Pilgrim(SM)
- ---------------------------
FUNDS FOR SERIOUS INVESTORS
PROSPECTUS
March 1, 1999,
As supplemented November 1, 1999
This supplement supersedes all prior supplements.
EQUITY FUNDS
Pilgrim SmallCap Opportunities Fund
Pilgrim MidCap Opportunities Fund
Pilgrim Growth Opportunities Fund
Pilgrim Growth + Value Fund
Pilgrim International Value Fund
Pilgrim Emerging Markets Value Fund
Pilgrim Research Enhanced Index Fund
INCOME AND EQUITY FUNDS
Pilgrim Income and Growth Fund
INCOME FUNDS
Pilgrim Government Securities Fund
Pilgrim High Yield Fund III
Pilgrim High Total Return Fund II
Pilgrim High Total Return Fund
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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, 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.
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On October 29, 1999, ReliaStar Financial Corporation, the parent of the
investment adviser to your fund(s), acquired Pilgrim Investments, Inc., an
adviser to a group of mutual funds known as the Pilgrim Group of Funds and
to other institutional investors. The names of the Northstar funds have
been changed to identify the funds as Pilgrim Funds, and the name of the
investment adviser to your fund(s), formerly Northstar Investment
Management Corporation, is now Pilgrim Advisors, Inc. Shareholders now
have the ability to exchange into thirty-two mutual funds. For more
complete information on other Pilgrim Funds, ask your financial consultant
for a prospectus and read that prospectus carefully before investing.
<PAGE>
WHAT'S
INSIDE
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[GRAPHIC OMITTED] OBJECTIVE These pages contain a description of each of our
funds included in this prospectus, including its
objective, investment strategy, risks and
portfolio manager(s).
[GRAPHIC OMITTED] INVESTMENT
STRATEGY
You'll also find:
WHAT
[GRAPHIC OMITTED] YOU PAY
TO INVEST 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 OMITTED] RISKS
HOW THE How the fund has performed. A chart that shows
[GRAPHIC OMITTED] FUND HAS the fund's financial performance for the past
PERFORMED ten years (or since inception, if shorter).
An introduction to the
Pilgrim family of funds 1
Equity Funds
Pilgrim SmallCap Opportunities Fund 2
Pilgrim MidCap Opportunities Fund 4
Pilgrim Growth Opportunities Fund 6
Pilgrim Growth + Value Fund 8
Pilgrim International Value Fund 10
Pilgrim Emerging Markets Value Fund 12
Pilgrim Research Enhanced Index Fund 14
Income and Equity Funds
Pilgrim Income and Growth Fund 16
Income Funds
Pilgrim Government Securities Fund 18
Pilgrim High Yield Fund III 20
Pilgrim High Total Return Fund II 22
Pilgrim High Total Return Fund 24
Meet the portfolio managers 26
Your guide to buying, selling and
exchanging shares of Pilgrim funds 34
Mutual fund earnings and your taxes 42
Financial highlights 44
Where to go for more information 55
<PAGE>
INTRODUCTION TO
THE PILGRIM
FAMILY OF FUNDS
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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 OMITTED]
If you have any questions about the Pilgrim family of funds, please call your
financial consultant or call us at 1-800-992-0180.
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Year 2000 update: Pilgrim Advisors, the Sub-Advisers, Administrator and other
service providers are taking steps to address any year 2000-related computer
problems. However, as with all companies that rely on computer systems to
process date-related information, there is some risk that these problems could
disrupt the funds' operations and/or the financial markets generally. There is
also the risk that a fund's performance may be adversely affected if the value
of its portfolio holdings decreases due to year 2000-related computer problems.
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This prospectus is designed to help you make informed decisions about your
investments. In order to make it easy for you to find what you're looking for,
we have divided the Pilgrim family of funds into three categories:
EQUITY FUNDS
Our Equity Funds focus on long-term growth by investing primarily in
equities.
They will suit you if you:
o are investing for the long-term - at least several years
o are willing to accept higher risk in exchange for long-term growth.
INCOME AND EQUITY FUNDS
Our Income and Equity Fund seeks income and growth of capital.
It will suit you if you:
o want both regular income and capital appreciation
o are looking for greater growth potential than that offered by the
Income Funds, but don't feel comfortable with the level of risk
associated with the Equity Funds.
