price of securities or currencies that the Fund owns, or Futures Contracts will be purchased to protect the Fund against an increase in the price of securities or currencies it has committed to purchase or expects to purchase. An interest rate Futures Contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (debt security or currency) for a specified price at a designated date, time and place. Brokerage fees are incurred when a Futures Contract is bought or sold, and margin deposits must be maintained at all times the Futures Contract is outstanding. -30- Although Futures Contracts typically require future delivery of and payment for financial instruments or currencies, Futures Contracts usually are closed out before the delivery date. Closing out an open Futures Contract sale or purchase is effected by entering into an offsetting Futures Contract purchase or sale, respectively, for the same aggregate amount of the identical financial instrument or currency and the same delivery date. If the offsetting purchase price is less than the original sale price, the Global Income Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The transaction costs also must be included in these calculations. There can be no assurance, however, that the Fund will be able to enter into an offsetting transaction with respect to a particular Futures Contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the Futures Contract. Options on Futures Contracts are similar to options on securities or currencies except that options on Futures Contracts give the purchaser the right, in return for the premium paid, to assume a position in a Futures Contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the Futures Contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, 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 Futures margin account which represents the amount by which the market price of the Futures Contract, at 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. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the securities, currencies or index upon which the Futures Contracts are based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. To reduce or eliminate the leverage then employed by the Global Income Fund, or to reduce or eliminate the hedge position then currently held by the Fund, the Fund may seek to close out an option position by selling an option covering the same securities or contract and having the same exercise price and expiration date. Trading in options on Futures Contracts began relatively recently. The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop. An interest rate futures contract is an agreement to purchase or sell debt securities, usually U.S. government securities, at a specified date and price. For example, the fund may sell interest rate futures contracts (i.e., enter into a futures contract to sell the underlying debt security) in an attempt to hedge against an anticipated increase in interest rates and a corresponding decline in debt securities it owns. The Global Income Fund will have collateral assets equal to the purchase price of the portfolio securities represented by the underlying interest rate futures contracts it has an obligation to purchase. The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. The prices of Futures Contracts are volatile and are influenced, among other things, by actual and anticipated changes in interest rates, which in turn are affected by fiscal and monetary policies and national and international political and economic events. There is a risk of imperfect correlation between changes in prices of Futures Contracts and prices of the securities or currencies in the Global Income Fund's portfolio being hedged. The degree of imperfection of correlation depends upon circumstances such as: variations in speculative market demand for Futures and for debt securities or currencies, including technical influences in -31- Futures trading; and differences between the financial instruments being hedged and the instruments underlying the standard Futures Contracts available for trading, with respect to interest rate levels, maturities, and creditworthiness of issuers. A decision of whether, when, and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or interest rate trends. Furthermore, in the case of a Futures Contract purchase, in order to be certain that the Global Income Fund has sufficient assets to satisfy its obligations under a Futures Contract, the Fund sets aside and commits to back the Futures Contract an amount of cash, U.S. government securities and other liquid, high grade debt securities equal in value to the current value of the underlying instrument less margin deposit. REPURCHASE AGREEMENTS The Funds' (with the exception of the Russia Fund and the Lexington Money Market Trust) investment portfolios may include repurchase agreements ("repos") with banks and dealers in U.S. Government securities. A repurchase agreement involves the purchase by the Funds of an investment contract from a bank or a dealer in U.S. Government securities which contract is secured by debt securities whose value is equal to or greater than the value of the repurchase agreement including the agreed upon interest. The agreement provides that the institution will repurchase the underlying securities at an agreed upon time and price. Under the Investment Company Act, repurchase agreements are considered to be loans by the Funds and must be fully collateralized by collateral assets. If the seller defaults on its obligations to repurchase the underlying security, the Funds may experience delay or difficulty in exercising its rights to realize upon the security, may incur a loss if the value of the security declines and may incur disposition costs in liquidating the security. The total amount received on repurchase would exceed the price paid by the Funds, reflecting an agreed upon rate of interest for the period from the date of the repurchase agreement to the settlement date, and would not be related to the interest rate on the underlying securities. The difference between the total amount to be received upon the repurchase of the securities and the price paid by the Funds upon their acquisition is accrued daily as interest. If the institution defaults on the repurchase agreement, the Funds will retain possession of the underlying securities. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization on the collateral by the Funds may be delayed or limited and the Funds may incur additional costs. In such case, the Funds will be subject to risks associated with changes in the market value of the collateral securities. The Global Corporate Leaders, Gold Fund, Silver, Russia, and Global Income Funds intend to limit repurchase agreements to institutions believed by the Investment Manager or the Sub-Adviser to present minimal credit risk. The Gold Fund, Global Corporate Leader, and GNMA Income Funds will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in United States government securities. The Global Corporate Leaders Fund may enter into repurchase agreements with respect to any portfolio securities it may acquire consistent with its investment objectives and policies, but intends to enter into repurchase agreements only with respect to obligations of the U.S. government or its agencies and instrumentalities, to meet anticipated redemptions or pending investments or reinvestment of Fund assets in portfolio securities. The Funds will not enter into repurchase agreements maturing in more than seven days if the aggregate of such repurchase agreements and all other illiquid securities when taken together would exceed 15% (10% in the case of the GNMA Income Fund) of the total assets of the Fund. The Funds treat any securities subject to restrictions on repatriation for more than seven days, and securities issued in connection with foreign debt conversion programs that are restricted as to remittance of invested capital or profit, as illiquid. Illiquid securities do not include securities that are restricted from trading on formal markets for some period of time but for which an active informal market exists, or securities that meet the requirements of Rule 144A under the Securities Act of 1933 and that, subject to the review by the Board of Directors/Trustees and guidelines adopted by the Board of Directors/Trustees, the Investment Manager has determined to be liquid. -32- REVERSE REPURCHASE AGREEMENTS All of the Funds except Money Market Trust may enter into reverse purchase agreements. In a reverse repurchase agreement, a Fund sell to a financial institution a security that it holds and agrees to repurchase the same security at an agreed-upon price and date. A Fund will maintain, in a segregated account with a custodian, cash, U.S. government securities or other liquid, high grade debt securities in an amount sufficient to cover its obligation under reverse repurchase agreements. ROLL TRANSACTIONS The Global Income Fund may engage in "roll" borrowing transactions which involve the Fund's sale of fixed income securities together with a commitment (for which the Fund may receive a fee) to purchase similar, but not identical, securities at a future date. The Fund will maintain, in a segregated account with a custodian, cash, U.S. government securities or other liquid, high grade debt securities in an amount sufficient to cover its obligation under "roll" transactions. WHEN ISSUED AND FORWARD COMMITMENT SECURITIES The Global Corporate Leaders, Gold Fund, International, Silver, Worldwide Emerging Markets, SmallCap Asia Growth, and Global Income Funds may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") because new issues of securities are typically offered to investors, such as the Funds, on that basis. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of the Funds' other assets. Although the Funds will enter into such contracts with the intention of acquiring the securities, the Funds may dispose of a commitment prior to settlement if the investment adviser deems it appropriate to do so. The Funds may realize short-term profits or losses upon the sale of forward commitments. The Funds may purchase U.S. government or other securities on a "when-issued" basis and may purchase or sell securities on a "delayed delivery" basis. The price is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued securities and forward commitments may be sold prior to the settlement date, but a Fund will enter into when-issued and forward commitments only with the intention of actually receiving or delivering the securities. No income accrues on securities that have been purchased pursuant to a forward commitment or on a when-issued basis prior to delivery to a Fund. At the time a Fund enters into a transaction on a when-issued or forward commitment basis, it supports its obligation with collateral assets equal to the value of the when-issued or forward commitment securities and causes the collateral assets to be marked to market daily. There is a risk that the securities may not be delivered and that the Fund may incur a loss. FORWARD CURRENCY CONTRACTS The Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets, and Global Income Funds may enter into forward currency contracts. A forward currency contract is a contract individually negotiated and privately traded by currency traders and their customers and creates an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The Funds generally do not enter into forward contracts with terms greater than one year. The Funds generally enter into forward contracts only under two circumstances. First, if the Funds enter into a contract for the purchase or sale of a security denominated in a foreign currency, they may desire to "lock in" the U.S. dollar price of the security by entering into a forward contract to buy the amount of a foreign currency needed -33- to settle the transaction. Second, if the Investment Manager believes that the currency of a particular foreign country will substantially rise or fall against the U.S. dollar, it may enter into a forward contract to buy or sell the currency approximating the value of some or all of the Funds' portfolio securities denominated in such currency. The Funds will not enter into a forward contract if, as a result, it would have more than one-third of total assets committed to such contracts (unless they own the currency that it is obligated to deliver or has caused its custodian to segregate segregable assets having a value sufficient to cover its obligations). Although forward contracts are used primarily to protect the Funds from adverse currency movements, they involve the risk that currency movements will not be accurately predicted. Investors should recognize that investing in securities of foreign companies and in particular securities of companies domiciled in or doing business in emerging markets and emerging countries involves certain risk considerations, including those set forth below, which are not typically associated with investing in securities of U.S. companies. INTEREST RATE AND CURRENCY AND CURRENCY SWAPS The Global Income Fund usually will enter into interest rate swaps on a net basis, that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as swaps, caps, floors, collars and other derivative transactions are entered into for good faith hedging purposes, the Investment Manager and the Fund believe that they do not constitute senior securities under the 1940 Act and, thus, will not treat them as being subject to the Fund's borrowing restrictions. The Fund will not enter into any swap, cap, floor, collar or other derivative transaction unless, at the time of entering into the transaction, the unsecured long-term debt rating of the counterparty combined with any credit enhancements is rated at least A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") or has an equivalent rating from a nationally recognized statistical rating organization or is determined to be of equivalent credit quality by the Investment Manager. If a counterparty defaults, the Fund may have contractual remedies pursuant to the agreements related to the transactions. The swap market has grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, for that reason, they are less liquid than swaps. FOREIGN SECURITIES CONSIDERATIONS FOREIGN CURRENCY CONSIDERATIONS. The Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets and Global Income Funds' assets will be invested in securities of foreign companies and substantially all income will be received by the Funds in foreign currencies. However, the Funds will compute and distribute their income in dollars, and the computation of income will be made on the date of its receipt by the Funds at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Funds receive their income falls relative to the dollar between receipt of the income and the making of Funds' distributions, the Funds will be required to liquidate securities in order to make distributions if the Funds has insufficient cash in dollars to meet distribution requirements. The value of the assets of the Funds as measured in dollars also may be affected favorably or unfavorably by fluctuations in currency rates and exchange control regulations. Further, the Funds may incur costs in connection with conversions between various currencies. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Funds at one rate, while offering a lesser rate of exchange should the Funds desire immediately to resell that currency to the dealer. The Funds will conduct their foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward or futures contracts to purchase or sell foreign currencies. -34- INVESTMENT AND REPATRIATION RESTRICTIONS (Global Corporate Leaders, Gold Fund, International, Silver, Russia, SmallCap Asia Growth, Worldwide Emerging Markets, and Global Income Funds.) Some foreign countries may have laws and regulations which currently preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries is permitted by certain foreign countries through investment funds which have been specifically authorized. The Funds may invest in these investment funds subject to the provisions of the 1940 Act as discussed below under "Investment Restrictions". If the Funds invest in such investment funds, the Funds' shareholders will bear not only their proportionate share of the expenses of the Funds (including operating expenses and the fees of the Investment Manager), but also will bear indirectly similar expenses of the underlying investment funds. In addition, prior governmental approval for foreign investments may be required under certain circumstances in some foreign countries, while the extent of foreign investment in domestic companies may be subject to limitation in other foreign countries. Foreign ownership limitations also may be imposed by the charters of individual companies in foreign countries to prevent, among other concerns, violation of foreign investment limitations. Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some foreign countries. The Funds could be adversely affected by delays in or a refusal to grant any required governmental approval for such repatriation. EMERGING COUNTRY AND EMERGING SECURITIES MARKETS. Certain Funds may invest in securities in emerging markets. Investing in securities in emerging countries may entail greater risks than investing in debt securities in developed countries. These risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; and (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property. RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Global Income Fund may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for wide-spread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of the Fund's investment in those countries. FOREIGN SECURITIES MARKETS. (Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets, Global Income) Trading volume on foreign country and, in particular emerging market stock exchanges is substantially less than that on the New York Stock Exchange. Further, securities of some foreign and in particular emerging market companies are less liquid and more volatile than securities of comparable U.S. companies. Similarly, volume and liquidity in most foreign bond markets is substantially less than in the U.S. and, consequently, volatility of price can be greater than in the U.S. Fixed commissions on foreign exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Funds endeavor to achieve the most favorable net results on its portfolio transactions and may be able to purchase the securities in which the Funds may invest on -35- other stock exchanges where commissions are negotiable. Foreign stock exchanges, brokers and listed companies are generally subject to less government supervision and regulation than in the United States. The customary settlement time for foreign securities may be longer than the five day customary settlement time for United States securities. Companies in foreign countries are not generally subject to uniform accounting, auditing and financial reporting standards, practices and disclosure requirements comparable to those applicable to U.S. companies. Consequently, there may be less publicly available information about a foreign company than about a U.S. company. Further, there is generally less governmental supervision and regulation of foreign stock exchanges, brokers and listed companies than in the U.S. Further, the Funds may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. ECONOMIC AND POLITICAL RISKS. (Global Corporate Leaders, Gold Fund, International, Silver, SmallCap Asia, Russia, Emerging Markets and Global Income Funds) The economies of individual foreign countries in which the Funds invest may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of foreign countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The export driven nature of Asian economies is often dependent on the strength of their trading partners in the United States and Europe, although growing intra-regional trade is seen mitigating some of this external dependence. With respect to any foreign country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the Funds' investments in those countries. In addition, it may be more difficult to obtain a judgement in a court outside of the United States. INVESTING IN ASIA REGION SECURITIES The SmallCap Asia Growth Fund will invest at least 65% of its total assets in equity securities and equivalents of companies in the Asia Region which have market capitalizations of less than $1 billion. Approximately 13,000 companies are listed on recognized exchanges in the Asia Region. Approximately 300 companies in the Asia Region are capitalized over $1 billion. These companies form the principal components of their respective market indices and consequently attract the majority of foreign investment in the region. Approximately 3,000 companies, which are considered Small Capitalization companies, will be the primary focus for the Fund's investments. These companies are frequently under-researched by international investors and undervalued by their markets. The companies in which the Fund intends to invest will generally have the following characteristics: a market capitalization of less than $1 billion; part of a strong growth industry; proven management; under-researched; and undervalued. INVESTING IN RUSSIAN SECURITIES For the purposes of the Russia Fund section of the prospectus, and this statement of additional information, Russian company means a legal entity (i) that is organized under the laws of, or with a principal office and domicile in, Russia, (ii) for which the principal equity securities trading market is in Russia, or (iii) that derives at least 50% of its revenues or profits from goods produced or sold, investments made, or services performed, in Russia or that has at least 50% of its assets situated in Russia. -36- The Russia Fund intends to invest its assets in Russian companies in a broad array of industries, including the following: oil and gas, energy generation and distribution, communications, mineral extraction, trade, financial and business services, transportation, manufacturing, real estate, textiles, food processing and construction. The Fund is not permitted to invest more than 25% of the value of its total assets in any one industry. It may, however, invest an unrestricted amount of its assets in the oil and gas industry. The Fund's investments will include investments in Russian companies that have characteristics and business relationships common to companies outside of Russia. As a result, outside economic forces may cause fluctuations in the value of securities held by the Fund. Under current conditions, the Russia Fund expects to invest at least 20% of its total assets in very liquid assets to maintain liquidity and provide stability. As the Russian equity markets develop, however, and the liquidity of Russian securities becomes less problematic, the Fund will invest a greater percentage of its assets in Russian equity securities. As further described above, the Russia Fund is authorized to use various investment strategies, some or all of which may be classified as derivatives, to hedge various market risks and to enhance total return, which may be deemed a form of speculation. Subject to the requirements of the Investment Company Act of 1940, as amended, the Russia Fund may hedge up to 100% of its assets when deemed appropriate by the Investment Manager. The Fund is also authorized to use investment strategies to manage the effective maturity or duration of debt securities or instruments held by the Fund, or to enhance the Fund's income or gain. Although these strategies are regularly used by some investment companies and other institutional investors in various markets, most of these strategies are currently unavailable in Russia and may not become available in the future. Techniques and instruments may change over time, however, as new instruments and strategies are developed or regulatory changes occur. INVESTMENT IN GOLD AND SILVER -- (GOLD FUND AND SILVER FUND). The Gold Fund's and Silver Fund's performance and ability to meet their objective will generally be largely dependent on the market value of gold and silver, respectively. The Funds' professional management seeks to maximize on advances and minimize on declines by monitoring and anticipating shifts in the relative values of silver and gold and the equity securities of companies engaged in mining or processing silver and gold ("silver-related securities" and "gold-related securities"). The Funds may also invest in other precious metals, including platinum and palladium. A substantial portion of the Gold Fund's and Silver Fund's investments will be in the securities of foreign issuers. The Gold Fund and Silver Fund are of the belief that a silver and gold investment medium will, over the long term, protect capital from adverse monetary and political developments of a national or international nature and, in the face of what appears to be continuous worldwide inflation, may offer better opportunity for capital growth than many other forms of investment. Throughout history, silver and gold have been thought of as the most basic monetary standards. Investments in silver and gold may provide more of a hedge against currencies with declining buying power, devaluation, and inflation than other types of investments. Of course, there can be no assurance that management's' belief will be realized or that the investment objective will be achieved. To the extent that investments in silver and gold and silver and gold related securities appreciate in value relative to the U.S. dollar, the Funds' investments may serve to offset erosion in the purchasing power of the U.S. dollar. -37- The Gold Fund and Silver Fund may invest in debt securities of companies engaged in mining and processing gold and silver. These debt securities can be expected to be comparable to that of other debt obligations and generally will not react to fluctuations in the price of gold and silver. An investment in the debt instruments of these companies, therefore, cannot be expected to provide the hedge against inflation that may be provided through investments in equity securities of companies engaged in such activities and can be expected to fluctuate inversely with prevailing interest rates. It is anticipated that, except for temporary defensive or liquidity purposes, 65% of the total assets of the Funds will be invested in silver and gold and silver-related or gold-related securities. At any time management deems it advisable for defensive or liquidity purposes, the Funds may hold cash or cash equivalents in the currency of any major industrial nation, and invest in, or hold unlimited amounts of debt obligations of the United States Government or its political subdivisions, and money market instruments including repurchase agreements with maturities of seven days or less and Certificates of Deposit. It is the Investment Manager's present intention to manage the Gold Fund's and the Silver Fund's investments so that (i) less than half of the value of their portfolios will consist of silver, gold or other precious metals and (ii) more than half of the value of their portfolios will be invested in silver or gold-related securities, including securities of foreign issuers. Although the Funds' Board of Directors/Trustees present policy prohibits investments in speculative securities trading at extremely low prices and in relatively illiquid markets, investments in such securities can be made when and if the Board determines such investments to be in the best interests of the Funds and their shareholders. The policies set forth in this paragraph are subject to change by the Board of Directors/Trustees of the Gold Fund or Silver Fund, respectively, in their sole discretion. FLUCTUATIONS IN THE PRICE OF GOLD AND SILVER. The prices of silver and gold have been subject to dramatic downward and upward price movements over short periods of time and may be affected by unpredictable international monetary and political policies, such as currency devaluations or revaluations, economic conditions within an individual country, trade imbalances, or trade or currency restrictions between countries. The price of silver and gold, in turn, is likely to affect the market prices of securities of companies mining or processing silver and gold, and accordingly, the value of the Funds' investments in such securities may also be affected. POTENTIAL EFFECT OF CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL OF SALES. The two largest national producers of silver and gold bullion are the Republic of South Africa and the United States of America. Changes in political and economic conditions affecting either country may have direct impact on that country's sales of silver and gold. Under South African law, the only authorized sales agent for silver and gold produced in South Africa is the Reserve Bank of South Africa, which through its retention policies controls the time and place of any sale of South African bullion. The South African Ministry of Mines determines silver and gold mining policy. South Africa depends predominately on silver and gold sales for the foreign exchange necessary to finance its imports, and its sales policy is necessarily subject to national economic and political developments. INVESTMENTS IN SILVER AND GOLD BULLION. Unlike certain more traditional investment vehicles such as savings deposits and stocks and bonds, which may produce interest or dividend income, silver and gold bullion earns no income return. Appreciation in the market price of silver and gold is the sole manner in which the Funds will be able to realize gains on its investment in silver and gold bullion. Furthermore, the Funds may encounter storage and transaction costs in connection with its ownership of silver and gold bullion which may be higher than those attendant to the purchase, holding and disposition of more traditional types of investments. -38- INTERNATIONAL AND DOMESTIC MONETARY SYSTEMS. Substantial amounts of silver and gold bullion serving as primary official reserve assets play a major role in the international monetary system. Since December 31, 1974, when it again became legal to invest in silver and gold, several new markets have developed in the United States. In connection with this legalization of silver ownership, the U.S. Treasury and the International Monetary Fund embarked upon programs to dispose of substantial amounts of silver and gold bullion. INVESTING IN EMERGING MARKET DEBT SECURITIES -- GLOBAL INCOME FUND The Global Income Fund, under normal circumstances, invests substantially all of its assets in debt securities of issuers in the United States, developed foreign countries and emerging markets. For purposes of its investment objective, the Fund considers an emerging country to be any country whose economy and market the World Bank or United Nations considers to be emerging or developing. The Fund may also invest in debt securities traded in any market, of companies that derive 50% or more of their total revenue from either goods or services produced in such emerging countries and emerging markets or sales made in such countries. Determinations as to eligibility will be made by the Investment Manager based on publicly available information and inquiries made to the companies. It is possible in the future that sufficient numbers of emerging country or emerging market debt securities would be traded on securities markets in industrialized countries so that a major portion, if not all, of the Fund's assets would be invested in securities traded on such markets, although such a situation is unlikely at present. Currently, investing in many of the emerging countries and emerging markets is not feasible or may involve political risks. Accordingly, the Investment Manager currently intends to consider investments only in those countries in which it believes investing is feasible and does not involve such risks. The list of acceptable countries will be reviewed by the Investment Manager and approved by the Board of Trustees on a periodic basis and any additions or deletions with respect to such list will be made in accordance with changing economic and political circumstances involving such countries. In determining the appropriate distribution of investments among various countries and geographic regions for the Global Income Fund, the Investment Manager ordinarily consider the following factors: prospects for relative economic growth among the different countries in which the Fund may invest; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of the individual investment opportunities available to international investors. Although the Global Income Fund values assets daily in terms of U.S. dollars, the Fund does not intend to convert holdings of foreign currencies into U.S. dollars on a daily basis. The Fund will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference ("spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to sell that currency to the dealer. INVESTMENT STRATEGIES AND RISKS -- MONEY MARKET TRUST In order for the Lexington Money Market Trust to achieve its objective of seeking as high a level of current income as is available from short term investments and consistent with the preservation of capital and liquidity, the Fund will invest its assets in the following money market instruments: (l) Obligations issued, or guaranteed as to interest and principal, by the Government of the United States or any agency or instrumentality thereof; (2) U.S. dollar denominated time deposits, certificates of deposit and bankers' acceptances of U.S. banks and their London and Nassau branches and of U.S. branches of foreign banks, provided that the bank has total assets of one -39- billion dollars; (3) Commercial paper of U.S. corporations, rated Al, A2 by Standard & Poor's Corporation or Pl, P2 by Moody's Investors Service, Inc. or, if not rated, of such issuers having outstanding debt rated A or better by either of such services, or debt obligations of such issuers maturing in two years or less and rated A or better; (4) Repurchase agreements under which the Fund may acquire an underlying debt instrument for a relatively short period subject to the obligation of the seller to repurchase, and of the Fund to resell, at a fixed price. The underlying security must be of the same quality as those described herein, although the usual practice is to use U.S. Government or government agency securities. The Fund will enter into repurchase agreements only with commercial banks and dealers in U.S. Government securities. Repurchase agreements when entered into with dealers, will be fully collateralized including the interest earned thereon during the entire term of the agreement. If the institution defaults on the repurchase agreement, the Fund will retain possession of the underlying securities. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization on the collateral by the Fund may be delayed or limited and the Fund may incur additional costs. In such case the Fund will be subject to risks associated with changes in the market value of the collateral securities. The Fund intends to limit repurchase agreements to institutions believed by the Investment Manager to present minimal credit risk. The Fund will not enter into repurchase agreements maturing in more than seven days if the aggregate of such repurchase agreements would exceed 10% of the total assets of the Fund; or (5) Other money market instruments. FOREIGN BRANCHES OF U.S. BANKS The obligations of London and Nassau branches of U.S. banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by governmental regulation. Payment of interest and principal upon these obligations may also be affected by governmental action in the country of domicile of the branch (generally referred to as "sovereign risk"). In addition, evidences of ownership of portfolio securities may be held outside of the U.S., and the Lexington Money Market Trust may be subject to the risks associated with the holding of such property overseas. Examples of governmental actions would be the imposition of currency controls, interest limitations, seizure of assets, or the declaration of a moratorium. Obligations of U.S. branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by Federal and state regulation as well as by governmental action in the country in which the foreign bank has its head office. While the Funds will carefully consider these factors on making such investments, there are no limitations on the percentage of the Funds' portfolio which may be invested in any one type of instrument. The Investment Policies stated above are fundamental and may not be changed without shareholder approval. The Fund may not invest in securities other than the types of securities listed above and is subject to other specific restrictions as detailed under "Investment Restrictions" below. OTHER INVESTMENT COMPANIES All of the Funds 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. The Funds may also make indirect foreign investments through other investment companies that have comparable investment objectives and policies as the Funds. In addition to the advisory and operational fees a Fund bears directly in connection with its own operation, the Fund would also bear its pro rata portions of each other investment company's advisory and operational expenses. -40- INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT RESTRICTIONS--THE PILGRIM GLOBAL CORPORATE LEADERS FUND The Fund's investment objective and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) The Fund will not issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (2) The Fund will not borrow money, except that: (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) the Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. The Fund will only invest in reverse repurchase agreements up to 5% of the Fund's total assets. (3) The Fund will not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. (4) The Fund will not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (5) The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may: (a) purchase bonds, debentures or other debt securities, including short-term obligations; (b) enter into repurchase transactions; and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. -41- (6) The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, may engage in transactions on a when-issued or forward commitment basis, and may enter into forward currency contracts. (7) The Fund will not concentrate its investments in any one industry, except that the Fund may invest up to 25% of its total assets in securities issued by companies principally engaged in any one industry. The Fund considers securities of individual foreign governments, companies and supranational organizations to be industries. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. (8) The Fund will not purchase securities of an issuer, if: (a) more than 5% of the Fund's total assets taken at market value would at the time be invested in the securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States government or its agencies or instrumentalities or, with respect to 25% of the Fund's total assets, to securities issued or guaranteed by the government of any country other than the United States which is a member of the Organization for Economic Cooperation and Development ("OECD"). The member countries of OECD are at present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland, Ireland, taly, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States; or (b) such purchases would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. In addition to the above fundamental restrictions, the Fund has undertaken the following non-fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. (2) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (3) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (4) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (5) The Fund will not invest for the purpose of exercising control over or management of any company. (6) The Fund will not purchase warrants except in units with other securities in original issuance thereof or attached to other securities, if at the time of the purchase, the Fund's investment in warrants, valued at the lower of cost or market, would exceed 5% of the Fund's total assets. For these purposes, warrants attached to units or other securities shall be deemed to be without value. -42- (7) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--GNMA INCOME FUND The following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions, the Fund will not : (1) issue senior securities; (2) borrow money; (3) underwrite securities of other issuers; (4) concentrate its investments in a particular industry to an extent greater than 25% of its total assets, provided that such limitation shall not apply to securities issued or guaranteed by the U.S. Government or its agencies; (5) purchase or sell real estate, commodity contracts or commodities (however, the Fund may purchase interests in GNMA mortgage-backed certificates); (6) make loans to other persons except: (a) through the purchase of a portion or portions of an issue or issues of securities issued or guaranteed by the U.S. Government or its agencies, or (b) through investments in "repurchase agreements" (which are arrangements under which the Fund acquires a debt security subject to an obligation of the seller to repurchase it at a fixed price within a short period), provided that no more than 10% of the Fund's assets may be invested in repurchase agreements which mature in more than seven days; (7) purchase the securities of another investment company or investment trust, except in the open market and then only if no profit, other than the customary broker's commission, results to a sponsor or dealer, or by merger or other reorganization; (8) purchase any security on margin or effect a short sale of a security; (9) buy securities from or sell securities (other than securities issued by the Fund) to any of its officers, directors or its investment adviser, as principal; -43- (10) contract to sell any security or evidence of interest therein, except to the extent that the same shall be owned by the Fund; (11) purchase or retain securities of an issuer when one or more of the officers and directors of the Fund or of the Adviser, or a person owning more than 10% of the stock of either, own beneficially more than 1/2 of 1% of the securities of such issuer and such persons owning more than 1/2 of 1% of such securities together own beneficially more than 5% of the securities of such issuer; (12) invest more than 5% of its total assets in the securities of any one issuer (except securities issued or guaranteed by the U.S. Government or its agencies), except that such restriction shall not apply to 25% of the Fund's portfolio so long as the net asset value of the portfolio does not exceed $2,000,000; (13) purchase any securities if such purchase would cause the Fund to own at the time of purchase more than 10% of the outstanding voting securities of any one issuer; (14) purchase any security restricted as to disposition under Federal securities laws; (15) invest in interests in oil, gas or other mineral exploration or development programs; or (16) buy or sell puts, calls or other options. In addition to the above fundamental restrictions, the Fund has undertaken the following non fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) invest in real estate limited partnership interests, oil, gas or mineral leases, as well as exploration or development programs; or (2) purchase warrants except in units with other securities in original issuance thereof or attached to other securities, if at the time of purchase, the Fund's investment in warrants, valued at the lower of cost or market, would exceed 5% of the Fund's total assets. Warrants which are not listed on the New York or American stock exchanges shall not exceed 2% of the Fund's net assets. Shares of the Fund will not be issued for consideration other than cash. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--GOLD FUND The Fund's investment objective, as described under "investment policy" and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) the Fund will not issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the -44- Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (2) at the end of each quarter of the taxable year, (i) with respect to at least 50% of the market value of the Fund's assets, the Fund may invest in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purchases of this calculation to an amount not greater than 5% of the value of the Fund's total assets, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). (3) the Fund will not concentrate its investments by investing more than 25% of its assets in the securities of issuers in any one industry. This limit will not apply to gold and gold-related securities, and to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. (4) the Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, and may enter into forward currency contracts. Transactions in gold, platinum, palladium or silver bullion will not be subject to this restriction. (5) the Fund will not purchase real estate, interests in real estate or real estate limited partnership interest except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (6) the Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (7) the Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) the Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber then in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduced its borrowings to the extent necessary to meet the 300% test. The Fund will only invest in reverse repurchase agreements up to 5% of the Fund's total assets. (8) the Fund will not act as underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. -45- In additional to the above fundamental restrictions, the Fund has undertaken the following non fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. (2) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (3) The Fund will not write, purchase or sell puts or calls on underlying securities. However, the Fund may invest up to 15% of the value of its assets in warrants. This restriction on the purchase of warrants does not apply to warrants attached to, or otherwise included in, a unit with other securities. (4) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (5) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (6) The Fund will not invest for the purpose of exercising control over or management of any company. (7) The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--GROWTH AND INCOME FUND The Fund shareholder vote required for modification of the investment policies or restrictions listed below is the lesser of: (a) 67% or more of the voting securities present at a meeting if the holders of more than 50% are present or represented by proxy; or (b) more than 50% of the voting securities. -46- The Fund shall not: (1) issue senior securities; (2) underwrite securities of other issuers; (3) purchase or sell real estate, commodity contracts or commodities (however, the Fund may purchase interests in real estate investment trusts whose securities are registered under the Securities Act of 1933 and are readily marketable); (4) make loans to other persons except (a) through the purchase of a portion or portions of publicly distributed bonds, notes, debentures and evidences of indebtedness authorized by its investment policy, or (b) through investments in" repurchase agreements" (which are arrangements under which the Fund acquires a debt security subject to an obligation of the seller to repurchase it at a fixed price within a short period), provided that no more than 10% of the Fund's assets may be invested in repurchase agreements which mature in more than seven days; (5) purchase the securities of another investment company or investment trust except in the open market where no profit results to a sponsor or dealer, other than the customary broker's commission; (6) purchase any security on margin or effect a short sale of a security; (7) buy securities from or sell securities to any of its officers and directors or those of the investment adviser or principal distributor as principal; (8) contract to sell any security or evidence of interest therein except to the extent that the same shall be owned by the Fund; (9) retain securities of an issuer when one or more of the officers and directors of the Fund or the investment adviser or a person owning more than 10% of the stock of either, own beneficially more than 0.5% of the securities of such issuer and the persons owning more than 0.5% of such securities together own beneficially more than 5% of the securities of such issuer; (10) .invest more than 5% of the value of its total assets in the securities of any one issuer nor acquire more than 10% of the outstanding voting securities of any one issuer; (11) invest in companies for the purpose of exercising management or control; or (12) concentrate its investments in a particular industry; thus the Fund will not purchase a security if the immediate effect of such purchase would be to increase the Fund's holdings in such industry above 25% of the Fund's assets. In addition to the above fundamental investment restrictions, the Fund has undertaken not to: a) invest an aggregate of more than 5% of its total assets in the securities of unseasoned issuers and equity securities of issuers which are not readily marketable; b) invest in puts, calls, straddles, spreads, and any combination thereof; or c) pledge, mortgage or hypothecate the assets of the Fund to an extent greater than 15% of the gross assets of the Fund taken at cost. The Fund has authority to borrow money from a bank not in excess of the lesser of: (a) 5% of the gross assets of the Fund at the current market value at the time of such borrowing; or (b) 10% of the gross assets of the Fund taken at cost. Any such borrowing may be undertaken only as a temporary measure for extraordinary or emergency purposes. This borrowing power has not been exercised by the Fund's management. -47- The 5% diversification limitation set forth in subparagraph (x) above does not apply to obligations issued or guaranteed as to principal and interest by the United States Government, nor does it apply to bank certificates of deposit, which are not classified by the Fund as securities for the purposes of this limitation. The Fund may not use more than 5% of its net assets to purchase illiquid securities. The Fund treats any securities subject to restrictions on repatriation for more than seven days, and securities issued in connection with foreign debt conversion programs that are restricted as to remittance of invested capital or profit, as illiquid. The Fund also treats repurchase agreements with maturities in excess of seven days as illiquid. Illiquid securities do not include securities that are restricted from trading on formal markets for some period of time but for which an active informal market exists, or securities that meet the requirements of Rule 144A under the Securities Act of 1933 and that, subject to the review by the Board of Directors and guidelines adopted by the Board of Directors, the Investment Manager has determined to be liquid. FUNDAMENTAL INVESTMENT RESTRICTIONS--INTERNATIONAL FUND The Fund's investment objective and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) the Fund will not issue any senior security (as defined in the 1940 Act), except that: (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (2) The Fund will not borrow money, except that: (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) The Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. (3) The Fund will not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. -48- (4) The Fund will not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (5) The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may: (a) purchase bonds, debentures or other debt securities, including short-term obligations; (b) enter into repurchase transactions; and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (6) The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, may engage in transactions on a when-issued or forward commitment basis, and may enter into forward currency contracts. (7) The Fund will not concentrate its investments in any one industry, except that the Fund may invest up to 25% of its total assets in securities issued by companies principally engaged in any one industry. The Fund considers foreign government securities and supranational organizations to be industries. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. (8) The Fund will not purchase securities of an issuer, if (a) more than 5% of the Fund's total assets taken at market value would at the time be invested in the securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States government or its agencies or instrumentalities or, with respect to 25% of the Fund's total assets, to securities issued or guaranteed by the government of any country other than the United States which is a member of the Organization for Economic Cooperation and Development ("OECD"). The member countries of OECD are at present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States; or (b) such purchases would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. In addition to the above fundamental restrictions, the Fund has undertaken the following non fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. (2) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (3) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. -49- (4) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (5) The Fund will not invest for the purpose of exercising control over or management of any company. (6) The Fund will not purchase warrants except in units with other securities in original issuance thereof or attached to other securities, if at the time of the purchase, the Fund's investment in warrants, valued at the lower of cost or market, would exceed 5% of the Fund's total assets. For these purposes, warrants attached to units or other securities shall be deemed to be without value. (7) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--SILVER FUND The Fund's investment objective, as described under "Investment Objective" in the Fund's prospectus, and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) At least 80% of the Fund's assets will be invested in established silver-related companies which have been in business for more than three years. (2) At the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer counted for the purposes of this calculation only if the value of thereof is not greater than 5% of the value of the Fund's total assets, and (ii) not more than 25% of its total assets be invested in securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). (3) The Fund will not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. -50- (4) The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, may engage in transactions on a when-issued or forward commitment basis, and may enter into forward currency contracts. Transactions in which silver bullion is taken in payment of principal, interest or both or a debt instrument and where the Fund disposes of the silver bullion for cash will not be subject to this restriction. (5) The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities or bullion provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (6) The Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) the Fund may pledge its silver or portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. (7) The Fund will not issue any senior security (as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretations of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (8) The Fund will not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the Securities Act of 1933, as amended (the "1933 Act"). In addition to the above fundamental restrictions, the Fund has undertaken the following nonfundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not invest more than 15% of its total net assets at market value in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold -51- under Rule 144A or securities offered pursuant to Section 4(2) of the 1933 Act shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. (2) The Fund will not invest for the purpose of exercising control over management of any company. (3) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the Fund's total assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (4) The Fund will not issue its securities for any considerations other than cash or securities except as a dividend or distribution in connection with a reorganization. (5) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (6) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (7) The Fund will not write, purchase or sell puts, calls on underlying securities. However, the Fund may invest up to 15% of the value of its total assets in warrants. This restriction on the purchase of warrants does not apply to warrants attached to, or otherwise included in, a unit with other securities. