-----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, C6hl4xjwYB+zfuej1zQnfb+XIt8O+EdG3G6yyKr3y70fyDTnQpbyQQGNU+9Tq74u z2L8bfHki9YbBYz3Uo1isQ== /in/edgar/work/20000804/0000950147-00-001150/0000950147-00-001150.txt : 20000921 0000950147-00-001150.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950147-00-001150 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000804 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: 497 SEC ACT: SEC FILE NUMBER: 002-48906 FILM NUMBER: 686790 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC/MD CENTRAL INDEX KEY: 0000061448 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 136066974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 002-34552 FILM NUMBER: 686791 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQUARE 40 N CENTRAL STREET 2: STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC DATE OF NAME CHANGE: 19950503 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM MAGNACAP FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MAGNACAP FUND INC DATE OF NAME CHANGE: 19850701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM GOVERNMENT SECURITIES INCOME FUND INC CENTRAL INDEX KEY: 0000746575 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 222544280 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 002-91302 FILM NUMBER: 686792 BUSINESS ADDRESS: STREET 1: TWO RENAISSANC SQUARE 40 N CENTRAL STREET 2: STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM GOVERNMENT SECURITIES INC DATE OF NAME CHANGE: 19950530 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM GNMA FUND DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON GLOBAL INCOME FUND CENTRAL INDEX KEY: 0000793741 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 033-05827 FILM NUMBER: 686793 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 RAMIREZ GLOBAL INCOME FUND DATE OF NAME CHANGE: 19950209 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON TAX EXEMPT BOND TRUST DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM MUTUAL FUNDS CENTRAL INDEX KEY: 0000895430 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 033-56094 FILM NUMBER: 686794 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQUARE STREET 2: 40 NORTH CENTRAL AVE #1200 CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQUARE STREET 2: 40 NORTH CENTRAL AVE #1200 CITY: PHOENIX STATE: AZ ZIP: 85004 FORMER COMPANY: FORMER CONFORMED NAME: NICHOLAS APPLEGATE MUTUAL FUNDS DATE OF NAME CHANGE: 19930328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM MAYFLOWER TRUST CENTRAL INDEX KEY: 0000911294 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 033-67852 FILM NUMBER: 686795 BUSINESS ADDRESS: STREET 1: 40 NORTH CENTRAL AVENUE STREET 2: STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 2036027881 MAIL ADDRESS: STREET 1: 40 NORTH CENTRAL AVENUE STREET 2: SUITE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004 FORMER COMPANY: FORMER CONFORMED NAME: NORTHSTAR TRUST DATE OF NAME CHANGE: 19981209 FORMER COMPANY: FORMER CONFORMED NAME: NORTHSTAR ADVANTAGE TRUST DATE OF NAME CHANGE: 19950620 FORMER COMPANY: FORMER CONFORMED NAME: NWNL NORTHSTAR SERIES TRUST DATE OF NAME CHANGE: 19931108 497 1 0001.txt DEFINITIVE PROSPECTUS PILGRIM(R) - --------------------------- FUNDS FOR SERIOUS INVESTORS Prospectus Classes: A, B, C, M and T July 31, 2000 INCOME FUNDS Pilgrim Government Securities Income Pilgrim GNMA Income Pilgrim Strategic Income Pilgrim High Yield Pilgrim High Yield II Pilgrim High Total Return Pilgrim High Total Return II Pilgrim Global Income Pilgrim Money Market 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. WHAT'S INSIDE - -------------------------------------------------------------------------------- [GRAPHIC] OBJECTIVE These pages contain a description of each of our Funds included in this prospectus, including its objective, investment strategy and risks. [GRAPHIC] INVESTMENT You'll also find: STRATEGY HOW THE FUND HAS PERFORMED. A chart that shows the Fund's financial performance for the past [GRAPHIC] 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. [GRAPHIC] HOW THE FUND HAS PERFORMED AN INTRODUCTION TO THE PILGRIM FUNDS 1 Funds At A Glance 2 INCOME FUNDS Pilgrim Government Securities Income 4 Pilgrim GNMA Income 6 Pilgrim Strategic Income 8 Pilgrim High Yield 10 Pilgrim High Yield II 12 Pilgrim High Total Return 14 Pilgrim High Total Return II 16 Pilgrim Global Income 18 Pilgrim Money Market 20 WHAT YOU PAY TO INVEST 22 SHAREHOLDER GUIDE 26 MANAGEMENT OF THE FUNDS 33 DIVIDENDS, DISTRIBUTIONS AND TAXES 35 MORE INFORMATION ABOUT RISKS 36 FINANCIAL HIGHLIGHTS 39 WHERE TO GO FOR MORE INFORMATION Back cover 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. INCOME FUNDS Pilgrim offers both aggressive and conservative Income Funds. They may suit you if you: * want a regular stream of income. Income Funds other than the Money Market Fund 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. [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 - -------------------------------------------------------------------------------- Income Government Securities Income Fund High current income, consistent with liquidity and Funds Adviser: Pilgrim Investments, Inc. preservation of capital GNMA Income Fund High current income, consistent with liquidity and Adviser: Pilgrim Investments, Inc. safety of principal Strategic Income Fund Maximum total return Adviser: Pilgrim Investments, Inc. High Yield Fund High current income, with capital appreciation as a Adviser: Pilgrim Investments, Inc. secondary objective High Yield Fund II High level of current income and capital growth Adviser: Pilgrim Investments, Inc. High Total Return Fund High income and capital appreciation Adviser: Pilgrim Investments, Inc. High Total Return Fund II High income and capital appreciation Adviser: Pilgrim Investments, Inc. Global Income Fund High current income, with capital appreciation Adviser: Pilgrim Investments, Inc. as a secondary objective Money Market Fund High current income consistent with the preservation Adviser: Pilgrim Investments, Inc. of capital and liquidity
2 MAIN INVESTMENTS MAIN RISKS - -------------------------------------------------------------------------------- Securities issued or guaranteed by Credit, interest rate, prepayment and other risks that the U.S. Government and certain of accompany an investment in government bonds and its agencies or instrumentalities mortgage related investments. Generally has less credit risk than the other income funds. Mortgage-backed GNMA Certificates Credit, interest rate, prepayment and other risks that that are guaranteed as to the accompany an investment in government bonds and timely payment of principal and mortgage related investments. Generally has less credit interest by the U.S. Government. risk than the other income funds. Investment grade and high yield Credit, interest rate, prepayment and other risks that debt securities accompany an investment in debt securities, including high yield debt securities. May be sensitive to credit risk during economic downturns. High yield debt securities Credit, interest rate and other risks that accompany an investment in lower-quality debt securities. Particularly sensitive to credit risk during economic downturns. High yield debt securities, Credit, liquidity, interest rate and other risks that including those in the lowest accompany an investment in lower-quality debt ratings, as well as equities and securities. Particularly sensitive to credit risk foreign securities during economic downturns. May also present price volatility from equity exposure, and foreign securities. May be sensitive to currency exchange rates, international political and economic conditions, and other risks. High yield debt securities, Credit, liquidity, interest rate and other risks that including those in the lowest accompany an investment in lower-quality debt ratings, and foreign securities securities. Particularly sensitive to credit risk during economic downturns. Foreign securities may be sensitive to currency exchange rates, international political and economic conditions, and other risks. High yield debt securities, Credit, liquidity, interest rate and other risks that including those in the lowest accompany an investment in lower-quality debt ratings, and foreign securities securities. Particularly sensitive to credit risk during economic downturns. Foreign securities may be sensitive to currency exchange rates, international, political and economic conditions, and other risks. Foreign and domestic high yield, Credit, liquidity, interest rate and other risks that lower rated or unrated debt accompany an investment in lower-quality debt 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, international political and economic conditions, and other risks. Shares of another investment Credit, interest rate and other risks that accompany an company whose main investments investment in government bonds and mortgage related incudes short-term securities investments. Presents less credit and interest rate issued or guaranteed by the U.S. risk than the other income funds. Government and certain of its agencies and instrumentalities.
3 - ------ Income Funds - ------ ADVISER PILGRIM GOVERNMENT SECURITIES INCOME FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks high current income, consistent with liquidity and preservation of capital. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 70% of its total assets in securities issued or guaranteed by the U.S. Government and the following agencies or instrumentalities of the U.S. Government: the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Such securities include direct obligations of the U.S. Treasury and mortgage-backed securities. The Fund may fall below the 70% threshold due to changes in the value of the Fund's holdings or the sale of securities to meet redemptions, in which case the Fund will purchase only U.S. Government securities until the 70% level is restored. The remainder of the Fund's assets may be invested in securities issued by other agencies and instrumentalities of the U.S. Government and in instruments collateralized by securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The foregoing policies are fundamental and may not be changed without shareholder approval. The Fund may invest in securities of any maturity; however, the Fund is expected to have a dollar-weighted average duration within a range of 20% above or below that of the Lehman Intermediate Treasury Index. As of February 29, 2000, the dollar-weighted average duration of the Lehman Intermediate Treasury Index was 2.87 years. The adviser determines the composition of the Fund's portfolio on the basis of its judgment of existing market conditions, such as the general direction of interest rates, trends in creditworthiness, expected inflation, supply and demand of fixed income securities, and other factors. The Fund may enter into reverse repurchase agreements, dollar roll transactions or pairing off transactions. The Fund does not invest in highly leveraged derivatives, such as swaps, interest-only or principal-only stripped mortgage-backed securities, or interest rate futures contracts. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Changes in Interest Rates -- the value of the Fund's investments may fall when interest rates rise. This Fund may be particularly sensitive to interest rates because it primarily invests in U.S. government securities. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund is subject to less credit risk than the other income funds because it principally invests in debt securities issued or guaranteed by the U.S. Government, its agencies and government sponsored enterprises. Prepayment Risk -- the Fund may invest in mortgage related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. 4 Pilgrim Government Securities Income Fund PILGRIM GOVERNMENT SECURITIES INCOME FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 8.03 11.90 7.46 4.71(8) -3.61 14.51 2.56 7.85 5.61 -1.17 - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 3rd quarter 1992: up 4.70% 1st quarter 1994: down 2.66% The Fund's year-to-date total return as of June 30, 2000 was up 2.99%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of two broad measures of market performance -- the Lehman Brothers Government/Mortgage Index and the Lehman Brothers Intermediate Treasury Index. Average Annual Total Returns(2) Lehman Lehman Gov't/ Intermediate Class Class Class Mortgage Treasury A(3) B(4) M(5) Index(6) Index(7) ---- ---- ---- -------- -------- One year, ended December 31, 1999 % -5.86 -6.56 -4.86 1.93 0.49 Five years, ended December 31, 1999 % 4.73 N/A N/A 8.08 6.93 Ten years, ended December 31, 1999(8) % 5.14 N/A N/A 7.87 7.07 Since inception of Classes B and M(9) % N/A 3.18 3.08 6.63 5.77(10) - ---------- (2) Class C and T shares of the Fund did not have a full year's performance during the year ended December 31, 1999. (3) Reflects deduction of sales charge of 4.75%. (4) Reflects deduction of deferred sales charge of 5% and 2% respectively for 1 year and since inception returns. (5) Reflects deduction of sales charge of 3.25%. (6) The Lehman Brothers Government/Mortgage Index is an unmanaged index that measures the performance of U.S. Government agencies and instrumentalities, as well as mortgage pass-through instruments issued by FNMA, FHLMC and GNMA. (7) The Lehman Brothers Intermediate Treasury Index is an unmanaged index that measures the performance of U.S. Treasuries with maturities of under 10 years. Information on the Lehman Intermediate Index is presented because effective May 24, 1999, the Fund seeks an average portfolio duration within +/-20% of the duration of that Index. Previously, the Fund's average portfolio maturity was generally longer. (8) The Fund earned income and realized capital gains as a result of entering into reverse repurchase agreements during the six-month period from July to December 1992 that caused the Fund to exceed its 10% investment restriction on borrowing. Therefore, the Fund's performance was higher than it would have been had the Fund adhered to its borrowing restriction. (9) Classes B and M commenced operations on July 17, 1995. (10) Index return is for period beginning July 31, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Government Securities Income Fund 5 - ------ Income Funds - ------ ADVISER PILGRIM GNMA INCOME FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] 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 Government National Mortgage Association ("GNMA") mortgage-backed securities (also known as "GNMA Certificates") that are guaranteed as to the timely payment of principal and interest by the United States Government. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund will invest at least 80% of the value of its total assets in GNMA ("Ginnie Mae") 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 [GRAPHIC] 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. 6 Pilgrim GNMA Income Fund PILGRIM GNMA INCOME FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 9.23 15.75 5.19 8.06 -2.07 15.91 5.71 10.20 7.52 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: 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-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 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. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim GNMA Income Fund 7 - ------ Income Funds - ------ ADVISER PILGRIM STRATEGIC INCOME FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum total return. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 60% of its total assets in debt securities issued by U.S. and foreign corporations, U.S. and foreign governments, and their agencies and instrumentalities that are rated in one of the top four categories by a nationally recognized statistical rating agency, or of comparable quality if unrated. These securities include bonds, notes, mortgage-backed and asset-backed securities with rates that are fixed, variable or floating. The Fund may invest up to 40% of its total assets in high yield debt securities, commonly known as "junk bonds." There is no minimum credit rating for high yield debt securities in which the Fund may invest. The "total return" sought by the Fund consists of income earned on the Fund's investments, plus capital appreciation, if any, which generally arises from decreases in interest rates or improving credit fundamentals for a particular sector or security. The Fund may invest in debt securities of any maturity; however, the average portfolio duration of the Fund will generally range from two to eight years. The Fund may invest up to 30% of its total assets in securities payable in foreign currencies. The Fund may invest up to 10% of its assets in other investment companies that invest in secured floating rate loans, including up to 5% of its assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund may also use options, futures contracts and interest rate and currency swaps as hedging techniques. The Fund does not invest in interest-only or principal-only stripped mortgage-backed securities. PENDING MERGER -- Subject to shareholder approval, the Fund's Board of Trustees has approved the reorganization of the Fund into Pilgrim High Yield Fund. You could therefore ultimately hold shares of that fund. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Changes in Interest Rates -- the value of the Fund's investments may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long terms to maturity. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This is especially true during periods of economic uncertainty or economic downturns. This Fund may be subject to more credit risk than the other income funds, because it may invest in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. Prepayment Risk -- the Fund may invest in mortgage-related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. Inability to Sell Securities -- high yield securities may be less liquid than higher quality investments. A security in the lowest rating categories, that is unrated, or whose credit rating has been lowered may be particularly difficult to sell. Foreign securities and mortgage-related and asset-backed debt securities may be less liquid than other debt securities. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security, credit risk with respect to the counterparty to the derivatives instrument, and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 8 Pilgrim Strategic Income Fund PILGRIM STRATEGIC INCOME FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -1.16 - ---------- (1) These figures are as of December 31, 1999. They do not reflect sales charges and would be lower if they did. (2) Prior to May 24, 1999 a different adviser managed the Fund. Best and worst quarterly performance during this period: 4th quarter 1999: up 0.81% 2nd quarter 1999: down 1.23% The Fund's year-to-date total return as of June 30, 2000 was up 3.29%. 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 Aggregate Bond Index. Average Annual Total Returns Lehman Aggregate Class Class Class Bond A(3) B(4) C(5) Index(6) ---- ---- ---- -------- One year, ended December 31, 1999 % -5.83 -6.15 -2.46 -0.82 Since inception of Classes A, B, and C (7) % -1.74 -1.29 1.31 2.37 - ---------- (3) Reflects deduction of sales charge of 4.75%. (4) Reflects deduction of a deferred sales charge of 5% and 4%, respectively, for the 1 year and since inception returns. (5) Reflects deduction of a deferred sales charge of 1% for the 1 year return. (6) The Lehman Aggregate Bond Index is an unmanaged index that measures the performance of fixed income securities that are similar, but not identical, to those in the Fund's portfolio. (7) Classes A, B and C commenced operations on July 27, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Strategic Income Fund 9 - ------ Income Funds - ------ ADVISER PILGRIM HIGH YIELD FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks a high level of current income, with capital appreciation as a secondary objective. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its assets in high yield debt securities, including preferred stock and convertible securities, that do not in the opinion of the adviser involve undue risk relative to their expected return. High yield securities, which are commonly known as "junk bonds," are securities that are rated below investment grade, i.e., rated lower than Baa by Moody's Investors Service, Inc. or BBB by Standard and Poor's, or of comparable quality if not rated. Generally, the Fund will invest in securities rated lower than B by Moody's or S&P only when the adviser believes the financial condition of the issuer or other available protections reduce the risk to the Fund or that there is greater value in the securities than is reflected in their prevailing market price. There is no minimum credit rating for high yield securities in which the Fund may invest. The Fund may invest in debt securities of any maturity. In selecting securities for the Fund, preservation of capital is a consideration. The remainder of the Fund's assets may be invested in common stocks, investment grade preferred stocks, investment grade debt obligations of all types, U.S. Government securities, warrants, money market instruments (including repurchase agreements on U.S. Government securities), mortgage-related securities and participation interests and assignments in floating rate loans and notes. The Fund may also invest up to 10% of its assets in foreign debt securities of any rating. The Fund may invest in financial futures and related options to attempt to hedge risk, although the Fund has not invested in such instruments since Pilgrim Investments, Inc. became the adviser in 1995 through the date of this prospectus. In selecting equity securities, the portfolio managers use a "bottom-up" analysis that focuses on individual companies and assesses the company's valuation, financial condition, management, competitiveness, and other factors. Differences Between the Fund and High Yield Fund II -- While both Funds invest primarily in high yield securities, the High Yield Fund normally emphasizes bonds with stronger credit ratings in the high yield bond universe. Thus, of the two Funds, High Yield Fund II normally presents the potential for higher income, but with potentially higher credit risk and volatility. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] The Fund is subject to risks associated with investing in lower rated debt securities. You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund may be subject to more credit risk than other income mutual funds because it invests in high yield (or "junk bond") 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. The Fund is also subject to credit risk through its investment in floating rate loans. Changes in Interest Rates -- the value of the Fund's investments may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long terms to maturity. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Prepayment Risk -- the Fund may invest in mortgage-related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. Inability to Sell Securities -- high yield securities may be less liquid than higher quality investments. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial. A security whose credit rating has been lowered may be particularly difficult to sell. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security, and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. Price Volatility -- Equity securities face market, issuer and other risks, and their values may go up and 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. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks, securities depositories or exchanges than those in the U.S., and foreign controls on investment. 10 Pilgrim High Yield Fund PILGRIM HIGH YIELD FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - -9.49 29.44 16.19 18.52 -1.55 17.71 15.76 14.98 -2.96 -1.14 - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 1st quarter 1991: up 14.83% 3rd quarter 1998: down 7.91% The Fund's year-to-date total return as of June 30, 2000 was down 3.18%. 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 High Yield Bond Index. Average Annual Total Returns(2) Lehman High Yield Bond Class A(3) Class B(4) Class M(5) Index(6) ---------- ---------- ---------- -------- One year, ended December 31, 1999 % -5.86 -6.35 -4.92 2.39 Five years, ended December 31, 1999 % 7.44 N/A N/A 9.31 Ten years, ended December 31, 1999 % 8.56 N/A N/A 10.72 Since inception(7) % N/A 5.72 5.51 7.41 - ---------- (2) Class C shares of the Fund did not have a full year's performance during the year ended December 31, 1999. (3) Reflects deduction of sales charge of 4.75%. (4) Reflects deduction of deferred sales charge of 5% and 2% respectively for 1 year and since inception returns. (5) Reflects deduction of a sales charge of 3.25%. (6) The Lehman Brothers High Yield Bond Index is an unmanaged index that measures the performance of fixed-income securities that are similar, but not identical, to those in the Fund's portfolio. (7) Classes B and M commenced operations on July 17, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Yield Fund 11 - ------ Income Funds - ------ ADVISER PILGRIM HIGH YIELD FUND II Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks a high level of current income and capital growth. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in high yield, lower rated debt securities, which are commonly referred to as "junk bonds," and convertible securities rated below investment grade (i.e., lower than the four highest rating categories) by a nationally recognized statistical rating agency, or of comparable quality if unrated. There is no limit on either the portfolio maturity or the acceptable rating of securities bought by the Fund. Securities may bear rates that are fixed, variable or floating. The Fund may invest up to 35% of its total assets in equity securities of U.S. and foreign companies, including securities of companies in emerging markets. In selecting equity securities, the portfolio managers use a "bottom-up" analysis that focuses on individual companies and assesses the company's valuation, financial condition, management, competitiveness, and other factors. The Fund is not restricted to investments in companies of any particular size, but currently intends to invest principally in companies with market capitalization above $100 million at the time of purchase. The Fund may also use options, futures contracts and interest rate and currency swaps as hedging techniques or to help seek the Fund's investment objectives. Differences Between the Fund and High Yield Fund While both Funds invest primarily in high yield securities, the High Yield Fund normally emphasizes bonds with stronger credit ratings in the high yield bond universe. Thus, of the two Funds, High Yield Fund II normally presents the potential for higher income, but with potentially higher credit risk and volatility. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] 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 mutual funds because it invests in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. This is especially true during periods of economic uncertainty or economic downturns. Changes in Interest Rates -- the value of the Fund's investments may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long term maturities. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Prepayment Risk -- the Fund may invest in mortgage-related securities, which can be paid off early if the owners of the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. 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. Risk of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security, credit risk with respect to the counterparty to the derivative instrument, and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. Price Volatility -- equity securities face market, issuer and other risks, and their values may go up and 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. 12 Pilgrim High Yield Fund II PILGRIM HIGH YIELD FUND II - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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 shares from year to year. Year by Year Total Returns (%)(1)(2) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 21.05 4.17 6.12 - ---------- (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 May 24, 1999 a different adviser managed the Fund. The figure shown for the year 1999 provides performance for the Class A shares of the Fund. The figures shown for the years 1997 and 1998 provide performance for Institutional Class shares of the Fund, revised to reflect the higher expenses of Class A shares. Best and worst quarterly performance during this period: 3rd quarter 1997: up 8.30% 3rd quarter 1998: down 7.14% The Fund's year-to-date total return as of June 30, 2000 was up 2.26%. 