INCOME FUNDS
Pilgrim offers both aggressive and conservative Income Funds. Both offer
regular income, but some take higher risks to attain higher returns.
They will suit you if you:
o want a regular stream of income
o want greater growth potential than a money market fund
o are willing to accept more risk than a money market fund.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
1
<PAGE>
PILGRIM Portfolio manager
SMALLCAP Mary Lisanti
OPPORTUNITIES
FUND
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OBJECTIVE [GRAPHIC OMITTED]
This fund seeks capital appreciation by investing primarily in a diversified
portfolio of domestic equity securities on the basis of their potential for
growth.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in the common stock of smaller, lesser-known U.S.
companies that the portfolio manager feels have above average prospects for
growth. Smaller companies are companies with market capitalizations that fall
within the range of companies in the Russell 2000 Index. The market
capitalization range will change as the range of the companies included in the
Russell 2000 changes.
The portfolio manager uses a disciplined investment process, which includes
extensive database screening, frequent fundamental research, identification and
implementation of a thematic approach in structuring the portfolio and a sell
discipline. Themes attempt to articulate the major social, economic and
technological trends that are likely to shape the future of business and
commerce over the next three to five years, and provide a framework for
identifying the industries and companies expected to benefit most. This top down
approach is combined with rigorous fundamental research (a bottoms up approach)
to guide stock selection and portfolio structure.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
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WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C Class T
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Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2) 4.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Management fee % 0.75 0.75 0.75 0.75
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Distribution and service (12b-1) fees % 0.30 1.00 1.00 0.95
- --------------------------------------------------------------------------------
Other expenses % 0.42 0.43 0.47 0.40
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Total fund operating expenses % 1.47 2.18 2.22 2.10
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Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
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Class A
if you sell your shares $ 716 1,013 1,332 2,231
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Class B
if you sell your shares $ 721 982 1,369 2,334(3)
if you don't sell your shares $ 221 682 1,169 2,334(3)
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Class C
if you sell your shares $ 325 694 1,190 2,554
if you don't sell your shares $ 225 694 1,190 2,554
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Class T
if you sell your shares $ 613 858 1,129 2,270(4)
if you don't sell your shares $ 213 658 1,129 2,270(4)
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(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
(4) Class T shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
2 Pilgrim SmallCap Opportunities Fund
<PAGE>
PILGRIM
SMALLCAP
OPPORTUNITIES
FUND
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RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities of small and mid-sized companies,
this fund's performance may go up or down rapidly depending on market
conditions.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
The fund trades securities actively. This may generate taxable capital gains,
and generally increases trading costs, which can lower performance.
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HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year for the past 10 years, while the table below compares the fund's long-term
performance with the Russell 2000 Index. This information may help provide an
indication of the fund's risks and potential rewards. All figures assume
reinvestment of dividends and distributions. Looking at how a fund has performed
in the past is important - but it's no guarantee of how it will perform in the
future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1989 22.20
1990 -8.83
1991 57.27
1992 14.54
1993 20.16
1994 -4.86
1995 11.34
1996 17.47
1997 14.29
1998 6.94
Best and worst quarterly performance during this period:
4th quarter 1998: up 28.63%
3rd quarter 1998: down 24.18%
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(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Russell
2000
Class A Class B Class C Class T Index(3)
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One year, ended
December 31, 1998 % 1.42 1.84 5.81 2.94 -2.54
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Five years, ended
December 31, 1998 % N/A N/A N/A 8.75 11.87
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Ten years, ended
December 31, 1998 % N/A N/A N/A 13.88 12.92
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Since inception(4) % 12.93 13.62 14.00 10.20 11.33
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(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Russell 2000 Index measures the performance of securities of small
companies. The since inception return for the Index is for the Class T
time period.
(4) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim SmallCap Opportunities Fund 3
<PAGE>
PILGRIM Portfolio managers
MIDCAP Mary Lisanti
OPPORTUNITIES Jeffrey Bernstein
FUND
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OBJECTIVE [GRAPHIC OMITTED]
This fund seeks long-term capital appreciation by investing in a diversified
portfolio of equity securities.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in the common stocks of mid-sized U.S. companies that
the portfolio managers feel have above average prospects for growth. Mid-sized
companies are companies with market capitalizations that fall within the range
of companies in the S&P MidCap 400 Index. The market capitalization range will
change as the range of the companies included in the S&P MidCap 400 changes.