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--SMALLCAP ASIA GROWTH FUND The Fund's investment objective and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) the Fund will not issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. -52- (2) The Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) The Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. (3) The Fund will not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. (4) The Fund will not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (5) The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (6) The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, enter into transactions in financial and index futures contracts and related options, engage in transactions on a when-issued or forward commitment basis, and enter into forward currency contracts. (7) The Fund will not concentrate its investments in any one industry, except that the Fund may invest up to 25% of its total assets in securities issued by companies principally engaged in any one industry. The Fund considers foreign government securities and supranational organizations to be industries. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. (8) The Fund will not purchase securities of an issuer, if (a) more than 5% of the Fund's total assets taken at market value would, at the time, be invested in the securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States government or its agencies or instrumentalities or, with respect to 25% of the Fund's total assets, to securities issued or guaranteed by the government of any country other than the United States which is a member of the Organization for Economic Cooperation and Development ("OECD"). The member countries of OECD are at present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States; or (b) such purchases would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. -53- In addition to the above fundamental restrictions, the Fund has undertaken the following non-fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser or sub-adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. (2) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (3) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (4) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (5) The Fund will not invest for the purpose of exercising control over or management of any company. (6) The Fund will not purchase warrants except in units with other securities in original issuance thereof or attached to other securities, if at the time of the purchase, the Fund's investment in warrants, valued at the lower of cost or market, would exceed 5% of the Fund's total assets. For these purposes, warrants attached to units or other securities shall be deemed to be without value. (7) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. (8) The Fund will not enter into options on securities, securities indices or currencies or related options (including options on futures) if the sum of initial margin deposits and premiums paid for any such option or options would exceed 5% of its total assets, and it will not enter into options with respect to more than 25% of its total assets. (9) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. -54- The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--TROIKA DIALOG RUSSIA FUND The Fund's investment objective, as described under "investment policy" and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) the Fund will not issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c} the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (2) at the end of each quarter of the taxable year, (i) with respect to at least 50% of the market value of the Fund's assets, the Fund may invest in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purchases of this calculation to an amount not greater than 5% of the value of the Fund's total assets, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). (3) the Fund will not concentrate its investments by investing more than 25% of its assets in the securities of issuers in any one industry. This limit will not apply to oil and gas related securities and to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. (4) the Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, and may enter into forward currency contracts. (5) the Fund will not purchase real estate, interests in real estate or real estate limited partnership interest except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (6) the Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (7) the Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse -55- repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) the Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber then in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. The Fund will only invest in reverse repurchase agreements up to 5% of the Fund's total assets. (8) the Fund will not act as underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. In addition to the above fundamental restrictions, the Russia Fund has undertaken the following non- fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. (2) The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (3) The Fund may invest up to 15% of the value of its assets in warrants. This restriction on the purchase of warrants does not apply to warrants attached to, or otherwise included in, a unit with other securities. (4) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (5) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (6) The Fund will not invest for the purpose of exercising control over or management of any company. (7) The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. -56- The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--WORLDWIDE EMERGING MARKETS FUND The Fund's investment objective and the following investment restrictions are matters or fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund present at a shareholders' meeting at which more than 50% of the outstanding shares are present or represented by proxy or (b) more than 50% of the outstanding shares. Under these investment restrictions: (1) the Fund will not issue any senior security (as defined in the 1940 Act), except that: (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act. (2) The Fund shall not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act. (3) The Fund shall not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (4) The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, may engage in transactions on a when-issued or forward commitment basis, and may enter into forward currency contracts. (5) The Fund shall not make loans, except that, to the extent appropriate under its investment program, the Fund may: (a) purchase bonds, debentures or other debt securities, including short-term obligations; (b) enter into repurchase transactions; and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets. (6) The Fund will not hold more than 5% of the value of its total assets in the securities of any one issuer or hold more than 10% of the outstanding voting securities of any one issuer. This restriction applies only to 75% of the value of the Fund's total assets. Securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities are excluded from this restriction. -57- (7) The Fund will not concentrate its investments in any one industry except that the Fund may invest up to 25% of its total assets in securities issuers principally engaged in any one industry. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, securities invested in, or repurchase agreements for, U.S. Government securities, and certificates of deposit, or bankers' acceptances, or securities of U.S. banks and bank holding companies. (8) The Fund shall not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) the Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. In addition to the above fundamental restrictions, the Fund has undertaken the following non-fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund: (1) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. (2) The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act. (3) The Fund will not purchase any securities on margin or make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund. (4) The Fund shall not buy securities from or sell securities (other than securities issued by the Fund) to any of its officers, directors or its investment adviser or distributor as principal. (5) The Fund shall not contract to sell any security or evidence of interest therein, except to the extent that the same shall be owned by the Fund. (6) The Fund will not invest for the purpose of exercising control over or management of any company. (7) The Fund shall not write, purchase or sell puts or calls on underlying securities. However, the Fund may invest up to 15% of the value of its assets in warrants. This restriction on the purchase of warrants does not apply to warrants attached to, or otherwise included in, a unit with other securities. -58- (8) The Fund will invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets. FUNDAMENTAL INVESTMENT RESTRICTIONS--GLOBAL INCOME FUND The Fund's investment policy, and the investment restrictions set forth below, may not be changed without the affirmative vote (defined as the lesser of: 67% of the shares represented at a meeting at which 50% of the outstanding shares are present or 50% of the outstanding shares) of the Fund's shareholders. These restrictions may be summarized as follows: The Fund shall not: (1) issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, delayed delivery and when-issued securities, which may be considered the issuance of senior securities to the extent permitted under applicable regulations; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, the interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act; (2) borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements, and (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made. (3) underwrite securities of other issuers; (4) concentrate its investments in a particular industry to an extent greater than 25% of the value of its total assets, provided that such limitation shall not apply to securities issued or guaranteed by the U.S. Government or its agencies; (5) invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options for hedging purposes, may engage in transactions on a when-issued or forward commitment basis and may enter into forward currency contracts. The Fund will not purchase real estate, interests in -59- real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein issued by companies, including real estate investment trusts, which deal in real estate or interests therein. (6) make loans to other persons except: (a) through the purchase of a portion or portions of an issue or issues of securities issued or guaranteed by the U.S. Government or its agencies, or (b) through investments in "repurchase agreements" (which are arrangements under which the Fund acquires a debt security subject to an obligation of the seller to repurchase it at a fixed price within a short period), provided that no more than 5% of the Fund's assets may be invested in repurchase agreements; (7) purchase the securities of another investment company or investment trust, except in the open market and then only if no profit, other than the customary broker's commission, results to a sponsor or dealer, or by merger or other reorganization; (8) buy securities from or sell securities (other than securities issued by the Fund) to any of its officers, Trustees or the Adviser as principal; (9) contract to sell any security or evidence of interest therein, except to the extent that the same shall be owned by the Fund; (10) purchase or retain securities of an issuer when one or more of the officers and Trustees of the Fund or of the investment adviser, or a person owning more that 10% of the stock of either, own beneficially more than 1/2 of 1% of the securities of such issuer and such persons owning more than 1/2 of 1% of such securities together own beneficially more than 5% of the securities of such issuer; (11) invest more than 5% of its total assets in the securities of any one issuer (except securities issued or guaranteed by the U.S. Government) except that such restriction shall not apply to 50% of the Fund's portfolio; (12) purchase any security if such purchase would cause the Fund to own at the time of purchase more than 10% of the outstanding voting securities of any one issuer; (13) invest more than 15% of its net assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors; and (14) invest in interest in oil, gas or other mineral exploration or development programs. The following investment policy of the Fund is not a fundamental policy and may be changed by a vote of a majority of the Fund's Board of Trustees without shareholder approval. The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the Fund's total assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. FUNDAMENTAL INVESTMENT RESTRICTIONS--LEXINGTON MONEY MARKET TRUST The following investment restrictions adopted by the Fund may not be changed without the affirmative vote of a majority (defined as the lesser of: 67% of the shares represented at a meeting at which 50% of outstanding shares are present, or 50% of outstanding shares) of its outstanding shares. The Fund may not: (l) purchase any securities other than money market instruments or other debt securities maturing within two years of the date of purchase; (2) borrow an amount which is in excess of one-third of its total assets taken at market value (including the amount borrowed); and then only from banks as a -60- temporary measure for extraordinary or emergency purposes. The Fund will not borrow to increase income but only to meet redemption requests which might otherwise require undue disposition of portfolio securities. The Fund will not invest while it has borrowings outstanding; (3) pledge its assets except in an amount up to 15% of the value of its total assets taken at market value in order to secure borrowings made in accordance with number (2) above; (4) sell securities short unless at all times while a short position is open the Fund maintains a long position in the same security in an amount at least equal thereto; (5) write or purchase put or call options; (6) purchase securities on margin except the Fund may obtain such short term credit as may be necessary for the clearance of purchases and sales of portfolio securities; (7) make investments for the purpose of exercising control or management; (8) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; (9) make loans to other persons, provided that the Fund may purchase money market securities or enter into repurchase agreements and lend securities owned or held by it as provided herein; (10) lend its portfolio securities, except in conformity with the guidelines set forth below; (11) concentrate more than 25% of its total assets, taken at market value at the time of such investment, in any one industry, except U.S. Government and U.S. Government agency securities and U.S. bank obligations; (12) purchase any securities other than U.S. Government or U.S. Government agency securities, if immediately after such purchase more than 5% of its total assets would be invested in securities of any one issuer for more than three business days; (taken at market value) (13) purchase or hold real estate, commodities or commodity contracts; ( 14 ) invest more than 5% of its total assets (taken at market value) in issues for which no readily available market exists or with legal or contractual restrictions on resale except for repurchase agreements; (15) act as an underwriter (except as it may be deemed such as to the sale of restricted securities); or (16) enter into reverse repurchase agreements. LENDING OF PORTFOLIO SECURITIES. As stated in number (10) above, subject to guidelines established by the Funds and by the Securities and Exchange Commission, the Lexington Money Market Trust, from time-to-time, may lend portfolio securities to brokers, dealers, corporations or financial institutions and receive collateral which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Such collateral will be either cash or fully negotiable U. S. Treasury or agency issues. If cash, such collateral will be invested in short term securities, the income from which will increase the return to the Fund. However, a portion of such incremental return may be shared with the borrower. If securities, the usual procedure will be for the borrower to pay a fixed fee to the Fund for such time as the loan is outstanding. The Fund will retain substantially all rights of beneficial ownership as to the loaned portfolio securities including rights to interest or other distributions and will have the right to regain record ownership of loaned securities in order to exercise such beneficial rights. Such loans will be terminable at any time. The Fund may pay reasonable fees to persons unaffiliated with it in connection with the arranging of such loans. PORTFOLIO TRANSACTIONS Subject to policies established by the Funds' Board of Trustees, the Investment Manager is responsible for the execution of the Funds' portfolio transactions and the selection of brokers/dealers that execute such transactions on behalf of the Funds. The Funds' primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, taking into account such factors as the price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved. This policy governs the selection of brokers and dealers and the market in which a transaction is -61- executed. Consistent with this policy, the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and such other policies as the Directors may determine, Pilgrim Investments may consider sales of shares of the Funds and of the other funds managed by Pilgrim Investments (the "Pilgrim Funds") as a factor in the selection of broker-dealers to execute the Funds' portfolio transactions. Consistent with the interests of the Funds, the Investment Manager may select brokers to execute the Funds' portfolio transactions on the basis of the research and brokerage services they provide to the Investment Manager for its use in managing the Funds and its other advisory accounts so long as the criteria of Section 28(e) of the Securities Exchange Act of 1934 are met. Section 28(e) of the Securities Exchange Act of 1934 was adopted in 1975 and specifies that a person with investment discretion shall not be "deemed to have acted unlawfully or to have breached a fiduciary duty" solely because such person has caused the account to pay higher commissions than the lowest available under certain circumstances, provided that the person so exercising investment discretion makes a good faith determination that the amount of commissions paid was "reasonable in relation to the value of the brokerage and research services provided are viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion." Such services may include furnishing analyses, reports and information concerning issuers, industries, securities, geographic regions, economic factors and trends, portfolio strategy, and performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement). Research and brokerage services received from such brokers are in addition to, and not in lieu of, the services required to be performed by the Investment Manager under the Investment Management Agreement. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Investment Manager determines in good faith that such commission is reasonable in terms either of that particular transaction or the overall responsibility of the Investment Manager to the Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits received by the Fund over the long term. Research services may also be received from dealers who execute Fund transactions. Currently, it is not possible to determine the extent to which commissions that reflect an element of value for research services ("soft dollars") might exceed commissions that would be payable for execution services alone. Nor generally can the value of research services to the Funds be measured. Research services furnished might be useful and of value to Pilgrim Investments and its affiliates, in serving other clients as well as the Funds. On the other hand, any research services obtained by Pilgrim Investments or its affiliates from the placement of portfolio brokerage of other clients might be useful and of value to Pilgrim Investments in carrying out its obligations to the Funds. With respect to Gold Fund and Silver Fund it is, as a general matter, the Funds' policy to execute in the U.S. all transactions with respect to securities traded in the U.S. and to execute its gold transactions in the U.S. except when better price and execution can, in the judgment of management of the Funds, be obtained elsewhere. For the Gold Fund and Silver Fund, over-the-counter purchases and sales are normally made with principal market makers, except where, in the opinion of management, the best executions are available elsewhere. Investment decisions for the Funds and for other investment accounts managed by the Investment Manager are made independently of each other in light of differing conditions. However, the same investment decision occasionally may be made for two or more of such accounts. In such cases, simultaneous transactions may occur. Purchases or sales are then allocated as to price or amount in a manner deemed fair and equitable to all accounts involved. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Funds are concerned, in other cases the Investment Manager believes that coordination and the ability to participate in volume transactions will be beneficial to the Funds. Debt securities generally are traded on a "net" basis with a dealer acting as principal for its own account without a stated commission, although the price of the security usually includes a profit to the dealer. U.S. and foreign government securities and money market instruments generally are traded in the OTC markets. In underwritten offerings, securities usually are purchased at a fixed price which includes a amount of compensation to the underwriter. On occasion, securities may be purchased directly from an issuer, in which case no commissions or discounts are paid. Brokers/dealers may receive commissions on futures, currency and options transactions. -62- The Funds anticipate that their brokerage transactions involving securities of companies domiciled in countries other than the United States will normally be conducted on the principal stock exchanges of those countries. Fixed commissions of foreign stock exchange transactions are generally higher than the negotiated commission rates available in the United States. There is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the United States. The Funds engage in portfolio trading when the Investment Manager concludes that the sale of a security owned by the Funds and/or the purchase of another security of better value can enhance principal and/or increase income. A security may be sold to avoid any prospective decline in market value, or a security may be purchased in anticipation of a market rise. Consistent the Funds' investment objectives, a security also may be sold and a comparable security purchased coincidentally in order to take advantage of what is believed to be a disparity in the normal yield and price relationship between the two securities. Although the Funds do not generally intend to trade for short-term profits, the Funds' investments may be changed when circumstances warrant, without regard to the length of time a particular security has been held. It is expected that the Funds will have an annual portfolio turnover rate that will generally not exceed 100%. A 100% portfolio turnover rate would occur if the lesser of the value of purchases or sales of portfolio securities for the Fund for a year (excluding purchases of U.S. Treasury and other securities with a maturity at the date of purchase of one year or less) were equal to 100% of the average monthly value of the securities, excluding short-term investments, held by the Funds during such year. A high turnover rate (100% or more) results in correspondingly greater brokerage commissions and other transactional expenses which are borne by the Funds. High portfolio turnover may result in the realization of net short-term capital gains by the Funds which, when distributed to shareholders, will be taxable as ordinary income. See "Tax Considerations." The brokerage commissions paid by each Fund and the Fund's portfolio turnover rate for the last three years are as follows: PILGRIM GNMA INCOME FUND, INC. Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 40,646 $ 0 134.28% 1998 $ 34,516 $ 0 54.47% 1999 $ 60,939 $ 0 25.10% -63- PILGRIM GOLD FUND, INC. Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 223,351 $ 42,728 38.32% 1998 $ 124,761 $ 31,159 28.93% 1999 $ 389,449 $ 110,507 78.55% PILGRIM GROWTH AND INCOME FUND, INC. Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 457,246 $ 172,381 88.15% 1998 $ 372,204 $ 177,110 63.20% 1999 $ 482,487 $ 237,439 86.31% PILGRIM INTERNATIONAL FUND Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 177,179 $ 20,613 122.56% 1998 $ 174,405 $ 40,453 143.67% 1999 $ 167,074 $ 38,707 148.82% PILGRIM TROIKA DIALOG RUSSIA FUND Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 5,475 $ 0 66.84% 1998 $ 47,806 $ 0 65.76% 1999 $ 91,247 $ 0 91.14% -64- PILGRIM GLOBAL CORPORATE LEADERS FUND Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 275,413 $ 37,312 117.48% 1998 $ 203,102 $ 68,164 137.33% 1999 $ 18,457 $ 7,360 12.76% PILGRIM SILVER FUND Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 111,983 $ 0 18.76% 1998 $ 62,713 $ 0 28.78% 1999 $ 36,882 $ 11,129 29.44% PILGRIM SMALLCAP ASIA GROWTH FUND, INC. Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 632,268 $ 0 187.41% 1998 $ 290,149 $ 0 192.28% 1999 $ 235,538 $ 0 172.89% -65- PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC. Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $2,989,156 $ 234,472 112.05% 1998 $ 924,618 $ 36,566 107.19% 1999 $1,367,102 $ 170,098 184.39% PILGRIM GLOBAL INCOME FUND Total Brokerage Soft Dollar Portfolio Commission Paid Commission Paid Turnover Rate --------------- --------------- ------------- 1997 $ 212,446 $ 0 117.94% 1998 $ 317,877 $ 0 45.26% 1999 $ 334,433 $ 0 24.56% ABOUT THE MONEY MARKET TRUST Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for money market instruments. Therefore, usually no brokerage commissions were paid by the Fund. Transactions are allocated to various dealers by the Investment Manager in its best judgment. Dealers are selected primarily on the basis of prompt execution of orders at the most favorable prices. The Fund has no obligation to deal with any dealer or group of dealers. Particular dealers may be selected for research or statistical and other services to enable the Investment Manager to supplement its own research and analysis with that of such firms. Information so received will be in addition to and not in lieu of the services required to be performed by the Investment Manager under the Investment Management Agreement and the expenses of the Investment Manager will not necessarily be reduced as a result of the receipt of such supplemental information. ABOUT GLOBAL INCOME FUND Portfolio securities are purchased directly from dealers acting as principal underwriters or market makers for GNMA certificates or government securities. Such transactions are usually conducted on a net basis and accordingly no brokerage commissions are paid by the Fund. The Fund may also execute transactions through broker-dealers on a commission basis. -66- ADDITIONAL PURCHASE AND REDEMPTION INFORMATION A complete description of the manner in which shares may be purchased, redeemed or exchanged appears in the Prospectus under "Shareholder Guide." Shares of the Funds are offered at the net asset value next computed following receipt of the order by the dealer (and/or the Distributor) or by the Funds' transfer agent, DST Systems, Inc. ("Transfer Agent"), plus, for Class A, a varying sales charge depending upon the amount of money invested, as set forth in the Prospectus. SPECIAL PURCHASES AT NET ASSET VALUE Class A shares of the Funds may be purchased at net asset value, without a sales charge, by persons who have redeemed their Class A shares of a Fund (or shares of other funds managed by the Investment Manager in accordance with the terms of such privileges established for such funds) within the previous 90 days. The amount that may be so reinvested in the Fund is limited to an amount up to, but not exceeding, the redemption proceeds (or to the nearest full share if fractional shares are not purchased). In order to exercise this privilege, a written order for the purchase of shares must be received by the Transfer Agent, or be postmarked, within 90 days after the date of redemption. This privilege may only be used once per calendar year. Payment must accompany the request and the purchase will be made at the then current net asset value of the Fund. Such purchases may also be handled by a securities dealer who may charge a shareholder for this service. If the shareholder has realized a gain on the redemption, the transaction is taxable and any reinvestment will not alter any applicable Federal capital gains tax. If there has been a loss on the redemption and a subsequent reinvestment pursuant to this privilege, some or all of the loss may not be allowed as a tax deduction depending upon the amount reinvested, although such disallowance is added to the tax basis of the shares acquired upon the reinvestment. Class A shares of the Funds may also be purchased at net asset value by any person who can document that Fund shares were purchased with proceeds from the redemption (within the previous 90 days) of shares from any unaffiliated mutual fund on which a sales charge was paid or which were subject at any time to a CDSC, and the Distributor has determined in its discretion that the unaffiliated fund invests primarily in the same types of securities as the Pilgrim Fund purchased. Additionally, Class A shares of the Funds may also be purchased at net asset value by any charitable organization or any state, county, or city, or any instrumentality, department, authority or agency thereof that has determined that a Fund is a legally permissible investment and that is prohibited by applicable investment law from paying a sales charge or commission in connection with the purchase of shares of any registered management investment company ("an eligible governmental authority"). If an investment by an eligible governmental authority at net asset value is made though a dealer who has executed a selling group agreement with respect to the Fund (or the other open-end Pilgrim Funds) the Distributor may pay the selling firm 0.25% of the Offering Price. The officers, directors/trustees and bona fide full-time employees of each Fund and the officers, directors and full-time employees of the Investment Manager, any Sub-Advisers, the Distributor, any service provider to the Funds 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 -67- immediate families) and discretionary advisory accounts of the Investment Manager or any Sub-Adviser, may purchase Class A shares of a Fund at net asset value without a sales charge. Such purchaser may be required to sign a letter stating that the purchase is for his own investment purposes only and that the securities will not be resold except to the Fund. The Funds may, under certain circumstances, allow registered investment advisers to make investments on behalf of their clients at net asset value without any commission or concession. Class A shares may also be purchased at net asset value by certain fee based registered investment advisers, trust companies and bank trust departments under certain circumstances making investments on behalf of their clients and by shareholders who have authorized the automatic transfer of dividends from the same class of another open-end fund managed by the Investment Manager or from Pilgrim Prime Rate Trust. Class A shares may also be purchased without a sales charge by (i) shareholders who have authorized the automatic transfer of dividends from the same class of another Pilgrim Fund distributed by the Distributor or from Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies and bank trust departments investing in Class A shares on their own behalf or on behalf of their clients, provided that the aggregate amount invested in any one or more Funds, during the 13 month period starting with the first investment, equals at least $1 million; (iii) broker-dealers, who have signed selling group agreements with the Distributor, and registered representatives and employees of such broker-dealers, for their own accounts or for members of their families (defined as current spouse, children, parents, grandparents, uncles, aunts, siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv) broker-dealers using third party administrators for qualified retirement plans who have entered into an agreement with the Pilgrim Funds or an affiliate, subject to certain operational and minimum size requirements specified from time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or broker-dealer charges an account management fee ("wrap accounts"); and (vi) any registered investment company for which Pilgrim Investments serves as Investment Manager. The Funds may terminate or amend the terms of these sales charge waivers at any time. LETTERS OF INTENT AND RIGHTS OF ACCUMULATION An investor may immediately qualify for a reduced sales charge on a purchase of Class A shares 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 Funds. 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. -68- An investor acknowledges and agrees to the following provisions by completing the Letter of Intent section of the Shareholder Application in the Prospectus. A minimum initial investment equal to 25% of the intended total investment is required. An amount equal to the maximum sales charge or 5.75% of the total intended purchase will be held in escrow at Pilgrim Funds, in the form of shares, in the investor's name to assure that the full applicable sales charge will be paid if the intended purchase is not completed. The shares in escrow will be included in the total shares owned as reflected on the monthly statement; income and capital gain distributions on the escrow shares will be paid directly by the investor. The escrow shares will not be available for redemption by the investor until the Letter of Intent has been completed, or the higher sales charge paid. If the total purchases, less redemptions, equal the amount specified under the Letter, the shares in escrow will be released. If the total purchases, less redemptions, exceed the amount specified under the Letter and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by the Distributor and the dealer with whom purchases were made pursuant to the Letter of Intent (to reflect such further quantity discount) on purchases made within 90 days before, and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the applicable offering price. If the total purchases, less redemptions, are less than the amount specified under the Letter, the investor will remit to the Distributor an amount equal to the difference in dollar amount of sales charge actually paid and the amount of sales charge which would have applied to the aggregate purchases if the total of such purchases had been made at a single account in the name of the investor or to the investor's order. If within 10 days after written request such difference in sales charge is not paid, the redemption of an appropriate number of shares in escrow to realize such difference will be made. If the proceeds from a total redemption are inadequate, the investor will be liable to the Distributor for the difference. In the event of a total redemption of the account prior to fulfillment of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption and the balance will be forwarded to the Investor. By completing the Letter of Intent section of the Shareholder Application, an investor grants to the Distributor a security interest in the shares in escrow and agrees to irrevocably appoint the Distributor as his attorney-in-fact with full power of substitution to surrender for redemption any or all shares for the purpose of paying any additional sales charge due and authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as directed by the Distributor. The investor or the securities dealer must inform the Transfer Agent or the Distributor that this Letter is in effect each time a purchase is made. If at any time prior to or after completion of the Letter of Intent the investor wishes to cancel the Letter of Intent, the investor must notify the Distributor in writing. If, prior to the completion of the Letter of Intent, the investor requests the Distributor to liquidate all shares held by the investor, the Letter of Intent will be terminated automatically. Under either of these situations, the total purchased may be less than the amount specified in the Letter of Intent. If so, the Distributor will redeem at NAV to remit to the Distributor and the appropriate authorized dealer an amount equal to the difference between the dollar amount of the sales charge actually paid and the amount of the sales charge that would have been paid on the total purchases if made at one time. The value of shares of the Funds 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 applies 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. -69- 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 Funds 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 shares for a reduced sales charge but will not affect any CDSC which may be imposed upon the redemption of shares of a Fund which imposes a CDSC. REDEMPTIONS Payment to shareholders for shares redeemed will be made within seven days after receipt by the Funds' 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 the Fund not reasonably practicable; or (c) for such other period as the SEC may permit for the protection of the Funds' 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. The Funds intend to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, an investor may incur brokerage costs in converting such securities to cash. However, the Funds have elected to be governed by the provisions of Rule 18f-1 under the 1940 Act, which contains a formula for determining the minimum amount of cash to be paid as part of any redemption. In the event the Funds must liquidate portfolio securities to meet redemptions, they 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 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. -70- Certain purchases of Class A shares and most Class B and Class C shares may be subject to a CDSC. Shareholders will be charged a CDSC if certain of those shares are redeemed within the applicable time period as stated in the prospectus. No CDSC is imposed on any shares subject to a CDSC to the extent that those shares (i) are no longer subject to the applicable holding period, (ii) resulted from reinvestment of distributions on CDSC shares, or (iii) were exchanged for shares of another fund managed by the Investment Manager, provided that the shares acquired in such exchange and subsequent exchanges will continue to remain subject to the CDSC, if applicable, until the applicable holding period expires. The CDSC or redemption fee will be waived for certain redemptions of shares upon (i) the death or permanent disability of a shareholder, or (ii) in connection with mandatory distributions from an Individual Retirement Account ("IRA") or other qualified retirement plan. The CDSC or redemption fee will be waived in the case of a redemption of shares following the death or permanent disability of a shareholder if the redemption is made within one year of death or initial determination of permanent disability. The waiver is available for total or partial redemptions of shares owned by an individual or an individual in joint tenancy (with rights of survivorship), but only for redemptions of shares held at the time of death or initial determination of permanent disability. The CDSC or redemption fee will also be waived in the case of a total or partial redemption of shares in connection with any mandatory distribution from a tax-deferred retirement plan or an IRA. The waiver does not apply in the case of a tax-free rollover or transfer of assets, other than one following a separation from services, except that a CDSC or redemption fee may be waived in certain circumstances involving redemptions in connection with a distribution from a qualified employer retirement plan in connection with termination of employment or termination of the employer's plan and the transfer to another employer's plan or to an IRA. The shareholder must notify the Fund either directly or through the Distributor at the time of redemption that the shareholder is entitled to a waiver of CDSC or redemption fee. The waiver will then be granted subject to confirmation of the shareholder's entitlement. The CDSC or redemption fee, which may be imposed on Class A shares purchased in excess of $1 million, will also be waived for registered investment advisors, trust companies and bank trust departments investing on their own behalf or on behalf of their clients. 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 a 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. -71- DEALER'S COMMISSIONS AND OTHER INCENTIVES In connection with the sale of shares of the Funds, the Distributor may pay Authorized Dealers of record a sales commission as a percentage of the purchase price. In connection with the sale of Class A shares, the Distributor will re-allow to Authorized Dealers of record from the sales charge on such sales the following amounts: EQUITY FUNDS DEALER'S REALLOWANCE AS A PERCENTAGE OF OFFERING PRICE AMOUNT OF TRANSACTION CLASS A ------- Less than $50,000 5.00% $50,000 - $99,999 3.75% $100,000 - $249,999 2.75% $250,000 - $499,999 2.00% $500,000 - $999,999 1.75% $1,000,000 and over See below INCOME FUNDS DEALER'S REALLOWANCE AS A PERCENTAGE OF OFFERING PRICE AMOUNT OF TRANSACTION CLASS A ------- Less than $50,000 4.25% $50,000 - $99,999 4.00% $100,000 - $249,999 3.00% $250,000 - $499,999 2.25% $500,000 - $999,999 1.75% $1,000,000 and over See below The Distributor may pay to Authorized Dealers out of its own assets commissions on shares sold in Classes A, B and C, at net asset value, which at the time of investment would have been subject to the imposition of a contingent deferred sales charge ("CDSC") if redeemed. There is no sales charge on purchases of $1,000,000 or more of Class A shares. However, such purchases may be subject to a CDSC, as disclosed in the Prospectus. The Distributor will pay Authorized Dealers of record commissions at the rates shown in the table below for purchases of Class A shares that are subject to a CDSC. DEALER COMMISSION AS A AMOUNT OF TRANSACTION PERCENTAGE OF AMOUNT INVESTED - --------------------- ----------------------------- $1,000,000 to $2,499,000 1.00% $2,500,000 to $4,999,999 0.50% $5,000,000 and over 0.25% Also, the Distributor will pay out of its own assets a commission of 1% of the amount invested for purchases of Class A shares of less than $1 million by qualified employer retirement plans with 50 or more participants. -72- The Distributor will pay out of its own assets a commission of 4% of the amount invested for purchases of Class B shares subject to a CDSC. For purchases of Class C shares subject to a CDSC, the Distributor may pay out of its own assets a commission of 1% of the amount invested of each Fund. The Distributor may, from time to time, at its discretion, allow a selling dealer to retain 100% of a sales charge, and such dealer may therefore be deemed an "underwriter" under the Securities Act of 1933, as amended. the Distributor, at its expense, may also provide additional promotional incentives to dealers. The incentives may include payment for travel expenses, including lodging, incurred in connection with trips taken by qualifying registered representatives and members of their families to locations within or outside of the United States, merchandise or other items. For more information on incentives, see "Management of the Funds -- 12b-1 Plans" in this Statement of Additional Information. DETERMINATION OF SHARE PRICE The Funds calculate net asset value as of the close of normal trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time, unless weather, equipment failure or other factors contribute to an earlier closing time) each business day. It is expected that the New York Stock Exchange will be closed on Saturdays and Sundays and on New Year's Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Per share net asset value is calculated by dividing the value of the Funds' total net assets by the total number of the Funds' shares then outstanding. For the Money Market Trust, substantially all of the Fund's net income calculated from the immediately preceding determination of net income, is declared daily as dividends. The Funds' portfolio securities and other assets are valued as follows: Portfolio securities are valued using current market valuations: either the last reported sales price or, in the case of securities for which there is no reported last sale and fixed-income securities, the mean between the closing bid and asked price. Securities and assets for which market quotations are not readily available (including restricted securities which are subject to limitations as to their sale) are valued at their fair values as determined in good faith by or under the supervision of each Fund's Board, in accordance with methods that are specifically authorized by the Board. The valuation procedures applied in any specific instance are likely to vary from case to case. However, consideration is generally given to the financial position of the issuer and other fundamental analytical data relating to the investment and to the nature of the restrictions on disposition of the securities (including any registration expenses that might be borne by the Funds in connection with such disposition). In addition, specific factors also are generally considered, such as the cost of the investment, the market value of any unrestricted securities of the same class (both at the time of purchase and at the time of valuation), the size of the holding, the prices of any recent transactions or offers with respect to such securities and any available analysts' reports regarding the issuer. The fair value of other assets is added to the value of all securities positions to arrive at the value of a Fund's total assets. The Fund's liabilities, including accruals for expenses, are deducted from its total assets. Once the total value of the Fund's net assets is so determined, that value is then divided by the total number of shares outstanding (excluding treasury shares), and the result, rounded to the nearest cent, is the net asset value per share. Short-term obligations with maturities of 60 days or less are valued at amortized cost as reflecting fair value. Options are valued at the mean of the last bid and asked price on the exchange where the option is primarily traded. Long-term debt obligations are valued at the mean of representative quoted bid or asked prices for such securities or, if such prices are not available, at prices for securities of comparable maturity, quality and type; however, when the Investment Manager deems it appropriate, prices obtained for the day of valuation from a bond pricing service will be used. Short-term debt investments are amortized to maturity based on their cost, adjusted for foreign exchange translation, provided such valuation represents fair value. -73- Options on currencies purchased by the Funds are valued at their last bid price in the case of listed options or at the average of the last bid prices obtained from dealers in the case of OTC options. The value of each security denominated in a currency other than U.S. dollars will be translated into U.S. dollars at the prevailing market rate as determined by the Investment Manager on that day. The value of securities denominated in foreign currencies and traded on foreign exchanges or in foreign markets will be translated into U.S. dollars at the last price of their respective currency denomination against U.S. dollars quoted by a major bank or, if no such quotation is available, at the rate of exchange determined in accordance with policies established in good faith by the Boards. Because the value of securities denominated in foreign currencies must be translated into U.S. dollars, fluctuations in the value of such currencies in relation to the U.S. dollar may affect the net asset value of a Fund's shares even without any change in the foreign-currency denominated values of such securities. Because foreign securities markets may close before a Fund determines its net asset value, events affecting the value of portfolio securities occurring between the time prices are determined and the time the Fund calculates its net asset value may not be reflected unless the Investment Manager, under supervision of the Board, determines that a particular event would materially affect the Fund's net asset value. European, Far Eastern or Latin American securities trading may not take place on all days on which the NYSE is open. Further, trading takes place in Japanese markets on certain Saturdays and in various foreign markets on days on which the NYSE is not open. Consequently, the calculation of a Fund's respective net asset values therefore may not take place contemporaneously with the determination of the prices of securities held by the Fund. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of regular trading on the NYSE will not be reflected in a Fund's net asset value unless the Investment Manager, under the supervision of the Fund's Board of Trustees, determines that the particular event would materially affect net asset value. As a result, the Fund's net asset value may be significantly affected by such trading on days when a shareholder cannot purchase or redeem shares of the Fund. The per share net asset value of Class A shares generally will be higher than the per share net asset value of shares of the other classes, reflecting daily expense accruals of the higher distribution fees applicable to Class B and Class C. 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. The price of silver and gold bullion is determined by measuring the mean between the closing bid and asked quotations of silver and gold bullion set at the time of the close of the New York Stock Exchange, as supplied by the Gold Fund's and Silver Fund's custodian bank or other broker-dealers or banks approved by the Gold Fund and Silver Fund, on each date that the Exchange is open for business. LEXINGTON MONEY MARKET TRUST For the purpose of determining the price at which shares are issued and redeemed, the net asset value per share is calculated immediately after the daily dividend declaration by: (a) valuing all securities and instruments as set forth below; (b) deducting the Fund's liabilities; and (c) dividing the resulting amount by the number of shares outstanding. As discussed below, it is the intention of the Fund to maintain a net asset value per share of $1.00. The Fund's portfolio instruments are valued on the basis of amortized cost. This involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of -74- fluctuating interest rates on the market value of the security. While this method provides certainty in valuation, it may result in periods during which the value, as determined by amortized cost, is higher or lower than the price the Fund would receive if it sold its portfolio. During periods of declining interest rates, the daily yield on shares of the Fund computed as described above may be higher than a like computation made by a fund with identical investments utilizing a method of valuation based upon market prices and estimates of market prices for all its portfolio instruments. Thus, if the use of amortized cost by the Fund results in a lower aggregate portfolio value on a particular day, a prospective investor in the Fund would be able to obtain a somewhat higher yield than would result from an investment in a fund utilizing solely market values, and existing investors in the Fund would receive less investment income. The converse would apply in a period of rising interest rates. The Fund's use of amortized cost and the maintenance of the Fund's per share net value at $1.00 is based on its election to operate under the provisions of Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating under that rule, the Fund must maintain a dollar-weighted average portfolio maturity of 90 days or less, purchase only instruments having remaining maturities of thirteen months or less, and invest only in securities which are determined by the Board of Trustees to present minimal credit risks and which are of high quality as required by the Rule, or in the case of any instrument not so rated, considered by the Board of Trustees to be of comparable quality. Securities in the Trust will consist of money market instruments that have been rated (or whose issuer's short-term debt obligations are rated) in one of the two highest categories (i.e., "Al/Pl") by both Standard & Poor's Corporation ("S&P") and Moody's Investors Services, Inc. ("Moody's"), two nationally recognized statistical rating organizations ("NRSRO"). The Fund may invest up to 5% of its assets in any single "Tier I" security (other than U.S. Government securities), measured at the time of acquisition; however, it may invest more than 5% of its assets in a single Tier 1 security for no more than three business days. A "Tier I" security is one that has been rated (or the issuer of such security has been rated) by both S&P and Moody's in the highest rating category or, if unrated, is of comparable quality. A security rated in the highest category by only one of these NRSROs is also considered a Tier 1 security. In addition, the Fund may invest not more than 5% of its assets in "Tier 2" securities. A Tier 2 security is a security that is (a) rated in the second highest category by either S&P or Moody's or (b) an unrated security that is deemed to be of comparable quality by the Fund's investment advisor. The Fund may invest up to 1% of its assets in any single Tier 2 security. The Fund may invest only in a money market instrument that has a remaining maturity of 13 months (397 days) or less, provided that the Fund's average weighted maturity is 90 days or less. The Board of Trustees has also agreed, as a particular responsibility within the overall duty of care owed to its shareholders, to establish procedures reasonably designed, taking into account current market conditions and the Fund's investment objective, to stabilize the net asset value per share as computed for the purposes of sales and redemptions at $1.00. These procedures include periodic review, as the Board deems appropriate and at such intervals as are reasonable in light of current market conditions, of the relationship between the amortized cost value per share and a net asset value per share based upon available indications of market value. In such review, investments for which market quotations are readily available are valued at the most recent bid price or quoted yield equivalent for such securities or for securities of comparable maturity, quality and type as obtained from one or more of the major market makers for the securities to be valued. Other investments and assets are valued at fair value, as determined in good faith by the Board of Trustees. -75- SHAREHOLDER INFORMATION Certificates representing shares of the Funds will not normally be issued to shareholders. The Transfer Agent will maintain an account for each shareholder upon which the registration and transfer of shares are recorded, and any transfers shall be reflected by bookkeeping entry, without physical delivery. The Transfer Agent will require that a shareholder provide requests in writing, accompanied by a valid signature guarantee form, when changing certain information in an account (i.e., wiring instructions, telephone privileges, etc.). Each Fund 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 the 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 a 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 Fund has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which the 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 the Funds 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 Funds 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 the Funds 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 the Funds on a periodic basis, the Funds 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 Funds' 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 the 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 -76- 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 Funds. Employers who wish to use shares of a Fund under a custodianship with another bank or trust company must make individual arrangements with such institution. INDIVIDUAL RETIREMENT ACCOUNTS Investors having earned income are eligible to purchase shares of a Fund under an IRA pursuant to Section 408(a) of the Internal Revenue Code. An individual who creates an IRA may contribute annually certain dollar amounts of earned income, and an additional amount if there is a non-working spouse. Simple IRA plans that employers may establish on behalf of their employees are also available. Roth IRA plans that enable employed and self-employed individuals to make non-deductible contributions, and, under certain circumstances, effect tax-free withdrawals, are also available. Copies of a model Custodial Account Agreement are available from the Distributor. Investors Fiduciary Trust Company, Kansas City, Missouri, will act as the Custodian under this model Agreement, for which it will charge the investor an annual fee of $12.00 for maintaining the Account (such fee is in addition to the normal custodial charges paid by the Funds). Full details on the IRA are contained in an IRS required disclosure statement, and the Custodian will not open an IRA until seven (7) days after the investor has received such statement from the Funds. 