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 First Boston High Yield Index. Average Annual Total Returns(3) First Boston High Class Class Class Institutional Yield A(4) B(5) C(6) Class(7) Index(8) ---- ---- ---- -------- -------- One year, ended December 31, 1999 % 1.07 0.53 4.38 9.55 3.28 Since inception of Classes A, B and C(9) % -0.18 -0.06 1.97 N/A 0.48(10) Since inception of Institutional Class(11) % N/A N/A N/A 13.63 6.90 - ---------- (3) Class T shares did not have a full year's performance as of December 31, 1999. (4) Reflects deduction of a sales charge of 4.75%. (5) Reflects deduction of a deferred sales charge of 5% and 4%, respectively, for the 1 year and since inception returns. (6) Reflects deduction of a deferred sales charge of 1% for the 1 year return. (7) Institutional Class shares of the Fund are no longer offered. (8) The First Boston High Yield Index is an unmanaged index that measures the performance of fixed income securities similar, but not identical, to those in the Fund's portfolio. (9) Classes A, B and C commenced operations on March 27, 1998. Class T commenced operations on January 4, 2000. (10) Index return is for period beginning March 31, 1998. (11) Institutional Class shares of the Fund commenced operations on July 31, 1996. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Yield Fund II 13 - ------ Income Funds - ------ ADVISER PILGRIM HIGH TOTAL RETURN FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks high income and capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in higher-yielding, lower-rated bonds (junk bonds) to achieve high current income with potential for capital growth. Under normal market conditions, the Fund invests at least 65% of its total assets in high-yielding, lower-rated U.S. dollar-denominated debt securities of any maturity of U.S. and foreign issuers. It may also invest up to 35% of its total assets in securities denominated in foreign currencies. It may invest up to 50% of its assets in securities of foreign issuers, including 35% in emerging market debt. Most of the debt securities the Fund invests in are lower-rated and considered speculative, including bonds in the lowest rating categories and unrated bonds. It can invest up to 10%, and can hold up to 25%, of its assets in securities rated below Caa by Moody's or CCC by S&P. It also holds debt securities that pay fixed, floating or adjustable interest rates and may hold pay-in-kind securities and discount obligations, including zero coupon securities, and mortgage-related or asset-backed debt securities. The Fund may also invest in equity or equity-related securities, such as common stock, preferred stock, convertible securities and rights and warrants attached to debt instruments. In selecting equity securities, the portfolio managers use a "bottom-up" analysis that focuses on individual companies and assesses the company's valuation, financial condition, management, competitiveness, and other factors. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Changes in Interest Rates -- The Fund's performance is significantly affected by 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 longer durations. 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. The value of the Fund's high-yield and zero coupon securities are particularly sensitive to changes in interest rates. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund is subject to more credit risk than many other income mutual 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 for bonds in the lowest rating category and unrated bonds, and during periods of economic uncertainty or economic downturns. Prepayment Risk -- the Fund may invest in mortgage-related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. Inability to Sell Securities -- high-yield securities may be less liquid than higher quality investments. Foreign securities and mortgage-related and asset-backed debt securities may be less liquid than other debt securities. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 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 judgement and may be more subjective than valuing securities using market quotes. Risk 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 may invest in midcap and smallcap 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. 14 Pilgrim High Total Return Fund PILGRIM HIGH TOTAL RETURN FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -8.57 21.17 15.70 11.44 -7.96 -13.23 - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 3rd quarter 1997: up 7.40% 3rd quarter 1998: down 13.76% The Fund's year-to-date total return as of June 30, 2000 was down 1.96%. 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 High Yield Bond Index. Average Annual Total Returns Lehman High Yield Bond Class A(2) Class B(3) Class C(4) Index(5) ---------- ---------- ---------- -------- One year, ended December 31, 1999 % -17.28 -17.97 -14.80 2.39 Five years, ended December 31, 1999 % 3.51 3.47 3.83 9.31 Since inception of Class A(6) % 1.82 N/A N/A 7.61(7) Since inception of Class B(6) % N/A 0.83 N/A 7.24(8) Since inception of Class C(6) % N/A N/A 1.35 8.23(9) - ---------- (2) Reflects deduction of sales charge of 4.75%. (3) Reflects deduction of deferred sales charge of 5%, 2%, and 1%, respectively, for 1 year, 5 year, and since inception returns. (4) Reflects deduction of a deferred sales charge of 1% for the 1 year return. (5) The Lehman Brothers High Yield Bond Index is an unmanaged index that measures the performance of fixed-income securities that are similar, but not identical, to those in the Fund's portfolio. (6) Class A commenced operations on November 8, 1993. Classes B and C commenced operations on February 9, 1994 and March 21, 1994, respectively. (7) Index return is for period beginning November 1, 1993. (8) Index return is for period beginning February 1, 1994. (9) Index return is for period beginning April 1, 1994. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Total Return Fund 15 - ------ Income Funds - ------ ADVISER PILGRIM HIGH TOTAL RETURN FUND II Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks high income and capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in higher-yielding, lower-rated bonds (junk bonds) to achieve high current income with potential for capital growth. Under normal market conditions, the Fund invests at least 65% of its total assets in high-yielding, lower-rated U.S. dollar-denominated debt securities of U.S. and foreign issuers. It may also invest up to 35% of its total assets in securities denominated in foreign currencies. It may invest up to 50% of its assets in securities of foreign issuers, including 35% in emerging market debt. Most of the debt securities the Fund invests in are lower-rated and considered speculative, including bonds in the lowest rating categories and unrated bonds. It can invest up to 10%, and can hold up to 25%, of its assets in securities rated below Caa by Moody's or CCC by S&P. It also holds debt securities that pay fixed, floating or adjustable interest rates and may hold pay-in-kind securities and discount obligations, including zero coupon securities, and mortgage-related or asset-backed debt securities. The Fund may also invest in equity or equity-related securities, such as common stock, preferred stock, convertible securities and rights and warrants attached to debt instruments. In selecting equity securities, the portfolio managers use a "bottom-up" analysis that focuses on individual companies and assesses the company's valuation, financial condition, management, competitiveness, and other factors. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Changes in Interest Rates -- The Fund's performance is significantly affected by 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 longer 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. The value of the Fund's high yield and zero coupon securities are particularly sensitive to changes in interest rates. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund is subject to more credit risk than many other income mutual 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 for bonds in the lowest rating catergories and unrated bonds, and during periods of economic uncertainty or economic downturns. Inability to Sell Securities -- high yield securities may be less liquid than higher quality investments. An unrated bond, a bond in the lowest rating catorgories, or a security whose credit rating has been lowered may be particularly difficult to sell. Foreign securities and mortgage-related and asset-backed debt securities may be less liquid than other debt securities. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Prepayment Risk -- the Fund may invest in mortgage-related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the Fund will be forced to reinvest this money at lower yields. Risk 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. 16 Pilgrim High Total Return Fund II PILGRIM HIGH TOTAL RETURN FUND II - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -2.93 -13.86 - ---------- (1) These figures are as of December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 2nd quarter 1997: up 8.89% 4th quarter 1999: down 10.31% The Fund's year-to-date total return as of June 30, 2000 was down 4.48%. 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 High Yield Bond Index. Average Annual Total Returns Lehman High Yield Bond Class A(2) Class B(3) Class C(4) Index(5) ---------- ---------- ---------- -------- One year, ended December 31, 1999 % -17.90 -18.37 -15.24 2.39 Since inception(6) % -1.77 -1.63 -0.75 5.37 - ---------- (2) Reflects deduction of sales charge of 4.75%. (3) Reflects deduction of deferred sales charge of 5% and 3%, respectively, for 1 year and since inception returns. (4) Reflects deduction of a deferred sales charge of 1% for the 1 year return. (5) The Lehman Brothers High Yield Bond Index is an unmanaged index that measures the performance of fixed-income securities that are similar, but not identical, to those in the Fund's portfolio. (6) The Fund commenced operations on January 31, 1997. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Total Return Fund II 17 - ------ Income Funds - ------ ADVISER PILGRIM GLOBAL INCOME FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] 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 [GRAPHIC] 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 [GRAPHIC] 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. 18 Pilgrim Global Income Fund PILGRIM GLOBAL INCOME FUND - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] 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) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 6.62 10.03 6.51 10.90 -6.52 20.10 13.33 5.00 8.21 -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 % -5.05 -0.99 Five years, ended December 31, 1999 % 7.98 7.88 Ten years, ended December 31, 1999 % 6.64 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 Treasury Index is an unmanaged index that is comprised of 19 countries with an average maturity of 7.46%. The index is overweighted in the U.S. and Japan, 27% and 25%, respectively. The average coupon is 5.37%. The index returns are calculated in three ways: U.S. Dollar, hedged U.S. Dollar, and local returns (local currencies). The modified adjusted duration of the index is 5.5 years. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Global Income Fund 19 - ------ Income Funds - ------ ADVISER PILGRIM MONEY MARKET FUND Pilgrim Investments, Inc. - -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks to provide as high a level of current income as is consistent with the preservation of capital and liquidity. INVESTMENT STRATEGY [GRAPHIC] The Fund invests all of its assets in Class A shares of the Primary Institutional Fund, a series of Reserve Institutional Trust, a registered open-end management investment company, rather than directly in a portfolio of securities. In turn, the Primary Institutional Fund seeks to provide as high a level of current income as is consistent with the preservation of capital and liquidity. This structure is different from that of other Pilgrim Funds and many other investment companies, which directly acquire and manage their own portfolio of securities. The Primary Institutional Fund seeks to achieve its investment objective by investing in instruments issued by the U.S. Government, its agencies and instrumentalities ("U.S. Government Securities"); high quality deposit-type obligations, such as negotiable certificates of deposit and time deposits, bankers' acceptances and letters of credit of domestic, foreign banks and foreign branches of foreign banks, savings and loan associations and savings banks; other short-term instruments of similar quality; and instruments fully collateralized by such obligations. The dollar weighted average portfolio maturity of the Fund will not exceed 90 days. The Primary Institutional Fund may invest in obligations of U.S. banking institutions that are insured by the Federal Deposit Insurance Corporation. The Primary Institutional Fund may also invest in obligations of foreign branches of both U.S. banks and foreign banks (Eurodollars). Investment in foreign banks will be limited to those located in Australia, Canada, Western Europe and Japan and which, at the time of investment, have more than $25 billion (or the equivalent in other currencies) in total assets and which, in the opinion of the Primary Institutional Fund's investment adviser, are of comparable quality to the obligations of U.S. banks which may be purchased by the Primary Institutional Fund. The Primary Institutional Fund may also invest in municipal obligations, the interest on which is not exempt from federal income taxation. The Primary Institutional Fund may also engage in repurchase agreements and periodically lend securities on a short-term basis to banks, brokers and dealers (but not individuals) and receive as collateral cash or securities issued by the U.S. Government or its agencies or instrumentalities (or any combination thereof). The value of the securities loaned cannot exceed 25% of the Primary Institutional Fund's total assets. The Primary Institutional Fund may invest, without limitation, in U.S. Government Securities and in instruments secured or collateralized by U.S. Government Securities. The Primary Institutional Fund will not invest more than 10% of its net assets in illiquid securities, including repurchase agreements providing for settlement in more than seven (7) days after notice and will not concentrate more than 25% of its total assets in securities of issuers in a single industry, except that it may invest more than 25% of its assets in bank obligations. In addition, the Primary Institutional Fund will not invest more than 5% of its assets in the securities of any single issuer (except U.S. Government Securities or repurchase agreements). The Primary Institutional Fund may borrow money for extraordinary or emergency purposes but not in an amount exceeding 5% of its total assets. The Primary Institutional Fund uses the amortized cost method of valuation to help the Fund maintain a stable $1.00 share price. Of course, there is no guarantee that the Fund will be able to maintain a $1.00 share price. Since the Fund invests substantially all of its assets in another investment company, the fund could be considered a feeder fund in an arrangement resembling a master/feeder structure. Investment of the Fund's assets in the Class A shares of the Primary Institutional Fund is not a fundamental policy of the Fund and a shareholder vote is not required for the Fund to withdraw its investment in the Primary Institutional Fund. - -------------------------------------------------------------------------------- RISKS [GRAPHIC] The Fund is subject to the risks associated with investing in debt securities. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The Fund may be affected by these other risks by virtue of its investment in the Primary Institutional Fund: Changes in Interest Rates -- money market funds like the Fund are subject to less interest rate risk than other income funds because they invest in debt securities with a remaining maturity not greater than 397 days. Still, the value of the Fund's investment may fall when interest rates rise. Credit Risk -- money market funds like the Fund are subject to less credit risk than other income funds because they invest in short-term debt securities of the highest quality. Still, the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. U.S. Government Securities -- some U.S. Government agency securities may be subject to varying degrees of credit risk, and all U.S. Government Securities may be subject to price declines in the securities due to changing interest rates. If an obligation, such as obligations issued by the Federal National Mortgage 20 Pilgrim Money Market Fund PILGRIM MONEY MARKET FUND - -------------------------------------------------------------------------------- Association, the Student Loan Marketing Association, the Federal Home Loan Bank and the Federal Home Loan Mortgage Corporation is supported only by the credit of the agency or instrumentality issuing the obligation, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment. Securities directly supported by the full faith and credit of the United States have less credit risk. Risk of Concentration in Banking Obligations -- the risks of concentrating in investments in the banking industry include credit risk, interest rate risks, and regulatory risk (the impact of state or federal legislation and regulations). Because the Fund invests all of its assets in another registered management investment, company, the Fund and its shareholders will bear the investment advisory fees and expenses of the Fund and the other registered management investment company in which it invests with the result that the Fund's expenses may be higher than those of other money market funds which invest directly in money market instruments. The Fund is also designed for investors who desire a short-term investment and may not be appropriate for those investors desiring a long-term investment. - -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] This Fund does not have a performance history because it was formed on July 1, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Money Market Fund 21 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 Class C(1) Class M(1) Class T(2) ------- ------- ---------- ---------- ---------- Maximum sales charge on your investment (as a % of offering price) % Income Funds (except Money Market) 4.75(3) none none 3.25(3) none Money Market Fund none none none N/A N/A Maximum deferred sales charge (as a % of purchase or sales price, whichever is less) Income Funds (including Money Market) none(4) 5.00(5) 1.00(6) none 4.00(7)
- ---------- (1) Not all Funds offer Classes C and M. Please see page 27. (2) Class T shares are available only for certain exchanges or reinvestment of dividends. Please see page 26. (3) Reduced for purchases of $50,000 and over. Please see page 27. (4) 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 27. (5) Imposed upon redemption within 6 years from purchase. The fee has scheduled reductions after the first year. Please see page 27. (6) Imposed upon redemption within 1 year from purchase. (7) Imposed upon redemption within 4 years from purchase. The fee has scheduled reductions after the first year. Please see page 27. Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class A
Distribution Total and Service Fund Fee Waiver Management (12b-1) Other Operating by Net Fund Fee Fees Expenses(2) Expenses Adviser(3) Expenses - ---- --- ---- ----------- -------- ---------- -------- Government Securities Income(4) % 0.50 0.25 0.65 1.40 -- 1.40 GNMA Income % 0.54 0.25 0.38 1.17 -- 1.17 Strategic Income % 0.45 0.35 0.67 1.47 -0.52 0.95 High Yield % 0.60 0.25 0.27 1.12 -0.02 1.10 High Yield II(4) % 0.60 0.35 0.32 1.27 -0.17 1.10 High Total Return(5) % 0.60 0.30 0.33 1.23 -- 1.23 High Total Return II(5) % 0.60 0.30 0.35 1.25 -- 1.25 Global Income % 1.00 0.25 0.51 1.76 -- 1.76 Money Market % 0.25 0.25 0.75 1.25 -- 1.25 Class B(6) Distribution Total and Service Fund Fee Waiver Management (12b-1) Other Operating by Net Fund Fee Fees Expenses(2) Expenses Adviser(3) Expenses - ---- --- ---- ----------- -------- ---------- -------- Government Securities Income(4) % 0.50 1.00 0.65 2.15 -- 2.15 GNMA Income % 0.54 1.00 0.38 1.92 -- 1.92 Strategic Income % 0.45 0.75 0.67 1.87 -0.52 1.35 High Yield % 0.60 1.00 0.27 1.87 -0.02 1.85 High Yield II(4) % 0.60 1.00 0.32 1.92 -0.17 1.75 High Total Return(5) % 0.60 1.00 0.35 1.95 -- 1.95 High Total Return II(5) % 0.60 1.00 0.36 1.96 -- 1.96 Global Income % 1.00 1.00 0.51 2.51 -- 2.51 Money Market % 0.25 1.00 0.75 2.00 -- 2.00
22 What You Pay to Invest WHAT YOU PAY TO INVEST - -------------------------------------------------------------------------------- Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class C(7)
Distribution Total and Service Fund Fee Waiver Management (12b-1) Other Operating by Net Fund Fee Fees Expenses(2) Expenses Adviser(3) Expenses - ---- --- ---- ----------- -------- ---------- -------- Government Securities Income(4) % 0.50 1.00 0.65 2.15 -- 2.15 GNMA Income % 0.54 1.00 0.38 1.92 -- 1.92 Strategic Income % 0.45 0.75 0.67 1.87 -0.52 1.35 High Yield % 0.60 1.00 0.27 1.87 -0.02 1.85 High Yield II(4) % 0.60 1.00 0.32 1.92 -0.17 1.75 High Total Return(5) % 0.60 1.00 0.36 1.96 -- 1.96 High Total Return II(5) % 0.60 1.00 0.37 1.97 -- 1.97 Global Income % 1.00 1.00 0.51 2.51 -- 2.51 Money Market % 0.25 1.00 0.75 2.00 -- 2.00 Class M Distribution Total and Service Fund Fee Waiver Management (12b-1) Other Operating by Net Fund Fee Fees Expenses(2) Expenses Adviser(3) Expenses - ---- --- ---- ----------- -------- ---------- -------- Government Securities Income(4) % 0.50 0.75 0.65 1.90 -- 1.90 High Yield % 0.60 0.75 0.27 1.62 -0.02 1.60 Class T(8) Distribution Total and Service Fund Fee Waiver Management (12b-1) Other Operating by Net Fund Fee Fees Expenses(2) Expenses Adviser(3) Expenses - ---- --- ---- ----------- -------- ---------- -------- Government Securities Income(4) % 0.50 0.65 0.65 1.80 -- 1.80 High Yield II(4) % 0.60 0.65 0.32 1.57 -0.17 1.40
- ---------- (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 for GNMA Income Fund and Global Income Fund. For those Funds, estimated operating expenses are based on estimated contractual operating expenses commencing with Pilgrim Investments' management of these Funds. (2) For the Strategic Income and High Yield II Funds, other expenses have been restated to reflect the elimination of certain administrative fees effective May 24, 1999. (3) Pilgrim Investments has entered into expense limitation agreements with each Fund except Government Securities Income, High Total Return, and High Total Return II under which it will limit expenses of the Fund, excluding interest, taxes, brokerage and extraordinary expenses, subject to possible reimbursement to Pilgrim Investments within three years. The amount of each Fund's expenses waived or reimbursed during the last fiscal year by Pilgrim Investments is shown under the heading "Fee Waiver by Adviser". For each Fund except Government Securities Income Fund, the expense limit will continue through at least October 31, 2001. Pilgrim Investments has separately agreed to reimburse Government Securities Income Fund to the extent that total Fund operating expenses, excluding interest, taxes, brokerage commissions, extraordinary expenses, and distribution fees in excess of 0.25%, exceed 1.50% of the Fund's average daily net assets on the first $40 million in net assets and 1% of average daily net assets in excess of $40 million. The expense limit for Government Securities Income Fund will terminate only with termination of the advisory contract with Pilgrim Investments. (4) Effective April 1, 2000, certain Pilgrim Funds merged with High Yield II and Government Securities Income Funds. It is expected that as a result of the mergers, operating expenses for High Yield II and Government Securities Income Funds will be lower than the operating expenses prior to the mergers. (5) For the High Total Return Fund and High Total Return Fund II, the management fee shown reflects a fee waiver effective July 26, 2000. Absent the waiver, the management fees for the High Total Return Fund and High Total Return Fund II would be 0.71% and 0.75%, respectively. (6) Because Class B shares are new for GNMA Income and Global Income Funds, their expenses are estimated based on Class A expenses. (7) Because Class C shares are new for Government Securities Income, GNMA Income, High Yield and Global Income Funds, their expenses are estimated based on Class B expenses. (8) Because Class T shares are new for High Yield II and Government Securities Income Funds, their expenses are estimated based on Class A expenses. [GRAPHIC] If you have any questions, please call 1-800-992-0180. What You Pay to Invest 23 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 - ---- ------ ------- ------- -------- Government Securities Income $ 611 897 1,204 2,075 GNMA Income $ 589 829 1,088 1,828 Strategic Income $ 567 818 1,143 2,061 High Yield $ 582 810 1,059 1,770 High Yield II $ 582 826 1,107 1,907 High Total Return $ 594 847 1,119 1,893 High Total Return II $ 596 853 1,129 1,915 Global Income $ 645 1,003 1,384 2,450 Money Market $ 127 397 686 1,511 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 - ---- ------ ------- ------- -------- ------ ------- ------- -------- Government Securities Income $ 718 973 1,354 2,292 218 673 1,154 2,292 GNMA Income $ 695 903 1,237 2,048 195 603 1,037 2,048 Strategic Income $ 637 784 1,111 1,998 137 484 911 1,998 High Yield $ 688 884 1,207 1,991 188 584 1,007 1,991 High Yield II $ 678 869 1,204 2,046 178 569 1,004 2,046 High Total Return $ 698 969 1,252 2,088 198 612 1,052 2,088 High Total Return II $ 699 915 1,257 2,102 199 615 1,057 2,102 Global Income $ 754 1,082 1,535 2,662 254 782 1,335 2,662 Money Market $ 703 927 1,278 2,134 203 627 1,078 2,134
24 What You Pay to Invest WHAT YOU PAY TO INVEST - -------------------------------------------------------------------------------- Examples 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 - ---- ------ ------- ------- -------- ------ ------- ------- -------- Government Securities Income $ 318 673 1,154 2,483 218 673 1,154 2,483 GNMA Income $ 295 603 1,037 2,243 195 603 1,037 2,243 Strategic Income $ 237 484 911 2,103 137 484 911 2,103 High Yield $ 288 584 1,007 2,187 188 584 1,007 2,187 High Yield II $ 278 569 1,004 2,215 178 569 1,004 2,215 High Total Return $ 299 615 1,057 2,285 199 615 1,057 2,285 High Total Return II $ 300 618 1,062 2,296 200 618 1,062 2,296 Global Income $ 354 782 1,335 2,846 254 782 1,335 2,846 Money Market $ 303 627 1,078 2,327 203 627 1,078 2,327
Class M Fund 1 year 3 years 5 years 10 years - ---- ------ ------- ------- -------- Government Securities Income $ 512 903 1,318 2,475 High Yield $ 482 816 1,174 2,181 Class T
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 - ---- ------ ------- ------- -------- ------ ------- ------- -------- Government Securities Income $ 583 766 975 2,011 183 566 975 2,011 High Yield II $ 543 662 822 1,757 143 462 822 1,757