The portfolio managers use a disciplined investment process, which includes
extensive database screening, frequent fundamental research, identification and
implementation of a thematic approach in structuring the portfolio and a sell
discipline. Themes attempt to articulate the major social, economic and
technological trends that are likely to shape the future of business and
commerce over the next three to five years, and provide a framework for
identifying the industries and companies expected to benefit most. This top down
approach is combined with rigorous fundamental research (a bottoms up approach)
to guide stock selection and portfolio structure.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee(3) % 1.00 1.00 1.00
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses(3) % 1.12 1.27 1.22
- --------------------------------------------------------------------------------
Total fund operating expenses(3) % 2.42 3.27 3.22
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- --------------------------------------------------------------------------------
(3) The adviser and administrator have agreed to waive or reimburse fees.
These figures are before the adviser reimbursed certain expenses. After
reimbursement other expenses would have been 0.50% for Class A, Class B
and Class C; and total fund operating expenses would have been 1.80% for
Class A, and 2.50% for Class B and Class C.
Example
Here's an example of what you would pay in expenses if you invested $10,000,
reinvested all your dividends, the fund earned an average annual return of 5%,
and annual operating expenses remained at the estimated level. Keep in mind that
this is only an example actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
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Class A
if you sell your shares $ 806 1,286 1,791 3,173
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 830 1,307 1,907 3,374(4)
if you don't sell your shares $ 330 1,007 1,707 3,374(4)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 425 992 1,683 3,522
if you don't sell your shares $ 325 992 1,683 3,522
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
4 Pilgrim MidCap Opportunities Fund
<PAGE>
PILGRIM
MIDCAP
OPPORTUNITIES
FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities of small and mid-sized companies,
this fund's performance may go up or down rapidly depending on market
conditions.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
The fund trades securities actively. This may generate taxable capital gains,
and generally increases trading costs, which can lower performance.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
This fund does not have a performance history because it was formed on August
20, 1998.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim MidCap Opportunities Fund 5
<PAGE>
PILGRIM Portfolio managers
GROWTH Mary Lisanti
OPPORTUNITIES Jeffrey Bernstein
FUND
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OBJECTIVE [GRAPHIC OMITTED]
This fund seeks long-term growth of capital by investing primarily in domestic
common stocks.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in U.S. companies that the portfolio manager feels
have above average prospects for growth.
Under normal market conditions, the fund invests at least 65% of its total
assets in securities purchased on the basis of the potential for capital
appreciation.
The portfolio manager uses a disciplined investment process, which includes
extensive database screening, frequent fundamental research, identification and
implementation of a thematic approach in structuring the portfolio and a sell
discipline. Themes attempt to articulate the major social, economic and
technological trends that are likely to shape the future of business and
commerce over the next three to five years, and provide a framework for
identifying the industries and companies expected to benefit most. This top down
approach is combined with rigorous fundamental research (a bottoms up approach)
to guide stock selection and portfolio structure.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2) 4.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Management fee % 0.75 0.75 0.75 0.75
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00 0.95
- --------------------------------------------------------------------------------
Other expenses % 0.32 0.38 0.38 0.35
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.37 2.13 2.13 2.05
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if 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 example -- actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 608 888 1,189 2,043
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 716 967 1,344 2,266(3)
if you don't sell your shares $ 216 667 1,144 2,266(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 316 667 1,144 2,462
if you don't sell your shares 216 667 1,144 2,462
- --------------------------------------------------------------------------------
Class T
if you sell your shares $ 608 843 1,103 2,205(4)
if you don't sell your shares 208 643 1,103 2,205(4)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
(4) Class T shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
6 Pilgrim Growth Opportunities Fund
<PAGE>
PILGRIM
GROWTH
OPPORTUNITIES
FUND
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RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities of small and mid-sized companies,
this fund's performance may go up or down rapidly depending on market
conditions.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
The fund trades securities actively. This may generate taxable capital gains,
and generally increases trading costs, which can lower performance.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year for the past 10 years, while the table below compares the fund's long-term
performance with the S&P 500 Index. This information may help provide an
indication of the fund's risks and potential rewards. All figures assume
reinvestment of dividends and distributions. Looking at how a fund has performed
in the past is important - but it's no guarantee of how it will perform in the
future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1989 24.25
1990 -5.24
1991 38.10
1992 8.05
1993 10.36
1994 -7.66
1995 24.40
1996 19.90
1997 22.94
1998 22.78
Best and worst quarterly performance during this period:
4th quarter 1998: up 31.14%
4th quarter 1987: down 21.57%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
S&P
500
Class A Class B Class C Class T Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % 16.49 17.69 21.90 18.79 28.57
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 % N/A N/A N/A 15.76 24.05
- --------------------------------------------------------------------------------
Ten years, ended
December 31, 1998 % N/A N/A N/A 14.96 19.19
- --------------------------------------------------------------------------------
Since inception(4) % 20.27 21.16 21.50 13.50 17.90
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The S&P 500 Index measures the performance of securities of large
companies. The since inception return for the Index is for the Class T
time period.