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) The Funds will not permit exchanges in violation of any of the terms and conditions set forth in the Funds' Prospectus or herein. -77- (4) Telephone redemption requests must meet the following conditions to be accepted by the Funds: (a) Proceeds of the redemption may be directly deposited into a predetermined bank account, or mailed to the current address on the registration. This address cannot reflect any change within the previous sixty (30) days. (b) Certain account information will need to be provided for verification purposes before the redemption will be executed. (c) Only one telephone redemption (where proceeds are being mailed to the address of record) can be processed with in a 30 day period. (d) The maximum amount which can be liquidated and sent to the address of record at any one time is $100,000. (e) The minimum amount which can be liquidated and sent to a predetermined bank account is $5,000. (5) If the exchange involves the establishment of a new account, the dollar amount being exchanged must at least equal the minimum investment requirement of the Pilgrim Fund being acquired. (6) Any new account established through the exchange privilege will have the same account information and options except as stated in the Prospectus. (7) Certificated shares cannot be redeemed or exchanged by telephone but must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141 and deposited into your account before any transaction may be processed. (8) If a portion of the shares to be exchanged are held in escrow in connection with a Letter of Intent, the smallest number of full shares of the 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 Fund's then-current prospectus. (10) Proceeds of a redemption may be delayed up to 15 days or longer until the check used to purchase the shares being redeemed has been paid by the bank upon which it was drawn. SYSTEMATIC WITHDRAWAL PLAN You may elect to make periodic withdrawals from your account in any fixed amount in excess of $100 to yourself, or to anyone else you properly designate, as long as the account has a current value of at least $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 -78- 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 Funds or terminated upon written notice by the relevant Fund. During the withdrawal period, you may purchase additional shares for deposit to your account, subject to any applicable sales charge, if the additional purchases are equal to at least one year's scheduled withdrawals, or $1,200, whichever is greater. There are no separate charges to you under this Plan, although a CDSC may apply if you purchased Class A, B or C shares. Shareholders who elect to have a systematic cash withdrawal must have all dividends and capital gains reinvested. As shares of the Fund are redeemed under the Plan, you may realize a capital gain or loss for income tax purposes. DISTRIBUTIONS As noted in the Prospectus, shareholders have the privilege of reinvesting both income dividends and capital gains distributions, if any, in additional shares of a respective class of a Fund at the then current net asset value, with no sales charge. The Funds' management believes that most investors desire to take advantage of this privilege. It has therefore made arrangements with its Transfer Agent to have all income dividends and capital gains distributions that are declared by the Funds automatically reinvested for the account of each shareholder. A shareholder may elect at any time by writing to the Fund or the Transfer Agent to have subsequent dividends and/or distributions paid in cash. In the absence of such an election, each purchase of shares of a class of a Fund is made upon the condition and understanding that the Transfer Agent is automatically appointed the shareholder's agent to receive his dividends and distributions upon all shares registered in his name and to reinvest them in full and fractional shares of the respective class of the Fund at the applicable net asset value in effect at the close of business on the reinvestment date. A shareholder may still at any time after a purchase of Fund shares request that dividends and/or capital gains distributions be paid to him in cash. TAX CONSIDERATIONS Information set forth in the Prospectus and this SAI is only a summary of certain key tax considerations generally affecting purchasers of shares of the Funds. The following is only a summary of certain additional tax considerations generally affecting the Funds and their shareholders that are not described in the Prospectus. No attempt has been made to present a complete explanation of the federal, state and local tax treatment of the Funds or the implications to shareholders, and the discussions here and in the Funds' Prospectus are not intended as substitutes for careful tax planning. Accordingly, potential purchasers of shares of the Funds are urged to consult their tax advisers with specific reference to their own tax circumstances. In addition, the tax discussion in the Prospectus and this SAI is based on tax law in effect on the date of the Prospectus and this SAI; such laws and regulations may be changed by legislative, judicial or administrative action, sometimes with retroactive effect. QUALIFICATION AS A REGULATED INVESTMENT COMPANY Each Fund has elected to be taxed as a regulated investment company under Subchapter M of the Code. As a regulated investment company, each Fund is not subject to federal income tax on the portion of its net investment income (i.e., taxable interest, dividends and other taxable ordinary income, net of expenses) and capital gain net income (i.e., the excess of capital gains over capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income (i.e., net investment income and the excess of net short-term capital gain over net long-term capital loss) for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. Distributions by a Fund made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year, will be considered distributions of income and gains of the taxable year and will, therefore, count toward satisfaction of the Distribution Requirement. -79- In addition to satisfying the Distribution Requirement, a regulated investment company must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "Income Requirement"). In general, gain or loss recognized by a Fund on the disposition of an asset will be a capital gain or loss. In addition, gain will be recognized as a result of certain constructive sales, including short sales "against the box." However, gain recognized on the disposition of a debt obligation purchased by a Fund at a market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount which accrued during the period of time the Fund held the debt obligation. In addition, under the rules of Code section 988, gain or loss recognized on the disposition of a debt obligation denominated in a foreign currency or an option with respect thereto (but only to the extent attributable to changes in foreign currency exchange rates), and gain or loss recognized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, except for regulated futures contracts or non-equity options subject to Code section 1256 (unless the Fund elects otherwise), will generally be treated as ordinary income or loss. Further, the Code also treats as ordinary income a portion of the capital gain attributable to a transaction where substantially all of the return realized is attributable to the time value of a Fund's net investment in the transaction and: (1) the transaction consists of the acquisition of property by the Fund and a contemporaneous contract to sell substantially identical property in the future; (2) the transaction is a straddle within the meaning of section 1092 of the Code; (3) the transaction is one that was marketed or sold to the Fund on the basis that it would have the economic characteristics of a loan but the interest-like return would be taxed as capital gain; or (4) the transaction is described as a conversion transaction in the Treasury Regulations. The amount of the gain recharacterized generally will not exceed the amount of the interest that would have accrued on the net investment for the relevant period at a yield equal to 120% of the federal long-term, mid-term, or short-term rate, depending upon the type of instrument at issue, reduced by an amount equal to: (1) prior inclusions of ordinary income items from the conversion transaction and (2) the capital interest on acquisition indebtedness under Code section 263(g). Built-in losses will be preserved where a Fund has a built-in loss with respect to property that becomes a part of a conversion transaction. No authority exists that indicates that the converted character of the income will not be passed through to a Fund's shareholders. In general, for purposes of determining whether capital gain or loss recognized by a Fund on the disposition of an asset is long-term or short-term, the holding period of the asset may be affected if (1) the asset is used to close a "short sale" (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Fund as part of a "straddle" (which term generally excludes a situation where the asset is stock and the Fund grants a qualified covered call option (which, among other things, must not be deep-in-the-money) with respect thereto), or (3) the asset is stock and the Fund grants an in-the-money qualified covered call option with respect thereto. In addition, a Fund may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position. Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by a Fund from a closing transaction with respect to, an option written by the Fund will be treated as a short-term capital gain or loss. -80- Certain transactions that may be engaged in by certain Funds (such as regulated futures contracts, certain foreign currency contracts, and options on stock indexes and futures contracts) will be subject to special tax treatment as "Section 1256 contracts." Section 1256 contracts are treated as if they are sold for their fair market value on the last business day of the taxable year, even though a taxpayer's obligations (or rights) under such contracts have not terminated (by delivery, exercise, entering into a closing transaction or otherwise) as of such date. Any gain or loss recognized as a consequence of the year-end deemed disposition of Section 1256 contracts is taken into account for the taxable year together with any other gain or loss that was previously recognized upon the termination of Section 1256 contracts during that taxable year. Any capital gain or loss for the taxable year with respect to Section 1256 contracts (including any capital gain or loss arising as a consequence of the year-end deemed sale of such contracts) is generally treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. A Fund, however, may elect not to have this special tax treatment apply to Section 1256 contracts that are part of a "mixed straddle" with other investments of the Fund that are not Section 1256 contracts. Certain Funds may purchase securities of certain foreign investment funds or trusts which constitute passive foreign investment companies ("PFICs") for federal income tax purposes. If a Fund invests in a PFIC, it has three separate options. First, it may elect to treat the PFIC as a qualified electing fund (a "QEF"), in which event the Fund will each year have ordinary income equal to its pro rata share of the PFIC's ordinary earnings for the year and long-term capital gain equal to its pro rata share of the PFIC's net capital gain for the year, regardless of whether the Fund receives distributions of any such ordinary earnings or capital gains from the PFIC. Second, a Fund that invests in stock of a PFIC may make a mark-to-market election with respect to such stock. Pursuant to such election, the Fund will include as ordinary income any excess of the fair market value of such stock at the close of any taxable year over the Fund's adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock exceeds the fair market value of the stock at the end of a given taxable year, such excess will be deductible as ordinary loss in an amount equal to the lesser of the amount of such excess or the net mark-to-market gains on the stock that the Fund included in income in previous years. A Fund's holding period with respect to its PFIC stock subject to the election will commence on the first day of the next taxable year. If the Fund makes the mark-to-market election in the first taxable year it holds PFIC stock, it will not incur the tax described below under the third option. Finally, if a Fund does not elect to treat the PFIC as a QEF and does not make a mark-to-market election, then, in general, (1) any gain recognized by the Fund upon the sale or other disposition of its interest in the PFIC or any "excess distribution" (as defined) received by the Fund from the PFIC will be allocated ratably over the Fund's holding period of its interest in the PFIC stock, (2) the portion of such gain or excess distribution so allocated to the year in which the gain is recognized or the excess distribution is received shall be included in the Fund's gross income for such year as ordinary income (and the distribution of such portion by the Fund to shareholders will be taxable as an ordinary income dividend, but such portion will not be subject to tax at the Fund level), (3) the Fund shall be liable for tax on the portions of such gain or excess distribution so allocated to prior years in an amount equal to, for each such prior year, (i) the amount of gain or excess distribution allocated to such prior year multiplied by the highest tax rate (individual or corporate) in effect for such prior year, plus (ii) interest on the amount determined under clause (i) for the period from the due date for filing a return for such prior year until the date for filing a return for the year in which the gain is recognized or the excess distribution is received, at the rates and methods applicable to underpayments of tax for such period, and (4) the distribution by the Fund to its shareholders of the portions of such gain or excess distribution so allocated to prior years (net of the tax payable by the Fund thereon) will again be taxable to the shareholders as an ordinary income dividend. -81- Treasury Regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) for any taxable year, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or any part of any net capital loss, any net long-term capital loss or any net foreign currency loss (including, to the extent provided in Treasury Regulations, losses recognized pursuant to the PFIC mark-to-market election) incurred after October 31 as if it had been incurred in the succeeding year. In addition to satisfying the requirements described above, each Fund must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of a Fund's taxable year, at least 50% of the value of the Fund's assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to each of which the Fund has not invested more than 5% of the value of the Fund's total assets in securities of such issuer and does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses. Generally, an option (call or put) with respect to a security is treated as issued by the issuer of the security, not the issuer of the option. If for any taxable year a Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. Such distributions generally will be eligible for the dividends-received deduction in the case of corporate shareholders. EXCISE TAX ON REGULATED INVESTMENT COMPANIES. A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of its ordinary income for such calendar year and 98% of capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year (a "taxable year election")). The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. For purposes of the excise tax, a regulated investment company shall: (1) reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year and (2) exclude foreign currency gains and losses and ordinary gains or losses arising as a result of a PFIC mark-to-market election (or upon the actual disposition of the PFIC stock subject to such election) incurred after October 31 of any year (or after the end of its taxable year if it has made a taxable year election) in determining the amount of ordinary taxable income for the current calendar year (and, instead, include such gains and losses in determining ordinary taxable income for the succeeding calendar year). Each Fund intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that a Fund may in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability. -82- FUND DISTRIBUTIONS Each Fund anticipates distributing all or substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income and treated as dividends for federal income tax purposes. Distributions attributable to dividends received by a Fund from domestic corporations will qualify for the 70% dividends-received deduction for corporate shareholders only to the extent discussed below. Distributions attributable to interest received by a Fund will not, and distributions attributable to dividends paid by a foreign corporation generally should not, qualify for the dividend-received deduction. Ordinary income dividends paid by each Fund with respect to a taxable year will qualify for the 70% dividends-received deduction generally available to corporations (other than corporations such as S corporations, which are not eligible for the deduction because of their special characteristics, and other than for purposes of special taxes such as the accumulated earnings tax and the personal holding company tax) to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. A dividend received by a Fund will not be treated as a qualifying dividend (1) if it has been received with respect to any share of stock that the Fund has held for less than 46 days (91 days in the case of certain preferred stock), excluding for this purpose under the rules of Code Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case of certain preferred stock) after the date on which the stock becomes ex-dividend and (ii) any period during which the Fund has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such (or substantially identical) stock; (2) to the extent that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property; or (3) to the extent the stock on which the dividend is paid is treated as debt-financed under the rules of Code Section 246A. Moreover, the dividends-received deduction for a corporate shareholder may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the Fund or (2) by application of Code Section 246(b) which in general limits the dividends-received deduction to 70% of the shareholder's taxable income (determined without regard to the dividends-received deduction and certain other items). A Fund may either retain or distribute to shareholders its net capital gain for each taxable year. Each Fund currently intends to distribute any such amounts. Net capital gain that is distributed and designated as a capital gain dividend will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares or whether such gain was recognized by the Fund prior to the date on which the shareholder acquired his shares. The Code provides, however, that under certain conditions only 50% (58% for alternative minimum tax purposes) of the capital gain recognized upon a Fund's disposition of domestic "small business" stock will be subject to tax. Conversely, if a Fund elects to retain its net capital gain, the Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net capital gain, it is expected that the Fund also will elect to have shareholders of record on the last day of its taxable year treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will be required to report his pro rata share of such gain on his tax return as long-term capital gain, will receive a refundable tax credit for his pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit. Alternative minimum tax ("AMT") is imposed in addition to, but only to the extent it exceeds, the regular tax and is computed at a maximum marginal rate of 28% for non corporate taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount. For purposes of the corporate AMT, the corporate dividends-received deduction is not itself an item of tax preference that must be added back to -83- taxable income or is otherwise disallowed in determining a corporation's AMTI. However, a corporate shareholder will generally be required to take the full amount of any dividend received from a Fund into account (without a dividends-received deduction) in determining its adjusted current earnings, which are used in computing an additional corporate preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings over its AMTI (determined without regard to this item and the AMT net operating loss deduction)) includable in AMTI. Investment income that may be received by a Fund from sources within foreign countries may be subject to foreign taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle a Fund to a reduced rate of, or exemption from, taxes on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of a Fund's assets to be invested in various countries is not known. If more than 50% of the value of a Fund's total assets at the close of its taxable year consist of the stock or securities of foreign corporations, the Fund may elect to "pass through" to its shareholders the amount of foreign taxes paid by the Fund. If a Fund so elects, each shareholder would be required to include in gross income, even though not actually received, his pro rata share of the foreign taxes paid by the Fund, but would be treated as having paid his pro rata share of such foreign taxes and would therefore be allowed to either deduct such amount in computing taxable income or use such amount (subject to various Code limitations) as a foreign tax credit against federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each shareholder would treat as foreign source income his pro rata share of such foreign taxes plus the portion of dividends received from the Fund representing income derived from foreign sources. No deduction for foreign taxes could be claimed by an individual shareholder who does not itemize deductions. Each shareholder should consult his own tax adviser regarding the potential application of foreign tax credits. Distributions by a Fund that do not constitute ordinary income dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any excess will be treated as gain from the sale of his shares, as discussed below. Distributions by a Fund will be treated in the manner described above regardless of whether such distributions are paid in cash or reinvested in additional Fund shares or shares of another Fund. Shareholders receiving a distribution in the form of additional shares will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date. In addition, if the net asset value at the time a shareholder purchases shares of a Fund reflects undistributed net investment income or recognized capital gain net income, or unrealized appreciation in the value of the assets of the Fund, distributions of such amounts will be taxable to the shareholder in the manner described above, although they economically constitute a return of capital to the shareholder. Ordinarily, shareholders are required to take distributions by a Fund into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such month will be deemed to have been received by the shareholders (and made by the Fund) on December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised annually as to the U.S. federal income tax consequences of distributions made (or deemed made) during the year. The Funds will be required in certain cases to withhold and remit to the U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has failed to provide a correct taxpayer identification number, (2) who is subject to backup withholding for failure to properly report the receipt of interest or dividend income, or (3) who has failed to certify to the Fund that it is not subject to backup withholding or that it is an exempt recipient (such as a corporation). -84- SALE OR REDEMPTION OF SHARES A shareholder will recognize gain or loss on the sale or redemption of shares of a Fund in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares (however, because the Money Market Trust normally maintains a stable value, in most cases there will be no gain or loss on the sale of shares of that Fund). All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of a Fund within 30 days before or after the sale or redemption. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of a Fund will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on such shares. For this purpose, the special holding period rules of Code section 246(c)(3) and (4) (discussed above in connection with the dividends-received deduction for corporations) generally will apply in determining the holding period of shares. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income. 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 a Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from a Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends paid to a foreign shareholder will be subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount of the dividend. Furthermore, such foreign shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) on the gross income resulting from a Fund's election to treat any foreign taxes paid by it as paid by its shareholders, but may not be allowed a deduction against this gross income or a credit against this U.S. withholding tax for the foreign shareholder's pro rata share of such foreign taxes which it is treated as having paid. Such foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Fund, capital gain dividends, and amounts retained by a Fund that are designated as undistributed capital gains. If the income from a 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. In the case of foreign non-corporate shareholders, a Fund may be required to withhold U.S. federal income tax at the rate of 31% on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Fund with proper notification of their foreign status. 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 a Fund, including the applicability of foreign taxes. -85- EFFECT OF FUTURE LEGISLATION; STATE AND LOCAL TAX CONSIDERATIONS The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect. Rules of state and local taxation of ordinary income dividends and capital gain dividends from regulated investment companies may differ from the rules for U.S. federal income taxation described above. Shareholders are urged to consult their tax advisers as to the consequences of these and other state and local tax rules affecting investment in a Fund. CALCULATION OF PERFORMANCE DATA For the purpose of quoting and comparing the performance of the Funds (with the exception of the Lexington Money Market Trust) to that of other mutual funds and to other relevant market indices in advertisements or in reports to shareholders, performance may be stated in terms of total return. Under the rules of the SEC ("SEC rules"), funds advertising performance must include total return quotes calculated according to the following formula: n P(l+T) = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years (1, 5 or 10) ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or 10 year periods (or fractional portion thereof). Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication, and will cover one, five and ten year periods or a shorter period dating from the effectiveness of the Funds' Registration Statement. In calculating the ending redeemable value, all dividends and distributions by the Funds are assumed to have been reinvested at net asset value as described in the prospectus on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5 and 10 year periods (or fractional portion thereof) that would equate the initial amount invested to the ending redeemable value. Any recurring account charges that might in the future be imposed by the Funds would be included at that time. The Funds may also from time to time include in such advertising a total return figure that is not calculated according to the formula set forth above in order to compare more accurately the performance of the Funds with other measures of investment return. For example, in comparing the Funds' total return with data published by Lipper Analytical Services, Inc., or with the performance of the Standard and Poor's 500 Stock Index or the Dow Jones Industrial Average, the Funds calculate their aggregate total return for the specified periods of time assuming the investment of $10,000 in Fund shares and assuming the reinvestment of each dividend or other distribution at net asset value on the reinvestment date. Percentage increases are determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the beginning value. -86- With respect to the Lexington Money Market Fund, the Fund provides current yield and effective yield quotations, which are calculated in accordance with the regulations of the Securities and Exchange Commission, based upon changes in account value during a recent seven-day base period. Current yield quotations are computed by annualizing (on a 365-day basis) the "base period return". The "base period return" is computed by determining the net change exclusive of capital changes in the value of the account, divided by the value of the account at the beginning of the base period. Effective yield is computed by compounding the "base period return." Based upon dividends actually credited to the shareholders' accounts (i.e.: based upon net investment income), the current yield to an investor in the Fund during the last seven calendar days of its fiscal year ended December 31, 1999 was at an annual rate of 5.08% and the effective yield was at an annual rate of 4.96%. The average weighted maturity of investments was 46 days. The current and effective yield are affected by market conditions, portfolio quality, portfolio maturity, type of instruments held and operating expenses. The Fund attempts to keep its net asset value per share at $1.00, but attainment of this objective is not guaranteed. This Statement of Additional Information may be in use for a full year and it can be expected that these yields will fluctuate substantially from the example shown above. The current and effective yield figures are not a representation of future yield as the Fund's net income and expenses will vary based on many factors, including changes in short term money market yields generally and the types of instruments in the Fund's portfolio. The stated yield of the Fund may be useful in reviewing the Fund's performance and in providing a basis for comparison with other investment alternatives. However, unlike bank deposits and other investments which pay fixed yields for stated periods of time, the yield of the Fund fluctuates. In addition, other investment companies may calculate yield on a different basis and may purchase securities for their portfolios which have different qualities and maturities than those of the Fund's portfolio securities. 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 or Class Q shares with that of other mutual funds as listed in the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc., Value Line, Inc. or similar independent services that monitor the performance of mutual funds or with other appropriate indexes of investment securities. In addition, certain indexes may be used to illustrate historic performance of select asset classes. The performance information may also include evaluations of the Funds published by nationally recognized ranking services and by financial publications that are nationally recognized, such as Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall Street Journal. If a Fund compares its performance to other funds or to relevant indexes, the Fund's performance will be stated in the same terms in which such comparative data and indexes are stated, which is normally total return rather than yield. For these purposes the performance of the Fund, as well as the performance of such investment companies or indexes, may not reflect sales charges, which, if reflected, would reduce performance results. 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 -87- valuations of the Funds and individual stocks in a Fund's portfolio, appropriate indices and descriptions of such comparisons; (ix) quotes from the Sub-Adviser 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 Sub-Advisers, Pilgrim Capital, Pilgrim Group, Inc. or affiliates of the Company, the Investment Manager, the Sub-Advisers, Pilgrim Capital or Pilgrim Group, Inc. including: (i) performance rankings of other funds managed by the Investment Manager or a Sub-Adviser, or the individuals employed by the Investment Manager or a Sub-Adviser 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) information regarding rights offerings conducted by closed-end funds managed by the Investment Manager. The average annual total returns, [including sales charges,] for each Fund for the one-, five-, and ten-year periods ended December 31, 1999, is as follows: 1 Year 5 Year 10 Year ------ ------ ------- Pilgrim Global Corporate Leaders Fund, Inc. 39.06% 17.93% 11.01% Pilgrim GNMA Income Fund, Inc. 0.58% 7.87% 7.47% Pilgrim Gold Fund, Inc. 8.58% -9.32% -4.53% Pilgrim Growth and Income Fund, Inc. 15.54% 23.17% 14.62% Pilgrim International Fund, Inc. 47.85% 16.52% N/A Pilgrim Silver Fund, Inc. 8.70% -4.15% 1.89% Pilgrim SmallCap Asia Growth Fund, Inc. 57.29% N/A N/A Pilgrim Troika Dialog Russia Fund, Inc. 159.76% N/A N/A Pilgrim Worldwide Emerging Markets Fund, Inc. 112.58% 6.18% 7.68% Pilgrim Global Income Fund -0.31% 9.04% 7.16% Lexington Money Market Trust (1) Prior to June 17, 1991, the Growth and Income Fund operated under a different investment objective. (2) The International Fund commenced operations on January 1, 1994. (3) The SmallCap Asia Fund commenced operations on July 3, 1995. Since that time, the Fund's average annual return has been -2.38%. (4) The Russia Fund commenced operations on July 3, 1996. Since that time, the Fund's average annual return has been -9.47%. -88- GENERAL INFORMATION CUSTODIAN Brown Brothers Harriman & Co., 40 Walker Street, Boston, Massachusetts 12109, has been retained to act as the Custodian for all Funds' (except Pilgrim Growth & Income Fund, Pilgrim GNMA Income Fund and Lexington Money Market Trust) portfolio securities including those to be held by foreign banks and foreign securities depositories which qualify as eligible foreign custodians under the rules adopted by the SEC and for the Funds' domestic securities and other assets. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02181, has been retained to act as the custodian for the portfolio securities of Pilgrim Growth & Income Fund, Pilgrim GNMA Income Fund and Lexington Money Market Trust. DST Systems, Inc. has been retained to act as the transfer agent. Neither Brown Brothers Harriman nor DST Systems, Inc. have any part in determining the investment policies of the Funds or in determining which portfolio securities are to be purchased or sold by the Funds or in the declaration of dividends and distributions. LEGAL COUNSEL Legal matters for the Funds are passed upon by Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006. INDEPENDENT AUDITORS KPMG LLP, 355 South Grand Avenue, Los Angeles, California 90071, has been selected as independent auditors for the Funds for the fiscal year ending December 31, 2000. DECLARATION OF TRUST The Global Income Fund and Money Market Trust are organized as Massachusetts business trusts. The Declaration of Trust of each of these Funds provides that obligations of the Fund are not binding upon its Trustees, officers, employees and agents individually and that the Trustees, officers, employees and agents will not be liable to the trust or its investors for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee, officer, employee or agent against any liability to the trust or its investors to which the Trustee, officer, employee or agent would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Declaration of Trust also provides that the debts, liabilities, obligations and expenses incurred, contracted for or existing with respect to a designated Fund shall be enforceable against the assets and property of such Fund only, and not against the assets or property of any other Fund or the investors therein. OTHER INFORMATION The Funds are registered with the SEC as an open-end management investment company. Such registration does not involve supervision of the management or policies of the Funds by any governmental agency. The Prospectus and this Statement of Additional Information omit certain of the information contained in the Funds' Registration Statement filed with the SEC and copies of this information may be obtained from the SEC upon payment of the prescribed fee or examined at the SEC in Washington, D.C. without charge. Investors in the Funds will be kept informed of their progress through semi-annual reports showing portfolio composition, statistical data and any other significant data, including financial statements audited by independent certified public accountants. -89- REPORTS TO SHAREHOLDERS The fiscal year of the Funds ends on December 31. The Funds will send financial statements to its shareholders at least semiannually. An annual report containing financial statements audited by the independent accountants will be sent to shareholders each year. FINANCIAL STATEMENTS The financial statements from the Funds' December 31, 1999 Annual Report are incorporated herein by reference. Copies of the Funds' Annual and Semi-Annual Reports may be obtained without charge by contacting Pilgrim Funds at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004, (800) 992-0180. -90- PART C OTHER INFORMATION ITEM 23. EXHIBITS (a) (1) Form of Articles of Incorporation (2) Form of Articles Supplementary Designating Classes A, B, C & Q (b) Form of Bylaws (c) Not Applicable (d) Form of Investment Management Agreement between Registrant and Pilgrim Investments, Inc. (e) Form of Underwriting Agreement between Registrant and Pilgrim Securities, Inc. (f) Not Applicable (g) Form of Custodian Agreement between Registrant and State Street Bank & Trust Company (h) (1) Form of Administration Agreement between Registrant and Pilgrim Group, Inc. (2) Form of Expense Limitation Agreement between Registrant and Pilgrim Investments, Inc. (i) Opinion of Counsel - Filed as an exhibit to Registrant's Form N-1A Registration Statement and incorporated herein by reference. (j) (1) Consent of KPMG LLP (2) Consent of Dechert Price & Rhoads (k) Not Applicable (l) Form of Investment Letter of Initial Investors - Filed as an exhibit to Registrant's Form N-1A Registration Statement and incorporated herein by reference. (m) (1) Form of Service and Distribution Plan for Class A Shares (2) Form of Service and Distribution Plan for Class B Shares (3) Form of Service and Distribution Plan for Class C Shares (4) Form of Shareholder Service Plan for Class Q Shares (n) Form of Multiple Class Plan Pursuant to Rule 18f-3 (p) Form of Code of Ethics ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 25. INDEMNIFICATION Article Seventh of the Articles of Incorporation provides to the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the corporation shall have any liability to the corporation or its stockholders for damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. The corporation shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The corporation shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with the law. The Board of Directors may, through a by-law, resolution or agreement, make further provisions for indemnification of directors, officers, employees C-1 and agents to the fullest extent permitted by Maryland General Corporation Law. No provision of the Articles of Incorporation shall be effective to require a waiver of compliance with any provision of the Securities Act of 1933, or of the Investment Company Act of 1940, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder or to protect or purport to protect any director or officer of the corporation against any liability to the corporation or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Section 7 of Registrant's Administration Agreement provides for the indemnification of Registrant's Administrator against all liabilities incurred by it in performing its obligations under the agreement, except with respect to matters involving its disabling conduct. Registrant has obtained from a major insurance carrier a trustees' and officers' liability policy covering certain types of errors and omissions. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS Information as to the directors and officers of the Investment Manager, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Investment Manager in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-48282) filed under the Investment Advisers Act of 1940 and is incorporated herein by reference thereto. ITEM 27. PRINCIPAL UNDERWRITERS (a) Pilgrim Securities, Inc. is the principal underwriter for the Registrant and for Pilgrim Advisory Funds, Inc., Pilgrim Investment Funds, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim Prime Rate Trust, Pilgrim Mutual Funds, Pilgrim Equity Trust, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities Fund, Pilgrim Mayflower Trust, Pilgrim Government Securities Income Fund, Pilgrim Global Corporate Leaders Fund, Pilgrim Global Technology Fund Pilgrim Gold Fund, Pilgrim Growth and Income Fund, Pilgrim International Fund, Pilgrim Silver Fund, Pilgrim SmallCap Asia Growth Fund, Pilgrim Troika Dialog Russia Fund, Pilgrim Worldwide Emerging Markets Fund, Pilgrim Global Income Fund and Lexington Money Market Trust. C-2 (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 Investments, Inc., (c) Pilgrim Group, Inc., (d) the Portfolio Managers, (e) the Custodians and (f) the Transfer Agent. The address of each is as follows: (a) Pilgrim GNMA Income Fund, 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) Pilgrim Investments, Inc. 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 (e) State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 (f) DST Systems, Inc. P.O. Box 419368 Kansas City, Missouri 64141 ITEM 29. MANAGEMENT SERVICES None. ITEM 32. UNDERTAKINGS Not Applicable C-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, Registrant certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix and State of Arizona on the 26th day of July, 2000. PILGRIM GNMA INCOME FUND, INC. By: /s/ James M. Hennessy ------------------------------------ James M. Hennessy Executive Vice President & Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- Director and Chairman July 26, 2000 - ---------------------------- John G. Turner* Director and President - ---------------------------- (Chief Executive Officer) July 26, 2000 Robert W. Stallings* Senior Vice President and - ---------------------------- Principal Financial Officer Michael J. Roland* (Principal Financial Officer) July 26, 2000 Director July 26, 2000 - ---------------------------- Robert B. Goode, Jr.* Director July 26, 2000 - ---------------------------- Al Burton* Director July 26, 2000 - ---------------------------- Jock Patton* Director July 26, 2000 - ---------------------------- John R. Smith* Director July 26, 2000 - ---------------------------- David W. Wallace* C-4 SIGNATURE TITLE DATE --------- ----- ---- Director July 26, 2000 - ---------------------------- David W.C. Putnam* Director July 26, 2000 - ---------------------------- Walter H. May* Director July 26, 2000 - ---------------------------- Paul S. Doherty* Director July 26, 2000 - ---------------------------- Alan L. Gosule* *By: /s/ James M. Hennessy ------------------------------------- James M. Hennessy, Attorney-in-Fact** - ---------- ** Powers of Attorney for Michael J. Roland and for all Directors are attached hereto. C-5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L. Anderberg, and each of them his true and lawful attorney-in-fact as agent with full power of substitution and resubstitution of him in his name, place, and stead, to sign any and all registration statements on Form N-1A applicable to the Pilgrim GNMA Income Fund, Inc. and any amendment or supplement thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. Dated: July 26, 2000 /s/ Al Burton /s/ Paul S. Doherty - ---------------------------------- ---------------------------------- Al Burton Paul S. Doherty /s/ Robert B. Goode /s/ Alan L. Gosule - ---------------------------------- ---------------------------------- Robert B. Goode, Jr. Alan L. Gosule /s/ Walter H. May /s/ Jock Patton - ---------------------------------- ---------------------------------- Walter H. May Jock Patton /s/ David W.C. Putnam /s/ John R. Smith - ---------------------------------- ---------------------------------- David W.C. Putnam John R. Smith /s/ Robert W. Stallings /s/ John G. Turner - ---------------------------------- ---------------------------------- Robert W. Stallings John G. Turner /s/ David W. Wallace - ---------------------------------- David W. Wallace C-6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L. Anderberg, and each of them his true and lawful attorney-in-fact as agent with full power of substitution and resubstitution of him in his name, place, and stead, to sign any and all registration statements on Form N-1A applicable to the Pilgrim Global Corporate Leaders Fund, Inc., Pilgrim GNMA Income Fund, Inc., Pilgrim Gold Fund, Inc., Pilgrim Growth and Income Fund, Inc., Pilgrim International Fund, Inc., Pilgrim Silver Fund, Inc., Pilgrim SmallCap Asia Growth Fund, Inc., Pilgrim Troika Dialog Russia Fund, Inc., Pilgrim Worldwide Emerging Markets Fund, Inc., Pilgrim Global Income Fund, Lexington Money Market Trust, Lexington Natural Resources Trust and Lexington Emerging Markets Fund, Inc. and any amendment or supplement thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. Dated: July 26, 2000 /s/ Michael J. Roland - ------------------------------ Michael J. Roland Senior Vice President and Principal Financial Officer C-7 EXHIBIT LIST EXHIBIT NUMBER NAME OF EXHIBIT - ------ --------------- (a) (1) Form of Articles of Incorporation (2) Form of Articles Supplementary Designating Classes A, B, C & Q (b) Form of Bylaws (d) Form of Investment Management Agreement between Registrant and Pilgrim Investments, Inc. (e) Form of Underwriting Agreement between Registrant and Pilgrim Securities, Inc. (g) Form of Custodian Agreement between Registrant and State Street Bank & Trust Company (h) (1) Form of Administration Agreement between Registrant and Pilgrim Group, Inc. (2) Form of Expense Limitation Agreement between Registrant and Pilgrim Investments, Inc. (j) (1) Consent of KPMG LLP (2) Consent of Dechert Price & Rhoads (m) (1) Form of Service and Distribution Plan for Class A Shares (2) Form of Service and Distribution Plan for Class B Shares (3) Form of Service and Distribution Plan for Class C Shares (4) Form of Shareholder Service Plan for Class Q Shares (n) Form of Multiple Class Plan Pursuant to Rule 18f-3 (p) Form of Code of Ethics EX-99.A.1 2 0002.txt AMENDED ARTICLES OF INCORPORATION PILGRIM GNMA INCOME FUND, INC. ARTICLES OF AMENDMENT AND RESTATEMENT Pilgrim GNMA Income Fund, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Corporation desires to amend and restate its Charter as currently in effect. Therefore, the Charter of the Corporation is hereby amended and restated by striking out in its entirety the existing Charter and substituting in lieu thereof the following: FIRST: The name of the corporation is "Pilgrim GNMA Income Fund, Inc." SECOND: The purpose for which the corporation is formed and the business or objects to be transacted, carried on and promoted by it, is to act as an open-end investment company of the management type registered as such with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940 and to exercise and generally to enjoy all of the powers, rights and privileges granted to, or conferred upon, corporations by the general laws of the State of Maryland now or hereafter in force. THIRD: The address of the principal office of the corporation in the State of Maryland is 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. The name and address of the resident agent in the State of Maryland are: CT Corporation Trust, Inc., 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. FOURTH: (1) The total number of shares of stock which the Corporation has authority to issue is twenty-five million (25,000,000) shares of Common Stock all of which are designated to one series. All of the shares of Common Stock of the series are designated as one class of shares. The par value of the shares of each class is one cent ($0.01) per share. (2) The aggregate par value of all the authorized shares of stock is two hundred fifty thousand dollars ($250,000.00). (3) The Board of Directors of the corporation is authorized, from time to time, to fix the price or the minimum price or the consideration or minimum consideration for, and to authorize the issuance of, the shares of stock of the corporation and securities convertible into shares of stock of the corporation. (4) The Board of Directors of the corporation is authorized, from time to time, to further classify or to reclassify, as the case may be, any unissued shares of stock of the corporation by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption of the stock. (5) Subject to the power of the Board of Directors to classify and reclassify unissued shares, the shares of each class of stock of the corporation shall have the following preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption: (6) (a) (i) All consideration received by the corporation for the issuance or sale of shares of the class together with all income, earnings, profits and proceeds thereof, shall irrevocably belong to such class for all purposes, subject only to the rights of creditors and to effect the conversion of shares of any class of stock into another class of stock of the corporation, and are herein referred to as "assets belonging to" such class. (ii) The assets belonging to such class shall be charged with the liabilities of the corporation in respect of such class and with such class' share of the general liabilities of the corporation, in the latter case in proportion that the net asset value of such class bears to the net asset value of all classes. The determination of the Board of Directors shall be conclusive as to the allocation of liabilities, including accrued expenses and reserves, to a class. (iii) Dividends or distributions on shares of each class, whether payable in stock or cash, shall be paid only out of earnings, surplus or other assets belonging to such class. (iv) In the event of the liquidation or dissolution of the corporation, stockholders of each class shall be entitled to receive, as a class, out of the assets of the corporation available for distribution to stockholders, the assets belonging to such class and the assets so distributable to the stockholders of such class shall be distributed among such stockholders in proportion to the number of shares of such class held by them. (b) A series of Common Stock may be further classified by the Board of Directors into two or more classes of stock that may be invested together in the common investment portfolio in which the series is invested. Notwithstanding the provisions of paragraph (5)(a) of this Article FOURTH, if two or more classes are invested in a common investment portfolio as a series, the shares of each such class of stock of the corporation shall be subject to the following preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption, and, if there are other classes of stock of another series invested in a different investment portfolio, shall also be subject to the provisions of paragraph (5)(a) of this Article FOURTH at the series level as if the classes within the series were one class: (i) The income and expenses of the series shall be allocated among the classes in the series in accordance with the number of shares outstanding of each such class or as otherwise determined by the Board of Directors in a manner consistent with subparagraph (iii) below. (ii) As more fully set forth in this paragraph (5)(b) of Article FOURTH, the liabilities and expenses of the classes in the series shall be determined separately from those of each other and, accordingly, the net asset value, the dividends and distributions payable to holders, and the amounts distributable in the event of liquidation of the corporation to holders of shares of the corporation's stock may vary from class to class within the series. Except for these differences and certain other differences set forth in this paragraph (5) of Article FOURTH or elsewhere in the Articles of Incorporation, the classes in the me series shall have the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption. (iii) The dividends and distributions of investment income and capital gains with respect to the classes in the series shall be in such amounts as may be declared from time to time by the Board of Directors, and such dividends and distributions may vary among the classes in the series to reflect differing allocations of the expenses of the corporation among the classes and any resultant differences among the net 2 asset values per share of the classes, to such extent and for such purposes as the Board of Directors may deem appropriate. The allocation of investment income, capital gains, expenses and liabilities of the corporation among the classes in the series shall be determined by the Board of Directors in a manner that is consistent with an order, if any, obtained from the Securities and Exchange Commission or any future amendment to such order or any rule or interpretation under the Investment Company Act of 1940, as amended. (c) Except as provided below, on each matter submitted to a vote of the stockholders, each holder of a share of stock shall be entitled to one vote for each share standing in his name on the books of the corporation irrespective of the class or series thereof. All holders of shares of stock shall vote as a single class except as may otherwise be required by law pursuant to any applicable order, rule or interpretation issued by the Securities and Exchange Commission, or otherwise, or except with respect to any matter which affects only one or more classes or series of stock, in which case only the holders of shares of the class, classes or series affected shall be entitled to vote. (d) The proceeds of the redemption of shares of any class of stock of the corporation may be reduced by the amount of any contingent deferred sales charge or other charge (which charges may vary within and among the classes) payable on such redemption pursuant to the terms of issuance of such shares, all in accordance with the Investment Company Act of 1940, applicable rules and regulations thereunder, and applicable rules and regulations of the National Association of Securities Dealers, Inc. ("NASD"). (e) At such times as may be determined by the Board of Directors (or with the authorization of the Board of Directors, by the officers of the corporation) in accordance with the Investment Company Act of 1940, applicable rules and regulations thereunder, and applicable rules and regulations of the NASD and reflected in the corporation's current registration statement, shares of a particular class of stock of the corporation may be automatically converted into shares of another class of stock of the corporation based on the relative net asset values of such classes at the time of conversion, subject, however, to any conditions of conversion that may be imposed by the Board of Directors (or with the authorization of the Board of Directors, by the officers of the corporation) and reflected in the corporation's current registration statement as aforesaid. Except as provided above, all provisions of the Articles of Incorporation relating to stock of the corporation shall apply to shares of, and to the holders of, all classes of stock. (7) Notwithstanding any provisions of the Maryland General Corporation Law requiring a greater proportion than a majority of the votes of stockholders of all classes or of any class of stock entitled to be cast in order to take or authorize any action, any such action may be taken or authorized upon the concurrence of a majority of the aggregate number of votes entitled to be cast thereon. (8) The presence in person or by proxy of the holders of one-third of the shares of stock of the corporation entitled to vote (without regard to class) shall constitute a quorum at any meeting of the stockholders, except with respect to any matter which, under applicable statutes or regulatory requirements, requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of one-third of the shares of stock of each class required to vote as a class on the matter shall constitute a quorum. 