[GRAPHIC] If you have any questions, please call 1-800-992-0180. What You Pay to Invest 25 SHAREHOLDER GUIDE CHOOSING A SHARE CLASS - -------------------------------------------------------------------------------- PILGRIM PURCHASE OPTIONSTM Depending upon the Fund, you may select from up to four separate classes of shares: Class A, Class B, Class C and Class M. Class A * Front-end sales charge, as described on the next page (except for Money Market Fund). * Distribution and service (12b-1) fees of 0.25% to 0.35%. Class B * No front-end sales charge; all your money goes to work for you right away. * Distribution and service (12b-1) fees of 1% (0.75% for Strategic Income Fund). * A contingent deferred sales charge, as described on the next page. * Automatic conversion to Class A shares after eight years, thus reducing future annual expenses. Class B shares acquired initially through Funds that were part of the Nicholas-Applegate Mutual Funds at the time of purchase will convert after seven years from the date of original purchase. * Not offered by Global Corporate Leaders Fund, Worldwide Emerging Markets Fund, Troika Dialog Russia 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% (0.75% for Strategic Income Fund). * 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 Bank and Thrift Fund, Asia-Pacific Equity Fund, Global Corporate Leaders Fund, Worldwide Emerging Markets Fund, SmallCap Asia Growth Fund, Troika Dialog Russia Fund, Gold Fund and Silver Fund. Class M * Lower front-end sales charge than Class A, as described on the next page. * Distribution and service (12b-1) fees of 0.75%. * No automatic conversion to Class A shares, so annual expenses continue at the Class M level throughout the life of your investment. * Offered only by MagnaCap Fund, LargeCap Leaders Fund, MidCap Value Fund, Asia-Pacific Equity Fund, Government Securities Income Fund and High Yield Fund. Class T * No longer available for purchase, unless you are investing income earned on Class T shares or exchanging Class T Shares of another Fund. * Distribution and service (12b-1) fees of 0.65 to 1% (varies by fund). * A contingent deferred sales charge, as described in this section. * Automatic conversion to Class A shares after 8 years, thus reducing future annual expenses. * Offered only by Growth Opportunities, SmallCap Opportunities, Government Securities Income, High Yield II, and Balanced. When choosing between classes, you should carefully consider the ongoing annual expenses along with the initial sales charge or the contingent deferred sales charge. The relative impact of the initial sales charges and ongoing annual expenses will depend on the length of time a share is held. Higher distribution fees mean a higher expense ratio, so Class B and Class C shares pay correspondingly lower dividends and may have a lower net asset value than Class A or Class M shares. Orders for Class B shares and Class M shares in excess of $250,000 and $1,000,000, respectively, will be accepted as orders for Class A shares or declined. You should discuss which Class of shares is right for you with your investment professional. 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. 26 Shareholder Guide CHOOSING A SHARE CLASS SHAREHOLDER GUIDE - -------------------------------------------------------------------------------- SALES CHARGE CALCULATION Class A(1) Class A shares of the Funds are sold subject to the following sales charge: U.S. and International Equity Funds, Equity & Income Funds and Precious Metals Funds Income Funds -------------------------- ------------------------- As a % As a % of the As a % of of the As a % of offering net offering net Your Investment price asset value price asset value - --------------- ----- ----------- ----- ----------- Less than $50,000 5.75 6.10 4.75 4.99 $50,000 - $99,999 4.50 4.71 4.50 4.71 $100,000 - $249,999 3.50 3.63 3.50 3.63 $250,000 - $499,999 2.50 2.56 2.50 2.56 $500,000 - $1,000,000 2.00 2.04 2.00 2.04 $1,000,000 and over See below See below - ---------- (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. Money Market Fund. There is no sales charge if you purchase Class A shares of Money Market Fund. However, if the Class A shares are exchanged for shares of another Pilgrim Fund, you will be charged the applicable sales load for that fund upon the exchange. Investments of $1 Million or More. There is no front-end sales charge if you purchase Class A shares in an amount of $1 million or more. However, the shares will be subject to a contingent deferred sales charge if they are redeemed within one or two years of purchase, depending on the amount of the purchase, as follows: Period during which Your investment CDSC CDSC applies --------------- ---- ------------ $1,000,000 to $2,499,999 1.00% 2 years $2,500,000 to $4,999,999 0.50% 1 year $5,000,000 and over 0.25% 1 year However, Class A shares that were purchased in an amount of $1 million or more through Funds that were part of the Nicholas-Applegate Mutual Funds at the time of purchase will be subject to a contingent deferred sales charge of 1% within one year from the date of purchase. Class A shares that were purchased in an amount of $1 million or more through funds that were part of the Northstar family of funds at the time of purchase are subject to a different contingent deferred sales charge period of 18 months from the date of purchase. See the SAI for further information. Class B, Class C and Class T Class B and Class C shares are offered at their net asset value per share without any initial sales charge. However, you may be charged a contingent deferred sales charge (CDSC) on shares that you sell within a certain period of time after you bought them. The amount of the CDSC is based on the lesser of the net asset value of the shares at the time of purchase or redemption. There is no CDSC on shares acquired through the reinvestment of dividends and capital gains distributions. The CDSCs are as follows: Class B Deferred Sales Charge(1) 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 - ---------- (1) Class B shares that were purchased through funds that were part of the Northstar family of funds at the time of purchase are subject to a different contingent deferred sales charge. Please see the SAI for further information. Class C Deferred Sales Charge CDSC on shares Years after purchase being sold - -------------------- ---------- 1st year 1% After 1st year none Class T Deferred Sales Charge CDSC on shares Years after purchase being sold - -------------------- ---------- 1st year 4% 2nd year 3% 3rd year 2% 4th year 1% After 4th year none To keep your CDSC as low as possible, each time you place a request to redeem shares the Funds will first redeem shares in your account that are not subject to a CDSC, and then will sell shares that have the lowest CDSC. Class M Class M shares of the Funds are sold subject to the following sales charge: MagnaCap LargeCap Leaders, Government MidCap Value, Securities and Income and Asia-Pacific High Yield Equity Funds Funds ----------------------- ---------------------- As a % As a % of As a % As a % of of the net of the net offering asset offering asset Your Investment price value price value - --------------- ----- ----- ----- ----- Less than $50,000 3.50% 3.63% 3.25% 3.36% $50,000 - $99,999 2.50% 2.56% 2.25% 2.30% $100,000 - $249,999 1.50% 1.52% 1.50% 1.52% $250,000 - $499,999 1.00% 1.01% 1.00% 1.01% $500,000 and over none none none none [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 27 SHAREHOLDER GUIDE CHOOSING A SHARE CLASS - -------------------------------------------------------------------------------- Sales Charge Reductions and Waivers Reduced Sales Charges. You may reduce the initial sales charge on a purchase of Class A or Class M shares of the funds by combining multiple purchases to take advantage of the breakpoints in the sales charge schedules. You may do this by: Letter of Intent -- lets you purchase shares over a 13 month period and pay the same sales charge as if the shares had all been purchased at once. Rights of Accumulation -- lets you add the value of shares of any open-end Pilgrim Fund (excluding the Money Market Fund) you already own to the amount of your next purchase for purposes of calculating the sales charge. Combination Privilege -- shares held by investors in the Pilgrim Funds which impose a CDSC may be combined with Class A or Class M shares for a reduced sales charge. See the Account Application or the Statement of Additional Information for details, or contact your financial representative or the Shareholder Servicing Agent for more information. CDSC Waivers. If you notify the Transfer Agent at the time of redemption, the CDSC for each Class will be waived in the following cases: * redemptions following the death or permanent disability of a shareholder if made within one year of death or the initial determination of permanent disability. The waiver is available only for shares held at the time of death or initial determination of permanent disability. * for Class B Shares, redemptions pursuant to a Systematic Withdrawal Plan, up to a maximum of 12% per year of a shareholder's account value based on the value of the account at the time the plan is established and annually thereafter, provided all dividends and distributions are reinvested and the total redemptions do not exceed 12% annually. * mandatory distributions from a tax-deferred retirement plan or an IRA. However, if you purchased shares that were part of the Nicholas-Applegate Mutual Funds, you may be eligible for a CDSC waiver prior to the mandatory distribution age. * If you think you may be eligible for a CDSC waiver, contact your financial representative or the Shareholder Servicing Agent. Reinstatement Privilege. If you sell Class B, Class C or Class T 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, Class C and Class T shares will retain their original cost and purchase date for purposes of the CDSC. This privilege can be used only once per calendar year. If you want to use the Reinstatement Privilege, contact your financial representative or the Shareholder Servicing Agent. Consult the SAI for more information. Sales Charge Waivers. Class A or Class M shares may be purchased without a sales charge by certain individuals and institutions. For additional information, contact the Shareholder Servicing Agent, or see the Statement of Additional Information. 28 Shareholder Guide 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 IRAs). 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. State Street Bank and Trust -- Kansas City (SSB) acts as the custodian under these plans. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. SSB currently receives a $12 custodial fee annually for the maintenance of such accounts. Initial Additional Method Investment Investment ------ ---------- ---------- By Contacting An investment Your professional with an Investment authorized firm Professional can help you establish and maintain your account. By Mail Visit or consult an Visit or consult an investment investment professional. Make professional. Fill out your check payable to the Account Additions the Pilgrim Funds and form included on the mail it, along with a bottom of your account completed Application. statement along with Please indicate your your check payable to investment professional the Fund and mail on the New Account them to the address on Application the account statement. Remember to write your account number on the check. By Wire Call the Pilgrim Wire the funds in the Operations Department same manner described at (800) 336-3436 to under "Initial obtain an account Investment." number and indicate your investment professional on the account. Instruct your bank to wire funds to the Fund in the care of: State Street Bank and Trust -- Kansas City 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 [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 29 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 Professional investment 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. By Telephone -- You may redeem shares by telephone on all Expedited Redemption accounts 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. 30 Shareholder Guide SHAREHOLDER TRANSACTION POLICIES GUIDE - -------------------------------------------------------------------------------- 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. Money Market Fund. The Money Market Fund tries to maintain a stable NAV of $1.00 per share. Because the Primary Institutional Fund uses the amortized cost method of valuing the securities held by it and rounds its per share net asset value to the nearest whole cent, it is anticipated that the net asset value of the Primary Institutional Fund will remain constant at $1.00 per share. However, the Money Market Fund makes no assurance that either it or the Primary Institutional Fund can maintain a $1.00 net asset value per share. 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. Exchanges You may exchange shares of a Fund for shares of the same class of any other Pilgrim Fund, except for Lexington Money Market Trust and Pilgrim Corporate Leaders Trust Fund, without paying any additional sales charge, except that Class A shares of the Pilgrim Money Market Fund for which no sales charge was paid must pay the applicable sales load on an exchange into Class A shares of another Fund. In addition, Class T shares of any Fund may be exchanged for Class B shares of the Pilgrim Money Market Fund. Shares subject to a CDSC will continue to age from the date that the original shares were purchased. If you exchange shares of a Fund that at the time you acquired the shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the exchange will be subject to the current CDSC structure and conversion rights of the Fund being acquired, although the shares will continue to age for CDSC and conversion purposes from the date the original shares were acquired. The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 31 SHAREHOLDER GUIDE TRANSACTION POLICIES - -------------------------------------------------------------------------------- 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. 32 Shareholder Guide MANAGEMENT ADVISER OF THE FUNDS - -------------------------------------------------------------------------------- Pilgrim Investments, Inc. ("Pilgrim" or "Pilgrim Investments") 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 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 April 30, 2000, Pilgrim Advisors, Inc. ("Pilgrim Advisors") served as investment adviser to certain of the Funds. On April 30, 2000, Pilgrim Advisors, an indirect wholly-owned subsidiary of ReliaStar, merged with Pilgrim Investments. Pilgrim Advisors and Pilgrim Investments were sister companies and shared certain resources and investment personnel. 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 Managers, 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 $16.8 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: Advisory Fund Fee - ---- --- Government Securities Income 0.50% GNMA Income 0.54 Strategic Income 0.45 High Yield 0.60 High Yield II 0.60 High Total Return 0.71 High Total Return II 0.75 Global Income 1.00 Money Market 0.25 Pilgrim Directly Manages the Portfolios of the Following Funds: GNMA Income Fund and Global Income Fund Denis P. Jamison has served as Senior Portfolio Manager of GNMA Income Fund since July 1981 and Global Income Fund since July 1986. Mr. 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. Jamison graduated from the City College of New York with a B.A. in Economics. Roseann G. McCarthy has served as co-manager of GNMA Income Fund since May 1999. 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 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. High Total Return Fund and High Total Return Fund II Kevin Mathews has served as Senior Portfolio Manager of High Total Return II and High Total Return since November 1999. Mr. Mathews has over 16 years of experience in the management of high-yield fixed income investments. Mr. Mathews serves as a Senior Vice President and Senior Portfolio Manager of Pilgrim. Prior to joining Pilgrim, Mr. Mathews was a Vice President and Senior Portfolio Manager of Van Kampen American Capital. Charles Ullerich has served as co-manager of High Total Return II and High Total Return since December 1999. Mr. Ullerich has approximately nine years of experience in the management of fixed-income investments. Mr. Ullerich serves as a Vice President and Portfolio Manager of Pilgrim. Prior to joining Pilgrim, Mr. Ullerich was Vice President of Treasury Services for First Liberty Bank of Macon, Georgia since 1991, where he was Portfolio Manager for a mortgage and treasury securities portfolio. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Management of the Funds 33 MANAGEMENT OF THE FUNDS ADVISER - -------------------------------------------------------------------------------- Strategic Income Fund The following individuals share responsibility for the day-to-day management of the Strategic Income Fund: Robert K. Kinsey, Vice President of Pilgrim, has served as a Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Kinsey manages Strategic Income Fund's assets that are invested in assets other than high yield debt securities. Prior to joining Pilgrim, Mr. Kinsey was a Vice President and Fixed Income Portfolio Manager for Federated Investors from January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a Principal and Portfolio Manager for Harris Investment Management. Kevin G. Mathews, whose background is described above, has served as a Senior Portfolio Manager of Strategic Income Fund since May 24, 1999. Mr. Mathews manages Strategic Income Fund's assets that are invested in high yield debt securities. Charles Ullerich, whose background is described above, has served as a Co-Portfolio Manager of Strategic Income Fund since December 1999. Government Securities Income Fund Robert K. Kinsey, whose background is described above, has primary responsibility for the day-to-day management of Government Securities Income Fund, and has served as Senior Portfolio Manager of Government Securities Income Fund since May 24, 1999. High Yield Fund and High Yield Fund II Kevin G. Mathews, whose background is described above, has served as Senior Portfolio Manager of High Yield Fund and High Yield Fund II since June 1995 and May 1999, respectively. Charles Ullerich, whose background is described above, has served as a co-manager of High Yield Fund and High Yield Fund II since December 1999. 34 Management of the Funds 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: Quarterly(1) Monthly(2) - ------------ ---------- Global Income GNMA Income Government Securities Income Strategic Income High Yield High Yield II High Total Return High Total Return II Money Market - ---------- (1) Distributions normally expected to consist on an annual basis of a variable combination of capital gains and ordinary income. (2) 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, C, M or T shares of a Fund invested in another Pilgrim Fund which offers the same class shares. If you are a shareholder of Pilgrim Prime Rate Trust, whose shares are not held in a broker or nominee account, you may, upon written request, elect to have all dividends invested into a pre-existing Class A account of any open-end Pilgrim Fund. Taxes The following information is meant as a general summary for U.S. shareholders. Please see the Statement of Additional Information for additional information. You should rely your own tax adviser for advice about the particular federal, state and local tax consequences to you of investing in a Fund. Each Fund will distribute most of its net investment income and net capital gains to its shareholders each year. Although the Funds will not be taxed on amounts they distribute, most shareholders will be taxed on amounts they receive. A particular distribution generally will be taxable as either ordinary income or long-term capital gains. It does not matter how long you have held your Fund shares or whether you elect to receive your distributions in cash or reinvest them in additional Fund shares. For example, if a Fund designates a particular distribution as a long-term capital gains distribution, it will be taxable to you at your long-term capital gains rate. Dividends declared by a Fund in October, November or December and paid during the following January may be treated as having been received by shareholders in the year the distributions were declared. You will receive an annual statement summarizing your dividend and capital gains distributions. If you invest through a tax-deferred account, such as a retirement plan, you generally will not have to pay tax on dividends until they are distributed from the account. These accounts are subject to complex tax rules, and you should consult your tax adviser about investment through a tax-deferred account. There may be tax consequences to you if you 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. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Dividends, Distributions and Taxes 35 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 Statement of Additional Information (the "SAI"). Many of the investment techniques and strategies discussed in this prospectus and in the SAI 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. 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 Fund's 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 abond 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 36 More Information About Risks MORE INFORMATION ABOUT RISKS - -------------------------------------------------------------------------------- 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. Convertible Securities. The price of a convertible security will normally fluctuate in some proportion to changes in the price of the underlying equity security, and as such is subject to risks relating to the activities of the issuer and general market and economic conditions. The income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer. Convertible securities are often lower rated securities. A Fund may be required to redeem or convert a convertible security before the holder would otherwise choose. Other Investment Companies. Each Fund (except the High Yield and Government Securities Income Funds) may invest up to 10% of its assets in other investment companies. When a Fund invests in other investment companies, you indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fees, and custodial fees) in addition to the expenses of the Fund. Restricted and Illiquid Securities. Each Fund may invest in restricted and illiquid securities. 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. [GRAPHIC] If you have any questions, please call 1-800-992-0180. More Information About Risks 37 MORE INFORMATION ABOUT RISKS - -------------------------------------------------------------------------------- Temporary Defensive Strategies. When the 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. 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, certain Funds may lend portfolio securities in an amount up to 331|M/3% of total Fund assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower default or fail financially. Borrowing. Certain Funds may borrow for certain types of temporary or emergency purposes subject to certain limits. Borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the net asset value of a Fund, and money borrowed will be subject to interest costs. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales. Reverse Repurchase Agreements and Dollar Rolls. A reverse repurchase agreement or dollar roll involves the sale of a security, with an agreement to repurchase the same or substantially similar securities at an agreed upon price and date. Whether such a transaction produces a gain for a Fund depends upon the costs of the agreements and the income and gains of the securities purchased with the proceeds received from the sale of the security. If the income and gains on the securities purchased fail to exceed the costs, net asset value will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar rolls, as leveraging techniques, may increase a Fund's yield; however, such transactions also increase a Fund's risk to capital and may result in a shareholder's loss of principal. Short Sales. Each Fund (except Government Securities Income, GNMA Income, and High Yield Funds) may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the 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. 38 More Information About Risks FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The financial highlights tables on the following pages are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of the Fund's operations. Certain information reflects financial results for a single share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). A report of each Fund's independent accountant, along with the Fund's financial statements, is included in the Fund's annual report, which is available upon request. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Financial Highlights 39 FINANCIAL PILGRIM GOVERNMENT SECURITIES INCOME FUND HIGHLIGHTS - -------------------------------------------------------------------------------- The information in the table below, except for the six months ended December 31, 1999, has been audited by KPMG LLP, independent auditors.
Class A ------------------------------------------------------------------ Six months ended Dec. 31, 1999 Year ended June 30, (unaudited) 1999 1998 1997 1996 1995(1) ----------- ---- ---- ---- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 12.35 12.88 12.71 12.59 12.97 12.73 Income (loss) from investment operations: Net investment income $ 0.35 0.76 0.64 0.69 0.75 0.84 Net realized and unrealized gain (loss) on investments $ (0.37) (0.52) 0.30 0.20 (0.32) 0.24 Total from investment operations $ (0.02) 0.24 0.94 0.89 0.43 1.08 Less distributions from: Net investment income $ 0.38 0.77 0.77 0.73 0.75 0.84 Tax return of capital $ -- -- -- 0.04 0.06 -- Total distributions $ 0.38 0.77 0.77 0.77 0.81 0.84 Net asset value, end of period $ 11.95 12.35 12.88 12.71 12.59 12.97 Total Return(3): % (0.20) 1.89 7.63 7.33 3.34 8.96 Ratios/Supplemental Data: Net assets, end of period (000's) $ 19,304 21,060 23,682 29,900 38,753 43,631 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.52 1.40 1.50 1.42 1.51 1.40 Gross expenses prior to expense reimbursement(4) % 1.52 1.40 1.58 1.42 1.57 1.54 Net investment income after expense reimbursement(4) % 5.69 6.05 5.13 5.78 5.64 6.37 Portfolio turnover rate % 41 58 134 172 170 299 Class B ---------------------------------------------------- Six months ended July 17, Dec. 31, 1995(2) to 1999 Year ended June 30, June 30, (unaudited) 1999 1998 1997 1996 ----------- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 12.30 12.84 12.68 12.59 12.95 Income (loss) from investment operations: Net investment income $ 0.30 0.69 0.60 0.67 0.66 Net realized and unrealized gain (loss) on investments $ (0.36) (0.54) 0.24 0.11 (0.37) Total from investment operations $ (0.06) 0.15 0.84 0.78 0.29 Less distributions from: Net investment income $ 0.33 0.69 0.68 0.69 0.65 Tax return of capital $ -- -- -- -- -- Total distributions $ 0.33 0.69 0.68 0.69 0.65 Net asset value, end of period $ 11.91 12.30 12.84 12.68 12.59 Total Return(3): % (0.50) 1.09 6.78 6.38 2.25 Ratios/Supplemental Data: Net assets, end of period (000's) $ 12,333 12,426 3,220 1,534 73 Ratios to average net assets: Net expenses after expense reimbursement(4) % 2.27 2.15 2.25 2.17 2.26 Gross expenses prior to expense reimbursement(4) % 2.27 2.15 2.29 2.17 2.41 Net investment income after expense reimbursement(4) % 4.93 5.30 4.24 4.92 4.98 Portfolio turnover rate % 41 58 134 172 170 Class C ----------------------- Six months ended June 11, Dec. 31, 1999(2) to 1999 June 30, (unaudited) 1999 ----------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 12.43 12.24 Income (loss) from investment operations: Net investment income $ (1.62) 2.05 Net realized and unrealized gain (loss) on investments $ 1.56 (1.86) Total from investment operations $ (0.06) 0.19 Less distributions from: Net investment income $ 0.34 -- Tax return of capital $ -- -- Total distributions 0.34 -- Net asset value, end of period $ 12.03 12.43 Total Return(3) % (0.52) 1.55 Ratios/Supplemental Data: Net assets, end of period (000's) $ 263 7 Ratios to average net assets: Net expenses after expense reimbursement(4) % 2.27 2.15 Gross expenses prior to expense reimbursement(4) % 2.27 2.15 Net investment income after expense reimbursement(4) % 4.87 5.30 Portfolio turnover rate % 41 58 Class M -------------------------------------------------------- Six months ended July 17, Dec. 31, 1995(2) to 1999 Year Ended June 30, June 30, (unaudited) 1999 1998 1997 1996 ----------- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 12.34 12.88 12.72 12.59 12.95 Income (loss) from investment operations: Net investment income $ 0.36 0.69 0.64 0.70 0.68 Net realized and unrealized gain (loss) on investments $ (0.40) (0.52) 0.23 0.14 (0.36) Total from investment operations $ (0.04) 0.17 0.87 0.84 0.32 Less distributions from: Net investment income $ 0.35 0.71 0.71 0.70 0.68 Tax return of capital $ -- -- -- 0.01 -- Total distributions 0.35 0.71 0.71 0.71 0.68 Net asset value, end of period $ 11.95 12.34 12.88 12.72 12.59 Total Return(3) % (0.36) 1.31 7.02 6.88 2.52 Ratios/Supplemental Data: Net assets, end of period (000's) $ 662 751 224 61 24 Ratios to average net assets: Net expenses after expense reimbursement(4) % 2.02 1.90 2.00 1.92 2.01 Gross expenses prior to expense reimbursement(4) % 2.02 1.90 2.05 1.92 2.16 Net investment income after expense reimbursement(4) % 5.19 5.57 4.29 5.25 5.73 Portfolio turnover rate % 41 58 134 172 170
- ---------- (1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain assets of Pilgrim Management Corporation, the Fund's former Investment Manager, in a transaction that closed on April 7, 1995. (2) Commencement of offering shares. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized. 40 Pilgrim Government Securities Income Fund FINANCIAL HIGHLIGHTS PILGRIM GNMA INCOME FUND - -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Per Share Operating Performance: 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
[GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim GNMA Income Fund 41 FINANCIAL PILGRIM STRATEGIC INCOME FUND HIGHLIGHTS - -------------------------------------------------------------------------------- For the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ending prior to June 30, 1999, the financial information was audited by another independent auditor.