(4) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Growth Opportunities Fund 7
<PAGE>
PILGRIM Portfolio manager
GROWTH + Louis Navellier
VALUE FUND
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OBJECTIVE [GRAPHIC OMITTED]
This fund seeks capital appreciation by investing in a diversified portfolio of
equity securities.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in companies the portfolio manager identifies as
either growth or value companies through quantitative analysis.
Growth companies have above average earnings or sales growth and higher price to
earnings ratios. Value companies are temporarily undervalued or out of favor,
and tend to have lower price to book ratios relative to price and higher returns
on equity. The percentage of fund assets allocated to the two different kinds of
companies varies depending on the portfolio manager's assessment of economic
conditions and investment opportunities.
Under normal market conditions, the fund invests at least 65% of its total
assets in securities purchased on the basis of the potential for capital
appreciation. The fund also holds preferred stocks and convertible securities.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class Aor Class B shares prior to November 1, 1999, those shares
are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee % 1.00 1.00 1.00
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.42 0.45 0.46
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.72 2.45 2.46
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 740 1,086 1,455 2,488
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 748 1,064 1,506 2,606(3)
if you don't sell your shares $ 248 764 1,306 2,606(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 349 767 1,311 2,796
if you don't sell your shares $ 249 767 1,311 2,796
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
8 Pilgrim Growth + Value Fund
<PAGE>
PILGRIM
GROWTH +
VALUE FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities, this fund's performance may go up
or down rapidly depending on market conditions.
This fund's performance will also be affected if the portfolio manager makes an
inaccurate assessment of economic conditions and investment opportunities, and
chooses growth companies that do not grow as quickly as hoped, or value
companies that continue to be undervalued by the market.
Although the manager invests in value companies to decrease volatility, these
investments may also lower the fund's performance.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year since inception, while the table below compares the fund's long-term
performance with the Russell 2000 Index. This information may help provide an
indication of the fund's risks and potential rewards. All figures assume
reinvestment of dividends and distributions. Looking at how a fund has performed
in the past is important - but it's no guarantee of how it will perform in the
future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1997 18.10
1998 17.72
Best and worst quarterly performance during this period:
4th quarter 1998: up 29.15%
3rd quarter 1998: down 16.34%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Russell
2000
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % 10.93 11.77 15.68 -2.54
- --------------------------------------------------------------------------------
Since inception(4) % 12.09 13.22 14.41 9.99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Russell 2000 Index is an unmanaged index that measures the performance
of securities of small companies.
(4) The fund commenced operations on November 18, 1996.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Growth + Value Fund 9
<PAGE>
PILGRIM Portfolio managers
INTERNATIONAL Charles Brandes
VALUE FUND Jeff Busby
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in foreign companies with market capitalizations
greater than $1 billion, but it may hold up to 25% of its assets in companies
with smaller market capitalizations.
The portfolio managers apply the technique of "value investing" by seeking
stocks that their research indicates are priced below their long-term value.
This gives the fund both a possible margin of safety against price declines and
an opportunity for profit.
The fund holds common stocks, preferred stocks, American, European and Global
depository receipts, as well as convertible securities.