3 (9) The corporation may issue shares of stock in fractional denominations to the same extent as its whole shares, and shares in fractional denominations shall be shares of stock having proportionately to the respective fractions represented thereby all the rights of whole shares, including, without limitation, the right to vote, the right to receive dividends and distributions and the right to participate upon liquidation of the corporation, but excluding the right to receive a stock certificate evidencing a fractional share. (10) No holder of any shares of any class of the corporation shall be entitled as of right to subscribe for, purchase, or otherwise acquire any shares of any class which the corporation proposes to issue, or any rights or options which the corporation proposes to issue or to grant for the purchase of shares of any class or for the purchase of any shares, bonds, securities, or obligations of the corporation which are convertible into or exchangeable for, or which carry any rights to subscribe for, purchase, or otherwise acquire shares of any class of the corporation; and any and all of such shares, bonds, securities or obligations of the corporation, whether now or hereafter authorized or created, may be issued, or may be reissued if the same have been reacquired, and any and all of such rights and options may be granted by the Board of Directors to such persons, firms, corporations and associations, and for such lawful consideration, and on such terms, as the Board of Directors in its discretion may determine, without first offering the same, or any thereof, to any said holder. FIFTH: (1) The initial number of directors of the corporation is eleven (11) and the names of those who will serve as such until the first annual meeting or until their successors are duly elected and qualify are as follows: Al Burton Paul S. Doherty Robert B. Goode Alan L. Gosule Walter H. May Jock Patton David W.C. Putnam John R. Smith Robert W. Stallings John G. Turner David W. Wallace The By-Laws of the corporation may fix the number of directors at a number greater or less than that named in these Articles of Incorporation and may authorize a majority of the entire Board of Directors to increase or decrease the number of directors. The number of directors shall never be less than the minimum number prescribed by the Maryland General Corporation Law. (2) The initial by-laws of the corporation shall be adopted by the directors at their organizational meeting or by their informal written action, as the case may be. Thereafter, the power to make, alter, and repeal the by-laws of the corporation shall be vested in the Board of Directors of the corporation. (3) Any determination made in good faith by or pursuant to the direction of the Board of Directors, as to: the amount of the assets, debts, obligations, or liabilities of the corporation; the amount of any reserves or charges set up and the propriety thereof; the time of or purpose for creating such reserves or charges; the use, alteration or cancellation of any reserves or charges (whether or not any debt, obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged or shall be then or thereafter required to be paid or discharged); the value of any investment or fair value of any other asset of the corporation; the amount of net investment income; the number of shares of stock outstanding; the estimated expense in connection with purchases or redemptions of the corporation's stock; the 4 ability to liquidate investments in an orderly fashion; the extent to which it is practicable to deliver a cross-section of the portfolio of the corporation in payment for any such shares, or as to any other matters relating to the issue, sale, purchase, redemption and/or other acquisition or disposition of investments or shares of the corporation, or the determination of the net asset value of shares of the corporation shall be final and conclusive, and shall be binding upon the corporation and all holders of its shares, past, present and future, and shares of the corporation are issued and sold on the condition and understanding that any and all such determinations shall be binding as aforesaid. SIXTH: (1) To the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the corporation shall have any liability to the corporation or its stockholders for damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. (2) The corporation shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The corporation shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with law. The Board of Directors may, through a by-law, resolution or agreement, make further provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law. (3) No provision of this Article SIXTH shall be effective (i) to require a waiver of compliance with any provision of the Securities Act of 1933, or of the Investment Company Act of 1940, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder or (ii) to protect or purport to protect any director or officer of the corporation against any liability to the corporation or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (4) References to the Maryland General Corporation Law in this Article SEVENTH are to the law as from time to time amended. No amendment to the Articles of Incorporation of the corporation shall affect any right of any person under this Article SIXTH based on any event, omission or proceeding prior to such amendment. SEVENTH: (1) Any holder of shares of stock of the corporation may require the corporation to redeem and the corporation shall be obligated to redeem at the option of such holder all or any part of the shares of the corporation owned by said holder, at the redemption price, pursuant to the method, upon the terms and subject to the conditions hereinafter set forth: (a) The redemption price per share shall be the net asset value per share determined at such time or times as the Board of Directors of the corporation shall designate in accordance with any provision of the Investment Company Act of 1940, any rule or regulation thereunder or exemption or exception therefrom, or any rule or regulation made or adopted by any securities association registered under the Securities Exchange Act of 1934. (b) Net asset value per share of a class shall be determined by dividing: 5 (i) The total value of the assets of such class, or in the case of a series with more than one class, such class's proportionate share of the total value of the assets of the series, such value determined as provided in Subsection (c) below less, to the extent determined by or pursuant to the direction of the Board of Directors, all debts, obligations and liabilities of such class (which debts, obligations and liabilities shall include, without limitation of the generality of the foregoing, any and all debts, obligations, liabilities, or claims, of any and every kind and nature, fixed, accrued and otherwise, including the estimated accrued expenses of management and supervision, administration and distribution and any reserves or charges for any or all of the foregoing, whether for taxes, expenses or otherwise) but excluding such class's liability upon its shares and its surplus, by (ii) The total number of shares of such class outstanding. The Board of Directors is empowered, in its absolute discretion, to establish other methods for determining such net asset value whenever such other methods are deemed by it to be necessary in order to enable the corporation to comply with, or are deemed by it to be desirable provided they are not inconsistent with, any provision of the Investment Company Act of 1940 or any rule or regulation thereunder. (c) In determining for the purposes of these Articles of Incorporation the total value of the assets of the corporation at any time, investments and any other assets of the corporation shall be valued in such manner as may be determined from time to time by the Board of Directors. (d) Payment of the redemption price by the corporation may be made either in cash or in securities or other assets at the time owned by the corporation or partly in cash and partly in securities or other assets at the time owned by the corporation. The value of any part of such payment to be made in securities or other assets of the corporation shall be the value employed in determining the redemption price. Payment of the redemption price shall be made on or before the seventh day following the day on which the shares are properly presented for redemption hereunder, except that delivery of any securities included in any such payment shall be made as promptly as any necessary transfers on the books of the issuers whose securities are to be delivered may be made. The corporation, pursuant to resolution of the Board of Directors, may deduct from the payment made for any shares redeemed a liquidating, redemption or similar charge as may be determined by the Board of Directors from time to time. (e) Redemption of shares of stock by the corporation is conditional upon the corporation having funds or property legally available therefor. (2) The corporation, either directly or through an agent, may repurchase its shares, out of funds legally available therefor, upon such terms and conditions and for such consideration as the Board of Directors shall deem advisable, by agreement with the owner at a price not exceeding the net asset value per share as determined by the corporation at such time or times as the Board of Directors of the corporation shall designate, less any liquidating, redemption or similar charge as may be fixed by resolution of the Board of Directors of the corporation from time to time, and take all other steps deemed necessary or advisable in connection therewith. (3) The corporation may cause the redemption, upon the terms set forth in subsections (1)(a) through (e) and subsection 5 of this Article SEVENTH, of shares of a class of stock held by a stockholder if the net asset value of the shares of stock is less than $500 or such other amount 6 not exceeding $5000 as may be fixed from time to time by the Board of Directors (the "Minimum Amount") with respect to that class. The Board of Directors may establish differing Minimum Amounts for each class of the corporation's stock and for categories of holders of stock based on such criteria as the Board of Directors may deem appropriate. The corporation shall give the stockholder notice which shall be in writing personally delivered or deposited in the mail, at least 30 days (or such other number of days as may be specified from time to time by the Board of Directors) prior to such redemption. Notwithstanding any other provision of this Article SEVENTH, if certificates representing such shares have been issued, the redemption price need not be paid by the corporation until such certificates are presented in proper form for transfer to the corporation or the agent of the corporation appointed for such purpose; however, the redemption shall be effective, in accordance with the resolution of the Board of Directors, regardless of whether or not such presentation has been made. (4) The obligations set forth in this Article SEVENTH may be suspended or postponed as may be permissible under the Investment Company Act of 1940 and the rules and regulations thereunder. (5) The Board of Directors may establish other terms and conditions and procedures for redemption, including requirements as to delivery of certificates evidencing shares, if issued. EIGHTH: All persons who shall acquire stock or other securities of the corporation shall acquire the same subject to the provisions of the corporation's Charter, as from time to time amended. NINTH: From time to time any of the provisions of the Charter of the corporation may be amended, altered or repealed, including amendments which alter the contract rights of any class of stock outstanding, and other provisions authorized by the Maryland General Corporation Law at the time in force may be added or inserted in the manner and at the time prescribed by said Law, and all rights at any time conferred upon the stockholders of the corporation by its Charter are granted subject to the provisions of this Article. SECOND: The amendment and restatement of the Charter of the Corporation herein made was recommended and advised by a majority of the Board of Directors of the Corporation of the Corporation at a meeting held on July 26th, 2000, and was approved by the shareholders of the Corporation at a meeting of such shareholders held on _________________, 2000. THIRD: The provisions set forth in the above Articles of Amendment and Restatement are all of the provisions of the Corporation's Charter currently in effect as hereby amended. FOURTH: The current address of the principal office of the Corporation is 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202, and the Corporation's current Resident Agent is CT Corporation Trust, Inc., whose address is 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. 7 FIFTH: The Corporation currently has eleven (11) Directors; the Directors currently in office are as follows: Al Burton Paul S. Doherty Robert B. Goode Alan L. Gosule Walter H. May Jock Patton David W.C. Putnam John R. Smith Robert W. Stallings John G. Turner David W. Wallace SIXTH: These Amended and Restated Articles do not increase the authorized stock of the Corporation or the aggregate par value of such authorized stock. IN WITNESS WHEREOF, Pilgrim GNMA Income Fund, Inc., has caused these Articles to be signed in its name and on its behalf by its Senior Vice President, Michael J. Roland, and attested by its Secretary, James M. Hennessy, on the 26th day of July, 2000. THE UNDERSIGNED, Senior Vice President acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and states that, to the best of his knowledge, information and belief, the matters and facts set forth herein with respect to the authorization and approval hereof are true in all material respects and that this statement is made under the penalties of perjury. ATTEST: PILGRIM GNMA INCOME FUND, INC. /s/ James M. Hennessy /s/ Michael J. Roland (SEAL) - ------------------------------ ---------------------------------- By: James M. Hennessy By: Michael J. Roland Secretary Senior Vice President 8 EX-99.A.2 3 0003.txt ARTICLES SUPPLEMENTARY - CLASSES A, B, C & Q ARTICLES OF AMENDMENT PILGRIM GNMA INCOME FUND, INC. Pilgrim GNMA Income Fund, Inc., a Maryland corporation (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Corporation is authorized to issue one hundred million (100,000,000) shares of Common Stock, one cent ($0.01) par value per share, with an aggregate par value of one million dollars ($1,000,000), all of which have been previously classified as one series and one class of shares. SECOND: The Board of Directors of the Corporation, by resolution dated July 26, 2000, increased the number of authorized shares of the Corporation from 100,000,000 shares to 1,000,000,000 shares, and classified the shares as shares of Common Stock. THIRD: The Board of Directors hereby redesignates one hundred million (100,000,000) shares (including all issued shares) of Pilgrim GNMA Income Fund, Inc. Common Stock as Pilgrim GNMA Income Fund, Inc. Class A Common Stock. FOURTH: The shares of Class A Common Stock of the Corporation redesignated hereby shall have the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as currently set forth in Article FIFTH of the charter of the Corporation. FIFTH: The Board of Directors of the Corporation has classified and designated the shares described above pursuant to authority contained in the Corporation's charter. SIXTH: The foregoing amendments to the charter of the Corporation were approved by a majority of the entire Board of Directors of the Corporation; the charter amendments are limited to changes expressly permitted by Section 2-605 of Title 2 of Subtitle 6 of the Maryland General Corporation Law to be made without action by the stockholders. The undersigned Senior Vice President of the Corporation acknowledges these Articles of Amendment to be the corporate act of the Corporation and states that to the best of his knowledge, information and belief, the matters and facts set forth in these Articles with respect to authorization and approval are true in all material respects and that this statement is made under penalties of perjury. IN WITNESS WHEREOF, Pilgrim GNMA Income Fund, Inc. has caused these Articles of Amendment to be signed and filed in its name and on its behalf by its Senior Vice President, and witnessed by its Secretary on July 26th, 2000. PILGRIM GNMA INCOME FUND, INC. By: /s/ Michael J. Roland -------------------------- By: Michael J. Roland Senior Vice President ATTEST: /s/ James M. Hennessy - ---------------------------- By: James M. Hennessy Secretary EX-99.B 4 0004.txt AMENDED & RESTATED BY-LAWS BY-LAWS OF PILGRIM GNMA INCOME FUND, INC. (Amended and Restated as of July 26, 2000) ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing shares of stock shall set forth thereon the statements prescribed by Section 2-211 of the Maryland General Corporation Law ("General Corporation Law") and by any other applicable provision of law and shall be signed by the Chairman of the Board or the President or a Vice President and countersigned by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed with the corporate seal. The signatures of any such officers may be either manual or facsimile signatures and the corporate seal may be either facsimile or any other form of seal. In case any such officer who has signed manually or by facsimile any such certificate ceases to be such officer before the certificate is issued, it nevertheless may be issued by the corporation with the same effect as if the officer had not ceased to be such officer as of the date of its issue. No certificate representing shares of stock shall be issued for any share of stock until such share is fully paid, except as otherwise authorized in Section 2-206 of the General Corporation Law. The corporation may issue a new certificate of stock in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Board of Directors may require, in its discretion, the owner of any such certificate or his legal representative to give bond, with sufficient surety, to the corporation to indemnify it against any loss or claim that may arise by reason of the issuance of a new certificate. 2. SHARE TRANSFERS. Upon compliance with provisions restricting the transferability of shares of stock, if any, transfers of shares of stock of the corporation shall be made only on the stock transfer books of the corporation by the record holder thereof or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 3. RECORD DATE FOR STOCKHOLDERS. The Board of Directors may fix, in advance, a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any rights or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall be not more than 90 days, and in case of a meeting of stockholders not less than 10 days, prior to the date on which the meeting or particular action requiring such determination of stockholders is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of, or to vote at, a meeting of stockholders, such books shall be closed for at least 10 days immediately preceding such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders: (1) the record date for the determination of stockholders entitled to notice of, or to vote at, a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the day 30 days before the meeting, whichever is the closer date to the meeting; and (2) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any rights shall be at the close of business on the day on which the resolution of the Board of Directors declaring the dividend or allotment of rights is adopted, provided that the payment or allotment date shall not be more than 90 days after the date on which the resolution is adopted. 4. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock and said reference also is intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class or series upon which or upon whom the Articles of Incorporation confers such rights where there are two or more classes or series of shares or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the Articles of Incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder. 5. STOCKHOLDER MEETINGS. (a) ANNUAL MEETINGS. If a meeting of the stockholders of the corporation is required by the Investment Company Act of 1940, as amended, to elect the directors, then there shall be submitted to the stockholders at such meeting the question of the election of directors, and a meeting called for that purpose shall be designated the annual meeting of stockholders for that year. In other years in which no action by stockholders is required for the aforesaid election of directors, no annual meeting need be held. (b) SPECIAL MEETINGS. Special stockholder meetings for any purpose may be called by the Chairman of the Board of Directors, if any, the Board of Directors or the President and shall be called by the Secretary for the purpose of removing a Director and for all other purposes whenever the holders of shares entitled to at least ten percent (10%) of all the votes entitled to be cast at such meeting shall make a duly authorized request that such meeting be called. Such request shall state the purpose of such meeting and the matters proposed to be acted on thereat, and no other business shall be transacted at any such special meeting. In addition, the Directors will promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any 2 Director when requested to do so in writing by the recordholders of not less than ten percent (10%) of the Company's outstanding shares. Notwithstanding the foregoing, unless requested by stockholders entitled to cast a majority of the votes entitled to be cast at the meeting, a special meeting of the stockholders need not be called at the request of stockholders to consider any matter that is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve (12) months. (c) PLACE AND TIME. Stockholder meetings shall be held at such place, either within the State of Maryland or at such other place within the United States, and at such date or dates as the directors from time to time may fix. (d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER OF NOTICE. Written or printed notice of all meetings shall be given by the Secretary and shall state the time and place of the meeting. The notice of a special meeting shall state in all instances the purpose or purposes for which the meeting is called. Written or printed notice of any meeting shall be given to each stockholder either by mail or by presenting it to him personally or by leaving it at his residence or usual place of business not less than ten days and not more than ninety days before the date of the meeting, unless any provisions of the General Corporation Law shall prescribe a different elapsed period of time, to each stockholder at his address appearing on the books of the corporation or the address supplied by him for the purpose of notice. If mailed, notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the corporation with postage thereon prepaid. Whenever any notice of the time, place or purpose of any meeting of stockholders is required to be given under the provisions of these by-laws or of the General Corporation Law, a waiver thereof in writing, signed by the stockholder and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance or representation at the meeting shall be deemed equivalent to the giving of such notice to such stockholder. The foregoing requirements of notice also shall apply, whenever the corporation shall have any class of stock which is not entitled to vote, to holders of stock who are not entitled to vote at the meeting, but who are entitled to notice thereof and to dissent from any action taken thereat. (e) STATEMENT OF AFFAIRS. The President of the corporation or, if the Board of Directors shall determine otherwise, some other executive officer thereof, shall prepare or cause to be prepared annually a full and correct statement of the affairs of the corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be filed at the principal office of the corporation in the State of Maryland. (f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting: the Chairman of the Board, the President, a Vice President or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation or, in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the chairman of the meeting shall appoint a secretary of the meeting. 3 (g) PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether for the purposes of determining his presence at a meeting, or whether by waiving notice of any meeting, voting or participating at a meeting, expressing consent or dissent without a meeting or otherwise. Every proxy shall be executed in writing by the stockholder or by his duly authorized attorney-in-fact and filed with the Secretary of the corporation. No unrevoked proxy shall be valid after eleven months from the date of its execution, unless a longer time is expressly provided therein. (h) INSPECTORS OF ELECTION. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting or any stockholder, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. (i) VOTING. Each share of stock shall entitle the holder thereof to one vote with respect to each matter on which he is entitled to vote under the Articles of Incorporation, except in the election of directors, at which each said vote may be cast for as many persons as there are directors to be elected. Except for election of directors, a majority of the votes cast at a meeting of stockholders, duly called and at which a quorum is present, shall be sufficient to take or authorize action upon any matter which may come before a meeting, unless more than a majority of votes cast is required by the corporation's Articles of Incorporation or by law. A plurality of all the votes cast at a meeting at which a quorum is present shall be sufficient to elect a director. (j) QUORUM. At any meeting of stockholders the presence in person or by proxy of one-third of the shares of stock of the corporation entitled to vote thereat shall constitute a quorum. In the absence of a quorum, the stockholders present in person or by proxy, by majority vote and without notice other than by announcement at the meeting, may adjourn the meeting from time to time, but not for a period exceeding 120 days after the original record date until a quorum shall attend. 4 (k) ADJOURNED MEETINGS. A meeting of stockholders convened on the date for which it is called (including one adjourned to achieve a quorum as above provided) may be adjourned from time to time without further notice to a date not more than 120 days after the original record date, and any business may be transacted at any adjourned meeting which could have been transacted at the meeting as originally called. 6. INFORMAL ACTION. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by all the stockholders entitled to vote on the subject matter thereof and any other stockholders entitled to notice of a meeting of stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action and such consent and waiver are filed with the records of the corporation. ARTICLE II BOARD OF DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed under the direction of a Board of Directors. The use of the phrase "entire board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. Each director shall be a natural person being at least eighteen years of age. A director need not be a stockholder, a citizen of the United States or a resident of the State of Maryland. The initial Board of Directors shall consist of eleven persons. Thereafter, the number of directors constituting the entire board shall never be less than three or the number of shareholders, whichever is less. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may increase or decrease the number of directors, provided that the number thereof shall never be less than three or the number of shareholders, whichever is less, nor more than twenty and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. 3. ELECTION AND TERM. The first Board of Directors shall consist of the directors named in the Articles of Incorporation and shall hold office until the first meeting of stockholders or until their successors have been elected and qualified. Thereafter, directors who are elected at a meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until their successors have been elected and qualified. Newly created directorships and any vacancies in the Board of Directors, other than vacancies resulting from the removal of directors by the stockholders, may be filled by the Board of Directors, subject to the provisions of the Investment Company Act of 1940. Newly created directorships filled by the Board of Directors shall be by action of a majority of the entire Board of 5 Directors prior to board expansion. All vacancies to be filled by the Board of Directors may be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum thereof. 4. MEETINGS. (a) TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors conveniently may assemble. (b) PLACE. Meetings shall be held at such place within or without the State of Maryland as shall be fixed by the Board. (c) CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the President or of a majority of the directors in office. (d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. Whenever any notice of the time, place or purpose of any meeting of directors or any committee thereof is required to be given under the provisions of the General Corporation Law or of these by-laws, a waiver thereof in writing, signed by the director or committee member entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting shall be deemed equivalent to the giving of such notice to such director or such committee member. (e) QUORUM AND ACTION. One third of the entire Board of Directors (but in no event less than two Directors unless there is only one Director) shall constitute a quorum. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as otherwise specifically provided by the Articles of Incorporation, the General Corporation Law, the Investment Company Act of 1940, as amended, or these by-laws, the action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors. (f) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, or the President or any other director chosen by the Board, shall preside at all meetings. 5. REMOVAL OF DIRECTORS. Any or all of the directors may be removed for cause or without cause by the stockholders, who may elect a successor or successors to fill any resulting vacancy or vacancies for the unexpired term of the removed director or directors. 6. COMMITTEES. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of two or more directors and may delegate to such committee or committees, in the intervals between meetings 6 of the Board of Directors, any or all of the powers of the Board of Directors in the management of the business and affairs of the corporation to the extent permitted by law. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in the place of such absent member. 7. INFORMAL ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board of Directors or any such committee, as the case may be, and such written consent is filed with the minutes of the proceedings of the Board or any such committee. 8. TELEPHONE MEETING. Members of the Board of Directors or any committee designated thereby may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. ARTICLE III OFFICERS The corporation may have a Chairman of the Board and shall have a President, a Secretary and a Treasurer, who shall be elected by the Board of Directors, and may have such other officers, assistant officers and agents as the Board of Directors shall authorize from time to time. Any two or more offices, except those of President and Vice President, may be held by the same person, but no person shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law to be executed, acknowledged or verified by two or more officers. Any officer or agent may be removed by the Board of Directors whenever, in its judgment, the best interests of the corporation will be served thereby. ARTICLE IV PRINCIPAL OFFICE - RESIDENT AGENT - STOCK LEDGER The address of the principal office of the corporation in the State of Maryland is 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. The name and address of the resident agent in the State of Maryland are: CT Corporation Trust, 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. 7 The corporation shall maintain, at its principal office in the State of Maryland prescribed by the General Corporation Law or at the business office or an agency of the corporation, an original or duplicate stock ledger containing the names and addresses of all stockholders and the number of shares of each class held by each stockholder. Such stock ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. The corporation shall keep at said principal office in the State of Maryland the original or a certified copy of the by-laws, including all amendments thereto, and shall duly file thereat the annual statement of affairs of the corporation prescribed by Section 2-313 of the General Corporation Law. ARTICLE V CORPORATE SEAL The Board of Directors may provide a suitable corporate seal. The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine or the law require. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VII CONTROL OVER BY-LAWS The power to make, alter, amend and repeal the by-laws is vested in the Board of Directors of the corporation. ARTICLE VIII INDEMNIFICATION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall indemnify its directors to the fullest extent that indemnification of directors is permitted by the law. The corporation shall indemnify its officers to the same extent as its directors and to such further extent as is consistent with 8 law. The corporation shall indemnify its directors and officers who while serving as directors or officers also serve at the request of the corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan to the same extent as its directors and, in the case of officers, to such further extent as is consistent with law. The indemnification and other rights provided by this Article shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. This Article shall not protect any such person against any liability to the corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office ("disabling conduct"). 2. ADVANCES. Any current or former director or officer of the corporation seeking indemnification within the scope of this Article shall be entitled to advances from the corporation for payment of the reasonable expenses incurred by him in connection with the matter as to which he is seeking indemnification in the manner and to the fullest extent permissible under the General Corporation Law. The person seeking indemnification shall provide to the corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the corporation has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the corporation for his undertaking; (b) the corporation is insured against losses arising by reason of the advance; or (c) a majority of a quorum of directors of the corporation who are neither "interested persons" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. 3. PROCEDURE. At the request of any person claiming indemnification under this Article, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the General Corporation Law, whether the standards required by this Article have been met. Indemnification shall be made only following: (a) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason of disabling conduct or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct by (i) the vote of a majority of a quorum of disinterested non-party directors or (ii) an independent legal counsel in a written opinion. 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. Employees and agents who are not officers or directors of the corporation may be indemnified, and reasonable expenses may be advanced to such employees or agents, as may be provided by action of the Board of Directors or by contract, subject to any limitations imposed by the Investment Company Act of 1940, as amended. 9 5. OTHER RIGHTS. The Board of Directors may make further provision consistent with law for indemnification and advance of expenses to directors, officers, employees and agents by resolution, agreement or otherwise. The indemnification provided by this Article shall not be deemed exclusive of any other right, with respect to indemnification or otherwise, to which those seeking indemnification may be entitled under any insurance or other agreement or resolution of stockholders or disinterested non-party directors or otherwise. 6. AMENDMENTS. References in this Article are to the General Corporation Law and to the Investment Company Act of 1940 as from time to time amended. No amendment of the by-laws shall affect any right of any person under this Article based on any event, omission or proceeding prior to the amendment. EX-99.D 5 0005.txt INVESTMENT MANAGEMENT AGREEMENT INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made this 26th day of July, 2000 between Pilgrim GNMA Income Fund, Inc. (the "Fund"), a Maryland corporation, and Pilgrim Investments, Inc. (the "Manager"), a Delaware corporation (the "Agreement"). WHEREAS, the Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Fund is authorized to issue shares of common stock in separate series with each such series representing interests in a separate portfolio of securities and other assets; WHEREAS, the Fund may offer shares of additional series in the future; WHEREAS, the Fund desires to avail itself of the services of the Manager for the provision of advisory and management services for the Fund; and WHEREAS, the Manager is willing to render such services to the Fund; NOW, THEREFORE, in consideration of the premises, the promises and mutual covenants herein contained, it is agreed between the parties as follows: 1. APPOINTMENT. The Fund hereby appoints the Manager, subject to the direction of the Board of Directors, for the period and on the terms set forth in this Agreement, to provide advisory, management, and other services, as described herein, with respect to each series of the Fund (individually and collectively referred to herein as "Series"). The Manager accepts such appointment and agrees to render the services herein set forth for the compensation herein provided. In the event the Fund establishes and designates additional series with respect to which it desires to retain the Manager to render advisory services hereunder, it shall notify the Manager in writing. If the Manager is willing to render such services, it shall notify the Fund in writing, whereupon such additional series shall become a Series hereunder. 2. SERVICES OF THE MANAGER. The Manager represents and warrants that it is registered as an investment adviser under the Investment Advisers Act of 1940 and will maintain such registration for so long as required by applicable law. Subject to the general supervision of the Board of Directors of the Fund, the Manager shall provide the following advisory, management, and other services with respect to the Series: (a) Provide general, investment advice and guidance with respect to the Series and provide advice and guidance to the Fund's Directors, and oversee the management of the investments of the Series and the composition of each Series' portfolio of securities and investments, including cash, and the purchase, retention and disposition thereof, in accordance with each Series' investment objective or objectives and policies as stated in the Fund's current registration statement, which management may be provided by others selected by the Manager and approved by the Board of Directors as provided below or directly by the Manager as provided in Section 3 of this Agreement; (b) In the event that the Manager wishes to select others to render investment management services, the Manager shall analyze, select and recommend for consideration and approval by the Fund's Board of Directors investment advisory firms (however organized) to provide investment advice to one or more of the Series, and, at the expense of the Manager, engage (which engagement may also be by the Fund) such investment advisory firms to render investment advice and manage the investments of such Series and the composition of each such Series' portfolio of securities and investments, including cash, and the purchase, retention and disposition thereof, in accordance with the Series' investment objective or objectives and policies as stated in the Fund's current registration statement (any such firms approved by the Board of Directors and engaged by the Fund and/or the Manager are referred to herein as "Sub-Advisers"); (c) Periodically monitor and evaluate the performance of the Sub-Advisers with respect to the investment objectives and policies of the Series; (d) Monitor the Sub-Advisers for compliance with the investment objective or objectives, policies and restrictions of each Series, the 1940 Act, Subchapter M of the Internal Revenue Code, and if applicable, regulations under such provisions, and other applicable law; (e) If appropriate, analyze and recommend for consideration by the Fund's Board of Directors termination of a contract with a Sub-Adviser under which the Sub-Adviser provides investment advisory services to one or more of the Series; (f) Supervise Sub-Advisers with respect to the services that such Sub-Advisers provide under respective portfolio management agreements ("Sub-Adviser Agreements"); (g) Render to the Board of Directors of the Fund such periodic and special reports as the Board may reasonably request; and (h) Make available its officers and employees to the Board of Directors and officers of the Fund for consultation and discussions regarding the administration and management of the Series and services provided to the Fund under this Agreement. 3. INVESTMENT MANAGEMENT AUTHORITY. In the event the Manager wishes to render investment management services directly to a Series, then with respect to any such Series, the Manager, subject to the supervision of the Fund's Board of Directors, will provide a continuous investment program for the Series' portfolio and determine the composition of the assets of the Series' portfolio, including determination of the purchase, retention, or sale of the securities, cash, and other investments contained in the portfolio. The Manager will provide investment research and conduct a continuous program of evaluation, investment, sales, and reinvestment of the Series' assets by determining the securities and other investments that shall be purchased, entered into, sold, closed, offered to the public, or exchanged for the Series, when these transactions should be executed, and what portion of the assets of the Series should be held in the various securities and other investments in which it may invest, and the Manager is hereby authorized to execute and perform such services on behalf of the Series. To the extent permitted by the investment policies of the Series, the Manager shall make decisions for the Series as to foreign currency matters and make determinations as to, and execute and perform, foreign currency exchange contracts on behalf of the Series. The Manager will provide the services under this Agreement in accordance with the Series' investment objective or objectives, policies, and restrictions as stated in the Fund's Registration Statement filed with the Securities and Exchange Commission (the "SEC"), as amended. Furthermore: (a) The Manager will manage the Series so that each will qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. In managing the Series in accordance with these requirements, the Manager shall be entitled to receive and act upon advice of counsel to the Fund or counsel to the Manager. -2- (b) The Manager will conform with the 1940 Act and all rules and regulations thereunder, all other applicable federal and state laws and regulations, with any applicable procedures adopted by the Fund's Board of Directors, and the provisions of the Registration Statement of the Fund under the Securities Act of 1933 and the 1940 Act, as supplemented or amended. (c) On occasions when the Manager deems the purchase or sale of a security to be in the best interest of the Series as well as any other investment advisory clients, the Manager may, to the extent permitted by applicable laws and regulations and any applicable procedures adopted by the Fund's Board of Directors, but shall not be obligated to, aggregate the securities to be so sold or purchased with those of its other clients where such aggregation is not inconsistent with the policies set forth in the Registration Statement. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Manager in a manner that is fair and equitable in the judgment of the Manager in the exercise of its fiduciary obligations to the Fund and to such other clients. (d) In connection with the purchase and sale of securities of the Series, the Manager will arrange for the transmission to the custodian for the Fund on a daily basis, of such confirmation, trade tickets, and other documents and information, including, but not limited to, Cusip, Cedel, or other numbers that identify securities to be purchased or sold on behalf of the Series, as may be reasonably necessary to enable the custodian to perform its administrative and recordkeeping responsibilities with respect to the Series. With respect to portfolio securities to be purchased or sold through the Depository Trust Company, the Manager will arrange for the prompt transmission of the confirmation of such trades to the Fund's custodian. (e) The Manager will assist the custodian or portfolio accounting agent for the Fund in determining, consistent with the procedures and policies stated in the Registration Statement for the Fund and any applicable procedures adopted by the Fund's Board of Directors, the value of any portfolio securities or other assets of the Series for which the custodian or portfolio accounting agent seeks assistance or review from the Manager. (f) The Manager will make available to the Fund, promptly upon request, any of the Series' or the Managers' investment records and ledgers as are necessary to assist the Fund to comply with requirements of the 1940 Act, as well as other applicable laws. The Manager will furnish to regulatory authorities having the requisite authority any information or reports in connection with its services which may be requested in order to ascertain whether the operations of the Fund are being conducted in a manner consistent with applicable laws and regulations. (g) The Manager will regularly report to the Fund's Board of Directors on the investment program for the Series and the issuers and securities represented in the Series' portfolio, and will furnish the Fund's Board of Directors with respect to the Series such periodic and special reports as the Directors may reasonably request. (h) In connection with its responsibilities under this Section 3, the Manager is responsible for decisions to buy and sell securities and other investments for the Series' portfolio, broker-dealer selection, and negotiation of brokerage commission rates. The Manager's primary consideration in effecting a security transaction will be to obtain the best execution for the Series, taking into account the factors specified in the Prospectus and/or Statement of Additional Information for the Fund, which include price (including the -3- applicable brokerage commission or dollar spread), the size of the order, the nature of the market for the security, the timing of the transaction, the reputation, experience and financial stability of the broker-dealer involved, the quality of the service, the difficulty of execution, execution capabilities and operational facilities of the firms involved, and the firm's risk in positioning a block of securities. Accordingly, the price to the Series in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified, in the judgment of the Manager in the exercise of its fiduciary obligations to the Fund, by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Directors may determine and consistent with Section 28(e) of the Securities Exchange Act of 1934, as amended, the Manager shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Series to pay a broker-dealer for effecting a portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that transaction, if the Manager determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either that particular transaction or the Manager's overall responsibilities with respect to the Series and to its other clients as to which it exercises investment discretion. To the extent consistent with these standards and in accordance with Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, the Manager is further authorized to allocate the orders placed by it on behalf of the Series to the Manager if it is registered as a broker-dealer with the SEC, to an affiliated broker-dealer, or to such brokers and dealers who also provide research or statistical material or other services to the Series, the Manager or an affiliate of the Manager. Such allocation shall be in such amounts and proportions as the Manager shall determine consistent with the above standards, and the Manager will report on said allocation regularly to the Board of Directors of the Fund indicating the broker-dealers to which such allocations have been made and the basis therefor. 4. CONFORMITY WITH APPLICABLE LAW. The Manager, in the performance of its duties and obligations under this Agreement, shall act in conformity with the Registration Statement of the Fund and with the instructions and directions of the Board of Directors of the Fund and will conform to, and comply with, the requirements of the 1940 Act and all other applicable federal and state laws and regulations. 5. EXCLUSIVITY. The services of the Manager to the Fund under this Agreement are not to be deemed exclusive, and the Manager, or any affiliate thereof, shall be free to render similar services to other investment companies and other clients (whether or not their investment objectives and policies are similar to those of any of the Series) and to engage in other activities, so long as its services hereunder are not impaired thereby. 6. DOCUMENTS. The Fund has delivered properly certified or authenticated copies of each of the following documents to the Manager and will deliver to it all future amendments and supplements thereto, if any: (a) certified resolution of the Board of Directors of the Fund authorizing the appointment of the Manager and approving the form of this Agreement; (b) the Registration Statement as filed with the SEC and any amendments thereto; and (c) exhibits, powers of attorney, certificates and any and all other documents relating to or filed in connection with the Registration Statement described above. 7. RECORDS. The Fund agrees to maintain and to preserve for the periods prescribed under the 1940 Act any such records as are required to be maintained by the Fund with respect to the Series by the 1940 Act. The Manager further -4- agrees that all records of the Series are the property of the Fund and, to the extent held by the Manager, it will promptly surrender any of such records upon request. 8. EXPENSES. During the term of this Agreement, the Manager will pay all expenses incurred by it in connection with its activities under this Agreement, except such expenses as are assumed by the Fund under this Agreement and such expenses as are assumed by a Sub-Adviser under its Sub-Adviser Agreement. The Manager further agrees to pay all fees payable to the Sub-Advisers, executive salaries and expenses of the Directors of the Fund who are employees of the Manager or its affiliates, and office rent of the Fund. The Fund shall be responsible for all of the other expenses of its operations, including, without limitation, the management fee payable hereunder; brokerage commissions; interest; legal fees and expenses of attorneys; fees of auditors, transfer agents and dividend disbursing agents, custodians and shareholder servicing agents; the expense of obtaining quotations for calculating each Fund's net asset value; taxes, if any, and the preparation of the Fund's tax returns; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; expenses of registering and qualifying shares of the Fund under federal and state laws and regulations (including the salary of employees of the Manager engaged in the registering and qualifying of shares of the Fund under federal and state laws and regulations or a pro-rata portion of the salary of employees to the extent so engaged); salaries of personnel involved in placing orders for the execution of the Fund's portfolio transactions; expenses of disposition or offering any of the portfolio securities held by a Series; expenses of printing and distributing reports, notices and proxy materials to existing shareholders; expenses of printing and filing reports and other documents filed with governmental agencies; expenses in connection with shareholder and director meetings; expenses of printing and distributing prospectuses and statements of additional information to existing shareholders; fees and expenses of Directors of the Fund who are not employees of the Manager or any Sub-Adviser, or their affiliates; trade association dues; insurance premiums; extraordinary expenses such as litigation expenses. To the extent the Manager incurs any costs or performs any services which are an obligation of the Fund, as set forth herein, the Fund shall promptly reimburse the Manager for such costs and expenses. To the extent the services for which the Fund is obligated to pay are performed by the Manager, the Manager shall be entitled to recover from the Fund only to the extent of its costs for such services. 9. COMPENSATION. For the services provided by the Manager to each Series pursuant to this Agreement, the Fund will pay to the Manager an annual fee equal to the amount specified for such Series in Schedule A hereto, payable monthly in arrears. Payment of the above fees shall be in addition to any amount paid to the Manager for the salary of its employees for performing services which are an obligation of the Fund as provided in Section 8. The fee will be appropriately pro-rated to reflect any portion of a calendar month that this Agreement is not in effect between us. 10. LIABILITY OF THE MANAGER. The Manager may rely on information reasonably believed by it to be accurate and reliable. Except as may otherwise be required by the 1940 Act or the rules thereunder, neither the Manager nor its stockholders, officers, directors, employees, or agents shall be subject to, and the Fund will indemnify such persons from and against, any liability for, or any damages, expenses, or losses incurred in connection with, any act or omission connected with or arising out of any services rendered under this Agreement, except by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Manager's duties, or by reason of reckless disregard of the Manager's obligations and duties under this Agreement. Except as may otherwise be required by the 1940 Act or the rules thereunder, neither the Manager nor its stockholders, officers, directors, employees, or agents shall be subject to, and the Fund will indemnify such persons from and against, any liability for, or any damages, expenses, or losses incurred in connection with, any act or omission by a Sub-Adviser or any of the Sub-Adviser's stockholders or partners, officers, directors, employees, or agents connected with or arising out of any services rendered under a Sub-Adviser Agreement, except by reason of willful misfeasance, -5- bad faith, or gross negligence in the performance of the Manager's duties under this Agreement, or by reason of reckless disregard of the Manager's obligations and duties under this Agreement. No director, officer, employee or agent of the Fund shall be subject to any personal liability whatsoever, in his or her official capacity, to any person, including the Sub-Adviser, other than to the Fund or its shareholders, in connection with Fund property or the affairs of the Fund, save only that arising from his or her bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duty to such person; and all such persons shall look solely to the Fund property for satisfaction of claims of any nature against a director, officer, employee or agent of the Fund arising in connection with the affairs of the Fund. Moreover, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a Series shall be enforceable against the assets and property of that Series only, and not against the assets or property of any other series of the Fund. 11. CONTINUATION AND TERMINATION. This Agreement shall become effective on the date first written above, subject to the condition that the Fund's Board of Directors, including a majority of those Directors who are not interested persons (as such term is defined in the 1940 Act) of the Manager, and the shareholders of each Series, shall have approved this Agreement. Unless terminated as provided herein, the Agreement shall continue in full force and effect for two (2) years from the effective date of this Agreement, and shall continue from year to year thereafter with respect to each Series so long as such continuance is specifically approved at least annually (i) by the vote of a majority of the Board of Directors of the Fund, or (ii) by vote of a majority of the outstanding voting shares of the Series (as defined in the 1940 Act), and provided continuance is also approved by the vote of a majority of the Board of Directors of the Fund who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of the Fund or the Manager, cast in person at a meeting called for the purpose of voting on such approval. This Agreement may not be amended in any material respect without a majority vote of the outstanding voting shares (as defined in the 1940 Act). However, any approval of this Agreement by the holders of a majority of the outstanding shares (as defined in the 1940 Act) of a Series shall be effective to continue this Agreement with respect to such Series notwithstanding (i) that this Agreement has not been approved by the holders of a majority of the outstanding shares of any other Series or (ii) that this Agreement has not been approved by the vote of a majority of the outstanding shares of the Fund, unless such approval shall be required by any other applicable law or otherwise. This Agreement may be terminated by the Fund at any time, in its entirety or with respect to a Series, without the payment of any penalty, by vote of a majority of the Board of Directors of the Fund or by a vote of a majority of the outstanding voting shares of the Fund, or with respect to a Series, by vote of a majority of the outstanding voting shares of such Series, on sixty (60) days' written notice to the Manager, or by the Manager at any time, without the payment of any penalty, on sixty (60) days' written notice to the Fund. This Agreement will automatically and immediately terminate in the event of its "assignment" as described in the 1940 Act. 12. USE OF NAME. It is understood that the name "Pilgrim Investments, Inc." or any derivative thereof (including the name "Pilgrim") or logo associated with that name is the valuable property of the Manager and its affiliates, and that the Fund and/or the Series have the right to use such name (or derivative or logo) only so long as this Agreement shall continue with respect to such Fund and/or Series. Upon termination of this Agreement, the Fund (or Series) shall forthwith cease to use such name (or derivative or logo) and, in the case of the Fund, shall promptly amend its Articles of Incorporation to change its name (if such name is included therein). -6- 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original. 14. APPLICABLE LAW. (a) This Agreement shall be governed by the laws of the State of Arizona, provided that nothing herein shall be construed in a manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any rules or order of the SEC thereunder. (b) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (c) The captions of this Agreement are included for convenience only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. PILGRIM GNMA INCOME FUND, INC. /s/ Michael J. Roland ---------------------------------------- By: Michael J. Roland Senior Vice President PILGRIM INVESTMENTS, INC. James M. Hennessy ---------------------------------------- By: James M. Hennessy Senior Executive Vice President -7- Schedule A