Class A Class B ------------------------------------- -------------------------------- Six months Three Six months Three ended months July 27, ended months July 27, Dec. 31, ended 1998(1) to Dec. 31, ended 1998(1) to 1999 June 30, March 31, 1999 June 30, March 31, (unaudited) 1999(2) 1999 (unaudited) 1999(2) 1999 ----------- ------- ---- ----------- ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 12.59 12.89 13.08 12.33 12.61 12.78 Income from investment operations: Net investment income $ 0.45 0.26 0.53 0.42 0.18 0.45 Net realized and unrealized gains (loss) on investments $ (0.44) (0.42) (0.08) (0.43) (0.33) (0.05) Total from investment operations $ 0.01 (0.16) 0.45 (0.01) (0.15) 0.40 Less distributions from: Net investment income $ 0.44 0.14 0.53 0.42 0.13 0.46 Net realized gains on investments $ -- -- 0.11 -- -- 0.11 Net asset value, end of period $ 12.16 12.59 12.89 11.90 12.33 12.61 Total Return(3): % 0.14 (1.23) 5.60 (0.08) (1.20) 5.17 Ratios/Supplemental Data: Net assets, end of period (000's) $ 2,453 2,736 5,751 5,407 5,658 6,637 Ratios to average net assets: Net expenses after expense reimbursement(4) % 0.95 0.90 0.96 1.35 1.29 1.37 Gross expenses prior to expense reimbursement(4) % 1.81 1.56 1.98 2.21 1.95 2.42 Net investment income (loss) after expense reimbursement(4) % 7.42 5.88 5.81 7.00 5.49 5.35 Portfolio turnover % 76 69 274 76 69 274 Class C --------------------------------- Six months Three ended months July 27, Dec. 31, ended 1998(1) to 1999 June 30, March 31, (unaudited) 1999(2) 1999 ----------- ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 12.81 13.10 13.27 Income from investment operations: Net investment income $ 0.44 0.19 0.48 Net realized and unrealized gains (loss) on investments $ (0.45) (0.35) (0.06) Total from investment operations $ (0.01) (0.16) 0.42 Less distributions from: Net investment income $ 0.42 0.13 0.48 Net realized gains on investments $ -- -- 0.11 Net asset value, end of period $ 12.38 12.81 13.10 Total Return(3): % (0.08) (1.21) 5.19 Ratios/Supplemental Data: Net assets, end of period (000's) $ 4,380 7,965 8,128 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.35 1.29 1.36 Gross expenses prior to expense reimbursement(4) % 2.21 1.95 2.41 Net investment income (loss) after expense reimbursement(4) % 7.00 5.49 5.36 Portfolio turnover % 76 69 274
- ---------- (1) The Fund commenced operations on July 27, 1998. (2) Effective May 24, 1999, Pilgrim Investments, Inc., became the Investment Manager of the Fund. (3) Total returns are not annualized for periods of less than one year and do not reflect the impact of sales charges. (4) Annualized. 42 Pilgrim Strategic Income Fund FINANCIAL HIGHLIGHTS PILGRIM HIGH YIELD FUND - -------------------------------------------------------------------------------- The information in the table below, except for the six months ended December 31, 1999, has been audited by KPMG LLP, independent auditors.
Class A --------------------------------------------------------------------------------- Six months Eight ended months Year Dec. 31, ended ended 1999 Year ended June 30, June 30, October 31, (unaudited) 1999 1998 1997 1996 1995(1)(3) 1994 ----------- ---- ---- ---- ---- ---------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 5.93 6.94 6.80 6.36 6.15 5.95 6.47 Income (loss) from investment operations: Net investment income $ 0.28 0.58 0.61 0.61 0.59 0.35 0.54 Net realized and unrealized gain (loss) on investments $ (0.40) (0.96) 0.16 0.43 0.16 0.21 (0.51) Total from investment operations $ (0.12) (0.38) 0.77 1.04 0.75 0.56 0.03 Less distributions from: Net investment income $ 0.30 0.62 0.63 0.60 0.54 0.36 0.55 In excess of net investment income $ -- 0.01 -- -- -- -- -- Total distributions $ 0.30 0.63 0.63 0.60 0.54 0.36 0.55 Net asset value, end of period $ 5.51 5.93 6.94 6.80 6.36 6.15 5.95 Total Return(4): % (2.09) (5.57) 11.71 17.14 12.72 9.77 0.47 Ratios/Supplemental Data: Net assets, end of period (000's) $ 108,041 131,535 102,424 35,940 18,691 15,950 16,046 Ratios to average net assets: Net expenses after expense reimbursement(5) % 1.00 1.00 1.00 1.00 1.00 2.25 2.00 Gross expenses prior to expense reimbursement(5) % 1.15 1.12 1.17 1.42 2.19 2.35 2.07 Net investment income after expense reimbursement(5) % 10.03 9.32 9.05 9.54 9.46 8.84 8.73 Portfolio turnover rate % 47 184 209 394 399 166 192 Class B ---------------------------------------------------------- Six months ended July 17, Dec. 31, 1995(2) to 1999 Year ended June 30, June 30, (unaudited) 1999 1998 1997 1996 ----------- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 5.92 6.92 6.78 6.36 6.20 Income (loss) from investment operations: Net investment income $ 0.27 0.53 0.58 0.57 0.48 Net realized and unrealized gain (loss) on investments $ (0.41) (0.96) 0.14 0.41 0.14 Total from investment operations $ (0.14) (0.43) 0.72 0.98 0.62 Less distributions from: Net investment income $ 0.28 0.56 0.58 0.56 0.46 In excess of net investment income $ -- 0.01 -- -- -- Total distributions $ 0.28 Net asset value, end of period $ 5.50 5.92 6.92 6.78 6.36 Total Return(4): % (2.45) (6.23) 10.90 16.04 10.37 Ratios/Supplemental Data: Net assets, end of period (000's) $ 243,075 261,589 154,303 40,225 2,374 Ratios to average net assets: Net expenses after expense reimbursement(5) % 1.75 1.75 1.75 1.75 1.75 Gross expenses prior to expense reimbursement(5) % 1.90 1.87 1.92 2.17 2.94 Net investment income after expense reimbursement(5) % 9.27 8.57 8.30 8.64 9.02 Portfolio turnover rate % 47 184 209 394 339 Class C Class M --------------------- ----------------------------------------------- Six months Six months ended May 27, ended July 17, Dec. 31, 1999(2) to Dec. 31, 1995(2) to 1999 June 30, 1999 Year ended June 30, June 30, (unaudited) 1999 (unaudited) 1999 1998 1997 1996 ----------- ---- ----------- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 5.92 5.91 5.93 6.92 6.78 6.36 6.20 Income (loss) from investment operations: Net investment income $ 0.28 0.05 0.27 0.55 0.59 0.58 0.50 Net realized and unrealized gain (loss) on investments $ (0.43) 0.01 (0.41) (0.95) 0.14 0.41 0.14 Total from investment operations $ (0.15) 0.06 (0.14) (0.40) 0.73 0.99 0.64 Less distributions from: Net investment income $ 0.28 0.05 0.29 0.58 0.59 0.57 0.48 In excess of net investment income $ -- -- -- 0.01 -- -- -- Total distributions 0.28 0.29 Net asset value, end of period $ 5.49 5.92 5.50 5.93 6.92 6.78 6.36 Total Return(4): % (2.54) 0.34 (2.50) (5.85) 11.16 16.29 10.69 Ratios/Supplemental Data: Net assets, end of period (000's) $ 5,614 551 18,768 24,129 19,785 8,848 1,243 Ratios to average net assets: Net expenses after expense reimbursement(5) % 1.75 1.75 1.50 1.50 1.50 1.50 1.50 Gross expenses prior to expense reimbursement(5) % 1.90 1.87 1.65 1.62 1.67 1.92 2.69 Net investment income after expense reimbursement(5) % 9.33 8.57 9.53 8.82 8.55 8.93 9.41 Portfolio turnover rate % 47 184 47 184 209 394 339
- ---------- (1) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain assets of Pilgrim Management Corporation, the Fund's former Investment Manager, in a transaction that closed on April 7, 1995. (2) Commencement of offering shares. (3) Effective November 1, 1994, High Yield Fund changed its year end to June 30. (4) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (5) Annualized. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Yield Fund 43 FINANCIAL PILGRIM HIGH YIELD FUND II HIGHLIGHTS - -------------------------------------------------------------------------------- For the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ending prior to June 30, 1999, the financial information was audited by another independent auditor.
Class A --------------------------------------------- Six months Three ended months Year March 27, Dec. 31, ended ended 1998 to 1999 June 30, March 31, March 31, (unaudited) 1999(2) 1999 1998(1) ----------- ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.57 11.66 12.72 12.70 Income from investment operations: Net investment income $ 0.58 0.28 1.12 0.01 Net realized and unrealized gains (loss) on investments $ (0.40) (0.09) (1.00) 0.01 Total from investment operations $ 0.18 0.19 0.12 0.02 Less distributions from: Net investment income $ 0.58 0.28 1.18 -- Net asset value, end of period $ 11.17 11.57 11.66 12.72 Total Return(3): % 1.91 1.60 1.13 0.16 Ratios/Supplemental Data: Net assets, end of period (000's) $ 10,415 16,795 17,327 4,690 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.10 1.10 1.12 1.06 Gross expenses prior to expense reimbursement(4) % 1.25 1.37 1.53 1.06 Net investment income (loss) after expense reimbursement(4) % 10.28 9.68 9.44 7.22 Portfolio turnover % 55 44 242 484 Class B --------------------------------------------- Six months Three ended months Year March 27, Dec. 31, ended ended 1998 to 1999 June 30, March 31, March 31, (unaudited) 1999(2) 1999 1998(1) ----------- ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.58 11.66 12.71 12.69 Income from investment operations: Net investment income $ 0.54 0.27 1.04 0.01 Net realized and unrealized gains (loss) on investments $ (0.42) (0.09) (0.99) 0.01 Total from investment operations $ 0.12 0.18 0.05 0.02 Less distributions from: Net investment income $ 0.54 0.26 1.10 -- Net asset value, end of period $ 11.16 11.58 11.66 12.71 Total Return(3): % 1.41 1.53 0.55 0.16 Ratios/Supplemental Data: Net assets, end of period (000's) $ 40,553 41,882 42,960 8,892 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.75 1.75 1.77 1.69 Gross expenses prior to expense reimbursement(4) % 1.90 2.02 2.18 1.69 Net investment income (loss) after expense reimbursement(4) % 9.57 9.03 8.84 6.61 Portfolio turnover % 55 44 242 484 Class C --------------------------------------------- Six months Three ended months Year March 27, Dec. 31, ended ended 1998 to 1999 June 30, March 31, March 31, (unaudited) 1999(2) 1999 1998(1) ----------- ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.58 11.66 12.71 12.69 Income from investment operations: Net investment income $ 0.53 0.27 1.04 0.01 Net realized and unrealized gains (loss) on investments $ (0.40) (0.09) (0.99) 0.01 Total from investment operations $ 0.13 0.18 0.05 0.02 Less distributions from: Net investment income $ 0.54 0.26 1.10 -- Net asset value, end of period $ 11.17 11.58 11.66 12.71 Total Return(3): % 1.49 1.53 0.55 0.16 Ratios/Supplemental Data: Net assets, end of period (000's) $ 16,860 18,618 21,290 4,815 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.75 1.75 1.77 1.66 Gross expenses prior to expense reimbursement(4) % 1.90 2.02 2.18 1.66 Net investment income (loss) after expense reimbursement(4) % 9.57 9.03 8.79 6.91 Portfolio turnover % 55 44 242 484
- ---------- (1) The Fund commenced operations on March 27, 1998. (2) Effective May 24, 1999, Pilgrim Investments Inc., became the Investment Manager of the Fund. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized. 44 Pilgrim High Yield Fund II FINANCIAL HIGHLIGHTS PILGRIM HIGH TOTAL RETURN FUND - -------------------------------------------------------------------------------- The information in the table below has been audited by PricewaterhouseCoopers LLP, independent auditors.
Class A ---------------------------------------------------- Year ended October 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Operating performance Net asset value at the beginning of the period $ 3.77 5.00 4.78 4.48 4.41 Net investment income $ 0.37 0.46 0.48 0.46 0.48 Net realized and unrealized gain (loss) on investments $ (0.41) (1.07) 0.20 0.32 0.07 Total from investment operations $ (0.04) (0.61) 0.68 0.78 0.55 Dividends from net investment income $ (0.39) (0.47) (0.46) (0.48) (0.48) Dividends from net investment gain on investments sold $ -- (0.15) -- -- -- Distributions declared from capital $ (0.05) -- -- -- -- Total distributions $ (0.44) (0.62) (0.46) (0.48) (0.48) Net asset value at the end of the period $ 3.29 3.77 5.00 4.78 4.48 Total investment return(1) % (1.86) (13.65) 15.03 18.14 13.02 Ratios and supplemental data Net assets at the end of the period ($000s) $ 91,991 148,650 215,361 167,698 88,552 Ratio of expenses to average net assets % 1.34 1.30 1.42 1.52 1.55 Ratio of expense reimbursement to average net assets % -- -- -- -- -- Ratio of net investment income to average net assets(3) % 10.16 9.93 9.88 9.86 10.90 Portfolio turnover rate % 59 123 183 158 145 Class B --------------------------------------------------- Year ended October 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Operating performance Net asset value at the beginning of the period $ 3.77 5.00 4.77 4.47 4.41 Net investment income $ 0.34 0.43 0.44 0.43 0.45 Net realized and unrealized gain (loss) on investments $ (0.41) (1.07) 0.22 0.32 0.06 Total from investment operations $ (0.07) (0.64) 0.66 0.75 0.51 Dividends from net investment income $ (0.37) (0.44) (0.43) (0.45) (0.45) Dividends from net investment gain on investments sold $ -- (0.15) -- -- -- Distributions declared from capital $ (0.04) -- -- -- -- Total distributions $ (0.41) (0.59) (0.43) (0.45) (0.45) Net asset value at the end of the period $ 3.29 3.77 5.00 4.77 4.47 Total investment return(1) % (2.56) (14.28) 14.46 17.08 11.97 Ratios and supplemental data Net assets at the end of the period ($000s) $ 280,413 428,903 577,351 346,919 96,362 Ratio of expenses to average net assets % 2.06 2.02 2.12 2.23 2.25 Ratio of expense reimbursement to average net assets % -- -- -- -- -- Ratio of net investment income to average net assets(3) % 9.42 9.20 9.18 9.14 10.20 Portfolio turnover rate % 59 123 183 158 145 Class C ---------------------------------------------------- Year ended October 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Operating performance Net asset value at the beginning of the period $ 3.78 5.02 4.79 4.49 4.41 Net investment income $ 0.34 0.43 0.44 0.43 0.44 Net realized and unrealized gain (loss) on investments $ (0.40) (1.08) 0.22 0.32 0.09 Total from investment operations $ (0.06) (0.65) 0.66 0.75 0.53 Dividends from net investment income $ (0.37) (0.44) (0.43) (0.45) (0.45) Dividends from net investment gain on investments sold $ -- (0.15) -- -- -- Distributions declared from capital $ (0.04) -- -- -- -- Total distributions $ (0.41) (0.59) (0.43) (0.45) (0.45) Net asset value at the end of the period $ 3.31 3.78 5.02 4.79 4.49 Total investment return(1) % (2.24) (14.41) 14.42 17.28 12.44 Ratios and supplemental data Net assets at the end of the period ($000s) $ 40,503 64,141 97,457 54,382 11,011 Ratio of expenses to average net assets % 2.07 2.03 2.13 2.23 2.27 Ratio of expense reimbursement to average net assets % -- -- -- -- -- Ratio of net investment income to average net assets(3) % 9.42 9.19 9.18 9.14 10.18 Portfolio turnover rate % 59 123 183 158 145
- ---------- (1) Assumes dividends have been reinvested and does not reflect the effect of sales charges. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim High Total Return Fund 45 FINANCIAL PILGRIM HIGH TOTAL RETURN FUND II HIGHLIGHTS - -------------------------------------------------------------------------------- The information in the table below has been audited by PricewaterhouseCoopers LLP, independent auditors.
Class A(1) ---------------------- Year ended October 31, 1999 1998 1997 ---- ---- ---- Operating performance Net asset value at the beginning of the period $ 4.78 5.49 5.00 Net investment income $ 0.43 0.50 0.28 Net realized and unrealized (loss) on investments $ (0.55) (0.70) 0.53 Total from investment operations $ (0.12) (0.20) 0.81 Dividends from net investment income $ (0.43) (0.48) (0.28) Distributions declared from capital $ (0.05) (0.03) (0.04) Total distributions $ (0.48) (0.51) (0.32) Net asset value at the end of the period $ 4.18 4.78 5.49 Total investment return(2) % (3.10) (4.23) 16.53 Ratios and supplemental data Net assets at the end of the period ($000s) $ 20,003 40,924 8,548 Ratio of expenses to average net assets(3) % 1.40 1.44 1.26 Ratio of expense reimbursement to average net assets(3) % -- 0.01 3.36 Ratio of net investment income to average net assets(3) % 9.46 8.90 5.89 Portfolio turnover rate % 110 150 164 Class B(1) Class C(1) ------------------------ ------------------------ Year ended October 31, Year ended October 31, 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Operating performance Net asset value at the beginning of the period $ 4.79 5.49 5.00 4.79 5.50 5.00 Net investment income $ 0.41 0.47 0.25 0.40 0.47 0.25 Net realized and unrealized (loss) on investments $ (0.57) (0.70) 0.53 (0.55) (0.71) 0.54 Total from investment operations $ (0.16) (0.23) 0.78 (0.15) (0.24) 0.79 Dividends from net investment income $ (0.42) (0.44) (0.25) (0.41) (0.44) (0.25) Distributions declared from capital $ (0.03) (0.03) (0.04) (0.04) (0.03) (0.04) Total distributions $ (0.45) (0.47) (0.29) (0.45) (0.47) (0.29) Net asset value at the end of the period $ 4.18 4.79 5.49 4.19 4.79 5.50 Total investment return(2) % (4.00) (4.90) 15.91 (3.77) (4.90) 16.12 Ratios and supplemental data Net assets at the end of the period ($000s) $ 125,796 168,859 38,076 31,014 53,703 12,334 Ratio of expenses to average net assets(3) % 2.11 2.17 1.95 2.12 2.17 1.95 Ratio of expense reimbursement to average net assets(3) % -- 0.02 0.75 -- 0.01 0.78 Ratio of net investment income to average net assets(3) % 8.66 8.17 5.20 8.70 8.16 5.17 Portfolio turnover rate % 110 150 164 110 150 164
- ---------- (1) Classes A, B & C commenced operations on January 31, 1997. (2) Assumes dividends have been reinvested and does not reflect the effect of sales charges. (3) Annualized. 46 Pilgrim High Total Return Fund II FINANCIAL HIGHLIGHTS PILGRIM GLOBAL INCOME FUND - -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Per Share Operating Performance: 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
[GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Global Income Fund 47 FINANCIAL PILGRIM MONEY MARKET FUND HIGHLIGHTS - -------------------------------------------------------------------------------- Class A Class B Class C ----------- ----------- ----------- Period Period Period ended ended ended Dec. 31, Dec. 31, Dec. 31, 1999(1) 1999(2) 1999(2) (unaudited) (unaudited) (unaudited) Per Share Operating Performance: Net asset value, beginning of period $ 1.00 1.00 1.00 Income from investment operations: Net investment income $ 0.01 0.01 0.01 Net realized and unrealized gains (loss) on investments $ -- -- -- Total from investment operations $ 0.01 0.01 0.01 Less distributions from: Net investment income $ 0.01 0.01 0.01 Net realized gains on investments $ -- -- -- Net asset value, end of period $ 1.00 1.00 1.00 Total Return(3): % 0.36 1.41 1.41 Ratios/Supplemental Data: Net assets, end of period (000's) $ 5,732 11,414 2,670 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.50 2.25 2.25 Gross expenses prior to expense reimbursement(4) % 4.67 5.42 5.42 Net investment income (loss) after expense reimbursement(4) % 3.58 3.19 3.19 Portfolio turnover % -- -- -- - ---------- (1) Commenced operations on November 24, 1999. (2) Commenced operations on July 12, 1999. (3) Total returns are not annualized for periods of less than one year and do not reflect the impact of sales charges. (4) Annualized. 48 Pilgrim Money Market Fund WHERE TO GO FOR MORE INFORMATION You'll find more information about the Pilgrim Funds in our: ANNUAL/SEMI-ANNUAL REPORTS Includes 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 (SAI) 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/Semi-Annual 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 GNMA Income Fund, Inc. 811-2401 Pilgrim Mayflower Trust 811-7978 Pilgrim Government Securities Income Fund, Inc. 811-4031 Pilgrim Investment Funds, Inc. 811-1939 Pilgrim Mutual Funds 811-7428 Pilgrim Global Income Fund, Inc. 811-4675 INCPROS073100-073100 GRAPHICS DESCRIPTION APPENDIX There are four icon sized graphics used throughout the prospectus as follows: 1. In the sections describing the Objective of the Funds, the graphic icon is that of a dart in the bullseye of a target. 2. In the sections describing the Investment Strategy of the Funds, the graphic icon is that of a compass pointing due north. 3. In the sections describing the Risks of the Funds, the graphic icon is that of an old fashioned scale tilting heavy on the left side. 4. In the sections describing the Performance history of the Funds, the graphic icon is that of a stack of US currency bills. 5. On the bottom footer of every odd numbered page (right hand page), the graphic icon is that of a telephone by the 800 number of the fund to call for information. -----END PRIVACY-ENHANCED MESSAGE-----