FUND ANNUAL INVESTMENT MANAGEMENT FEE ---- -------------------------------- Pilgrim Growth and Income Fund, Inc. 0.75% of the Fund's average daily net assets up to $100 million, 0.60% of the Fund's average daily net assets in excess of $100 million up to $150 million, 0.50% of the Fund's average daily net assets in excess of $150 million up to $250 million, and 0.40% of the Fund's average daily net assets in excess of $250 million. Pilgrim Global Corporate Leaders Fund, Inc. 1.00% of the Fund's average daily net assets. Pilgrim International Fund, Inc. 1.00% of the Fund's average daily net assets. Pilgrim Worldwide Emerging Markets Fund, Inc. 1.00% of the Fund's average daily net assets. Pilgrim SmallCap Asia Growth Fund, Inc. 1.25% of the Fund's average daily net assets. Pilgrim Troika Dialog Russia Fund, Inc. 1.25% of the Fund's average daily net assets. Pilgrim GNMA Income Fund, Inc. 0.60% of the Fund's average daily net assets up to $150 million, 0.50% of the Fund's average daily net assets in excess of $150 million up to $400 million, 0.45% of the Fund's average daily net assets in excess of $400 million up to $800 million, and 0.40% of the Fund's average daily net assets in excess of $800 million. Pilgrim Global Income Fund 1.00% of the Fund's average daily net assets. Lexington Money Market Trust 0.50% of the Trust's average daily net assets up to $500 million, and 0.45% of the Trust's average daily net assets in excess of $500 million. Pilgrim Gold Fund, Inc. 1.00% of the Fund's average daily net assets up to $50 million, and 0.75% of the Fund's average daily net assets in excess of $50 million. Pilgrim Silver Fund, Inc. 1.00% of the Fund's average daily net assets of the first $30 million, and 0.75% of the Fund's average daily net assets in excess of $30 million. Pilgrim Global Technology Fund 1.25% of the Fund's average daily net assets. Pilgrim Emerging Markets Fund, Inc. 0.85% of the Fund's average daily net assets. Pilgrim Natural Resources Trust 0.85% of the Fund's average daily net assets.
-8- EX-99.E 6 0006.txt UNDERWRITING AGREEMENT PILGRIM GNMA INCOME FUND, INC. 40 N. Central Avenue, Suite 1200 Phoenix, Arizona 85004 July 26, 2000 Pilgrim Securities, Inc. 40 N. Central Avenue, Suite 1200 Phoenix, Arizona 85004 Re: UNDERWRITING AGREEMENT Ladies and Gentlemen: Pilgrim GNMA Income Fund, 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 one separate series: Pilgrim GNMA Income Fund, Inc. (the "Fund"). The Company on behalf of the Fund desires to offer and sell the authorized but unissued shares of the Fund 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 Fund. 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 Underwriting Agreement. 1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive distributor 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 may be sold through your efforts. 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 Fund 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 Fund shall be offered at a price equivalent to its net asset value plus, as appropriate, a variable percentage of the public offering price as a sales load, as set forth in the Fund's 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 time described in the Company's prospectus. The net asset value so determined shall apply to all orders for the purchase of the shares received by dealers prior to the time as of which net asset value is determined, 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 the time as of which net asset value is determined. To the extent that our Shareholder Servicing and Transfer Agent (collectively, "Agent") and the Custodian(s) for any pension, profit-sharing, employer or self-employed plan receive payments on behalf of the investors, such Agent and Custodian(s) shall be required to record the time of such receipt with respect to each payment, and the applicable net asset value shall be that which is next determined and effective after the time of receipt by them. In all events, you shall forthwith notify all of the dealers comprising your selling group and the Agent and Custodian(s) of the effective net asset value as received from us. Should we at any time calculate our net asset value more frequently than once each business day, you and we will follow procedures with respect to such additional price or prices comparable to those set forth above in this Section 3. 4. ORDERS. You shall promptly advise us of all purchase orders for shares of the Fund received by you. Any order may be rejected by us; provided, however, that we and the Company will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of shares of the Fund. We or our agent will confirm orders upon receipt, will make appropriate book entries and, upon receipt by the Company (or its agent) of payment therefor, will deliver deposit receipts for the shares. 5. SALES COMMISSION. (a) In respect of each Class of Shares other than Class B Shares: (i) You shall be entitled to receive a sales commission on the sale of shares of the Fund in the amounts and according to the procedures set forth in the Fund's Prospectus then in effect under the 1933 Act (including any supplements or amendments thereto). (ii) In addition to the payments of the sales commissions to you provided for in paragraph 5(a)(i), you may also receive reimbursement for expenses or a maintenance or trail fee as may be required by and described in the distribution plans adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plans"). (b) In respect of the Class B Shares of the Fund, the following provisions shall apply: 2 (i) In consideration of your services as principal underwriter of the Fund's 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 the Fund outstanding on such day, and (II) to withhold from redemption proceeds your Allocable Portion of the Contingent Deferred Sales Charges ("CDSCs") and to pay the same over to you or at your direction. (ii) The Allocation Schedule attached hereto as Schedule A and each of the provisions set forth in clauses (I) through (V) of the second sentence of Section 1(A) of the Class B Distribution Plan as in effect on the date hereof, together with the related definitions, are hereby incorporated herein by reference with the same force and effect as if set forth herein in their entirety. (iii) In addition to the payments of amounts provided for in Section 5(b)(i) and (ii), you may also receive reimbursement for expenses or a maintenance or trail fee as may be required by and described in the Class B Distribution Plan. (c) You may allow appointed sub-agents or dealers such commissions or discounts (not exceeding the total sales commission) as you shall deem advisable, so long as any such commissions or discounts are set forth in the Fund's then current Prospectus, to the extent required by the applicable federal and state securities laws. 6. PAYMENT OF SHARES. At or prior to the time of delivery of any of our shares you will pay or cause to be paid to the Custodian, for our account, an amount in cash equal to the net asset value of such shares. In the event that you pay for shares sold by you prior to your receipt of payment from purchasers, you are authorized to reimburse yourself for the net asset value of such shares from the offering price of such shares when received by you. 7. REDEMPTION. (a) We represent that any of the outstanding shares of the Fund may be tendered for redemption at any time, and we represent that the Company will repurchase or redeem the shares so tendered in accordance with the Company's Articles of Incorporation and Bylaws and the applicable provisions of the Fund's Prospectus. The price to be paid to redeem or repurchase the shares shall be equal to the net asset value, less any applicable contingent deferred sales charge, if any, determined as set forth in the applicable Prospectus (the "redemption price"). 8. REGISTRATION OF SHARES. No shares shall be registered on our books until (i) receipt by us of your written request therefor; (ii) receipt by the Custodian and Agent of a certificate signed by an officer of the 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 3 is received by the Agent, in which case certificates for shares in such names and amounts as is specified in such writing will be delivered by the Agent, as soon as practicable after registration thereof on the books. 9. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase shares for your own account for purposes of resale to the public, but you may purchase shares for your own investment account upon your written assurance that the purchase is for investment purposes only and that the shares will not be resold except through redemption by us. 10. SALE OF SHARES TO AFFILIATES. You may sell the Class A and Class C shares at net asset value, without a sales charge as appropriate, pursuant to a uniform offer described in the Fund's 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 Fund's then current Prospectus; PROVIDED that such sales are made in accordance with the rules and regulations under the 1940 Act and that such sales are made upon the written assurance of the purchaser that the purchases are made for investment purposes only, not for the purpose of resale to the public and that the shares will not be resold except through redemption by us. 11. ALLOCATION OF EXPENSES. (a) We will pay the following expenses in connection with the sales and distribution of shares of the Fund: (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 4 (v) expenses of the Agent, including all costs and expenses in connection with the issuance, transfer and registration of the shares, including but not limited to any taxes and other governmental charges in connection therewith. (b) Except to the extent that you are entitled to reimbursement under the provisions of any of the Distribution Plans for the Fund, you will pay the following expenses: (i) expenses of printing additional copies of the Prospectus and Statement of Additional Information and any amendments or supplements thereto which are necessary to continue to offer our shares to the public; (ii) expenses pertaining to the preparation (excluding legal fees) and printing of all amendments and supplements to our Registration Statement if the Amendment or supplement arises from or is necessitated by or related to your (including your "Parent") activities where those expenses would not otherwise have been incurred by us; and (iii) expenses pertaining to the printing of additional copies, for use by you as sales literature, of reports or other communications which have been prepared for distribution to our existing shareholders or incurred by you in advertising, promoting and selling our shares to the public. 12. FURNISHING OF INFORMATION. We will furnish to you such information with respect to our company and its shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained when so signed will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our shares for sale to the public under the Blue Sky Laws or in jurisdictions in which you may wish to offer them. We will furnish you at least annually with audited financial statements of our books and accounts certified by independent public accountants, and with such additional information regarding our financial condition, as you may reasonably request from time to time. 13. CONDUCT OF BUSINESS. Other than the currently effective Prospectus and Statement of Additional Information, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of federal and state securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such material prior to their use and no such material shall be published if we shall reasonably and promptly object. You shall comply with the applicable federal and state laws and regulations where our shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. 5 14. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If shares are tendered to us for redemption or are repurchased by us within seven (7) business days after your acceptance of the original purchase order for such shares, you will immediately refund to us the full amount of any sales commission (net of allowances to dealers or brokers) allowed to you on the original sale, and will promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of the balance of sales commissions reallowed by you. We shall notify you of such tender for redemption within ten (10) days of the day on which notice of such tender for redemption is received by us. 15. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares. 16. TERM OF AGREEMENT. This Agreement shall become effective on the date first written above or on such later date approved by the Company's Board of Directors, including a majority of those Directors who are not parties to this Agreement or interested persons (as such term is defined in the Investment Company Act of 1940) thereof. Unless terminated as provided herein, the Agreement shall continue in full force and effect for two (2) years from the effective date of this Agreement, and shall continue in effect from year to year 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. 17. 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 the Fund, on sixty (60) days' written notice to you; (ii) shall terminate immediately in the event of its assignment; and (iii) may be terminated by you on sixty (60) days' written notice to us. 18. SUSPENSION OF SALES. We reserve the right at all times to suspend or limit the public offering of the shares upon written notice to you, and to reject any order in whole or in part. 19. MISCELLANEOUS. This Agreement shall be subject to the laws of the State of Arizona and shall be interpreted and construed to further and promote the operation of the 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. 20. LIABILITY. Nothing contained herein shall be deemed to protect you against any liability to us or to our shareholders to which you would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of your duties hereunder, or by reason of your reckless disregard of your obligations and duties hereunder. 6 21. AMENDMENT. This Agreement may be amended with respect to the Fund by the parties only if such amendment is specifically approved by (a) the Directors or by the vote of a majority of the outstanding voting securities of the Fund, and (b) by the vote of a majority of the distinerested Directors cast in person at a meeting called for the purpose of voting on such amendment. If the foregoing meets with your approval, please acknowledge your acceptance by signing each of the enclosed counterparts hereof and returning such counterparts to us, whereupon this shall constitute a binding agreement as of the date first above written. Very truly yours, PILGRIM GNMA INCOME FUND, INC. /s/ Michael J. Roland ---------------------------------------- By: Michael J. Roland Senior Vice President Agreed to and Accepted: PILGRIM SECURITIES, INC. /s/ James M. Hennessy - --------------------------------- By: James M. Hennessy Executive Vice President 7 SCHEDULE A to the Underwriting Agreement UNDERWRITING AGREEMENT ALLOCATION PROCEDURES CDSCs and Distribution Fees related to Shares of each separate series of Pilgrim GNMA Income Fund, 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 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. 8 "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. 9 (2) FREE SHARES OTHER THAN OMNIBUS SHARES: Free Shares (excluding Omnibus Shares) of a Fund outstanding on any date shall be attributed to PSI or a Successor Distributor, as the case may be, in the same proportion that the Commission Shares (excluding Omnibus Shares) of such Fund outstanding on such date are attributed to it on such date; PROVIDED that if PSI reasonably determines that the Transfer Agent or the Selling Agent is able to produce monthly reports which track the Date of Original Issuance for the Commission Shares related to such Free Shares, then the Free Shares shall be allocated pursuant to clause 1(a), (b) and (c) above. (3) OMNIBUS SHARES: Omnibus Shares of the Fund outstanding on any date shall be attributed to PSI or a Successor Distributor, as the case may be, in the same proportion that the Commission Shares which are not Omnibus Shares of the Fund outstanding on such date are attributed to it on such date; PROVIDED that if PSI and its transferees reasonably determine that the Transfer Agent is able to produce monthly reports which track the Date of Original Issuance for the Omnibus Shares, then the Omnibus Shares shall be allocated pursuant to clause 1(a), (b) and (c) above. PART II: ALLOCATION OF CDSCS (1) CDSCS RELATED TO THE REDEMPTION OF COMMISSION SHARES OTHER THAN OMNIBUS SHARES: CDSCs in respect of the redemption of Commission Shares which are not Omnibus Shares shall be allocated to PSI or Successor Distributor depending upon whether the related redeemed Commission Share is attributable to PSI or Successor Distributor, as the case may be, in accordance with Part I above. (2) CDSCS RELATED TO THE REDEMPTION OF OMNIBUS SHARES: CDSCs in respect of the redemption of Omnibus Shares shall be allocated to PSI or a Successor Distributor in the same proportion that CDSCs related to the redemption of Commission Shares are allocated to each thereof; PROVIDED, that if PSI and its transferees reasonably determine that the Transfer Agent is able to produce monthly reports which track the Date of Original Issuance for the Omnibus Shares, then the CDSCs in respect of the redemption of Omnibus Shares shall be allocated among PSI and any Successor Distributors depending on whether the related redeemed Omnibus Share is attributable to PSI or a Successor Distributor, as the case may be, in accordance with Part I above. PART III: ALLOCATION OF DISTRIBUTION FEES Assuming that the Distribution Fee remains constant over time and among Funds so that Part IV hereof does not become operative: 10 (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 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. 11 EXHIBIT I To Schedule A to the Pilgrim GNMA Income Fund, Inc. Underwriting Agreement SELLING AGENTS 12 EX-99.G 7 0007.txt CUSTODIAN AGREEMENT CUSTODY AGREEMENT THIS AGREEMENT is made effective the 26th day of July, 2000, by and between STATE STREET BANK AND TRUST COMPANY, a trust company chartered under the laws of the commonwealth of Massachusetts, having its principal office at 225 Franklin Street, Boston, Massachusetts 02110 ("State Street"), and each registered investment company listed on Schedule A hereto, as it may be amended from time to time, incorporated herein by reference, each having its principal office and place of business at Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004 (each a "Fund"). WITNESSETH: WHEREAS, Fund desires to appoint State Street as custodian of the assets of the Fund's investment portfolio or portfolios (each a "Portfolio", and collectively the "Portfolios"); and WHEREAS, State Street is willing to accept such appointment on the terms and conditions hereinafter set forth; NOW THEREFORE, for and in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, mutually covenant and agree as follows: 1. APPOINTMENT OF CUSTODIAN AND AGENT. Fund hereby constitutes and appoints State Street as custodian of the investment securities, interests in loans and other non-cash investment property, and monies at any time owned by each of the Portfolios and delivered to State Street as custodian hereunder ("Assets"). 2. REPRESENTATIONS AND WARRANTIES. A. Fund hereby represents, warrants and acknowledges to State Street: 1. That it is a trust duly organized and existing and in good standing under the laws of its state of organization, and that it is registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and 2. That it has the requisite power and authority under applicable law and its declaration of trust) to enter into this Agreement; it has taken all requisite action necessary to appoint State Street as custodian for the Portfolios; this Agreement has been duly executed and delivered by Fund; and this Agreement constitutes a legal, valid and binding obligation of Fund, enforceable in accordance with its terms. B. State Street hereby represents, warrants and acknowledges to Fund: 1. That it is a trust company duly organized and existing and in good standing under the laws of the commonwealth of Massachusetts; and 2. That it has the requisite power and authority under applicable law, its charter and its bylaws to enter into and perform this Agreement; this Agreement has been duly executed and delivered by State Street; and this Agreement constitutes a legal, valid and binding obligation of State Street, enforceable in accordance with its terms. 3. DUTIES AND RESPONSIBILITIES OF THE PARTIES. A. DELIVERY OF ASSETS. Except as permitted by the 1940 Act, Fund will deliver or cause to be delivered to State Street on the effective date hereof, or as soon thereafter as practicable, and from time to time thereafter, all Assets acquired by, owned by or from time to time coming into the possession of each of the Portfolios during the term hereof. State Street has no responsibility or liability whatsoever for or on account of assets not so delivered. B. DELIVERY OF ACCOUNTS AND RECORDS. Fund will turn over or cause to be turned over to State Street all of each Portfolio's relevant accounts and records needed by State Street to perform its duties and responsibilities hereunder fully and properly . State Street may rely conclusively on the completeness and correctness of such accounts and records. C. DELIVERY OF ASSETS TO THIRD PARTIES. State Street will receive delivery of and keep safely the Assets of each Portfolio segregated in a separate account. Upon delivery of any such Assets to a subcustodian appointed pursuant hereto (hereinafter referred to as "Subcustodian"), State Street will create and maintain records identifying such Assets as belonging to the applicable Portfolio. State Street is responsible for the safekeeping of the Assets only until they have been transmitted to and received by other persons as permitted under the terms hereof, except for Assets transmitted to Subcustodians, for which State Street remains responsible to the extent provided herein. State Street may participate directly or indirectly through a subcustodian in the Depository Trust Company (DTC), Treasury/Federal Reserve Book Entry System (Fed System), Participant Trust Company (PTC) or other depository approved by Fund (as such entities are defined at 17 CFR Section 270.17f-4(b)) (each a "Depository" and collectively the "Depositories"). State Street will be responsible to Fund for any loss, damage or expense suffered or incurred by Fund resulting from the actions or omissions of any Depository only to the same extent such Depository is responsible to State Street. D. REGISTRATION. State Street will at all times hold registered Assets in the name of State Street as custodian, the applicable Portfolio, or a nominee of either of them, unless specifically directed by Instructions, as hereinafter defined, to hold such registered Assets in so-called "street name;" provided that, in any event, State Street will hold all such Assets in an account of State Street as custodian containing only Assets of the applicable Portfolio, or only assets held by State Street as a fiduciary or custodian for customers; and provided further, that State Street's records at all times will indicate the Portfolio or other customer for which such Assets are held and the respective interests therein. If, however, Fund directs 2 State Street to maintain Assets in "street name", notwithstanding anything contained herein to the contrary, State Street will be obligated only to utilize its best efforts to timely collect income due the Portfolio on such Assets and to notify the Portfolio of relevant information, such as maturities and pendency of calls, and corporate actions including, without limitation, calls for redemption, tender or exchange offers, declaration, record and payment dates and amounts of any dividends or income, reorganization, recapitalization, merger, consolidation, split-up of shares, change of par value, or conversion ("Corporate Actions"). All Assets and the ownership thereof by Portfolio will at all times be identifiable on the records of State Street. Fund agrees to hold State Street and its nominee harmless for any liability as a shareholder of record of securities held in custody. E. EXCHANGE. Upon receipt of Instructions, State Street will exchange, or cause to be exchanged, Assets held for the account of a Portfolio for other Assets issued or paid in connection with any Corporate Action or otherwise, and will deposit any such Assets in accordance with the terms of any such Corporate Action. Without Instructions, State Street is authorized to exchange Assets in temporary form for Assets in definitive form, to effect an exchange of shares when the par value of stock is changed, and, upon receiving payment therefor, to surrender bonds or other Assets at maturity or when advised of earlier call for redemption, except that State Street will receive Instruction prior to surrendering any convertible security. F. PURCHASES OF INVESTMENTS -- OTHER THAN OPTIONS AND FUTURES. On each business day on which a Portfolio makes a purchase of Assets other than options and futures, Fund will deliver to State Street Instructions specifying with respect to each such purchase: 1. If applicable, the name of the Portfolio making such purchase; 2. The name of the issuer and description of the Asset; 3. The number of shares and the principal amount purchased, and accrued interest, if any; 4. The trade date; 5. The settlement date; 6. The purchase price per unit and the brokerage commission, taxes and other expenses payable in connection with the purchase; 7. The total amount payable upon such purchase; 8. The name of the person from whom or the broker or dealer through whom the purchase was made; and 9. Whether the Asset is to be received in certificated form or via a specified Depository. In accordance with such Instructions, State Street will pay for out of monies held for the purchasing Portfolio, but only insofar as such monies are available for such purpose, and receive the Assets so purchased by or for the account of such Portfolio, except that State Street, or a Subcustodian, may in its sole discretion advance funds to such Portfolio which may result in an overdraft because the monies held on behalf of such Portfolio are insufficient to pay the total 3 amount payable upon such purchase. Except as otherwise instructed by Fund, State Street will make such payment only upon receipt of Assets: (a) by State Street; (b) by a clearing corporation of a national exchange of which State Street is a member; or (c) by a Depository. Notwithstanding the foregoing, (i) State Street may release funds to a Depository prior to the receipt of advice from the Depository that the Assets underlying a repurchase agreement have been transferred by book-entry into the account maintained with such Depository by State Street on behalf of its customers; provided that State Street's instructions to the Depository require that the Depository make payment of such funds only upon transfer by book-entry of the Assets underlying the repurchase agreement in such account; (ii) State Street may make payment for time deposits, call account deposits, currency deposits and other deposits, foreign exchange transactions, futures contracts or options, before receipt of an advice or confirmation evidencing said deposit or entry into such transaction; and (iii) State Street may make, or cause a Subcustodian to make, payment for the purchase of Assets the settlement of which occurs outside of the United States of America in accordance with generally accepted local custom and market practice. G. SALES AND DELIVERIES OF INVESTMENTS -- OTHER THAN OPTIONS AND FUTURES. On each business day on which a Portfolio makes a sale of Assets other than options and futures, Fund will deliver to State Street Instructions specifying with respect to each such sale: 1. If applicable, the name of the Portfolio making such sale; 2. The name of the issuer and description of the Asset; 3. The number of shares and principal amount sold, and accrued interest, if any; 4. The date on which the Assets sold were purchased or other information identifying the Assets sold and to be delivered; 5. The trade date; 6. The settlement date; 7. The sale price per unit and the brokerage commission, taxes or other expenses payable in connection with such sale; 8. The total amount to be received by the Portfolio upon such sale; and 9. The name and address of the broker or dealer through whom or person to whom the sale was made. State Street will deliver or cause to be delivered the Assets thus designated as sold for the account of the selling Portfolio as specified in the Instructions. Except as otherwise instructed by Fund, State Street will make such delivery upon receipt of: (a) payment therefor in such form as is satisfactory to State Street; (b) credit to the account of State Street with a clearing corporation of a national securities exchange of which State Street is a member; or (c) credit to the account maintained by State Street on behalf of its customers with a Depository. Notwithstanding the foregoing: (i) State Street will deliver Assets held in physical form in accordance with "street delivery custom" to a broker or its clearing agent; or (ii) State Street may make, or cause a Subcustodian to make, delivery of Assets the settlement of which occurs outside of the United States of America upon payment therefor in accordance with generally accepted local custom and market practice. 4 H. PURCHASES OR SALES OF OPTIONS AND FUTURES. On each business day on which a Portfolio makes a purchase or sale of the options and/or futures listed below, Fund will deliver to State Street Instructions specifying with respect to each such purchase or sale: 1. If applicable, the name of the Portfolio making such purchase or sale; 2. In the case of security options: a. The underlying security; b. The price at which purchased or sold; c. The expiration date; d. The number of contracts; e. The exercise price; f. Whether the transaction is an opening, exercising, expiring or closing transaction; g. Whether the transaction involves a put or call; h. Whether the option is written or purchased; i. Market on which option traded; and j. Name and address of the broker or dealer through whom the sale or purchase was made. 3. In the case of options on indices: a. The index; b. The price at which purchased or sold; c. The exercise price; d. The premium; e. The multiple; f. The expiration date; g. Whether the transaction is an opening, exercising, expiring or closing transaction; h. Whether the transaction involves a put or call; i. Whether the option is written or purchased; and j. The name and address of the broker or dealer through whom the sale or purchase was made, or other applicable settlement instructions. 4. In the case of security index futures contracts: a. The last trading date specified in the contract and, when available, the closing level, thereof; b. The index level on the date the contract is entered into; c. The multiple; d. Any margin requirements; 5 e. The need for a segregated margin account (in addition to Instructions, and if not already in the possession of State Street, Fund will deliver a substantially complete and executed custodial safekeeping account and procedural agreement, incorporated herein by reference); and f. The name and address of the futures commission merchant through whom the sale or purchase was made, or other applicable settlement instructions. 5. In the case of options on index future contracts: a. The underlying index future contract; b. The premium; c. The expiration date; d. The number of options; e. The exercise price; f. Whether the transaction involves an opening, exercising, expiring or closing transaction; g. Whether the transaction involves a put or call; h. Whether the option is written or purchased; and i. The market on which the option is traded. I. ASSETS PLEDGED OR LOANED. If specifically allowed for in the prospectus of a Portfolio, and subject to such additional terms and conditions as State Street may require: 1. Upon receipt of Instructions, State Street will release or cause to be released Assets to the designated pledgee by way of pledge or hypothecation to secure any loan incurred by a Portfolio; provided, however, that State Street will release Assets only upon payment to State Street of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made, further Assets may be released or caused to be released for that purpose. Upon receipt of Instructions, State Street will pay, but only from funds available for such purpose, any such loan upon redelivery to it of the Assets pledged or hypothecated therefor and upon surrender of the note or notes evidencing such loan. 2. Upon receipt of Instructions, State Street will release Assets to the designated borrower; provided, however, that the Assets will be released only upon deposit with State Street of full cash collateral as specified in such Instructions, and that the lending Portfolio will retain the right to any dividends, interest or distribution on such loaned Assets. Upon receipt of Instructions and the loaned Assets, State Street will release the cash collateral to the borrower. J. ROUTINE MATTERS. State Street will, in general, attend to all routine and mechanical matters in connection with the sale, exchange, substitution, purchase, transfer, or other dealings with the Assets except as may be otherwise provided herein or upon Instruction from Fund. 6 K. DEPOSIT ACCOUNTS. State Street will open and maintain one or more special purpose deposit accounts for each Portfolio in the name of State Street in such banks or trust companies (including, without limitation, affiliates of State Street) as may be designated by it or Fund in writing ("Accounts"), subject only to draft or order by State Street upon receipt of Instructions. State Street will deposit all monies received by State Street from or for the account of a Portfolio in an Account maintained for such Portfolio. Subject to Section 5.L hereof, State Street agrees: 1. To make Fed Funds available to the applicable Portfolio at 9:00 a.m., Kansas City time, on the second business day after deposit of any check into an Account, in the amount of the check; 2. To make funds available immediately upon a deposit made by Federal Reserve wire; and 3. To make funds available on the next business day after deposit of ACH wires. L. INCOME AND OTHER PAYMENTS. State Street will: 1. Collect, claim and receive and deposit for the account of the applicable Portfolio all income (including income from the Accounts) and other payments which become due and payable on or after the effective date hereof with respect to the Assets, and credit the account of such Portfolio in accordance with the schedule attached hereto as Exhibit A. If, for any reason, a Portfolio is credited with income that is not subsequently collected, State Street may reverse that credited amount. If monies are collected after such reversal, State Street will credit the Portfolio in that amount; 2. Execute ownership and other certificates and affidavits for all federal, state and local tax purposes in connection with the collection of bond and note coupons; and 3. Take such other action as may be necessary or proper in connection with (a) the collection, receipt and deposit of such income and other payments, including but not limited to the presentation for payment of all coupons and other income items requiring presentation; and all other Assets which may mature or be called, redeemed, retired or otherwise become payable and regarding which State Street has actual knowledge, or should reasonably be expected to have knowledge; and (b) the endorsement for collection, in the name of Fund or a Portfolio, of all checks, drafts or other negotiable instruments. 7 State Street, however, will not be required to institute suit or take other extraordinary action to enforce collection except upon receipt of Instructions and upon being indemnified to its satisfaction against the costs and expenses of such suit or other actions. State Street will receive, claim and collect all stock dividends, rights and other similar items and will deal with the same pursuant to Instructions. M. PROXIES AND NOTICES. State Street will promptly deliver or mail (or have delivered or mailed) to Fund all proxies properly signed, all notices of meetings, all proxy statements and other notices, requests or announcements affecting or relating to Assets and will, upon receipt of Instructions, execute and deliver or mail (or cause its nominee to execute and deliver or mail) such proxies or other authorizations as may be required. Except as provided herein or pursuant to Instructions hereafter received by State Street, neither it nor its nominee will exercise any power inherent in any such Assets, including any power to vote the same, or execute any proxy, power of attorney, or other similar instrument voting any of such Assets, or give any consent, approval or waiver with respect thereto, or take any other similar action. N. DISBURSEMENTS. State Street will pay or cause to be paid, insofar as funds are available for the purpose, bills, statements and other obligations of each Portfolio (including but not limited to obligations in connection with the conversion, exchange or surrender of Assets, interest charges, dividend disbursements, taxes, management fees, custodian fees, legal fees, auditors' fees, transfer agents' fees, brokerage commissions, compensation to personnel, and other operating expenses of such Portfolio) pursuant to Instructions setting forth the name of the person to whom payment is to be made, and the amount and purpose of the payment. O. DAILY STATEMENT OF ACCOUNTS. State Street will, within a reasonable time, render to Fund a detailed statement of the amounts received or paid and of Assets received or delivered for the account of each Portfolio during each business day. State Street will maintain such books and records as are necessary to enable it to render, from time to time upon request by Fund, a detailed statement of the Assets. State Street will permit, and upon Instruction will cause any Subcustodian to permit, such persons as are authorized by Fund, including Fund's independent public accountants, reasonable access to such records or will provide reasonable confirmation of the contents of such records, and if demanded, State Street will permit, and will cause any Subcustodian to permit, federal and state regulatory agencies to examine the Assets, books and records of the Portfolios. P. APPOINTMENT OF SUBCUSTODIANS. Notwithstanding any other provisions hereof: 1. All or any of the Assets may be held in State Street's own custody or in the custody of one or more other banks or trust companies (including, without limitation, affiliates of State Street) acting as Subcustodians as may be selected by State Street. Any such Subcustodian selected by State Street must have the qualifications required for a custodian under the 1940 Act. State Street will be responsible to the applicable Portfolio for any loss, damage or expense suffered or incurred by such Portfolio resulting from the actions or omissions of any 8 Subcustodians selected and appointed by State Street (except Subcustodians appointed at the request of Fund and as provided in Subsection 2 below) to the same extent State Street would be responsible to Fund hereunder if it committed the act or omission itself. 2. Upon request of Fund, State Street will contract with other Subcustodians reasonably acceptable to State Street for purposes of (a) effecting third-party repurchase transactions with banks, brokers, dealers, or other entities through the use of a common custodian or subcustodian, or (b) providing depository and clearing agency services with respect to certain variable rate demand note securities, or (c) for other reasonable purposes specified by Fund; provided, however, that State Street will be responsible to Fund for any loss, damage or expense suffered or incurred by Fund resulting from the actions or omissions of any such Subcustodian only to the same extent such Subcustodian is responsible to State Street. Fund may review State Street's contracts with such Subcustodians. Q. FOREIGN CUSTODY MANAGER. 1. DELEGATION TO STATE STREET AS FCM. The Fund, pursuant to resolution adopted by its Board of Trustees or Directors (the "Board"), hereby delegates to State Street, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section Q with respect to Foreign Assets held outside the United States, and State Street hereby accepts such delegation, as Foreign Custody Manager ("FCM") of each Portfolio. 2. DEFINITIONS. Capitalized terms in this Section Q have the following meanings: "Country Risk" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment; economic and financial infrastructure (including financial institutions such as any Mandatory Securities Depositories operating in the country); prevailing or developing custody and settlement practices; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country. "Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule 17f-5, except that the term does not include Mandatory Securities Depositories. "Foreign Assets" means any of the Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents in amounts deemed by Fund to be reasonably necessary to effect the Portfolios' transactions in such investments. 9 "Foreign Custody Manager" or "FCM" has the meaning set forth in section (a)(2) of Rule 17f-5. "Mandatory Securities Depository" means a foreign securities depository or clearing agency that, either as a legal or practical matter, must be used if the Fund determines to place Foreign Assets in a country outside the United States (i) because required by law or regulation; (ii) because securities cannot be withdrawn from such foreign securities depository or clearing agency; or (iii) because maintaining or effecting trades in securities outside the foreign securities depository or clearing agency is not consistent with prevailing or developing custodial or market practices. 3. COUNTRIES COVERED. The FCM is responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Exhibit C hereto , which may be amended from time to time by the FCM. The FCM will list on Exhibit C the Eligible Foreign Custodians selected by the FCM to maintain the assets of each Portfolio. Mandatory Securities Depositories are listed on Exhibit D hereto, which Exhibit D may be amended from time to time by the FCM. The FCM will provide amended versions of Exhibits C and D in accordance with subsection 7 of this Section Q. Upon the receipt by the FCM of Instructions to open an account, or to place or maintain Foreign Assets, in a country listed on Exhibit C, and the fulfillment by the Fund of the applicable account opening requirements for such country, the FCM is deemed to have been delegated by the Board responsibility as FCM with respect to that country and to have accepted such delegation. Following the receipt of Instructions directing the FCM to close the account of a Portfolio with the Eligible Foreign Custodian selected by the FCM in a designated country, the delegation by the Board to State Street as FCM for that country is deemed to have been withdrawn and State Street will immediately cease to be the FCM of the Portfolio with respect to that country. The FCM may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such longer period as to which the parties agree in writing) after receipt of any such notice by the Fund, State Street will have no further responsibility as FCM to a Portfolio with respect to the country as to which State Street's acceptance of delegation is withdrawn. 4. SCOPE OF DELEGATED RESPONSIBILITIES. a. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the provisions of this Section Q, the FCM may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the FCM in each country listed on Exhibit C, as amended from time to time. 10 In performing its delegated responsibilities as FCM to place or maintain Foreign Assets with an Eligible Foreign Custodian, the FCM will determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those set forth in Rule 17f-5(c)(1)(i) through (iv). b. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The FCM will determine that the contract (or the rules or established practices or procedures in the case of an Eligible Foreign Custodian that is a foreign securities depository or clearing agency) governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the FCM will provide reasonable care for the Foreign Assets held by that Eligible Foreign Custodian based on the standards applicable to custodians in the particular country. Each such contract will include the provisions set forth in Rule 17f-5(c)(2)(I)(A) through (F), or, in lieu of any or all of the provisions set forth in said (A) through (F), such other provisions that the FCM determines will provide, in their entirety, the same or greater level of care and protection for the Foreign Assets as the provisions set forth in said (A) through (F) in their entirety. c. MONITORING. In each case in which the FCM maintains Foreign Assets with an Eligible Foreign Custodian selected by the FCM, the FCM will establish a system to monitor (a) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (b) the contract governing the custody arrangements established by the FCM with the Eligible Foreign Custodian. In the event the FCM determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the FCM will notify the Board in accordance with subsection 7 of this Section Q. 5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For purposes of this Section Q, the Board will be solely responsible for considering and determining to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which State Street is serving as FCM of a Portfolio, and the Board will be solely responsible for monitoring on a continuing basis such Country Risk to the extent that the Board considers necessary or appropriate. The Fund, on behalf of the Portfolios, and State Street each expressly acknowledge that the FCM will not be delegated any responsibilities under this Section Q with respect to Mandatory Securities Depositories. 11 6. STANDARD OF CARE AS FCM OF A PORTFOLIO. In performing the responsibilities delegated to it, the FCM agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise. 7. REPORTING REQUIREMENTS. The FCM will report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board amended Exhibits C and D at the end of the calendar quarter in which an amendment to either Schedule has occurred. The FCM will make written reports notifying the Board of any other material change in the foreign custody arrangements of a Portfolio described in this Section Q after the occurrence of the material change. 8. REPRESENTATIONS WITH RESPECT TO RULE 17F-5. The FCM represents to the Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. The Fund represents to State Street that the Board has determined that it is reasonable for the Board to rely on State Street to perform the responsibilities delegated pursuant to this Contract to State Street as the FCM of each Portfolio. 9. EFFECTIVE DATE AND TERMINATION OF STATE STREET AS FCM. The Board's delegation to State Street as FCM of a Portfolio will be effective as of the date hereof and will remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty days after receipt by the non-terminating party of such notice. The provisions of subsection 3 of this Section Q govern the delegation to and termination of State Street as FCM of the Fund with respect to designated countries. R. ACCOUNTS AND RECORDS PROPERTY OF FUND. State Street acknowledges that all of the accounts and records maintained by State Street pursuant hereto are the property of Fund, and will be made available to Fund for inspection or reproduction within a reasonable period of time, upon demand. State Street will assist Fund's independent auditors, or upon the prior written approval of Fund, or upon demand, any regulatory body, in any requested review of Fund's accounts and records, provided that Fund will reimburse State Street for all expenses and employee time invested in any such review outside of routine and normal periodic reviews. Upon receipt from Fund of the necessary information or instructions, State Street will supply information from the books and records it maintains for Fund that Fund may reasonably request for tax returns, questionnaires, periodic reports to shareholders and such other reports and information requests as Fund and State Street may agree upon from time to time. 12 S. ADOPTION OF PROCEDURES. State Street and Fund hereby adopt the Funds Transfer Operating Guidelines attached hereto as Exhibit B. State Street and Fund may from time to time adopt such additional procedures as they agree upon, and State Street may conclusively assume that no procedure approved or directed by Fund, Fund's or Portfolio's accountants or other advisors conflicts with or violates any requirements of the prospectus, declaration of trust, any applicable law, rule or regulation, or any order, decree or agreement by which Fund may be bound. Fund will be responsible for notifying State Street of any changes in statutes, regulations, rules, requirements or policies which may impact State Street's responsibilities or procedures under this Agreement. T. ADVANCES. Fund will pay on demand any advance of cash or securities made by State Street or any Subcustodian, in its sole discretion, for any purpose (including but not limited to securities settlements, purchase or sale of foreign exchange or foreign exchange contracts and assumed settlement) for the benefit of any Portfolio. Any such cash advance will be subject to an overdraft charge at the rate set forth in the then-current fee schedule from the date advanced until the date repaid. As security for each such advance, Fund hereby grants State Street and such Subcustodian a lien on and security interest in all Assets at any time held for the account of the applicable Portfolio, including without limitation all Assets acquired with the amount advanced. Should Fund fail to promptly repay the advance, State Street and such Subcustodian may utilize available cash and dispose of such Portfolio's Assets pursuant to applicable law to the extent necessary to obtain reimbursement of the amount advanced and any related overdraft charges. U. EXERCISE OF RIGHTS; TENDER OFFERS. Upon receipt of Instructions, State Street will: (1) deliver warrants, puts, calls, rights or similar securities to the issuer or trustee thereof, or to the agent of such issuer or trustee, for the purpose of exercise or sale, provided that the new Assets, if any, are to be delivered to State Street; and (2) deposit securities upon invitations for tenders thereof, provided that the consideration for such securities is to be paid or delivered to State Street or the tendered securities are to be returned to State Street. V. FUND SHARES. 1. Fund will deliver to State Street Instructions with respect to the declaration and payment of any dividend or other distribution on the shares of capital stock of a Portfolio ("Fund Shares") by a Portfolio. On the date specified in such Instruction, State Street will pay out of the monies held for the account of the Portfolio, insofar as it is available for such purposes, and credit to the account of the Dividend Disbursing Agent for the Portfolio, the amount specified in such Instructions. 2. Whenever Fund Shares are repurchased or redeemed by a Portfolio, Portfolio or its agent will give State Street Instructions regarding the aggregate dollar amount to be paid for such shares. Upon receipt of such Instruction, State Street will charge such 13 aggregate dollar amount to the account of the Portfolio and either deposit the same in the account maintained for the purpose of paying for the repurchase or redemption of Fund Shares or deliver the same in accordance with such Instruction. State Street has no duty or responsibility to determine that Fund Shares have been removed from the proper shareholder accounts or that the proper number of Fund Shares have been canceled and removed from the shareholder records. 3. Whenever Fund Shares are purchased from Fund, Fund will deposit or cause to be deposited with State Street the amount received for such shares. State Street has no duty or responsibility to determine that Fund Shares purchased from Fund have been added to the proper shareholder account or that the proper number of such shares have been added to the shareholder records. 4. INSTRUCTIONS. A. The term "Instructions", as used herein, means written (including telecopied, telexed, or electronically transmitted) or oral instructions which State Street reasonably believes were given by a designated representative of Fund. Fund will deliver to State Street, prior to delivery of any Assets to State Street and thereafter from time to time as changes therein are necessary, written Instructions naming one or more designated representatives to give Instructions in the name and on behalf of Fund, which Instructions may be received and accepted by State Street as conclusive evidence of the authority of any designated representative to act for Fund and may be considered to be in full force and effect until receipt by State Street of notice to the contrary. Unless such written Instructions delegating authority to any person to give Instructions specifically limit such authority to specific matters or require that the approval of anyone else will first have been obtained, State Street will be under no obligation to inquire into the right of such person, acting alone, to give any Instructions whatsoever. If Fund fails to provide State Street any such Instructions naming designated representatives, any Instructions received by State Street from a person reasonably believed to be an appropriate representative of Fund will constitute valid and proper Instructions hereunder. The term "designated representative" may include Fund's or a Portfolio's employees and agents, including investment managers and their employees. B. No later than the next business day immediately following each oral Instruction, Fund will send State Street written confirmation of such oral Instruction. At State Street's sole discretion, State Street may record on tape, or otherwise, any oral Instruction whether given in person or via telephone, each such recording identifying the date and the time of the beginning and ending of such oral Instruction. 14 C. Fund will provide, upon State Street's request a certificate signed by an officer or designated representative of Fund, as conclusive proof of any fact or matter required to be ascertained from Fund hereunder. Fund will also provide State Street Instructions with respect to any matter concerning this Agreement requested by State Street. If State Street reasonably believes that it could not prudently act according to the Instructions, or the instruction or advice of Fund's or a Portfolio's accountants or counsel, it may in its discretion, with notice to Fund, not act according to such Instructions. 5. LIMITATION OF LIABILITY OF STATE STREET. State Street is not responsible or liable for, and Fund will indemnify and hold State Street harmless from and against, any and all costs, expenses, losses, damages, charges, counsel fees (including, without limitation, disbursements and the allocable cost of in-house counsel), payments and liabilities which may be asserted against or incurred by State Street or for which State Street may be held to be liable, arising out of or attributable to: A. State Street's action or failure to act pursuant hereto; provided that State Street has acted in good faith and with reasonable care; and provided further, that, in no event is State Street liable for consequential, special, or punitive damages; B. State Street's payment of money as requested by Fund, or the taking of any action which might make it or its nominee liable for payment of monies or in any other way; provided, however, that nothing herein obligates State Street to take any such action or expend its own monies except in its sole discretion; C. State Street's action or failure to act hereunder upon any Instructions, advice, notice, request, consent, certificate or other instrument or paper appearing to it to be genuine and to have been properly executed, including any Instruction, communications, data or other information received by State Street by means of the Systems, as hereinafter defined, or any electronic system of communication; D. State Street's action or failure to act in good faith reliance on the advice or opinion of counsel for Fund or of its own counsel with respect to questions or matters of law, which advice or opinion may be obtained by State Street at the expense of Fund, or on the Instruction, advice or statements of any officer or employee of Fund, or Fund's accountants or other authorized individuals, and other persons believed by it in good faith to be expert in matters upon which they are consulted; E. The purchase or sale of any securities or foreign currency positions. Without limiting the generality of the foregoing, State Street is under no duty or obligation to inquire into: 1. The validity of the issue of any securities purchased by or for any Portfolio, or the legality of the purchase thereof or of foreign currency positions, or evidence of ownership required by Fund to be received by State Street, or the propriety of the decision to purchase or the amount paid therefor; 15 2. The legality of the sale of any securities or foreign currency positions by or for any Portfolio, or the propriety of the amount for which the same are sold; or 3. The legality of the issue or sale of any Fund Shares, or the sufficiency of the amount to be received therefor, the legality of the repurchase or redemption of any Fund Shares, or the propriety of the amount to be paid therefor, or the legality of the declaration of any dividend by Fund, or the legality of the issue of any Fund Shares in payment of any stock dividend. F. Any error, omission, inaccuracy or other deficiency in any Portfolio's accounts and records or other information provided to State Street by or on behalf of a Portfolio, or the failure of Fund to provide, or provide in a timely manner, any accounts, records, or information needed by State Street to perform its duties hereunder; G. Fund's refusal or failure to comply with the terms hereof (including without limitation Fund's failure to pay or reimburse State Street under Section 5 hereof), Fund's negligence or willful misconduct, or the failure of any representation or warranty of Fund hereunder to be and remain true and correct in all respects at all times; H. The use or misuse, whether authorized or unauthorized, of the Systems or any electronic system of communication used hereunder, by Fund or by any person who acquires access to the Systems or such other systems through the terminal device, passwords, access instructions or other means of access to such Systems or such other system which are utilized by, assigned to or otherwise made available to Fund, except to the extent attributable to any negligence or willful misconduct by State Street; I. Any money represented by any check, draft, wire transfer, clearinghouse funds, uncollected funds, or instrument for the payment of money to be received by State Street on behalf of a Portfolio until actually received; provided, however, that State Street will advise Fund promptly if it fails to receive any such money in the ordinary course of business and will cooperate with Fund toward the end that such money is received; J. Except as provided in Section 3.P hereof, loss occasioned by the acts, omissions, defaults or insolvency of any broker, bank, trust company, securities system or any other person with whom State Street may deal; and K. The failure or delay in performance of its obligations hereunder, or those of any entity for which it is responsible hereunder, arising out of or caused, directly or indirectly, by circumstances beyond the affected entity's reasonable control, including, without limitation: any interruption, loss or malfunction of any utility, transportation, computer (hardware or software) or communication service; inability to obtain labor, material, equipment or transportation, or a delay in mails; governmental or exchange action, statute, ordinance, rulings, regulations or direction; war, strike, riot, emergency, civil 16 disturbance, terrorism, vandalism, explosions, labor disputes, freezes, floods, fires, tornadoes, acts of God or public enemy, revolutions, or insurrection. 6. COMPENSATION. In consideration for its services hereunder, Fund will pay to State Street the compensation set forth in a separate fee schedule, incorporated herein by reference, to be agreed to by Fund and State Street from time to time, and, upon demand, reimbursement for State Street's cash disbursements and reasonable out-of-pocket costs and expenses, including attorney's fees and disbursements, incurred by State Street in connection with the performance of services hereunder. State Street may charge such compensation against monies held by it for the account of the Portfolios. State Street will also be entitled to charge against any monies held by it for the account of the Portfolios the amount of any loss, damage, liability, advance, overdraft or expense for which it is entitled to reimbursement from Fund, including but not limited to fees and expenses due to State Street for other services provided to Fund by State Street. State Street will be entitled to reimbursement by Fund for the losses, damages, liabilities, advances, overdrafts and expenses of Subcustodians only to the extent that (a) State Street would have been entitled to reimbursement hereunder if it had incurred the same itself directly, and (b) State Street is obligated to reimburse the Subcustodian therefor. 7. TERM AND TERMINATION. The initial term of this Agreement is for a period of one (1) year. Thereafter, either Fund or State Street may terminate this Agreement by notice in writing, delivered or mailed, postage prepaid, to the other party and received not less than ninety (90) days prior to the date upon which such termination will take effect. Upon termination hereof: A. Fund will pay State Street its fees and compensation due hereunder and its reimbursable disbursements, costs and expenses paid or incurred to such date; B. Fund will designate a successor custodian by Instruction to State Street by the termination date. In the event no such Instruction has been delivered to State Street on or before the date when such termination becomes effective, then State Street may, at its option, (i) choose as successor custodian a bank or trust company meeting the qualifications for custodian set forth in the 1940 Act and having not less than Two Million Dollars ($2,000,000) aggregate capital, surplus and undivided profits, as shown by its last published report, or (ii) apply to a court of competent jurisdiction for the appointment of a successor or other proper relief, or take any other lawful action under the circumstances; provided, however, that Fund will reimburse State Street for its costs and expenses, including reasonable attorney's fees, incurred in connection therewith; and C. State Street will, upon payment of all sums due to State Street from Fund hereunder or otherwise, deliver all Assets, duly endorsed and in form for transfer, to the successor custodian, or as specified by the court, at State Street's office. State Street will co-operate in effecting changes in book-entries at all Depositories. Upon delivery to a successor or as specified by the court, State Street will have no further obligations or liabilities hereunder. Thereafter such successor will be the successor hereunder and will be entitled to reasonable compensation for its services. 17 In the event that Assets remain in the possession of State Street after the date of termination hereof for any reason other than State Street's failure to deliver the same, State Street is entitled to compensation as provided in the then-current fee schedule for its services during such period, and the provisions hereof relating to the duties and obligations of State Street will remain in full force and effect. 8. NOTICES. Notices, requests, instructions and other writings addressed to Fund at the address set forth above, or at such other address as Fund may have designated to State Street in writing, will be deemed to have been properly given to Fund hereunder. Notices, requests, Instructions and other writings addressed to State Street at State Street Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105, Attention: Custody Department, or to such other address as it may have designated to Fund in writing, will be deemed to have been properly given to State Street hereunder. 9. THE SYSTEMS; CONFIDENTIALITY. A. If State Street provides Fund direct access to the computerized investment portfolio custody systems used by State Street ("Systems") or if State Street and Fund agree to utilize any electronic system of communication, Fund agrees to implement and enforce appropriate security policies and procedures to prevent unauthorized or improper access to or use of the Systems or such other system. B. Fund will preserve the confidentiality of the Systems and the tapes, books, reference manuals, instructions, records, programs, documentation and information of, and other materials relevant to, the Systems and the business of State Street or its affiliates ("Confidential Information"). Fund agrees that it will not voluntarily disclose any such Confidential Information to any other person other than its own employees who reasonably have a need to know such information pursuant hereto. Fund will return all such Confidential Information to State Street upon termination or expiration hereof. C. Fund has been informed that the Systems are owned by or licensed for use by State Street and its affiliates from one or more third parties ("Licensors"), and Fund acknowledges that State Street and Licensors have proprietary rights in and to the Systems and all other State Street or Licensor programs, code, techniques, know-how, data bases, supporting documentation, data formats, and procedures, including without limitation any changes or modifications made at the request or expense or both of Fund (collectively, the "Protected Information"). Fund acknowledges that the Protected Information constitutes confidential material and trade secrets of State Street and Licensors. Fund will preserve the confidentiality of the Protected Information, and Fund hereby acknowledges that any unauthorized use, misuse, disclosure or taking of Protected Information, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be 18 subject to civil liabilities and criminal penalties under applicable law. Fund will so inform employees and agents who have access to the Protected Information or to any computer equipment capable of accessing the same. Licensors are intended to be and are third party beneficiaries of Fund's obligations and undertakings contained in this Section. D. Fund hereby represents and warrants to State Street that it has determined to its satisfaction that the Systems are appropriate and suitable for its use. THE SYSTEMS ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. STATE STREET EXPRESSLY DISCLAIMS ALL WARRANTIES INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, EXCEPT THOSE WARRANTIES STATED EXPRESSLY HEREIN. 10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio, the following provisions apply: A. Each Portfolio will be regarded for all purposes hereunder as a separate party apart from each other Portfolio. Unless the context otherwise requires, with respect to every transaction covered hereby, every reference herein to Fund is deemed to relate solely to the particular Portfolio to which such transaction relates. Under no circumstances will the rights, obligations or remedies with respect to a particular Portfolio constitute a right, obligation or remedy applicable to any other Portfolio. The use of this single document to memorialize the separate agreement as to each Portfolio is understood to be for clerical convenience only and will not constitute any basis for joining the Portfolios for any reason. B. Fund may appoint State Street as its custodian for additional Portfolios from time to time by written notice, provided that State Street consents to such addition. Rates or charges for each additional Portfolio will be as agreed upon by State Street and Fund in writing. 11. MISCELLANEOUS. A. This Agreement will be construed according to, and the rights and liabilities of the parties hereto will be governed by, the laws of the commonwealth of Massachusetts, without reference to the choice of laws principles thereof. B. All terms and provisions hereof will be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. C. The representations and warranties, the indemnifications extended hereunder, and the provisions of Section 9 hereof are intended to and will continue after and survive the expiration, termination or cancellation hereof. 19 D. No provisions hereof may be amended or modified in any manner except by a written agreement properly authorized and executed by each party hereto. E. The failure of either party to insist upon the performance of any terms or conditions hereof or to enforce any rights resulting from any breach of any of the terms or conditions hereof, including the payment of damages, will not be construed as a continuing or permanent waiver of any such terms, conditions, rights or privileges, but the same will continue and remain in full force and effect as if no such forbearance or waiver had occurred. No waiver, release or discharge of any party's rights hereunder will be effective unless contained in a written instrument signed by the party sought to be charged. F. The captions herein are included for convenience of reference only, and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. G. This Agreement may be executed in two or more counterparts, each of which is deemed an original but all of which together constitute one and the same instrument. H. If any provision hereof is determined to be invalid, illegal, in conflict with any law or otherwise unenforceable, the remaining provisions hereof will be considered severable and will not be affected thereby, and every remaining provision hereof will remain in full force and effect and will remain enforceable to the fullest extent permitted by applicable law. I. The benefits of this Agreement may not be assigned by either party nor may either party delegate all or a portion of its duties hereunder without the prior written consent of the other party. Notwithstanding the foregoing, Fund agrees that State Street may delegate all or a portion of its duties to an affiliate of State Street, provided that such delegation will not reduce the obligations of State Street under this Agreement. J. Neither the execution nor performance hereof will be deemed to create a partnership or joint venture by and between State Street and Fund or any Portfolio. K. Except as specifically provided herein, this Agreement does not in any way affect any other agreements entered into among the parties hereto and any actions taken or omitted by either party hereunder will not affect any rights or obligations of the other party hereunder. 20 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers. STATE STREET BANK AND PILGRIM GNMA INCOME FUND, INC. TRUST COMPANY PILGRIM GROWTH AND INCOME FUND, INC. By: LEXINGTON MONEY MARKET TRUST Title: LEXINGTON NATURAL RESOURCES TRUST By: ------------------------------------ On behalf of each of the Funds Title: --------------------------------- 21 SCHEDULE A PILGRIM GNMA INCOME FUND, INC. PILGRIM GROWTH AND INCOME FUND, INC. LEXINGTON MONEY MARKET TRUST LEXINGTON NATURAL RESOURCES TRUST 22 EXHIBIT A -- INCOME AVAILABILITY SCHEDULE FOREIGN--Income will be credited contractually on pay day in the markets noted with Contractual Income Policy. The markets noted with Actual income policy will be credited income when it is received.
MARKET INCOME POLICY MARKET INCOME POLICY MARKET INCOME POLICY ------ ------------- ------ ------------- ------ ------------- Argentina Actual Hong Kong Contractual Poland Actual Australia Contractual Hungary Actual Portugal Contractual Austria Contractual India Actual Russia Actual Bahrain Actual Indonesia Actual Singapore Contractual Bangladesh Actual Ireland Actual Slovak Republic Actual Belgium Contractual Israel Actual South Africa Actual Bermuda Actual Italy Contractual South Korea Actual * Bolivia Actual Ivory Coast Actual Spain Contractual Botswana Actual * Jamaica Actual Sri Lanka Actual Brazil Actual Japan Contractual Swaziland Actual Canada Contractual Jordan Actual Sweden Contractual Chile Actual Kenya Actual Switzerland Contractual China Actual Lebanon Actual Taiwan Actual Colombia Actual Luxembourg Actual Thailand Actual Cyprus Actual Malaysia Actual * Trinidad & Actual Tobago Czech Republic Actual Mauritius Actual * Tunisia Actual Denmark Contractual Mexico Actual Turkey Actual Ecuador Actual Morocco Actual UnitedKingdom Contractual Egypt Actual Namibia Actual United States See Attached **Euroclear Contractual/ Netherlands Contractual Uruguay Actual Actual Euro CDs Actual New Zealand Contractual Venezuela Actual Finland Contractual Norway Contractual Zambia Actual France Contractual Oman Actual Zimbabwe Actual Germany Contractual Pakistan Actual Ghana Actual Peru Actual Greece Actual Philippines Actual
- ---------- * Market is not 17F-5 eligible ** For Euroclear, contractual income paid only in markets listed with Income Policy of Contractual. 23 UNITED STATES--
INCOME TYPE DTC FED PTC PHYSICAL ----------- --- --- --- -------- Dividends Contractual N/A N/A Actual Fixed Rate Interest Contractual Contractual N/A Actual Variable Rate Interest Contractual Contractual N/A Actual GNMA I N/A N/A Contractual PD +1 N/A GNMA II N/A N/A Contractual PD *** N/A Mortgages Actual Contractual Contractual Actual Maturities Actual Contractual N/A Actual
Exceptions to the above Contractual Income Policy include securities that are: > Involved in a trade whose settlement either failed, or is pending over the record date, (excluding the United States); > On loan under a self directed securities lending program other than State Street's own vendor lending program; > Known to be in a condition of default, or suspected to present a risk of default or payment delay; > In the asset categories, without limitation, of Private Placements, Derivatives, Options, Futures, CMOs, and Zero Coupon Bonds. > Securities whose amount of income and redemption cannot be calculated in advance of payable date, or determined in advance of actual collection, examples include ADRs; > Payments received as the result of a corporate action, not limited to, bond calls, mandatory or optional puts, and tender offers. *** For GNMA II securities, if the 19th day of the month is a business day, Payable/Distribution Date is the next business day. If the 19th is not a business day, but the 20th is a business day, Payable/Distribution date is the first business day after the 20th. If both the 19th and 20th are not business days, Payable/Distribution will be the next business day thereafter. 24 EXHIBIT B--FUNDS TRANSFER OPERATING GUIDELINES 1. OBLIGATION OF THE SENDER: State Street Bank and Trust Company ("SSB") is authorized to promptly debit Client's account(s) upon the receipt of a payment order in compliance with any of the Security Procedures chosen by the Client, from those offered on the attached selection form (and any updated selection forms hereafter executed by the Client), for funds transfers and in the amount of money that SSB has been instructed to transfer. SSB is hereby instructed to accept funds transfer instructions only via the delivery methods and Security Procedures indicated on the attached selection form (and any updated executed by the Client). The Client agrees that the Security Procedures are reasonable and adequate for its wire transfer transactions and agrees to be bound by any payment orders, amendments and cancellations, whether or not authorized, issued in its name and accepted by SSB after being confirmed by any of the selected Security Procedures. The Client also agrees to be bound by any other valid and authorized payment order accepted by SSB. SSB shall execute payment orders in compliance with the selected Security Procedures and with the Client's/Investment Manager's instructions on the execution date provided that such payment order is received by the customary deadline for processing such a request, unless the payment order specifies a later time. SSB will use reasonable efforts to execute on the execution date payment orders received after the customary deadline, but if it is unable to execute any such payment order on the execution date, such payment order will be deemed to have been received on the next business day. 2. SECURITY PROCEDURES: The Client acknowledges that the selected Security Procedures were selected by the Client from Security Procedures offered by SSB. The Client shall restrict access to confidential information relating to the Security Procedures to authorized persons as communicated in writing to SSB. The Client must notify SSB immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in the Client's authorized personnel. SSB shall verify the authenticity of all instructions according to the selected Security Procedures. 3. ACCOUNT NUMBERS: SSB shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. Financial institutions that receive payment orders initiated by SSB at the instruction of the Client may also process payment orders on the basis of account numbers, regardless of any name included in the payment order. SSB will also rely on any financial institution identification numbers included in any payment order, regardless of any financial institution name included in the payment order. 4. REJECTION: SSB reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of SSB's receipt of such payment order; (b) if initiating such payment order would cause SSB, in SSB's sole judgment, to exceed any applicable volume, aggregate dollar, network, time, credit or similar limits upon wire transfers; or (c) if SSB, in good faith, is unable to satisfy itself that the transaction has been properly authorized. 5. CANCELLATION OR AMENDMENT: SSBshall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the selected Security Procedures provided that such requests are received in sufficient time to afford SSB a reasonable opportunity to act prior to executing the payment order. However, SSB assumes no liability if the request for amendment or cancellation cannot be satisfied by SSB reasonable efforts. 6. ERRORS: SSB shall assume no responsibility for failure to detect any erroneous payment order provided that SSB complies with the payment order instructions as received and SSB complies with the selected Security Procedures. The Security Procedures are established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders. 7. INTEREST AND LIABILITY LIMITS: SSB shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless SSB is notified of the unauthorized payment order within thirty (30) days of notification by SSB of the acceptance of such payment order. In no event (including but not limited to failure to execute a payment order) shall SSB be liable for special, indirect or consequential damages, even if advised of the possibility of such damages. 8. AUTOMATED CLEARING HOUSE ("ACH") CREDIT ENTRIES/PROVISIONAL PAYMENTS: When the Client initiates or receives ACH credit and debit entries pursuant to these Guidelines and the rules of the National Automated Clearing House Association and the Mid-America Payment Exchange or other similar body, SSB or its agent will act as an Originating Depository Financial Institution and/or Receiving Depository Financial Institution, as the case may be, with respect to such entries. Credits given with respect to an ACH credit entry are provisional until final settlement for such entry is received from the Federal Reserve Bank. If such final settlement is not received, the Client agrees to promptly refund the amount credited to the Client in connection with such entry, and the party making payment to the Client via such entry shall not be deemed to have paid the amount of the entry. 9. CONFIRMATIONS: Confirmation of SSB's execution of payment orders shall ordinarily be provided within 24 hours. Notice may be delivered through SSB's account statements, advices, information systems, or by facsimile or callback. The Client must report any objections to the execution of a payment order within 30 days. 10. MISCELLANEOUS: SSB may use the Federal Reserve System Fedwire to execute payment orders, and any payment order carried in whole or in part through Fedwire will be subject to applicable Federal Reserve Board rules and regulations. SSB and the Client agree to cooperate to attempt to recover any funds erroneously paid to wrong parties, regardless of any fault of SSB or the Client, but the party responsible for the erroneous payment shall bear all costs and expenses incurred in trying to effect such recovery. These Guidelines may not be amended except by a written agreement signed by the parties. 25 SECURITY PROCEDURES SELECTION FORM Please select at least two of the funds transfer security procedures indicated below. [ ] SWIFT SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a cooperative society owned and operated by member financial institutions that provides telecommunication services for its membership. Participation is limited to securities brokers and dealers, clearing and depository institutions, recognized exchanges for securities, and investment management institutions. SWIFT provides a number of security features through encryption and authentication to protect against unauthorized access, loss or wrong delivery of messages, transmission errors, loss of confidentiality and fraudulent changes to messages. SELECTION OF THIS SECURITY PROCEDURE WOULD BE MOST APPROPRIATE FOR EXISTING SWIFT MEMBERS. [ ] REMOTE BATCH TRANSMISSION Wire transfer instructions are delivered via Computer-to-Computer (CPU-CPU) data communications between the Client and/or its agent and SSB and/or its agent. Security procedures include encryption and/or the use of a test key by those individuals authorized as Automated Batch Verifiers or a callback procedure to those individuals. CLIENTS SELECTING THIS OPTION SHOULD HAVE AN EXISTING FACILITY FOR COMPLETING CPU-CPU TRANSMISSIONS. THIS DELIVERY MECHANISM IS TYPICALLY USED FOR HIGH-VOLUME BUSINESS SUCH AS SHAREHOLDER REDEMPTIONS AND DIVIDEND PAYMENTS. [ ] AUTOMATED CLEARING HOUSE (ACH) SSB or its agent receives an automated transmission from a Client for the initiation of payment (credit) or collection (debit) transactions through the ACH network. The transactions contained on each transmission or tape must be authenticated by the Client. The transmission is sent from the Client's or its agent's system to SSB's or its agent's system with encryption. [ ] REPETITIVE WIRES For situations where funds are transferred periodically from an existing authorized account to the same payee (destination bank and account number) and only the date and currency amount are variable, a repetitive wire may be implemented. Repetitive wires will be subject to a $10 million limit. If the payment order exceeds the $10 million limit, the instruction will be confirmed by Telephone Confirmation (Call Back) or Test Key prior to execution. Repetitive wire instructions must be reconfirmed annually. Clients may establish Repetitive Wires by following the agreed upon security procedures as described by Telephone Confirmation (Call Back) or Test Key. THIS ALTERNATIVE IS RECOMMENDED WHENEVER FUNDS ARE FREQUENTLY TRANSFERRED BETWEEN THE SAME TWO ACCOUNTS. IF THIS OPTION IS SELECTED, CHOOSE EITHER TELEPHONE CONFIRMATION OR TEST KEY TO BE USED AS A SECONDARY PROCEDURE WHEN OVER $10 MILLION. [ ] STANDING INSTRUCTIONS Funds are transferred by SSB to a counter party on the Client's established list of authorized counter parties. Only the date and the dollar amount are variable. Clients may establish Standby Instructions by following the agreed upon security procedures as described by Telephone Confirmation (Call Back) or Test Key. THIS OPTION IS USED FOR TRANSACTIONS THAT INCLUDE BUT ARE NOT LIMITED TO FOREIGN EXCHANGE CONTRACTS, TIME DEPOSITS AND TRI-PARTY REPURCHASE AGREEMENTS. IF THIS OPTION IS SELECTED, CHOOSE EITHER TELEPHONE CONFIRMATION OR TEST KEY TO BE USED AS A SECONDARY PROCEDURE WHEN OVER $10 MILLION. [ ] TELEPHONE CONFIRMATION (CALL BACK) This procedure requires Clients to designate individuals as authorized initiators and authorized verifiers. SSB will verify that the instruction contains the signature of an authorized person and prior to execution of the payment order, will contact someone other than the originator at the Client's location to authenticate the instruction. SELECTION OF THIS ALTERNATIVE IS APPROPRIATE FOR CLIENTS WHO DO NOT HAVE THE CAPABILITY TO USE OTHER SECURITY PROCEDURES. PLEASE COMPLETE THE TELEPHONE CONFIRMATION INSTRUCTIONS ATTACHED AS A SCHEDULE HERETO. [ ] TEST KEY Test Key confirmation will be used to verify all non-repetitive funds transfer instructions received via facsimile or phone. SSB will provide test keys if this option is chosen. SSB will verify that the instruction contains the signature of an authorized person and prior to execution of the payment order, will authenticate the test key provided with the corresponding test key at SSB. SELECTION OF THIS ALTERNATIVE IS APPROPRIATE FOR CLIENTS WHO DO NOT HAVE THE CAPABILITY TO USE OTHER SECURITY PROCEDURES. The individual signing below must be authorized to sign contract on behalf of the client. The execution of payment orders under the selected Security Procedures is governed by the Funds Transfer Operating Guidelines, which are incorporated by reference. CLIENT By: ---------------------------------- Authorized Signature - -------------------------------------- Type or Print Name - -------------------------------------- Title - -------------------------------------- Date 26 SCHEDULE TO FUNDS TRANSFER OPERATING GUIDELINES AND SECURITY PROCEDURES SELECTION FORM CLIENT/INVESTMENT MANAGER: ----------------------------------------------------- Company Name KEY CONTACT INFORMATION Whom shall we contact to implement your selection(s)? CLIENT OPERATIONS CONTACT ALTERNATE CONTACT Name Name Address Address City/State/Zip Code City/State/Zip Code Telephone Number Telephone Number Facsimile Number Facsimile Number SWIFT Number TELEPHONE CONFIRMATION INSTRUCTIONS Authorized Initiators (Please Type or Print) - Please provide a listing of your staff members who are currently authorized to INITIATE wire transfer instructions: NAME TITLE SPECIMEN SIGNATURE - ---- ----- ------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ Authorized Verifiers (Please Type or Print) - Please provide a listing of your staff members who will be CALLED BACK to verify the initiation of repetitive wires of $10 million or more and all non-repetitive wire instructions: NAME CALLBACK PHONE NUMBER DOLLAR LIMITATION (IF ANY) - ---- --------------------- -------------------------- - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ - ----------------------- ------------------------- ------------------------ 27 EXHIBIT C State Street GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES NON-MANDATORY COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ Argentina Citibank, N.A. -- Australia Westpac Banking Corporation -- Austria Erste Bank der Oesterreichischen -- Sparkassen AG Bahrain The British Bank of the Middle East (as -- delegate of the Hongkong and Shanghai Banking Corporation Limited) Bangladesh Standard Chartered Bank -- Belgium Generale de Banque -- Bermuda The Bank of Bermuda Limited -- Bolivia Banco Boliviano Americano S.A. -- Botswana Barclays Bank of Botswana Limited -- Brazil Citibank, N.A. -- Bulgaria ING Bank N.V. -- Canada State Street Trust Company Canada -- Chile Citibank, N.A. -- People's The Hongkong and Shanghai Banking Corporation -- Republic of Limited, Shanghai and Shenzhen branches China Colombia Cititrust Colombia S.A.Sociedad Fiduciaria -- Costa Rica Banco BCT S.A. -- Croatia Privredana Banka Zagreb d.d -- Cyprus Cypress Popular Bank Ltd. -- Czech Ceskoslovenska Obchodni Banka, A.S. -- Republic 28 EXHIBIT C STATE STREET GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES NON-MANDATORY COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ Denmark Den Danske Bank -- Ecuador Citibank, N.A. -- Egypt National Bank of Egypt -- Estonia Hansabank -- Finland Merita Bank Limited -- France Banque Paribas -- Germany Dresdner Bank AG -- Ghana Barclays Bank of Ghana Limited -- Greece National Bank of Greece S.A Bank of Greece, System for Monitoring Transactions in Securities in Book-Entry Form Hong Kong Standard Chartered Bank -- Hungary Citibank Budapest Rt. -- Iceland Icebank Ltd. -- India Deutsche Bank AG;The Hongkong and Shanghai -- Banking Corporation Limited Indonesia Standard Chartered Bank -- Ireland Bank of Ireland -- Israel Bank Hapoalim B.M. -- Italy Banque Paribas -- Ivory Coast Societe Generale de Banques en -- Cote d'Ivoire Jamaica Scotiabank Jamaica Trust and Merchant -- Bank, Ltd. Japan The Daiwa Bank, Limited; The Fuji Bank Japan Limited Securities Depository 29 EXHIBIT C STATE STREET GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES NON-MANDATORY COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ Jordan British Bank of the Middle East (as -- delegate of The Hongkong and Shanghai Banking Corporation Limited) Kenya Barclays Bank of Kenya Limited -- Republic of The Hongkong and Shanghai Banking -- Korea Corporation Limited Latvia JSC Hansabank-Latvija -- Lebanon British Bank of the Middle East -- (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Lithuania Vilniaus Bankas AB -- Malaysia Standard Chartered Bank Malaysia Berhad -- Mauritius The Hongkong and Shanghai Banking -- Corporation Limited Mexico Citibank Mexico, S.A. -- Morocco Banque Commerciale du Maroc -- Namibia (via) Standard Bank of South Africa -- Netherlands MeesPierson N.V. -- New Zealand ANZ Banking Group (New Zealand) Limited -- Norway Christiania Bank og Kreditkasse -- Oman The British Bank of the Middle East (as -- delegate of The Hongkong and Shanghai Banking Corporation Limited) Pakistan Deutsche Bank AG -- Peru Citibank, N.A. -- Philippines Standard Chartered Bank -- 30 EXHIBIT C STATE STREET GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES NON-MANDATORY COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ Poland Citibank (Poland) S.A. -- Bank Polska Kasa Opieki S.A. Portugal Banco Comercial Portugues -- Romania ING Bank, N.V. -- Russia Credit Suisse First Boston, AO, Moscow -- (as delegate of Credit Suisse First Boston, Zurich) Singapore The Development Bank of Singapore Ltd. -- Slovak Ceskoslovenska Obchodna Banka A.S. -- Republic Slovenia Banka Austria d.d. -- South Africa Standard Bank of South Africa Limited -- Spain Banco Santander, S.A. -- Sri Lanka The Hongkong and Shanghai Banking -- Corporation Limited Swaziland Barclays Bank of Swaziland Limited -- Sweden Skandinaviska Enskilda Banken -- Switzerland UBS AS -- Taiwan - Central Trust of China -- R.O.C. Thailand Standard Chartered Bank -- Trinidad Republic Bank Ltd. -- & Tobago Tunisia Banque Internationale Arabe de Tunisie -- Turkey Citibank, N.A.; Ottoman Bank -- Ukraine ING Bank, Ukraine -- 31 EXHIBIT C STATE STREET GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES NON-MANDATORY COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ United State Street Bank and Trust Company, -- Kingdom London Branch Uruguay Citibank, N.A. -- Venezuela Citibank, N.A. -- Zambia Barclays Bank of Zambia Limited -- Zimbabwe Barclays Bank of Zimbabwe Limited -- Euroclear (The Euroclear System)/State Street London Limited Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited INTERSETTLE (for EASDAQ Securities) 32 EXHIBIT D STATE STREET GLOBAL CUSTODY NETWORK MANDATORY DEPOSITORIES COUNTRY MANDATORY DEPOSITORIES (INCLUDES ENTITIES FOR WHICH USE IS MANDATORY AS A MATTER OF LAW OR EFFECTIVELY MANDATORY AS A MATTER OF MARKET PRACTICE) Argentina -Caja de Valores S.A. Australia -Austraclear Limited; -Reserve Bank Information andTransfer System Austria -Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division) Belgium -Caisse Interprofessionnelle de Depot et de Virement de Titres S.A.; -Banque Nationale de Belgique Brazil -Companhia Brasileira de Liquidacao e -Custodia (CBLC) -Bolsa de Valores de Rio de Janeiro - All SSB CLIENTS PRESENTLY USE CBLC -Central de Custodia e de Liquidacao Financeira de Titulos Bulgaria -Central Depository AD -Bulgarian National Bank Canada -The Canadian Depositoryfor Securities Limited People's Republic -Shanghai Securities Central Clearing and Registration of China Corporation; -Shenzhen Securities Central Clearing Co., Ltd. Costa Rica -Central de Valores S.A. (CEVAL) Croatia Ministry of Finance; - National Bank of Croatia Czech Republic --Stredisko cennych papiru; -Czech National Bank Denmark -Vaerdipapircentralen (The Danish Securities Center) Egypt -Misr Company for Clearing, Settlement, and Central Depository Estonia -Eesti Vaartpaberite Keskdepositooruim Finland -The Finnish Central Securities Depository France -Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres (SICOVAM) 33 EXHIBIT D STATE STREET GLOBAL CUSTODY NETWORK MANDATORY DEPOSITORIES COUNTRY MANDATORY DEPOSITORIES (INCLUDES ENTITIES FOR WHICH USE IS MANDATORY AS A MATTER OF LAW OR EFFECTIVELY MANDATORY AS A MATTER OF MARKET PRACTICE) Germany -The Deutscher Borse Clearing AG Greece -The Central Securities Depository (Apothetirion Titlon AE) Hong Kong -The Central Clearing and Settlement System; -Central Money Markets Unit Hungary -The Central Depository and Clearing House (Budapest) Ltd.(KELER) [MANDATORY FOR GOV'T BONDS ONLY; SSB DOES NOT USE FOR OTHER SECURITIES] India -The National Securities Depository Limited Indonesia -Bank Indonesia Ireland -The Central Bank of Ireland, Securities Settlement Office Israel -The Tel Aviv Stock Exchange Clearing House Ltd.; -Bank of Israel Italy -Monte Titoli S.p.A.; -Banca d'Italia Jamaica -The Jamaican Central Securities Depository Japan -Bank of Japan Net System Kenya -Central Bank of Kenya Republic of Korea -Korea Securities Depository Corporation Latvia -The Latvian Central Depository Lebanon -The Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East (MIDCLEAR) S.A.L.; - The Central Bank of Lebanon Lithuania -The Central Securities Depository of Lithuania Malaysia -The Malaysian Central Depository Sdn. Bhd.; -Bank Negara Malaysia, Scripless Securities Trading and Safekeeping Systems Mauritius -The Central Depository & Settlement Co. Ltd. 34 EXHIBIT D STATE STREET GLOBAL CUSTODY NETWORK MANDATORY DEPOSITORIES COUNTRY MANDATORY DEPOSITORIES (INCLUDES ENTITIES FOR WHICH USE IS MANDATORY AS A MATTER OF LAW OR EFFECTIVELY MANDATORY AS A MATTER OF MARKET PRACTICE) Mexico -S.D. INDEVAL, S.A. de C.V.(Instituto para el Deposito de Valores); Morocco -Maroclear The Netherlands -Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (NECIGEF) -De Nederlandsche Bank N.V. New Zealand -New Zealand Central Securities Depository Limited Norway -Verdipapirsentralen (the Norwegian Registry of Securities) Oman -Muscat Securities Market Pakistan -Central Depository Company of Pakistan Limited Peru -Caja de Valores y Liquidaciones S.A. (CAVALI) Philippines -The Philippines Central Depository Inc. -The Registry of Scripless Securities (ROSS) of the Bureau of the Treasury Poland -The National Depository of Securities (Krajowy Depozyt Papierow Wartos'ciowych); -Central Treasury Bills Registrar Portugal -Central de Valores Mobiliarios (Central) Romania -National Securities Clearing, Settlement and Depository Co.; -Bucharest Stock Exchange Registry Division; Singapore -The Central Depository (Pte)Limited; -Monetary Authority of Singapore Slovak Republic -Stredisko Cennych Papierov; -National Bank of Slovakia Slovenia -Klirinsko Depotna Druzba d.d. South Africa -The Central Depository Limited Spain -Servicio de Compensacion y Liquidacion de Valores, S.A.; -Banco de Espana; Central de Anotaciones en Cuenta 35 EXHIBIT D STATE STREET GLOBAL CUSTODY NETWORK MANDATORY DEPOSITORIES COUNTRY MANDATORY DEPOSITORIES (INCLUDES ENTITIES FOR WHICH USE IS MANDATORY AS A MATTER OF LAW OR EFFECTIVELY MANDATORY AS A MATTER OF MARKET PRACTICE) Sri Lanka -Central Depository System (Pvt) Limited Sweden -Vardepapperscentralen AB (the Swedish Central Securities Depository) Switzerland -Schweizerische Effekten - Giro AG; Taiwan - R.O.C. -The Taiwan Securities Central Depository Company, Ltd. Thailand -Thailand Securities Depository Company Limited Tunisia -Societe Tunisienne Interprofessionelle de Compensation et de Depot de Valeurs Mobilieres -Central Bank of Tunisia; -Tunisian Treasury Turkey -Takas ve Saklama Bankasi A.S. (TAKASBANK) -Central Bank of Turkey Ukraine -The National Bank of Ukraine United Kingdom -The Bank of England, The Central Gilts Office; The Central Moneymarkets Office Uruguay -Central Bank of Uruguay Venezuela -Central Bank of Venezuela Zambia -Lusaka Central Depository Limited -Bank of Zambia 36 EX-99.H.1 8 0008.txt ADMINISTRATION AGREEMENT ADMINISTRATION AGREEMENT AGREEMENT made this 26th day of July, 2000 between Pilgrim GNMA Income Fund, Inc. (the "Fund"), a Maryland corporation, and Pilgrim Group, Inc. (the "Administrator"), a Delaware corporation. WHEREAS, the Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Fund desires to avail itself of the services of the Administrator for the provision of administrative services for the Fund; and WHEREAS, the Administrator is willing to render such services to the Fund; NOW, THEREFORE, in consideration of the premises, the promises and mutual covenants herein contained, it is agreed between the parties as follows: 1. APPOINTMENT. The Fund hereby appoints the Administrator, subject to the direction of the Board of Directors, for the period and on the terms set forth in this Agreement, to provide administrative services, as described herein, with respect to the Fund. The Administrator accepts such appointment and agrees to render the services set forth herein. 2. SERVICES OF THE ADMINISTRATOR. Subject to the general supervision of the Board of Directors of the Fund, the Administrator shall provide the following administrative services: (a) Provide all administrative services reasonably necessary for the operation of the Fund other than the investment advisory services performed by the investment adviser or sub-adviser, including, but not limited to, (i) coordinating all matters relating to the operation of the Fund, including any necessary coordination among the investment adviser, custodian, transfer agent, dividend disbursing agent, and portfolio accounting agent (including pricing and valuation of the portfolio), accountants, attorneys, and other parties performing services or operational functions for the Fund; (ii) maintaining or supervising the maintenance by third parties engaged by the Fund of such books and records of the Fund as may be required by applicable federal or state law; (iii) preparing or supervising the preparation by third parties selected by the Fund of all federal, state, and local tax returns and reports required by applicable law; (iv) preparing and filing, with the assistance of counsel, and arranging for the distribution of proxy materials and periodic reports to shareholders as required by applicable law; (v) preparing and arranging for the filing, with the assistance of counsel, of registration statements and other documents with the Securities and Exchange Commission (the "SEC") and other federal and state regulatory authorities as may be required by applicable law; (vi) taking such other action with respect to the Fund as may be required by applicable law, including without limitation the rules and regulations of the SEC and other regulatory agencies; (vii) providing the Fund, at the Administrator's expense, with adequate personnel, office space, communications facilities, and other facilities necessary for operation of the Fund as contemplated in this Agreement; (viii) arranging for meetings of the Fund's Board of Directors and, in connection therewith, providing the Board with necessary or appropriate information for its meetings; (ix) providing non-investment related statistical and research data and such other reports, evaluations and information as the Fund may request from time to time; (x) maintaining the Fund's existence, and during such time as shares of the Fund are publicly offered, maintaining the registration and qualification of the Fund's shares under federal and state law; and (xi) responding to inquiries from shareholders or their agents or representatives relating to the Fund, concerning, among other things, exchanges among funds, or referring any such inquiries to the Fund's officers or transfer agent. Nothing in this provision shall be deemed to inhibit the Fund or its officers from engaging, at the expense of the Fund, other persons to assist in providing administrative services to the Fund including, but not limited to, accounting agents, recordkeeping agents, proxy solicitation agents, attorneys, accountants, consultants and others. (b) Render to the Board of Directors of the Fund such periodic and special reports as the Board may reasonably request; (c) Make available its officers and employees to the Board of Directors and officers of the Fund for consultation and discussions regarding the administration of the Fund and the services provided to the Fund under this Agreement; and (d) Develop and implement, if appropriate, management and shareholder services designed to enhance the value or convenience of the Fund as an investment vehicle. 3. CONFORMITY WITH APPLICABLE LAW. The Administrator, in the performance of its duties and obligations under this Agreement, shall act in conformity with the Registration Statement of the Fund and with the instructions and directions of the Board of Directors of the Fund and will conform to, and comply with, the requirements of the 1940 Act and all other applicable federal and state laws and regulations. 4. EXCLUSIVITY. The services of the Administrator to the Fund under this Agreement are not to be deemed exclusive, and the Administrator, or any affiliate thereof, shall be free to render similar services to other investment companies and other clients (whether or not their investment objectives and policies are similar to those of the Fund) and to engage in other activities, so long as its services hereunder are not impaired thereby. 5. EXPENSES. During the term of this Agreement, the Administrator will pay all expenses incurred by it in connection with its activities under this Agreement, except such expenses as are assumed by the Fund under this Agreement and such expenses as are assumed by the investment adviser pursuant to an Investment Management Agreement. The Fund shall be responsible for all of the other expenses of its operations, including, without limitation, the administration fee payable hereunder; advisory fees; brokerage commissions; interest; legal fees and expenses of attorneys; fees of auditors, transfer agents and dividend disbursing agents, custodians and shareholder servicing agents; fees of accountants and accounting services; the expense of obtaining 2 quotations for calculating the Fund's net asset value; taxes, if any, and the preparation of the Fund's tax returns; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; expenses of registering and qualifying shares of the Fund under federal and state laws and regulations; salaries of personnel involved in placing orders for the execution of the Fund's portfolio transactions; expenses of printing and distributing reports, notices and proxy materials to existing shareholders; expenses of printing and filing reports and other documents filed with governmental agencies; expenses in connection with shareholder and director meetings; expenses of printing and distributing prospectuses and statements of additional information to existing shareholders; fees and expenses of Directors of the Fund who are not "interested persons" of the Fund as that term is defined in the Investment Company Act of 1940; trade association dues; insurance premiums; and extraordinary expenses such as litigation expenses. To the extent the Administrator incurs any costs or performs any services which are an obligation of the Fund, as set forth herein, the Fund shall promptly reimburse the Administrator for such costs and expenses. To the extent the services for which the Fund is obligated to pay are performed by the Administrator, the Administrator shall be entitled to recover from the Fund only to the extent of its costs for such services. 6. COMPENSATION. For the services provided by the Administrator pursuant to this Agreement, the Fund will pay to the Administrator the annual fee set forth in Schedule A hereto. 7. LIABILITY OF THE ADMINISTRATOR. The Administrator may rely on information reasonably believed by it to be accurate and reliable. Except as may otherwise be required by the 1940 Act or the rules thereunder, neither the Administrator nor its stockholders, officers, directors, employees, or agents shall be subject to any liability for, or any damages, expenses, or losses incurred in connection with, any act or omission connected with or arising out of any services rendered under this Agreement, except by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Administrator's duties, or by reason of reckless disregard of the Administrator's obligations and duties under this Agreement. The liability incurred by the Administrator pursuant to this paragraph 7 in any year shall be limited to the revenues of the Administrator derived from the Fund in that fiscal year of the Fund. The Administrator shall look solely to Fund property for satisfaction of claims of any nature against the Fund or a director, officer, employee or agent of the Fund arising in connection with the affairs of the Fund. 8. CONTINUATION AND TERMINATION. This Agreement shall become effective on the date first written above, subject to the condition that the Fund's Board of Directors, including a majority of those Directors who are not interested persons (as such term is defined in the 1940 Act) of the Administrator, shall have approved this Agreement. Unless terminated as provided herein, the Agreement shall continue in full force and effect for two (2) years from the effective date of this Agreement, and shall continue from year to year thereafter so long as such continuance is specifically approved at least annually by the vote of a majority of the Board of Directors of the Fund, including a majority of the Board of Directors of the Fund who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of the Fund or the Administrator. 3 This Agreement may be terminated by the Fund at any time, without the payment of any penalty, by vote of a majority of the Board of Directors of the Fund on sixty (60) days' written notice to the Administrator, or by the Administrator at any time, without the payment of any penalty, on sixty (60) days' written notice to the Fund. 9. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original. 10. APPLICABLE LAW. (a) This Agreement shall be governed by the laws of the State of Arizona, provided that nothing herein shall be construed in a manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any rules or order of the SEC thereunder. (b) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (c) The captions of this Agreement are included for convenience only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 4 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. PILGRIM GNMA INCOME FUND, INC. /s/ Michael J. Roland ---------------------------------------- By: Michael J. Roland Senior Vice President PILGRIM GROUP, INC. /s/ James M. Hennessy ---------------------------------------- By: James M. Hennessy Senior Executive Vice President 5 SCHEDULE A ADMINISTRATIVE FEE 0.10% of the Fund's average daily net assets 6 EX-99.H.2 9 0009.txt EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT PILGRIM GNMA INCOME FUND, INC. EXPENSE LIMITATION AGREEMENT, effective as of July 26, 2000 by and between Pilgrim Investments, Inc. (the "Investment Manager") and Pilgrim GNMA Income Fund, Inc. (the "Company"), on behalf of each series of the Company set forth in SCHEDULE A (each a "Fund," and collectively, the "Funds"). WHEREAS, the Company is a Maryland corporation, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Company; and WHEREAS, the Company and the Investment Manager have entered into an Investment Management Agreement dated July 26, 2000 ("Management Agreement"), pursuant to which the Investment Manager provides investment management services to each Fund for compensation based on the value of the average daily net assets of each such Fund; and WHEREAS, the Company and the Investment Manager have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund may normally be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1. APPLICABLE EXPENSE LIMIT. To the extent that the ordinary operating expenses incurred by a class of a Fund in any fiscal year, including but not limited to investment management fees payable to the Investment Manager, but excluding interest, taxes, brokerage commissions, other investment-related costs, extraordinary expenses such as litigation, other expenses not incurred in the ordinary course of such Fund's business, and expenses of any counsel or other persons or services retained by the Company's directors who are not "interested persons," as that term is defined in the 1940 Act, of the Investment Manager ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Investment Manager. 1.2. OPERATING EXPENSE LIMIT. The Operating Expense Limit in any fiscal year with respect to each class of each Fund shall be the amount specified in SCHEDULE A based on a percentage of the average daily net assets of such class of the Fund. 1.3. METHOD OF COMPUTATION. To determine the Investment Manager's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for each class of a Fund shall be annualized. If the annualized Fund Operating Expenses for any day of a class of a Fund exceed the Operating Expense Limit of for that class of such Fund, the Investment Manager shall remit to the appropriate class of the Fund an amount that, together with the waived or reduced investment management fee, is sufficient to pay that day's Excess Amount. The Company may offset amounts owed to the Funds pursuant to this Agreement against the advisory fee payable to the Investment Manager. 1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment management fees waived or reduced and other payments remitted by the Investment Manager to each class of each Fund with respect to the previous fiscal year shall equal the Excess Amount. 2. RECOUPMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS. 2.1. RECOUPMENT. If on any day during which the Management Agreement is in effect, the estimated annualized Fund Operating Expenses of a class of a Fund for that day are less than the Operating Expense Limit, the Investment Manager shall be entitled to recoup from such Fund the investment management fees waived or reduced and other payments remitted by the Investment Manager to such class of the Fund pursuant to Section 1 hereof (the "Recoupment Amount") during any of the previous thirty-six (36) months, to the extent that such class' annualized Operating Expenses plus the amount so recouped equals, for such day, the Operating Expense Limit provided in SCHEDULE A, provided that such amount paid to the Investment Manager will in no event exceed the total Recoupment Amount and will not include any amounts previously recouped. 2.2. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the actual Fund Operating Expenses of each class of each a Fund for the prior fiscal year (including any recoupment payments hereunder with respect to such fiscal year) do not exceed the Operating Expense Limit. 3. TERM AND TERMINATION OF AGREEMENT. This Agreement shall have an initial term through July 26, 2002. Thereafter, this Agreement shall automatically renew for one-year terms unless the Investment Manager provides written notice to the Company of the termination of this Agreement at least 30 days prior to the end of the then-current term. In addition, this Agreement shall terminate upon termination of the Management Agreement, or it may be terminated by the Company, without payment of any penalty, upon ninety (90) days' prior written notice to the Investment Manager at its principal place of business. 4. MISCELLANEOUS. 4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Company or the Funds to take any action contrary to the Company's Articles of Incorporation or By-Laws, or any applicable statutory or regulatory -2- requirement to which it is subject or by which it is bound, or to relieve or deprive the Company's Board of Directors of its responsibility for and control of the conduct of the affairs of the Company or the Funds. 4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment management fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Management Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Management Agreement or the 1940 Act. 4.4. AMENDMENTS. This Agreement may be amended only by a written agreement signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. PILGRIM GNMA INCOME FUND, INC. /s/ Michael J. Roland ---------------------------------------- By: Michael J. Roland, Senior Vice President PILGRIM INVESTMENTS, INC. /s/ James M. Hennessy ---------------------------------------- By: James M. Hennessy, Senior Executive Vice President -3- SCHEDULE A OPERATING EXPENSE LIMITS This Agreement relates to the following Funds: Maximum Operating Expense Limit Name of Fund (As a Percentage of Average Net Assets) - ------------ --------------------------------------- CLASS A CLASS B CLASS C CLASS Q ------- ------- ------- ------- Pilgrim GNMA Income Fund, Inc. 1.29% 2.04% 2.04% 1.29% -4- EX-99.J.1 10 0010.txt CONSENT OF KPMG LLP Independent Auditors' Consent To the Shareholders and Board of Directors of Pilgrim Funds: We consent to the incorporation by reference, in this Prospectus and Statement of Additional Information, of our reports dated February 7, 2000 with respect to the funds listed below, on the statements of assets and liabilities as of December 31, 2000, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year periods then ended and the financial highlights for each of the years in the five-year periods then ended. These financial statements and financial highlights and our reports thereon are included in the Annual Reports of the Funds as filed on Form N-30D. We also consent to the references to our firm under the headings "Financial Highlights" in the Prospectus and "Auditors" in the Statement of Additional Information. Pilgram Funds: Pilgrim Global Corporate Pilgrim Gold Fund, Inc. Leaders Funds, Inc. Pilgrim GNMA Income Fund, Inc. Pilgrim Growth and Income Funds, Inc. Pilgrim International Fund, Inc. Lexington Money Market Trust Pilgrim Silver Fund, Inc. Pilgrim SmallCap Asia Growth Fund, Inc Pilgrim Troika Dialog Pilgrim Worldwide Emerging Russia Fund, Inc. Markets Funds, Inc. Pilgrim Global Income Fund /s/ KPMG LLP New York, New York July 25, 2000 EX-99.J.2 11 0011.txt CONSENT OF DECHERT PRICE & RHOADS [LETTERHEAD OF DECHERT PRICE & RHOADS] July 26, 2000 Pilgrim GNMA Income Fund, Inc. 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 Re: Pilgrim GNMA Income Fund, Inc. (File Nos. 2-48906 and 811-2401) Dear Sirs: We hereby consent to the incorporation by reference to our opinion as an exhibit to Post-Effective Amendment No. 36 to the Registration Statement of Pilgrim GNMA Income Fund, Inc., and to all references to our firm therein. In giving such consent, however, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, and the rules and regulations thereunder. Very truly yours, EX-99.M.1 12 0012.txt SERVICE AND DISTRIBUTION PLAN - CLASS A SERVICE AND DISTRIBUTION PLAN WHEREAS, Pilgrim GNMA Income Fund, 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 currently consist of one series, Pilgrim GNMA Income Fund, Inc. (the "Fund"); WHEREAS, shares of common stock of the Fund are divided into classes of shares, one of which is designated Class A; 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; and WHEREAS, the Company wishes to adopt the Distribution Plan and the Shareholder Service Plan of the Fund with respect to Class A shares as set forth hereinafter. NOW, THEREFORE, the Company hereby adopts on behalf of the Fund with respect to its Class A shares, and the Distributor hereby agrees to the terms of the Plan, in accordance with Rule 12b-l under the Act, on the following terms and conditions: 1. The Fund shall pay to the Distributor, as the distributor of the Class A shares of the Fund, a service or distribution fee at the rate of 0.25% on an annualized basis of the average daily net assets of the Fund's Class A shares, provided that, at any time such payment is made, whether or not this Plan continues in effect, the making thereof will not cause the limitation upon such payments established by this Plan to be exceeded. Such fee shall be calculated and accrued daily and paid monthly or at such intervals as the Board of Directors shall determine, subject to any applicable restriction imposed by rules of the National Association of Securities Dealers, Inc. 2. The amount set forth in paragraph 1 of this Plan shall 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. To the extent not used for servicing shareholder accounts, the amount set forth in paragraph 1 of this Plan may be paid for the Distributor's services as distributor of the shares of the Fund in connection with any activities or expenses primarily intended to result in the sale of the Class A shares of the Fund, including, but not limited to, payment of compensation, including incentive compensation, to securities dealers (which may include the Distributor itself) and other financial institutions and organizations (collectively, the "Service Organizations") to obtain various distribution related and/or administrative services for the Funds. These services may include, among other things, processing new shareholder account applications, preparing and transmitting to the Fund's Transfer Agent computer processable tapes of all transactions by customers and serving as the primary source of information to customers in answering questions concerning the Fund and their transactions with the Fund. The Distributor is also authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, this Plan hereby authorizes payment by the Fund of the cost of preparing, printing and distributing Fund Prospectuses and Statements of Additional Information to prospective investors and of implementing and operating the Plan. Distribution expenses also include an allocation of overhead of the Distributor and accruals for interest on the amount of distribution expenses that exceed distribution fees and contingent deferred sales charges received by the Distributor. 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 A shares of the Fund 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 the 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 A shares of the Fund 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 the fee (including any service fee) provided for in paragraph 1 hereof unless such amendment is approved by a vote of the shareholders of the Class A shares of the Fund, 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. Dated: July 26, 2000 2 EX-99.M.2 13 0013.txt SERVICE AND DISTRIBUTION PLAN - CLASS B SERVICE AND DISTRIBUTION PLAN WHEREAS, Pilgrim GNMA Income Fund, 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 currently consist of one series, Pilgrim GNMA Income Fund, Inc. (the "Fund"); WHEREAS, shares of common stock of the Fund 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"); 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 adopt the Distribution Plan and the Shareholder Service Plan of the Fund with respect to all Class B shares, whether issued before or after the date hereof, as set forth hereinafter. NOW, THEREFORE, the Company hereby adopts this Plan on behalf of the Fund with respect to its Class B shares, in accordance with Rule 12b-l under the Act, on the following terms and conditions: 1. A. The 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; (II) notwithstanding anything to the contrary in this Plan or the Underwriting Agreement, the 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 ________ ___, 2000, (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 Fund 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 Fund 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 Fund's prospectus or statement of -2- additional information on the date such Commission Share was issued, without the consent of such Distributor and its Transferees; (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, the 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 Fund for Class B shares, each successor company or fund, and each company or fund acquiring a substantial portion of the assets of the Fund (collectively, the "Affected Fund") involving the complete cessation of the payment of Distribution Fees in respect of all current Class B shares of the Affected Fund and each future class of shares of the Affected Fund which has substantially similar characteristics to the shares of the current Class B shares of the Fund, including the manner of payment and amount of sales charge, contingent deferred sales charge or other similar charges borne directly or indirectly by the holders of such shares (all such classes of shares "Class B Shares"). B. In addition to the amount provided in 1.A. above, the Fund shall pay to the Distributor, as the distributor of the Class B shares of the Fund, a service fee at the rate of 0.25% on an annualized basis of the average daily net -3- assets of the Fund's Class B shares, provided that, at any time such payment is made, whether or not this Plan continues in effect, the making thereof will not cause the limitation upon such payments established by this Plan to be exceeded. 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 Fund in connection with any activities or expenses primarily intended to result in the sale of the Class B shares of the Fund, 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 Fund. These services may include, among other things, processing new shareholder account applications, preparing and transmitting to the Fund's 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 Fund and their transactions with the Fund. The Distributor is also authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, this Plan hereby authorizes payment by the Fund 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 B shares of the Fund 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- 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 the 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 Fund 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 the Fund, 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. Dated: July 26, 2000 -5- EX-99.M.3 14 0014.txt SERVICE & DISTRIBUTION PLAN - CLASS C SERVICE AND DISTRIBUTION PLAN WHEREAS, Pilgrim GNMA Income Fund, 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 currently consist of one series, Pilgrim GNMA Income Fund, Inc. (the "Fund"); WHEREAS, shares of common stock of the Fund 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; and WHEREAS, the Company wishes to adopt the Distribution Plan and the Shareholder Service Plan of the Fund with respect to Class C shares as set forth hereinafter. NOW, THEREFORE, the Company hereby adopts this Plan on behalf of the Fund with respect to its Class C shares, in accordance with Rule 12b-l under the Act, on the following terms and conditions: 1. A. The 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 Fund shall pay to the Distributor, as the distributor of the Class C shares of the Fund, a service fee at the rate of 0.25% 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 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 Fund in connection with any activities or expenses primarily intended to result in the sale of the Class C shares of the Fund, 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 Fund. These services may include, among other things, processing new shareholder account applications, preparing and transmitting to the Fund's 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 Fund and their transactions with the Fund. The Distributor is also authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, this Plan hereby authorizes payment by the Fund 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 Fund 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 the Fund at any time, without payment of any penalty, by vote of the Directors of the Fund, 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 Fund on not more than 30 days' written notice to any other party to the Plan. -2- 7. This Plan may not be amended to increase materially the amount of distribution fee (including any service fee) provided for in paragraph 1 hereof unless such amendment is approved by a vote of the shareholders of the Class C shares of the Fund, 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 Directors 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. Dated: July 26, 2000 -3- EX-99.M.4 15 0015.txt SHAREHOLDER SERVICE PLAN - CLASS Q SHAREHOLDER SERVICE PLAN WHEREAS, Pilgrim GNMA Income Fund, 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 currently consist of one series, Pilgrim GNMA Income Fund, Inc. (the "Fund"); WHEREAS, shares of common stock of the Fund are divided into classes of shares, one of which is designated Class Q; WHEREAS, the Company employs Pilgrim Securities, Inc. (the "Distributor") as distributor of the securities of which it is the issuer; 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 adopt the Shareholder Service Plan of the Fund with respect to Class Q shares as set forth hereinafter. NOW, THEREFORE, the Company hereby adopts on behalf of the Fund with respect to its Class Q shares, and the Distributor hereby agrees to the terms of the Plan, in accordance with Rule 12b-l under the Act, on the following terms and conditions: 1. The Fund shall pay to the Distributor, as the distributor of the Class Q shares of the Fund, a service fee at the rate of 0.25% on an annualized basis of the average daily net assets of the Fund's Class Q shares, provided that, at any time such payment is made, whether or not this Plan continues in effect, the making thereof will not cause the limitation upon such payments established by this Plan to be exceeded. Such fee shall be calculated and accrued daily and paid monthly or at such intervals as the Board of Directors shall determine, subject to any applicable restriction imposed by rules of the National Association of Securities Dealers, Inc. 2. The amount set forth in paragraph 1 of this Plan may be used by the Distributor to pay securities dealers (which may include the Distributor itself) and other financial institutions and organizations for servicing shareholder accounts, including a continuing fee which may accrue immediately after the sale of shares. 3. This Plan shall not take effect until it, together with any related agreements, has been approved by votes of a majority of both (a) the 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 Q shares of the Fund 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 the 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 Q shares of the Fund on not more than 30 days' written notice to any other party to the Plan. 7. This Plan may not be amended to increase materially the amount of service fee provided for in paragraph 1 hereof unless such amendment is approved by a vote of the shareholders of the Class Q shares of the Fund, 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. Dated: July 26, 2000 -2- EX-99.N 16 0016.txt RULE 18F-3 MULTIPLE CLASS PLAN MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3 FOR PILGRIM GNMA INCOME FUND, INC. WHEREAS, Pilgrim GNMA Income Fund, 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"); and WHEREAS, shares of common stock of the Company currently consist of one series, Pilgrim GNMA Income Fund, Inc. (the "Fund"); and WHEREAS, the Company has adopted, on behalf of the Fund, a Multiple Class Plan pursuant to Rule 18f-3 under the Act (the "Plan") with respect to the Fund; and WHEREAS, pursuant to an Underwriting Agreement dated July 26, 2000, the Company on behalf of the Fund employs Pilgrim Securities, Inc. ("Distributor") as distributor of the securities of which it is the issuer; and NOW, THEREFORE, the Company hereby adopts, on behalf of the Fund, the Plan, in accordance with Rule 18f-3 under the Act on the following terms and conditions: 1. FEATURES OF THE CLASSES. The Fund issues its shares of common stock in four classes: "Class A Shares," "Class B Shares," "Class C Shares," and "Class Q Shares". Shares of each class of the Fund shall represent an equal pro rata interest in the Fund and, generally, shall have identical voting, dividend, liquidation, and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except that: (a) each class shall have a different designation; (b) each class of shares shall bear any Class Expenses, as defined in Section 5 below; and (c) each class shall have exclusive voting rights on any matter submitted to shareholders that relates solely to it or its distribution arrangement and each class shall have separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class. In addition, Class A, Class B, Class C, and Class Q shares shall have the features described in Sections 2, 5 and 6 below. 2. SALES CHARGE STRUCTURE. (a) CLASS A SHARES. Class A shares of the Fund shall be offered at the then-current net asset value plus a front-end sales charge. The front-end sales charge shall be in such amount as is disclosed in a Fund's current prospectus or prospectus supplement and shall be subject to reductions for larger purchases and such waivers or reductions as are determined or approved by the Board of Directors. There is no initial front-end sales charge on purchases of an amount as disclosed in the prospectus. Class A shares generally shall not be subject to a contingent deferred sales charge provided, however, that such a charge may be imposed when shares are redeemed within one or two years of purchase and/or in such other cases as is disclosed in the Fund's current prospectus or supplement thereto subject to the supervision of the Board of Directors. (b) CLASS B SHARES. Class B shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. A contingent deferred sales charge in such amount as is described in the Fund's current prospectus or prospectus supplement shall be imposed on Class B shares, subject to such waivers or reductions as are described in the Fund's prospectus or supplement thereto, subject to the supervision of the Fund's Board of Directors. (c) CLASS C SHARES. Class C shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. A contingent deferred sales charge in such amount as is described in the Fund's current prospectus or prospectus supplement shall be imposed on Class C shares, subject to such waivers or reductions as are described in the Fund's prospectus or supplement thereto, subject to the supervision of the Fund's Board of Directors. (d) CLASS Q SHARES. Class Q shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. Class Q shares shall not be subject to a contingent deferred sales charge. 3. SERVICE AND DISTRIBUTION PLANS. Each class of shares of the Fund has adopted a Rule 12b-1 plan each with the following terms: (a) CLASS A SHARES. Class A shares of the Fund may pay Distributor monthly a fee at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares for distribution or service activities (each as defined in paragraph (f), below), as designated by Distributor. Distributor, on behalf of Class A shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class A shares for shareholder services and distribution activities (as defined in paragraph (f), below) rendered to Class A Shareholders. (b) CLASS B SHARES. Class B shares of the Fund may pay Distributor monthly a fee at the annual rate of 1.00% of the average daily net assets of the Fund's Class B shares for distribution or service activities (as defined in paragraph -2- (f), below), as designated by Distributor. Distributor, on behalf of Class B shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class B shares for distribution and service activities (as defined in paragraph (f), below) rendered to Class B shareholders. (c) CLASS C SHARES. Class C shares of the Fund may pay Distributor monthly a fee at the annual rate of 1.00% of the average daily net assets of the Fund's Class C shares for distribution or service activities (as defined in paragraph (f), below), as designated by Distributor. Distributor, on behalf of Class C shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class C shares for distribution and service activities (as defined in paragraph (f), below) rendered to Class C shareholders. (d) CLASS Q SHARES. Class Q shares of the Fund may pay Distributor monthly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class Q shares for service activities (as defined in paragraph (f), below) as designated by Distributor. Distributor, on behalf of Class Q shares, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class Q shares for service activities (as defined in paragraph (f), below) rendered to Class Q shareholders. (e) DISTRIBUTION AND SERVICE ACTIVITIES. (1) As used herein, the term "distribution services" shall include services rendered by Distributor as distributor of the shares of a Fund in connection with any activities or expenses primarily intended to result in the sale of shares of a Fund, including, but not limited to, compensation to registered representatives or other employees of Distributor or to other broker-dealers that have entered into an Authorized Dealer Agreement with Distributor, compensation to and expenses of employees of Distributor who engage in or support distribution of the Funds' shares; telephone expenses; interest expense; printing of prospectuses and reports for other than existing shareholders; preparation, printing and distribution of sales literature and advertising materials; and profit and overhead on the foregoing. (2) As used herein, the term "service activities" shall mean activities in connection with the provision of personal, continuing services to investors in each Fund, excluding transfer agent and subtransfer agent services for beneficial owners of shares of a Fund, aggregating and processing purchase and redemption orders, providing beneficial owners with account statements, processing dividend payments, providing subaccounting services for Fund shares held beneficially, forwarding shareholder communications to beneficial owners and receiving, tabulating and transmitting proxies executed by beneficial owners; provided, however, that if the National Association of Securities Dealers Inc. ("NASD") adopts a definition of "service fee" for purposes of Section 2830 of the NASD Conduct Rules that differs from the definition of "service activities" hereunder, or if the NASD adopts a related definition intended to define the same concept, the definition of "service activities" in this Paragraph shall be automatically amended, without further action of the Board of Directors, to conform to such NASD definition. Overhead and other expenses of Distributor related to its "service activities," including telephone and other communications expenses, may be included in the information regarding amounts expended for such activities. -3- 4. COMPLIANCE STANDARDS. The Company desires that investors in the Fund select the sales financing method that best suits his or her particular financial situation. In this connection, Distributor may encourage Authorized Dealers to establish standards which govern sales of shares of the Fund to assist investors in making investment decisions and to help ensure proper supervision of purchase recommendations. 5. ALLOCATION OF INCOME AND EXPENSES. (a) The gross income of the Fund shall, generally, be allocated to each class on the basis of relative net assets. To the extent practicable, certain expenses (other than Class Expenses as defined below which shall be allocated more specifically) shall be subtracted from the gross income on the basis of the net assets of each class of the Fund. These expenses include: (1) Expenses incurred by the Company (for example, fees of Directors, auditors and legal counsel) not attributable to the Fund or to a particular class of shares of the Fund ("Corporate Level Expenses"); and (2) Expenses incurred by the Fund not attributable to any particular class of the Fund's shares (for example, advisory fees, custodial fees, or other expenses relating to the management of the Fund's assets) ("Fund Expenses"). (b) Expenses attributable to a particular class ("Class Expenses") shall be limited to: (i) payments made pursuant to a 12b-1 plan; (ii) transfer agent fees attributable to a specific class; (iii) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses and proxies to current shareholders of a specific class; (iv) Blue Sky registration fees incurred by a class; (v) SEC registration fees incurred by a class; (vi) the expense of administrative personnel and services to support the shareholders of a specific class; (vii) litigation or other legal expenses relating solely to one class; and (viii) directors' fees incurred as a result of issues relating to one class. Expenses in category (i) above must be allocated to the class for which such expenses are incurred. All other "Class Expenses" listed in categories (ii)-(viii) above may be allocated to a class but only if the President and Chief Financial Officer have determined, subject to Board approval or ratification, which of such categories of expenses will be treated as Class Expenses, consistent with applicable legal principles under the Act and the Internal Revenue Code of 1986, as amended. Therefore, expenses of the Fund shall be apportioned to each class of shares depending on the nature of the expense item. Corporate Level Expenses and Fund Expenses will be allocated among the classes of shares based on their relative net asset values. Approved Class Expenses shall be allocated to the particular class to which they are attributable. In addition, certain expenses may be allocated differently if their method of imposition changes. Thus, if a Class Expense can no longer be attributed to a class, it shall be charged to the Fund for allocation among classes, as determined by the Board of Directors. Any additional Class Expenses not specifically identified above which are subsequently identified and determined to be properly allocated to one class of shares shall not be so allocated until approved by the Board of Directors of the Company in light of the requirements of the Act and the Internal Revenue Code of 1986, as amended. -4- 6. EXCHANGE PRIVILEGES. Shares of one class of the Fund may be exchanged for shares of that same class of any other Pilgrim Fund at NAV without payment of any additional sales charge. However, a sales charge, equal to the excess, if any, of the sales charge rate applicable to the shares being acquired over the sales charge rate previously paid, may be assessed on exchanges from the Fund. If a shareholder exchanges and subsequently redeems his or her shares, any applicable Contingent Deferred Sales Charge fee will be based on the full period of the share ownership. 7. CONVERSION FEATURES. A shareholder's Class B shares will automatically convert to Class A shares in the Fund on the first business day of the month in which the eighth anniversary of the issuance of the Class B shares occurs, together with a pro rata portion of all Class B shares representing dividends and other distributions paid in additional Class B shares. The conversion of Class B shares into Class A shares may be subject to the continuing availability of an opinion of counsel or an Internal Revenue Service ruling to the effect that (1) such conversion will not constitute taxable events for federal tax purposes; and (2) the payment of different dividends on Class A and Class B shares shares, respectively, does not result in the Fund's dividends or distributions constituting "preferential dividends" under the Internal Revenue Code of 1986. The Class B shares so converted will no longer be subject to the higher expenses borne by Class B shares. The conversion will be effected at the relative net asset values per share of the two Classes. 8. QUARTERLY AND ANNUAL REPORTS. The Directors shall receive quarterly and annual statements concerning all allocated Class Expenses and distribution and servicing expenditures complying with paragraph (b)(3)(ii) of Rule 12b-1, as it may be amended from time to time. In the statements, only expenditures properly attributable to the sale or servicing of a particular class of shares will be used to justify any distribution or servicing fee or other expenses charged to that class. Expenditures not related to the sale or servicing of a particular class shall not be presented to the Directors to justify any fee attributable to that class. The statements, including the allocations upon which they are based, shall be subject to the review and approval of the independent Directors in the exercise of their fiduciary duties. 9. ACCOUNTING METHODOLOGY. (a) The following procedures shall be implemented in order to meet the objective of properly allocating income and expenses: (1) On a daily basis, a fund accountant shall calculate the Plan Fee to be charged to each 12b-1 class of shares by calculating the average daily net asset value of such shares outstanding and applying the applicable fee rate of the respective class to the result of that calculation. (2) The fund accountant will allocate designated Class Expenses, if any, to the respective classes. -5- (3) The fund accountant shall allocate income and Corporate Level and Fund Expenses among the respective classes of shares based on the net asset value of each class in relation to the net asset value of the Fund for Fund Expenses, and in relation to the net asset value of the Company for Corporate Level Expenses. These calculations shall be based on net asset values at the beginning of the day. (4) The fund accountant shall then complete a worksheet, developed for purposes of complying with this Section of this Plan, using the allocated income and expense calculations from Paragraph (3) above, and the additional fees calculated from Paragraphs (1) and (2) above. The fund accountant may make non-material changes to the form of worksheet as it deems appropriate. (5) The fund accountant shall develop and use appropriate internal control procedures to assure the accuracy of its calculations and appropriate allocation of income and expenses in accordance with this Plan. 10. WAIVER OR REIMBURSEMENT OF EXPENSES. Expenses may be waived or reimbursed by any adviser to the Company, by the Company's underwriter or any other provider of services to the Company without the prior approval of the Company's Board of Directors. 11. EFFECTIVENESS OF PLAN. This Plan shall not take effect until it 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, cast in person at a meeting (or meetings) called for the purpose of voting on this Plan. 12. MATERIAL MODIFICATIONS. This Plan may not be amended to modify materially its terms unless such amendment is approved in the manner provided for initial approval in paragraph 11 hereof. 13. LIMITATION OF LIABILITY. The Directors of the Company and the shareholders of the Fund shall not be liable for any obligations of the Company or the Fund under this Plan, and Distributor or any other person, in asserting any rights or claims under this Plan, shall look only to the assets and property of the Company or the Fund in settlement of such right or claim, and not to such Directors or shareholders. Dated: July 26, 2000 EX-99.P 17 0017.txt PILGRIM GROUP CODE OF ETHICS PILGRIM GROUP FUNDS CODE OF ETHICS STATEMENT OF GENERAL PRINCIPLES Each of (i) The Pilgrim Group Mutual Funds (as more particularly described on Exhibit A hereto and collectively referred to as the "Funds"), which are registered investment companies under the Investment Company Act of 1940 (the "1940 Act"), (ii) Pilgrim Investments, Inc. ("PII"), a registered investment adviser under the Investment Advisers Act of 1940, as amended, which serves as the investment adviser for the Funds, and (iii) Pilgrim Securities, Inc ("PSI"), a registered broker-dealer which serves as the principal underwriter for the open-end Funds, hereby adopt this Code of Ethics (hereinafter, the "Code"), pursuant to Rule 17j-1 promulgated by the Commission under Section 17(j) of the 1940 Act. In general, Rule 17j-1 imposes an obligation on registered investment companies and their investment advisers and principal underwriters to adopt written codes of ethics covering the securities activities of certain of their directors, trustees, officers, and employees. This Code is designed to ensure that those individuals who have access to information regarding the portfolio securities activities of registered investment company clients do not intentionally use information concerning such clients' portfolio securities activities for his or her personal benefit and to the detriment of such clients. For purposes of this Code, a Sub-Adviser of the Fund shall be treated as an Adviser of the Fund unless the Boards of the Funds have approved a separate code of ethics for that Sub-Adviser. It is not the intention of this Code to prohibit personal securities activities by Access Persons, but rather to prescribe rules designed to prevent actual and apparent conflicts of interest. While it is not possible to define and prescribe all-inclusive rules addressing all possible situations in which conflicts may arise, this Code sets forth the policies of the Funds, PII, and PSI regarding conduct in those situations in which conflicts are most likely to develop. In discharging his or her obligations under the Code, every Access Person should adhere to the following general fiduciary principles governing personal investment activities: A. Every Access Person should at all times scrupulously place the interests of the Funds' shareholders ahead of his or her own interests with respect to any decision relating to personal investments. B. No Access Person should take inappropriate advantage of his or her position with a Fund, or with PII or PSI, as the case may be, by using knowledge of any Fund's transactions to his or her personal profit or advantage. C. Every Access Person should at all times conform to the Policies and Procedures to Control The Flow And Use Of Material Non-Public Information In Connection With Securities Activities, copy of which is attached and is incorporated by reference into this Code of Ethics (that is, the policies and procedures set forth are legally considered a part of this Code of Ethics). II. DEFINITIONS This Code defines directors, officers and employees of the Funds, PII, and PSI into several categories, and imposes varying requirements by category appropriate to the sensitivity of the positions included in the category. As used herein and unless otherwise indicated, the following terms shall have the meanings set forth below: "PORTFOLIO MANAGER": means any employee of a Fund or of PII who is entrusted with the direct responsibility and authority to make investment decisions affecting an investment company, and who, therefore, may be best informed about such Fund's investment plans and interests. "INVESTMENT PERSONNEL": includes any employee of the Adviser (or of any company in a control relationship to the Adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of Securities by the Fund and includes the following individuals:all Finance Department staff of the Adviser, Portfolio Managers of the Funds, the Portfolio support staff, and traders who provide information and advice to a Portfolio Manager of a Fund or who assist in the execution of such Portfolio Manager's decisions. "ACCESS PERSONS": includes: (i) any director, officer, general partner or Advisory Person of the Funds or the Adviser to the Funds; and (ii) any director or officer of PSI who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Securities by the Funds, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Funds regarding the purchase or sale of Securities. This definition includes, but is not limited to, the following individuals: Portfolio Managers, Investment Personnel, certain employees in Operations, Marketing employees, Finance department employees, an Information Systems member, an Accounting/Compliance Department member, and Executive Management support staff members, as such individuals are defined by the Company's Human Resource Department. Where the term Access Person is used without specifying whether such person is an Access Person of a Fund, or of PII or PSI, such term shall be interpreted to include all Access Persons of each such entity. "ADVISORY PERSON" includes each employee of the Adviser (or of any company in a control relationship to the Adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Securities by the Funds or whose functions relate to the making of any recommendations with respect to the purchases or sales. "SEGREGATED PERSON" means an Access Person who in the ordinary course of business does not have access to information regarding the trading activities and/or current portfolio holdings of the Funds; does not ordinarily maintain an office on the premises utilized by Investment Personnel or Portfolio Managers; and who, by resolution, the Boards of the Funds have determined may be a Segregated Person because he or she will not 2 be permitted access to information regarding the trading activities and/or current portfolio holdings of the Funds. "EXEMPT PERSON": means a person who is, or could be, an Access Person who does not ordinarily maintain an office on the premises utilized by Investment Personnel or Portfolio Managers, and who, by resolution, the Boards of the Funds have determined may be an Exempt Person not subject to the Code because his or her responsibilities are ministerial in function and therefore the risk of violation of the Code is highly remote. "DISINTERESTED DIRECTOR": means a director/trustee of the Funds who is not an "interested person" of the Funds within the meaning of Section 2(a)(19) of the 1940 Act. "PII INVESTMENT ADVISER REPRESENTATIVES": means any officer or director of the investment adviser; any employee who makes any recommendation, who participates in the determination of which recommendation should be made, or whose functions or duties relate to the determination of which recommendation shall be made. These individuals are identified on Form ADV, Schedule F, Item 6. "BEING CONSIDERED FOR PURCHASE OR SALE": means, with respect to any security, that a recommendation to purchase or sell such security has been made and communicated or, with respect to the person making the recommendation, such person seriously considers making such recommendation. "BENEFICIAL OWNERSHIP": An Access Person will be deemed to have "beneficial ownership" of any Securities and commodities interests for any account held (i) in the name of his or her spouse or their minor children, (ii) in the name of another person (for example, a relative of the Access Person or his or her spouse sharing the same home) if, by reason of any contract, understanding, relationship or agreement or other arrangement, he or she obtains benefits substantially equivalent to those of ownership of the Securities, (iii) by a partnership of which he or she is a partner, (iv) by a corporation of which he or she is a controlling person and which is used by him or her alone or with a small group as a medium for investing or trading in Securities, or (v) by a trust over which he or she has any direct or indirect influence or control and of which he or she, or a member of his or her immediate family (spouse, children, grandchildren or parents) is a beneficiary. Exceptions may be made on a case-by-case basis by the Designated Officer where the Access Person certifies in writing (and annually re-certifies, as applicable) that he or she has no control over the account of e.g., a trust or estate, or of a spouse whose transactions in Securities are subject to a code of ethics of his or her employer. In making such exceptions, the Compliance Officer may require the Access Person to comply with various requirements under this Code, e.g., periodic filing of holdings or transactions reports, as the Designated Officer deems appropriate in the circumstances. "CONTROL": shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act. "DESIGNATED OFFICER": means, with respect to any Fund, or PII or PSI, the President of such Fund or of PII or PSI, or such other officer as the board of directors/trustees of such Fund, or of PII or PSI, as the case may be, shall designate. "FUNDS" OR "FUND": means The Pilgrim Group of Funds, or any fund within The Pilgrim Group of Funds, respectively, as more particularly described on Exhibit A hereto; provided that such terms shall not include any fund as to 3 which PII has appointed a sub-adviser if the Board of Directors/Trustees of that fund has adopted the sub-adviser's code of ethics on behalf of that fund. "PSI": means Pilgrim Securities, Inc. "PII": means Pilgrim Investments, Inc. and Pilgrim Advisors, Inc.. "PERSONAL SECURITIES HOLDINGS" OR "PERSONAL SECURITIES TRANSACTIONS": means, with respect to any person, any Security Beneficially Owned, or any Security purchased or otherwise acquired, or sold or otherwise disposed of by such person, including any Security in which such person has, or by reason of such transaction acquires or disposes of, any direct or indirect Beneficial Ownership in such Security and any account over which such person has discretion; provided, however, that such terms shall not include any holding or transaction in a Security held in or effectuated for an account over which such person does not have any direct or indirect influence and has certified such fact to the appropriate Designated Officer. Personal Securities Transactions shall include all Securities or commodity interests regardless of the dollar amount of the transaction or whether the sale is in response to a tender offer. "SECURITY": includes any note, stock, treasury stock, bond, debenture, evidence of indebtedness,certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities, or any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency. Securities also includes shares of closed-end investment companies, various derivative instruments such as ELKs, LEAPs and PERCs, limited partnership interests and private placement common or preferred stocks or debt instruments. Commodity interests, which includes futures contracts, and options on futures, relating to any stock or bond, stock or bond index, interest rate or currency shall also be included in this Code's definition of Security. Commodity interests in agricultural or industrial commodities, such as agricultural products or precious metals, are not covered under this Code. Security does not include shares of registered open-end investment companies, securities issued by the government of the United States and any options or futures thereon, bankers' acceptances, bank certificates of deposit and time deposits, commercial paper, repurchase agreements, and such other money market instruments as designated by the board of directors/trustees of such Fund, and shares of ReliaStar Financial Corporation. "SECURITY HELD OR TO BE ACQUIRED" by a Fund means: any Security which, within the most recent fifteen (15) days, (i) is or has been held by such Fund, or (ii) is being or has been considered by such Fund for purchase for such Fund. 4 "AUTOMATIC DISGORGEMENT." Where a violation results from a transaction which can be reversed prior to settlement, such transaction should be reversed, with the cost of the reversal being borne by the covered person; or if reversal is impractical or impossible, then any profit realized on such short-term investment, net of brokerage commissions but before tax effect, shall be disgorged to the appropriate Fund, or if no fund is involved then to a charity designated by PII. III. GOVERNING LAWS, REGULATIONS AND PROCEDURES All employees shall have and maintain knowledge of and shall comply strictly with all applicable Federal and State laws and all rules and regulations of any governmental agency or self-regulatory organization governing his or her activities. Each employee will be given a copy of the Code of Ethics at the time of his or her employment and each Access Person is required to submit a statement at least annually that he or she has reviewed the Codeof Ethics. Each employee shall comply with all laws and regulations relating to the use of material non-public information. Trading on "inside information" of any sort, whether obtained in the course of research activities, through a client relationship or otherwise, is strictly prohibited. All employees shall comply strictly with procedures established by the Funds to ensure compliance with applicable Federal and State laws and regulations of governmental agencies and self-regulatory organizations. The employees shall not knowingly participate in, assist, or condone any acts in violation of any statute or regulation governing securities matters, nor any act which would violate any provision of this Code of Ethics, or any rules adopted thereunder. Each employee having supervisory responsibility shall exercise reasonable supervision over employeessubject to his or her control with a view to preventing any violation by such of the provisions of the Code of Ethics. Any employee encountering evidence that acts in violation of applicable statutes or regulations or provisions of the Code of Ethics have occurred shall report such evidence to the Designated Officer or the Board of Directors/Trustees of each fund. IV. CONFIDENTIALITY OF TRANSACTIONS Information relating to each Fund's portfolio and research and studies activity is confidential untilpublicly available. Whenever statistical information or research is supplied to or requested by the Fund, such information must not be disclosed to any persons other than persons designated by the Designated Officer or the Board of Directors/Trustees of the Fund. If the Fund is considering a particular purchase or sale of a security, this must not be disclosed except to such duly authorized persons. Any employee authorized to place orders for the purchase or sale of Securities on behalf of a Fund shall take all steps reasonably necessary to provide that all brokerage orders for the purchase and sale of Securities 5 for the account of the Fund will be so executed as to ensure that the nature of the transactions shall be kept confidential until the information is reported to the Securities and Exchange Commission or each Fund's shareholders in the normal course of business. If any employee of the Fund or Access Person should obtain information concerning the Fund's portfolio (including, the consideration by the Fund of acquiring, or recommending any security for the Fund's portfolio), whether in the course of such person's duties or otherwise, such person shall respect the confidential nature of this information and shall not divulge it to anyone unless it is properly part of such person's services to the Fund to do so or such person is specifically authorized to do so by the Designated Officier of the Fund. V. ETHICAL STANDARDS A. INVESTMENT ACTIVITIES RELATED TO THE FUNDS. All Access Persons, in making any investment recommendations or in taking any investment action, shall exercise diligence and thoroughness, and shall have a reasonable and adequate basis for any such recommendations or actions. B. CONFLICTS. All Access Persons shall conduct themselves in a manner consistent with the highest ethical standards. They shall avoid any action, whether for personal profit or otherwise, that results in an actual or potential conflict of interest, with a Fund or which may otherwise be detrimental to the interest of a Fund. Therefore, no Access Person shall undertake independent practice for compensation in competition with the Fund. Every employee or Access Person of the Funds who owns beneficially, directly or indirectly, 1/2% or more of the stock of any corporation is required to report such holdings to the President of the Funds. C. OBLIGATION TO COMPLY WITH LAWS AND REGULATIONS. Every Access Person shall acquire and maintain knowledge of, and shall comply strictly with, all applicable federal and state laws and all rules and regulations of any governmental agency or self-regulatory organization governing such Access Person's activities. In addition, every Access Person shall comply strictly with all procedures established by the Funds, or by PII or PSI, to ensure compliance with such laws and regulations. Access Persons shall not knowingly participate in, assist or condone any acts in violation of any law or regulation governing Securities transactions, nor any act which would violate any provision of this Code. D. SELECTION OF BROKER-DEALERS. Any employee having discretion as to the election of broker- dealers to execute transactions in Securities for the Funds shall select broker-dealers solely on the basis of the services provided directly or indirectly by such broker-dealers as provided in the registration statements for the Funds. An employee shall not directly or indirectly, receive a fee or commission from any source in connection with the sale or purchase of any security for a Fund. 6 In addition, the Funds shall take all actions reasonably calculated to ensure that they engage broker-dealers to transact business with each Fund whose partners, officers and employees, and their respective affiliates, will conduct themselves in a manner consistent with the provisions of this Section V. E. SUPERVISORY RESPONSIBILITY. Every Access Person having supervisory responsibility shall exercise reasonable supervision over employees subject to his or her control in order to prevent any violation by such persons of applicable laws and regulations, procedures established by the Funds, or PII or PSI, as the case may be, or the provisions of this Code. ETHICAL STANDARDS CONTINUED F. ACCOUNTABILITY. Any Access Person encountering evidence of any action in violation of applicable laws or regulations, or of Fund procedures or the provisions of this Code shall report such evidence to the appropriate Designated Officer or the Board of Directors of each Fund. G. INABILITY TO COMPLY WITH CODE. If, as a result of fiduciary obligations to other persons or entities, an Access Person believes that he or she, is unable to comply with certain provisions of this Code, such Access Person shall so advise the Designated Officer of any Fund for which such person is an Access Person in writing and shall set forth with reasonably specificity the nature of his or her fiduciary obligations and the reasons why such Access Person believes that he or she cannot comply with the provisions of the Code. VI. EXEMPTED TRANSACTIONS The provisions of Article VII of this Code shall not apply to: A. Purchases or sales effected in any account over which such Access Person has no direct or indirect influence or control; B. Purchases or sales of Securities which are not eligible for purchase or sale by any Fund e.g. municipal securities. C. Purchases or sales which are non-volitional on the part of either the Access Person or a Fund; Purchases which are part of an automatic dividend reinvestment plan or employee stock purchase plan; D. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired; and E. Purchases or sales of Securities which receive the prior approval of the appropriate Designated Officer because they (i) are only remotely potentially harmful to each Fund, (ii) would be very unlikely to 7 affect a highly institutional market, or (iii) clearly are not related economically to the Securities to be purchased, sold or held by each Fund. F. Future elections into an employer sponsored 401(k) plan, in an amount not exceeding $1,000 in any calendar month and any other transfers to an open end fund. However, an exchange of a current account balance into or from one of the closed end funds in an amount greater than $1,000 would still need pre-clearance and be reportable at the end of the quarter on the quarterly transaction reports. G. The provisions of Article VII A, B and D of this Code shall not apply to any Segregated Person EXCEPT with respect to transactions in Securities where such Segregated Person knew, or in the ordinary course of fulfilling his or her duties, should have known that such Security was being purchased or sold by the Funds or that a purchase or sale of such Security was being considered by or with respect to the Funds. Pre-clearance approval WILL be required for purchases of Securities in private transactions conducted pursuant to Section 4(2) of the Securities Act of 1933 and Securities (debt or equity) acquired in an initial public offering. H. The provisions of this Code shall not apply to any Exempt Person EXCEPT with respect to transactions in Securities where such Exempt Person knew, or in the ordinary course of fulfilling his or her duties, should have known that such Security was being purchased or sold by the Funds or that a purchase or sale of such Security was being considered by or with respect to the Funds. VII. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES A. GENERAL. No Access Person shall purchase or sell, directly or indirectly or for any account over which an Access Person has discretion, any Security (including both publicly traded and private placement Securities), in which he or she has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership and which he or she knows or should have known at the time of such purchase or sale 1. is being considered for purchase or sale by a Fund; or 2. is being purchased or sold by a Fund. B. PRE-CLEARANCE. 1. Every Access Person must pre-clear all Personal Securities Transactions with the compliance department. In order to receive pre-clearance for Personal Securities Transactions, an Access Person must call the Compliance Officer or complete a Personal Trading Approval form. A member of the compliance department is available each business day to respond to pre-clearance requests. Access Persons are directed to identify (i) the subject of the transaction and the number of shares and principal amount of each security involved, (ii) the date on which the Access Person desires to engage in the subject transaction; (iii) the nature of the transaction (i.e., purchase, sale, private placement, or any other type of acquisition or 8 disposition); (iv) the approximate price at which the transaction will be effected; and (v) the name of the broker, dealer, or bank with or through whom the transaction will be effected. When granted, clearance authorizations will be identified by authorization number and will be effective for Day Orders for 24-hours from the time of authorization (or in the case of a private placementpurchase, the closing of the private placement transaction). In cases of Good Till cancelled Orders (GTC) or Open Orders, authorizations will be effective until theend of that calendar day, except for transactions in Pilgrim Capital Corporation (PACC), formerly Express Holdings Corporation (EXAM), stock for which authorizations will be effective for 30 days. If on any particular day the Compliance Officer is not present in the office, pre-clearance may be obtained by providing a completed Personal Trading Approval form to a Senior Vice President or Vice President of PII for authorization. The current list of designated officers of PII authorized to provide pre-clearance trade approval is attached as Exhibit B. Questions regarding pre-clearance procedures should be directed to the compliance department. 2. In determining whether to grant approval of Personal Securities Transactions of Investment Personnel who desire to purchase or otherwise acquire Securities in private placement transactions conducted pursuant to Section 4(2) of the Securities Act of 1933, the appropriate Designated Officer will consider, among other factors, whether the investment opportunity presented by such private placement offering should be reserved for investment company and its shareholders, and whether the opportunity is being offered to an individual by virtue of his position with the Fund. In the event that Investment Personnel who have been authorized to acquire Securities in a private placement transaction later have any role in a Fund's subsequent consideration of an investment in the issuer of the Securities acquired in such prior private placement transaction, such Investment Personnel must provide written notification of such prior authorization and investment to the compliance department, immediately upon learning of such Fund's subsequent consideration. In such circumstances, the Fund's decision to purchase Securities of such issuer will be subject to an independent review by Investment Personnel with no personal interest in the issuer. 3. A disinterested Director of a Fund need only pre-clear a transaction in a security if at the time such director/trustee proposes to engage in such transaction, he or she knows , in the ordinary course of fulfilling his or her official duties as a director/trustee of such Fund, should know that, during the fifteen (15) day period immediately preceding the date such director/trustee proposed to engage in the transaction, such security was purchased or sold by such Fund or was being considered by the Fund or its investment adviser for purchase by the Fund. COMPLIANCE OF TRANSACTIONS WITH THIS CODE BY ACCESS PERSONS MAY DEPEND ON THE SUBSEQUENT INVESTMENT ACTIVITIES OF THE FUNDS, THEREFORE, PRE-CLEARANCE APPROVAL OF A TRANSACTION BY THE DESIGNATED OFFICER DOES NOT NECESSARILY MEAN THE TRANSACTION COMPLIES WITH THE CODE. 9 C. INITIAL PUBLIC OFFERINGS. INITIAL PUBLIC OFFERINGS (IPOS AND HOT IPOS). No Access Person (or account over which they have beneficial ownership) may purchase any securities in an IPO or Hot IPO; provided, however, an Access Person (or their beneficially owned accounts) may, upon the prior written approval of a Designated Officer, participate in the following IPOs: (i) an IPO in connection with the de-mutualization of a savings bank or the de mutualization of a mutual insurance company in which the holder of the account owns a life insurance policy; (ii) an IPO of a spin-off company where the Access Person beneficially owns stock in the company that spins off the issuer; (iii) an IPO of a company in which the Acess Person beneficially owns stock in the company and the stock was acquired through participation in a private placement previously approved by thier Designated Officer; and (iv) an IPO of the employer of the holder of the Access Persons account. An IPO generally means an offering of securities registered with the Securities and Exchange Commission (SEC), the issuer of which, immediately before the registration, was not required to file reports with the SEC. See, rule 17j-1(a)(6). Hot IPOs are securities of a public offering that trade at a premium in the secondary market whenever such secondary market begins. D. BLACKOUT PERIODS. 1. No Access Person may execute any Personal Securities Transaction on a day during which any Fund has a pending "buy" or "sell" order in that same security until such order is executed or withdrawn. 2. Any purchase or sale of any Security by a Portfolio Manager which occurs within seven (7) calendar days (exclusive of the day of the relevant trade) from the day a Fund he or she manages trades in such security will be subject to Automatic Disgorgement. This seven day blackout period also applies to any portfolio support staff member who recommends the purchase or sale of the particular security to a Fund's Portfolio Manager. 10 RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES (CONTINUED) BAN ON SHORT-TERM TRADING PROFITS. Investment Personnel may not profit from the purchase and sale, or sale and purchase, of the same (or equivalent) Securities within sixty (60) calendar days, unless (i) such Securities were not eligible to be purchased by any of the Funds under their respective investment policies, or (ii) such Investment Personnel have requested and obtained an exemption from this provision from the compliance department with respect to a particular transaction. Violations of this policy will be subject to Automatic Disgorgement. GIFTS. Investment Personnel may not receive any fee, commission, gift or other thing, or services, having a value of more than $100.00 each year from any person or entity that does business with or on behalf of the Funds. SERVICES AS A DIRECTOR. Investment Personnel may not serve on the boards of directors of publicly traded companies, unless (i) the individual serving as a director has received prior authorization from the appropriate Designated Officer based upon a determination that the board service would be consistent with the interests of the Funds and their shareholders and (ii) policies and procedures have been developed and maintained by the board of directors/trustees of the Funds that are designed to isolate the individual from those making investment decisions (a "Chinese Wall"). NAKED OPTIONS. Investment Personnel are prohibited from engaging in naked options transactions. Transactions under any incentive plan sponsored by PII or PSI are exempt from this restriction. SHORT SALES. Short sales of Securities by Investment Personnel are prohibited. VIII. COMPLIANCE PROCEDURES DISCLOSURE OF PERSONAL HOLDINGS. All Investment Personnel must disclose all Personal Securities Holdings upon commencement of employment and thereafter on an annual basis. Such annual disclosure shall be made by January 31st of each year. Any person filing such report may state the report shall not be deemed an admission that such person is the beneficial owner of any Securities covered by the report. DUPLICATE TRADE CONFIRMATION STATEMENTS AND ACCOUNT STATEMENTS. Every Access Person must cause duplicate trading confirmations for all Personal Securities Transactions and copies of periodic statements for all Securities accounts to be sent to the compliance department, except that a Segregated Person may satisfy this requirement by providing a statement to the compliance department of an affiliate of the Adviser 11 QUARTERLY TRANSACTIONS REPORTS. 1. PII Investment Adviser Representatives. Quarterly reporting of transactions in Securities is required of all PII Investment Adviser Representatives pursuant to the requirements of Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940. PII must have a record of every Personal Securities Transaction including every transaction in Securities in which PII or any of its "advisory representatives" (as such term is defined in the rule) has (or by reason of such transaction acquires) any direct or indirect beneficial interest and any account over which an Access Person has discretion, except (i) any Personal Securities Transaction effected in any account over which neither PII, nor such advisory representative, has any direct or indirect influence or control, (ii) any Personal Securities Transaction which is a direct obligation of the United States and (iii) any Personal Securities Transactions in shares of unaffiliated open-end funds Such record must state (i) the title and amount of the Securities involved in the transaction, (ii) the trade date and nature of the transaction (i.e., purchase, sale, private placement, or other acquisition or disposition), (iii) the price at which the transaction was effected, and (iv) the name of the broker, dealer or bank with or through whom the transaction was effected, This report must be made no later than ten days following the end of the calendar quarter in which such Personal Securities Transaction was effected. A Segregated Person may satisfy this reporting requirement by providing a statement to the compliance department of an affiliate of the Adviser. 2. All Other Access Persons All other Access Persons must prepare a quarterly report of all transactions in Securities within 10 days following the end of each quarter in which such Personal Securities Transaction was effected. The transactional and reporting rules under the Code for these individuals do not include shares of registered open-end investment companies, securities issued by the government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper, and such other money market instruments as designated by the board of directors/trustees of such Fund. Such record must state (i) the title and amount of the Securities involved in the transaction, (ii) the trade date and nature of the transaction (i.e., purchase, sale, private placement, or other acquisition or disposition, (iii) the price at which the transaction was effected, and (iv) the name of the broker, dealer or bank with or through whom the transaction was effected. This report must be made no later than ten days following the end of the calendar quarter. A Segregated Person may satisfy this reporting requirement by providing a statement to the compliance department of an affiliate of the Adviser. 12 COMPLIANCE PROCEDURES CONTINUED D. CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS. All Access Persons will be provided with a copy of this Code upon beginning his or her employment with a Fund, or with PII or PSI, as the case may be, and must certify annually that they have read and understand this Code, and that they recognize that they are subject to the terms and provisions hereof. Further, all Access Persons must certify by January 31st of each year that they have complied with the requirements of this Code and that they have disclosed all personal brokerage accounts and disclosed or reported all Personal Securities Transactions required to be disclosed or reported pursuant to the requirements herein. IX. SANCTIONS A.GENERALLY. The Designated Officer shall investigate all apparent violations of this Code. If a Designated Officer for any Fund, or for PII or PSI, discovers that an Access Person has violated any provision of this Code, he or she may impose such sanctions as he or she deems appropriate, including, without limitation, one or more of the following: warnings, periods of "probation" during which all personal investment activities (except for specifically approved liquidations of current positions), a letter of censure, suspension with or without pay, termination of employment, or Automatic Disgorgement of any profits realized on transactions in violation of this Code. Any profits realized on transactions in violation of Sections D and E of Article VII of this Code shall be subject to Automatic Disgorgement. B.PROCEDURES. Upon discovering that an Access Person of a Fund, or of PII or PSI, has violated any provision of this Code, the appropriate Designated Officer shall report the violation, the corrective action taken, and any sanctions imposed to the relevant entity's board of irectors/trustees, which may, at the request of the individual involved, review the matter. If a transaction in Securities of a Designated Officer is under consideration, another senior officer of the relevant Fund, or of PII or PSI, as the case may be, shall act in all respects in the manner prescribed herein for a Designated Officer. X. MISCELLANEOUS PROVISIONS A. RECORDS. The Funds shall maintain records in the manner and to the extent set forth below, which records may be maintained on microfilm under the conditions described in Rule 31a-2(f)(1) under the 1940 Act and shall be available for examination by representatives of the Commission: a copy of this Code and any other code of ethics which is, or at any time within the past five (5) years has been, in effect shall be preserved in an easily accessible place; a record of any violation of this Code and of any action taken as a result of such violation shall be preserved in an easily-accessible place for a period of not less than five (5) years following the end of the fiscal year in which the violation occurs; 13 a copy of each duplicate confirmation statement concerning Personal Securities Transactions of Access Persons, made pursuant to this Code, shall be preserved for a period of not less than five (5) years from the end of the fiscal year in which the statement is provided, the first two (2) years in an easily-accessible place; and a copy of each report disclosing Personal Securities Holdings of Investment Personnel, made pursuant to this Code, shall be preserved for a period of not less than five (5) years from the end of the fiscal year in which the report is made, the first two (2) years in an easily-accessible place; and a list of all persons who are, or within the past five (5) years have been, required to pre-clear Personal Securities Transactions or make reports disclosing Personal Securities Holdings pursuant to this Code shall be maintained in an easily-accessible place. CONFIDENTIALITY. All pre-clearance requests pertaining to Personal Securities Transactions, reports disclosing Personal Securities Holdings, and any other information filed pursuant to this Code shall be treated as confidential, but are subject to review as provided herein and by representatives of the Commission. All information relating to any Fund portfolio or pertaining to any research activities is confidential until publicly available. Whenever statistical information or research is supplied to or requested by a Fund, such information must not be disclosed to any persons other than persons designated by the appropriate Designated Officer or the board of directors/trustees of such Fund. If the Fund is considering a particular purchase or sale of a security, this fact must not be disclosed except to such duly authorized persons. Any employee authorized to place orders for the purchase or sale of Securities on behalf of a Fund shall take all steps reasonably necessary to provide that all brokerage orders for the purchase and sale of Securities for the account of the Fund will be so executed as to ensure that the nature of the transactions shall be kept confidential until the information is reported to the Commission or each Fund's shareholders in the normal course of business. 4. If any employee of a Fund or Access Person should obtain information concerning such Fund's portfolio (including, the consideration by the Fund of acquiring, or recommending any security for the Fund's portfolio), whether in the course of such person's duties or otherwise, such person shall respect the confidential nature of this information and shall not divulge it to anyone unless it is properly part of such person's services to such Fund to do so or such person is specifically authorized to do so by the Designated Officer of the Fund.5.No officer, director or employee shall disclose any non-public information relating to a client's portfolio or transactions or to the investment recommendations of PII, nor shall any officer, director/trustee or employee disclose any non-public information relating to the business or operations of PII, PSI or the Funds unless properly authorized to do so. 14 C. INTERPRETATION OF PROVISIONS. Each Fund's board of directors/trustees may from time to time adopt such interpretation of this Code as such board deems appropriate. D. EFFECT OF VIOLATION OF THIS CODE. In adopting Rule 17j-1, the Commission specifically noted, in Investment Company Act Release No. IC-11421, that a violation of any provision of a particular code of ethics, such as this Code, would not be considered a per se unlawful act prohibited by the general anti-fraud provisions of this Rule. In adopting this Code, it is not intended that a violation of this Code necessarily is or should be considered to be a violation of Rule 17j-1. 15 INITIAL CERTIFICATION OF CODE OF ETHICS PILGRIM GROUP MUTUAL FUNDS I AM FULLY FAMILIAR WITH THE EFFECTIVE CODE OF ETHICS AS ADOPTED BY EACH OF THE PILGRIM GROUP MUTUAL FUNDS, PILGRIM INVESTMENTS, INC. AND PILGRIM SECURITIES, INC., AND WILL COMPLY WITH SUCH CODE AT ALL TIMES DURING THE FORTHCOMING CALENDAR YEAR. Name (print): Signature: Date: 16 EXHIBIT A TO CODE OF ETHICS Pilgrim Bank and Thrift Fund, Inc. Pilgrim Advisory Funds, Inc. Pilgrim LargeCap Leaders Fund Pilgrim MidCap Value Fund Pilgrim Asia-Pacific Equity Fund Pilgrim Investment Funds, Inc. Pilgrim MagnaCap Fund Pilgrim High Yield Fund Pilgrim Mutual Funds Pilgrim Internationl Core Growth Fund Pilgrim Worldwide Growth Fund Pilgrim International SmallCap Growth Fund Pilgrim Emerging Countries Fund Pilgrim LargeCap Growth Fund Pilgrim MidCap Growth Fund Pilgrim SmallCap Growth Fund Pilgrim Convertible Fund Pilgrim Balanced Fund Pilgrim High Yield Fund II Pilgrim Strategic Income Fund Pilgrim Money Market Fund Pilgrim Government Securities Income Fund, Inc. Pilgrim Prime Rate Trust Pilgrim Equity Trust Pilgrim MidCap Opportunities Fund Northstar Galaxy Trust Northstar Galaxy Emerging Growth Portfolio Northstar Galaxy Growth + Value Portfolio Northstar Galaxy High Yield Bond Portfolio Northstar Galaxy International Value Portfolio Northstar Galaxy Research Enhanced Index Portfolio Pilgrim SmallCap Opportunities Funds Pilgrim Growth Opportunities Fund 17 Pilgrim Mayflower Trust Pilgrim Emerging Markets Value Fund Pilgrim High Growth + Value Fund Pilgrim High Total Return Fund Pilgrim High Total Return Fund II Pilgrim International Value Fund Pilgrim Research Enhanced Index Fund USLICO Series Fund The Stock Portfolio The Money Market Portfolio The Bond Portfolio The Asset Allocation Portfolio Pilgrim Corporate Leaders Trust Pilgrim Global Corporate Leaders Fund, Inc. Pilgrim Global Income Fund Pilgrim Growth and Income Fund, Inc. Pilgrim GNMA Income Fund, Inc. Pilgrim Gold Fund, Inc. Pilgrim International Fund, Inc. Pilgrim Silver Fund, Inc. Pilgrim SmallCap Asia Growth Fund, Inc. Pilgrim Troika Dialog Russia Fund, Inc. Pilgrim Worldwide Emerging Markets Fund, Inc. Lexington Money Market Trust Lexington Emerging Markets Fund, Inc. Lexington Natural Resources Trust 18 EXHIBIT B TO CODE OF ETHICS Designated Officer of PII able to provide pre-clearance: Lauren Bensinger Senior Vice Presidents of PII able to provide pre-clearance: James M. Hennessy Rob Naka Michael Roland 19 POLICIES AND PROCEDURES TO CONTROL THE FLOW AND USE OF MATERIAL NON-PUBLIC INFORMATION IN CONNECTION WITH SECURITIES ACTIVITIES The reputation for integrity and high ethical standards in the conduct of its affairs of the Pilgrim Group, Inc., Pilgrim Investments, Inc. and Pilgrim Securities, Inc. (Pilgrim) is of paramount importance to all of us. To preserve this reputation, it is essential that all transactions in securities be effected in conformity with securities laws and in a manner which avoids the appearance of impropriety. In particular, it has been Pilgrim 's long-standing policy that there be no trading in securities of public companies on the basis of material non-public or "inside" information or disclosure of such information to persons who are in the position to trade on the basis of the information or transmit it to others. Material non-public information is information not known to the public that: (1) might reasonably be expected to affect the market value of securities and (2) influence investor decisions to buy, sell or hold securities. It is not possible to define with precision what constitutes "material" information. However, advance information about the following: * a merger, acquisition or joint venture; * a stock split or stock dividend; * earnings or dividends of an unusual nature; * the acquisition or loss of a significant contract; * a significant new product or discovery; * a change in control or a significant change in management; * a call of securities for redemption; * the public or private sale of a significant amount of additional securities; * the purchase or sale of a significant asset; * a significant labor dispute; * establishment of a program to make purchases of the issuer's own shares; * a tender offer for another issuer's securities; and * an event requiring the filing of a current report under the Act. Pilgrim Prime Rate Trust, an affiliated regulated investment company ("PPR"), and Pilgrim Investments, Inc as part of its structured finance activities are both frequently in possession of material non-public information about public companies as a result of its investments in participation interests in senior collateralized corporate loans. The following policies and procedures are designed to help insure that Pilgrim abides by the prohibition on trading on the basis of material non-public information by limiting the use and restricting the disclosure of material non-public information to persons within or outside the Pilgrim organization who are in the position to trade on the basis of such information or transmit it to others. All employees must familiarize themselves with these policies and procedures and abide by them. Compliance with the law and with the policies and procedures described in this memorandum is the individual responsibility of each director, 20 officer and employee of Pilgrim. It is each person's duty to see that the policies and procedures set forth herein are followed in both spirit and letter. In addition, all employees of Pilgrim should understand that supervisory personnel have special responsibilities for taking appropriate action to prevent insider trading violations. FAILURE TO COMPLY WITH THESE POLICIES WILL BE DEALT WITH HARSHLY AND COULD LEAD TO TERMINATION OF EMPLOYMENT, PERSONAL LIABILITY OR CRIMINAL PROSECUTION. PERSONAL SECURITIES TRADING It is a long-standing policy of Pilgrim that if an employee of Pilgrim or any of its subsidiaries or affiliated investment companies possesses material non-public information about a public company, the employee may not trade in or recommend trading in the securities of that company nor disclose such information to another person, whether within or outside the Pilgrim organization, except in fulfillment of a legitimate business objective of Pilgrim. Violations of this policy may result in severe civil and criminal penalties under the Federal securities laws, as well as disciplinary action by Pilgrim. Employees should refer to Pilgrim 's Policies and Procedures Governing Securities Transactions for a complete statement of these policies. "CHINESE WALL" POLICIES AND PROCEDURES APPLICABLE TO SECURITIES TRADING BY PILGRIM Employees of Pilgrim performing investment management related activities for PPR/Structured Finance Vehicles ("PPR/Structured Finance Investment Activities (and persons with supervisory or higher management responsibilities for such employees) are likely to receive in the normal course of their activities material non-public information about issuers of publicly-traded securities. The following policies and procedures are designed to prevent the flow of material non-public information about a public company or its securities from employees engaged in PPR/Structured Finance Investment Activities to those performing other "investment management activities." By following these policies and procedures, Pilgrim can continue, in most instances, to engage in "investment management activities," even though material non-public information about public companies may be known to others within the Pilgrim organization who are involved in performing PPR/Structured Finance Investment Activities. "INVESTMENT MANAGEMENT ACTIVITIES," FOR PURPOSES OF THESE POLICIES AND PROCEDURES, ARE ACTIVITIES OF EMPLOYEES OF PILGRIM WHOSE REGULAR FUNCTIONS OR DUTIES PRINCIPALLY CONSIST OF MAKING, PARTICIPATION IN, OR OBTAINING INFORMATION REGARDING, THE PURCHASE OR SALE OF PUBLICLY-TRADED SECURITIES OR MAKING, OR OBTAINING INFORMATION ABOUT, RESEARCH AND RECOMMENDATIONS WITH RESPECT TO PURCHASES OR SALES OF SUCH SECURITIES. 21 GENERAL "CHINESE WALL" POLICY IN ADDITION TO PILGRIM 'S GENERAL POLICY PROHIBITING TRADING ON THE BASIS OF MATERIAL NON-PUBLIC INFORMATION OR DISCLOSURE OF SUCH INFORMATION TO OTHERS, IT IS PILGRIM'S POLICY THAT ANY MATERIAL NON-PUBLIC INFORMATION ABOUT A PUBLIC COMPANY OR ITS SECURITIES OBTAINED BY A DIRECTOR, OFFICER OR EMPLOYEE OF PILGRIM OR ANY OF ITS AFFILIATED INVESTMENT COMPANIES, EITHER IN CONNECTION WITH HIS OR HER PPR/STRUCTURED FINANCE INVESTMENT ACTIVITIES OR OTHERWISE, SHALL NOT BE DISCLOSED TO ANY DIRECTOR, OFFICER OR EMPLOYEE OF PILGRIM OR ANY OF ITS AFFILIATED INVESTMENT COMPANIES PERFORMING INVESTMENT MANAGEMENT ACTIVITIES, OR ANY OTHER PERSON, EXCEPT AS SPECIFICALLY PERMITTED BY THESE POLICIES AND PROCEDURES. THIS PROHIBITION APPLIES TO ORAL AS WELL AS WRITTEN DISCLOSURE AND TO INFORMAL AS WELL AS FORMAL DISCLOSURE. REPORTING MATERIAL NON-PUBLIC INFORMATION TO CHIEF COMPLIANCE OFFICER. From time to time, a director, officer or employee of Pilgrim may come into possession of material non-public information (of the type described on page 18 of these policies and procedures) about a company. If such information is obtained in connection with the performance of such person's responsibilities as a director, officer or employee of Pilgrim, then he or she shall immediately report the information as follows: a. A director, officer or employee of Pilgrim, other than a PPR/Structured Finance staff member, shall report such information immediately to the Compliance Department, which is responsible for taking appropriate action, which may include restricting trading in the affected securities. Depending on the nature of such information, such director, officer or employee may have an ongoing duty to inform the Compliance Department of material changes in the information or the status of the transaction which it relates in order to permit the Compliance Department to take appropriate action, including restricting or terminating restrictions on trading in the affected securities. b. PPR/Structured Finance staff members who in their normal course of business deal with material non-public information are to follow the SPECIFIC "CHINESE WALL" PROCEDURES as set forth below. c. Such information need not be reported if, after reasonable inquiry, the director, officer or employee is satisfied that the Compliance Department has already received such information. 22 SPECIFIC "CHINESE WALL" PROCEDURES COMPLIANCE WITH SECTIONS 13(F) AND 13(G) OF THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE ACT") All directors, executive officers (or persons performing similar functions) or Investment Personnel of ReliaStar Financial Corp. ("ReliaStar") shall not have access to current information (less than 7 days old) that relates to the voting and investment power of the securities held by the Pilgrim Funds' portfolios. Such persons shall not have access to investment reports, Investment Personnel, the premises of Investment Personnel or attend meetings of Investment Personnel of PII, wherever located, except that such persons may attend meetings of the Board of Directors/Trustees of the Pilgrim Funds based on the premise that information concerning portfolio holdings is more than 7 days old. Communications concerning the holdings, voting or investment power of the Pilgrim Funds' portfolios between Investment Personnel of PII and directors, executive officers (or persons performing similar functions) or Investment Personnel of ReliaStar are prohibited. Exceptions may be permitted by the Chief Compliance Officer where the Chief Compliance Officer believes such persons will not act in concert with Investment Personnel of PII for purposes of transactions in securities that would require reporting under Sections 13(f) and 13(g) of the Exchange Act. PILGRIM PRIME RATE TRUST In order to contain material non-public information concerning a public company or its securities within the immediate group of persons engaged in performing PPR/Structured Finance Investment Activities who have a need to know such information, and in order to ensure that such information does not flow to those engaged in other investment management activities, the following policies and procedures should be followed: 1. ORAL AND WRITTEN COMMUNICATIONS. Except as specifically permitted by these policies and procedures, employees engaged in performing PPR/Structured Finance Investment Activities should not discuss or exchange any written or oral non-public information, whether or not material, about a company or its securities with employees performing other investment management activities. Any communication, whether written or oral, containing material non-public information (of the type described on the attached copy of Pilgrim 's Policies and Procedures to Control the Flow and Use of Material Non-Public Information in Connection with Securities Activities) about an issuer or its securities shall be restricted, on a need-to-know basis, to employees engaged in performing PPR/Structured Finance Investment Activities and to the following persons: a. directors and senior executives of Pilgrim who are not actually involved in investment management decisions; b. Compliance personnel; and c. certain identified accountants, attorneys or other outside professional advisers. In addition, the Company involved shall be placed on PPR/Structured Finance's Watch List/Inside Information List. Written communications containing material non-public information shall be marked "confidential." Documents prepared for presentation to PPR's Board of Directors shall be presumed to contain material non-public information and shall be handled accordingly. 23 2. ATTENDANCE AT MEETINGS. Attendance at meetings, whether held inside or outside the Pilgrim organization, at which personnel performing PPR/Structured Finance Investment Activities may be present, is limited as follows: a. Attendance at meetings at which material non-public information regarding a company or its securities are to be, or are likely to be, discussed is restricted to employees, on a need-to-know basis, performing PPR/Structured Finance Investment Activities and to the following persons: i) directors and senior executives of Pilgrim who are not actually involved in investment management decisions ii) compliance personnel; and iii) certain identified accountants, attorneys, or other outside professional advisers. 24 SPECIFIC "CHINESE WALL" PROCEDURES CONTINUED Persons engaged in other investment management activities ARE PROHIBITED from attending meetings at which material non-public information about a public company or its securities is to be, or is likely to be, discussed, without the specific authorization of the Compliance Department, after appropriate legal consultation. b. The preceding paragraph shall not prohibit investment management personnel from preparing and participating in written or oral presentations and attending meetings with persons performing PPR/Structured Finance Investment Activities in order to develop products or marketing plans, to report on the financial services of Pilgrim to existing or prospective clients or to discuss matters not related to PPR/Structured Finance Investment Activities, provi ded, that such persons shall leave such meetings if non-public matters are raised. 3. LIBRARY AND FILES. A separate credit file room has been established. The door is closed and locked at all times except when an Authorized Person is working in the room. NO OTHER PERSONS ARE ALLOWED IN THE PPR/STRUCTURED FINANCE FILE ROOM EVEN IN THE COMPANY OF AN AUTHORIZED PERSON (AS DEFINED ABOVE) OTHER THAN REPAIR OR MAINTENANCE PERSONNEL AND THEN ONLY IN THE PRESENCE OF AN AUTHORIZED PERSON. The Library's access is to be monitored by an Authorized Person. All information awaiting filing in the Library is to be under the supervision of an Authorized Person at all times or locked in a PPR/Structured Finance staff member's office or other lockable file cabinet. Materials, which have been archived, are stored with a storage company whose procedures restrict access to archived materials and where only a Pilgrim Authorized Person may request retrieval of files from the archives. 4. PPR/STRUCTURED FINANCE OFFICES ARE TO BE LOCKED when not occupied or supervised. Authorized Persons requiring keys must sign in/out for keys on a log maintained by the Administrative Assistant. 5. COMPUTERS WITH ACCESS TO PPR/STRUCTURED FINANCE FILES ARE TO HAVE SEPARATE ACCESS PASSWORDS. Pilgrim 's company-wide computer security has also been reviewed to insure that all reasonable and practical measures have been taken to limit the possibility that unauthorized access could be made to PPR/Structured Finance (and all Pilgrim) computer files. Pilgrim 's MIS personnel are required to notify in writing a PPR Senior Vice President of any file/systems maintenance work, in advance of beginning any such work. 25 6. THE (602) 417-8327 FAX MACHINE IS FOR THE EXCLUSIVE USE OF THE PPR/STRUCTURED FINANCE CREDIT DEPARTMENT. It is to remain situated in direct proximity to the PPR/Structured Finance Department Administrative Assistant for monitoring of incoming/outgoing information. Any Authorized Person noting any unattended information on the machine is required to take possession of that information until it can be properly delivered to the appropriate PPR/Structured Finance staff member. If any Pilgrim employee should inadvertently receive PPR/Structured Finance faxes, he/she is to immediately deliver it to a PPR/Structured Finance staff member and should immediately report the occurrence to a Senior Vice President of PPR. The Senior Vice President will decide if there has been any exposure of non-public information and, if so, will immediately inform the Chief Compliance Officer and place the issuer on the Restricted List. 7. ALL PPR/STRUCTURED FINANCE NON-PUBLIC DUPLICATE MATERIALS OR OTHER SUCH REFUSE OF A CONFIDENTIAL NATURE MUST BE DISPOSED OF PROPERLY. A document shredder is available for the use of each Authorized Person. 8. ALL PPR/STRUCTURED FINANCE MAIL IS TO BE DELIVERED UNOPENED TO THE PPR DEPARTMENT ADMINISTRATIVE ASSISTANT (OR NEAREST AVAILABLE PPR/STRUCTURED FINANCE STAFF MEMBER). If any Pilgrim employee should inadvertently receive PPR/Structured Finance mail, he/she is to immediately hand deliver it to a PPR/Structured Finance staff member. If the mail was opened before receipt by a PPR/Structured Finance staff member, the occurrence should be immediately reported to a Senior Vice President of PPR. The Senior Vice President will decide if there has been any exposure of non-public information and, if so, will immediately inform the Chief Compliance Officer and place the issuer on the Restricted List. 9. PPR/STRUCTURED FINANCE'S MAIL DISTRIBUTION IS TO BE HANDLED AS FOLLOWS: Mail is received and opened. Each item is reviewed to determine content. If the item is found to contain material, non-public information, the company will be placed on the Watch List/Inside Information List provided it is not currently in the portfolio and, therefore, already on the Watch List/Inside Information List. All items are distributed to the appropriate recipient. 26 RESTRICTIONS ON TRADING From time to time it may be appropriate to restrict or halt trading in a security if Pilgrim is in possession of material non-public information about the issuer of such security, particularly if such information is derived from a significant transaction or proposed transaction involving PPR/Structured Finance and the issuer. Whenever a trading restriction is in effect, Pilgrim 's Compliance Department shall implement appropriate procedures to halt trading in that security for any account for which Pilgrim Investments, Inc. acts as discretionary investment manager or adviser. Where PPR/Structured Finance is involved in a transaction, or is otherwise in possession of material non-public information, the securities of the affected company shall be placed on the Watch List/Inside Information List and trading in such securities shall be monitored. Depending on individual circumstance, such securities may also be considered for placement on Pilgrim 's Restricted List. HANDLING OF OTHER SENSITIVE INFORMATION Although the preceding policies deal in particular with the subject of MATERIAL non-public information, employees of Pilgrim have an obligation to treat ALL sensitive non-public information in strictest confidence. To safeguard this information, the following procedures should be followed: 1. Papers relating to non-public matters concerning issuers of securities should not be left lying in conference rooms or offices and should be locked in file cabinets or desks overnight or during absence from the office. In addition, sensitive information stored in computer systems and other electronic files should be kept secure. 2. Appropriate controls for the reception and oversight of visitors to sensitive areas should be implemented and maintained. For example, guests should be escorted around Pilgrim 's offices and should not be left unattended. 3 .Document control procedures, such as numbering counterparts and recording their distribution, and shredding papers containing material non-public information should be used where appropriate. 4. If an employee is out of the office on business, secretaries and receptionists should use caution in disclosing the employee's location. 5 Business conversations should be avoided in public places, such as elevators, hallways, restrooms and public transportation or in any other situation where such conversations may be overheard. QUESTIONS Questions concerning the interpretation or application of these procedures should be referred to the Compliance Department, who will consult with counsel about matters requiring legal interpretations. 27 POLICIES AND PROCEDURES GOVERNING SECURITIES TRANSACTIONS RESTRICTIONS ON TRADING IN SECURITIES. Pilgrim maintains a list of securities that are subject to trading restrictions or monitoring in accordance with its Code of Ethics, Chinese Wall Procedures and various provisions of the federal securities laws. These lists, referred to as the Restricted List, the Watch List/Inside Information List and the Trading Lists, are maintained and continuously updated under the supervision of the Compliance Department. Securities included on the Restricted List may not be purchased or sold in portfolio accounts, except for Pilgrim Prime Rate Trust ("PPR") and structured finance vehicles. Securities Watch List/Inside Information List securities are securities of issuers with respect to which there is a significant likelihood that PPR/Structured Finance is in possession of material inside information. Trading List securities are those with respect to which a portfolio manager has indicated an intent to trade or Structured Finance/PPR public companies to which PPR/Structured Finance is a lender or PPR/Structured Finance is, or within the preceding ninety (90) days has been, in possession of material non-public information concerning such company. The Restricted List, the Watch List/Inside Information List and the Trading Lists will be prepared and maintained for all Pilgrim Funds; provided that exceptions from the requirement for such lists may be granted on a case by case basis when the Compliance Department determines that a portfolios manager's alternative methodology is sufficient to achieve the purposes of such lists. Each portfolio manager will maintain a separate Trading List, unless an exception has been granted by the Compliance Department, as provided above. Each portfolio manager will have access to his/her Trading List and the Restricted List. A. CHINESE WALL PROCEDURES. Employees of Pilgrim performing investment management related activities for PPR/Structured Finance ("PPR/Structured Finance Investment Activities") (and persons with supervisory or management responsibilities for such employees) are likely, in the normal course of their activities, to receive material non-public information about issuers of publicly traded securities. If any employee of Pilgrim possesses material non-public information about a public company, regardless of its source, such employee may not trade in the securities of that company or recommend trading in such securities to any person nor can they disclose such information to another person, whether inside or outside the Pilgrim organization, except in fulfillment of a legitimate business objective of Pilgrim. Violations of this policy may result in severe civil or criminal penalties under the federal securities laws, as well as in disciplinary action by Pilgrim (including termination of employment). Pilgrim has adopted a series of stringent procedures designed to prevent the flow of material non-public information about a public company or its securities from employees engaged in "PPR/Structured Finance Investment Activities" to employees performing other "investment management activities." As a general matter, it is Pilgrim's policy that any material non-public information about a public company or its securities that is obtained by a director, officer or employee of Pilgrim, either in connection with their PPR/Structured Finance Investment Activities or otherwise, shall not be disclosed beyond the immediate group of persons involved in a particular transaction, except as specifically permitted by the firm's Chinese Wall Procedures. Employees should refer to Pilgrim 's Chinese Wall Procedures. 28 ALL DIRECTORS, OFFICERS AND EMPLOYEES OF PILGRIM MUST FAMILIARIZE THEMSELVES WITH THESE POLICIES AND PROCEDURES AND ABIDE BY THEM. COMPLIANCE WITH THE LAW AND THE POLICIES AND PROCEDURES DESCRIBED IN PILGRIM'S CHINESE WALL PROCEDURES IS THE INDIVIDUAL RESPONSIBILITY OF EACH DIRECTOR, OFFICER OR EMPLOYEE OF PILGRIM. IT IS EACH SUCH PERSON'S DUTY TO SEE THAT THE POLICIES AND PROCEDURES SET FORTH IN PILGRIM 'S CHINESE WALL PROCEDURES ARE FOLLOWED IN BOTH SPIRIT AND LETTER. FAILURE TO COMPLY WITH THE CHINESE WALL PROCEDURES WILL BE DEALT WITH HARSHLY AND COULD LEAD TO TERMINATION OF EMPLOYMENT, PERSONAL LIABILITY OR CRIMINAL PROSECUTION. B. THE RESTRICTED LIST. Securities are placed on the Restricted List: (i) in the unlikely event that there is a failure of the Chinese Wall Procedures and material non-public information is disseminated beyond persons performing PPR/Structured Finance Investment Activities; (ii) upon a determination by the Compliance Department or the Firm's General Counsel that the sensitivity of a transaction being considered by PPR/Structured Finance, the nature of the information in the possession of PPR/Structured Finance or other circumstances justify a halt in trading activity in securities of an issuer; and (iii) in other circumstances as determined by the Compliance Department or the Firm's General Counsel. Portfolios managed by Pilgrim, other than PPR, may not trade in securities that have been placed on the Restricted List. Pre-clearance requests for personal securities transactions in securities of an issuer on the Restricted List will not be approved. It is anticipated that few, if any, securities will be included on the Restricted List. C. WATCH LIST/INSIDE INFORMATION LIST. Each company will be placed on the Watch List/Inside Information List if PPR/Structured Finance is, or within the preceding ninety (90) days has been, in possession of material non-public information concerning such company. D. PREPARATION OF THE WATCH LIST/INSIDE INFORMATION LIST. Persons performing PPR/Structured Finance Investment Activities must immediately log the names of companies on the Watch List/Inside Information List upon the receipt of material non-public information concerning such company. PPR's/Structured Finance portfolio managers must advise the Compliance Department of any changes in the status of such information which might permit the removal of such securities from the Watch List/Inside Information List or require placing them on the Restricted List. In addition, the Firm's General Counsel may advise the Compliance Department to place the securities of a particular company on the Watch List/Inside Information List. While portfolio trading in securities on the Watch List/Inside Information List is NOT prohibited, such trading is monitored frequently to detect any unusual trading activity involving Watch List/Inside Information List securities. The Watch List/Inside Information List is prepared by a PPR/Structured Finance Portfolio Manager. 29 E. TRADING LISTS. - OPEN-END FUNDS A separate Trading List is maintained for each portfolio. A security of an issuer is placed on a Trading List each Friday or commencing upon the date that a portfolio manager determines to engage in a transaction involving such security imminently (generally within seven (7) business days, subject to market conditions) and for a period of five (5) business days following such transaction. A portfolio manager's decision to place a security on a Trading List should be made by reference to a number of factors, including, the relationship between the target buy/sell price and the market price, the volatility of the issue and consideration of other factors that may lead a portfolio manager to trade in a particular security. Obviously, unforeseen circumstances may lead to a rapid trading decision, in which case a security may be placed on the Trading List at the same time as a trading order is placed. Pre-clearance requests for personal securities transactions in securities of an issuer on the Trading List will not be approved.F. TRADING LIST - PPR AND STRUCTURED FINANCE VEHICLES Public companies will be put on PPR/Structured Finance's Trading list if either entity (I) owns a loan participation with respect to such company or (ii) is, or within the preceding ninety (90) days has been, in possession of material non-public information concerning such company. Pre-clearance requests for personal securities transactions in securities of an issuer on the PPR/Structured Finance Trading List will not be approved. G. PERSONAL SECURITIES TRANSACTIONS. Under Pilgrim 's Code of Ethics, all employees, officers and directors of Pilgrim, all directors/trustees of registered investment companies managed by Pilgrim, as well as certain consultants and independent contractors who have access to confidential information, other than Segregated Persons (collectively, "Access Persons") must (i) obtain pre-clearance for personal securities transactions involving beneficial ownership (as defined in Pilgrim 's Code of Ethics) and (ii) cause duplicate trading confirmations for such personal securities transactions to be sent to the Compliance Department A Segregated Person, as that term is defined in Pilgrim's Code of Ethics, need only pre-clear a transaction in a Security (as that term is defined in Pilgrim's Code of Ethics) if at the time such Segregated Person proposed to engage in such transaction, he or she knew, or in the ordinary course of fulfilling his or her duties, should have known that such Security was being purchased or sold by the Funds or that a purchase or sale of such Security was being considered by or with respect to the Funds EXCEPT that pre-clearance approval WILL be required for purchases of securities in private transactions conducted pursuant to Section 4(2) of the Securities Act of 1933 and Securities (debt or equity) acquired in an initial public offering. All Pilgrim Registered Representatives not deemed to be Access Persons must also pre-clear all Personal Securities Transactions with the Compliance Department. In order to receive pre-clearance for Personal Securities Transactions, a Registered Representative must call the Compliance Officer or complete a Personal Trading Approval form. A member of the Compliance Department is available each business day from 9:00 a.m. to 5:00 p.m. to respond to pre-clearance requests. Registered Representatives are directed to identify (i) the securities that will be the subject of the transaction and the number of shares and principal amount of each security involved, (ii) the date on which they desire to engage in the subject transaction; (iii) the nature of the transaction (i.e., purchase, sale, private placement, or any other type of acquisition or disposition); (iv) the approximate price at which the transaction will be effected; and (vi) the name of the broker, dealer, or bank with or through whom the transaction will be effected. Transactions in securities of an issuer on the Restricted List or the Trading Lists will not be approved. In 30 order to maintain the confidentiality of the Restricted List, the Watch List/Inside Information List and the Trading Lists, callers will not be apprised of the reason for the denial of the authorization to trade. If on any particular day the Compliance Officer is not present in the office, pre-clearance may be obtained by providing a completed Personal Trading Approval form to the Compliance Analyst for authorization who will obtain the signature of an appropriate designated officer. Questions regarding pre-clearance procedures should be directed to the Compliance Department. Exceptions - Certain Transactions No pre-clearance of a securities transaction is required for the following transactions: 1. Shares of registered open-end investment companies, 2 Securities issued by the government of the United States, bankers' acceptances, bank certificates of deposit and time deposits, commercial paper, repurchase agreements and such other money market instruments as designated by the board of directors/trustees of such Fund and shares of ReliaStar Financial Corporation. 3. Purchases or sales effected in any account over which such Registered Representative has no direct or indirect influence or control; 4. Purchases or sales of securities which are not eligible for purchase or sale by any Fund e.g. municipal securities. 5. Purchases or sales which are non-volitional on the part of either the Registered Representative or a Fund; 6. Purchases which are part of an automatic dividend reinvestment plan or employee stock purchase plan; 7. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. 8. Purchases or sales of securities which receive the prior approval of the appropriate Designated Officer because they (i) are only remotely potentially harmful to each Fund, (ii) would be very unlikely to affect a highly institutional market, or (iii) clearly are not related economically to the securities to be purchased, sold or held by each Fund. 9. Future elections into an employer sponsored 401(k) plan, in an amount not exceeding $1,000 in any calendar month and any other transfers to an open end fund. However, an exchange of a current account balance into or from one of the closed end funds in an amount greater than $1,000 would still need pre-clearance and be reportable at the end of the quarter on the quarterly transaction reports. 31 H. PERSONAL BROKERAGE ACCOUNTS Access Persons and registered representatives pursuant to Article III, Section 28 of the NASD Rules of Fair Practice, are required to notify the securities brokers with whom he or she opens personal brokerage accounts that he or she is an affiliated person of PII or PSI as appropriate. This notification should take place at the time the brokerage account is opened and applies to your personal accounts and to any account in which you have a beneficial interest as defined in Pilgrim 's Code of Ethics. If the securities account is with a non-member institution (e.g., investment adviser, bank or other financial institution) you are required to notify the Chief Compliance Officer prior to the execution of any initial transactions, of your intention to open such account or place an order. For brokerage and/or non-member institution accounts established prior to your association with PSI or PII, you are required to notify the Chief Compliance Officer promptly after your hire date. I. TRADE CONFIRMATIONS. Access Persons (other than Segregated Persons) and registered representatives shall cause broker-dealers maintaining accounts to deliver to Pilgrim duplicate trade confirmations and statements with respect to all transactions in such accounts. Pilgrim has prepared a form letter to be used such Access Persons to direct brokerage firms maintaining such accounts to send duplicate trade confirmations to the Compliance Department. A copy of this form letter is attached as Exhibit C. J. NEW ISSUES. "Hot issues" are securities which, immediately after their initial public distribution, sell at a premium in the secondary market. No Access Person nor Registered Representative ("RR") may purchase hot issue securities during the primary offering for his or her personal account, for any account in which the individual has a direct or indirect financial interest, or for the account of any member of the individual's immediate family. For this purpose, the term "immediate family" includes parents, spouse, brothers, sisters, in-laws, children or any other person who is directly or indirectly materially supported by you. Because of the difficulty in recognizing a potential "hot issue" until after distribution, you and your immediate family may not purchase, for any account in which you have a beneficial interest, any new issue of a security unless such purchase has been approved in advance by the Chief Compliance Officer. 32 SAMPLE LETTER TO BROKERAGE FIRM TO ESTABLISH DUPLICATE CONFIRMS AND PERIODIC STATEMENTS (PAGE C12, H. TRADE CONFIRMATIONS) January 2, 1996 Merrill Lynch, Pierce, Fenner & Smith, Inc. 111 W. Ocean Blvd., 24th Floor Long Beach, CA 90802 RE: The Brokerage Account of Account Registration Account No. Your Account Number -------------------- AE Name of Your Registered Representative -------------------------------------- Dear Ladies/Gentlemen: In accordance with the policies of Pilgrim Group, Inc., a financial services firm with which I have become associated, effective immediately, please forward duplicate trade confirmations and periodic statements on the above-captioned accounts as follows: Pilgrim Group, Inc. ATTN: LAUREN D. BENSINGER VP & CHIEF COMPLIANCE OFFICER TWO RENAISSANCE SQUARE 40 North Central Avenue Suite 1200 Phoenix, AZ 85004 Sincerely, Your Name -----END PRIVACY-ENHANCED MESSAGE-----