Under normal circumstances, the fund will invest at least 65% of its total
assets in securities of companies located in at least three countries other than
the U.S., located in Western Europe, North and South America, Australia, Asia
and other regions. The fund may invest up to the greater of:
o 20% of its assets in any one country or industry, or,
o 150% of the weighting of the country or industry in the MSCI EAFE Index,
as long as the fund meets any industry concentration or diversification
requirements under the Investment Company Act.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee % 1.00 1.00 1.00
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.44 0.47 0.47
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.74 2.47 2.47
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 742 1,091 1,464 2,509
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 750 1,070 1,516 2,626(3)
if you don't sell your shares $ 250 770 1,316 2,626(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 350 770 1,316 2,806
if you don't sell your shares $ 250 770 1,316 2,806
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
10 Pilgrim International Value Fund
<PAGE>
PILGRIM
INTERNATIONAL
VALUE FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities of foreign companies, this fund
offers international diversification, but its performance may also go up or down
rapidly depending on global or foreign market conditions.
Foreign investments can also be affected by:
o adverse political, social or economic developments in foreign countries
o unfavorable currency exchange rates
o a lack of liquidity in foreign markets
o inadequate or inaccurate information about foreign companies
o accounting, auditing and/or financial reporting standards that are
different from those in the United States.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
The fund does not currently intend to make use of any derivatives, including
transactions in currency forwards for hedging purposes.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS
PERFORMED [GRAPHIC OMITTED]
The bar chart below shows you how the fund's performance has varied from year to
year since inception, while the table below compares the fund's long-term
performance with the MSCI EAFE Index. This information may help provide an
indication of the fund's risks and potential rewards. All figures assume
reinvestment of dividends and distributions. Looking at how a fund has performed
in the past is important - but it's no guarantee of how it will perform in the
future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1996 15.23
1997 17.86
1998 13.46
- --------------------------------------------------------------------------------
(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:
4th quarter 1998: up 18.81%
3rd quarter 1998: down 14.73%
Average annual total return(2)
MSCI
EAFE
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % 6.90 7.73 11.76 20.00
- --------------------------------------------------------------------------------
Since inception(4) % 13.63 12.04 14.70 11.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Morgan Stanley Capital International European Australasian Far East
(MSCI EAFE) Index measures the performance of securities listed on
exchanges in markets in Europe, Australia and the Far East. The since
inception return for the Index is for the Class A time period.
(4) Classes A and C commenced operations on March 6, 1995. Class B commenced
operations on April 18, 1997.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim International Value Fund 11
<PAGE>
PILGRIM Portfolio managers
EMERGING Charles Brandes
MARKETS Ian Sunder
VALUE FUND
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks long-term capital appreciation.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in companies located in countries with emerging
markets, including companies that may be smaller and lesser-known.
The portfolio managers apply the technique of "value investing" by seeking
stocks that their research indicates are priced below their long-term value.
This gives the fund both a possible margin of safety against price declines and
an opportunity for profit.
The fund holds primarily common stocks, preferred stocks, American, European and
Global depositary receipts, shares of closed-end investment companies, as well
as convertible securities.
Under normal market conditions, the fund will invest at least 65% of its total
assets in securities of companies located in countries with emerging markets.
Countries with emerging markets include those countries that are generally
considered to be emerging market countries by the international financial
community. The fund may invest up to the greater of:
o 20% of its assets in any one country or industry, or,
o 150% of the weighting of the country or industry in the MSCI EMF Index, as
long as the fund meets any industry concentration or diversification
requirements under the Investment Company Act.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee % 1.00 1.00 1.00
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 2.58 2.74 2.87
- --------------------------------------------------------------------------------
Total fund operating expenses % 3.88 4.74 4.87
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if you invested $10,000,
reinvested all your dividends, the fund earned an average return of 5%, and
annual operating expenses remained at the current level. Keep in mind that this
is only an example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 943 1,691 2,455 4,443
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 975 1,728 2,585 4,633(3)
if you don't sell your shares $ 475 1,428 2,385 4,633(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 587 1,464 2,443 4,902
if you don't sell your shares $ 487 1,464 2,443 4,902
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
12 Pilgrim Emerging Markets Value Fund
<PAGE>
PILGRIM
EMERGING
MARKETS
VALUE FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in foreign companies in emerging markets, this
fund's performance may go up or down quite rapidly depending on market
conditions.
Foreign investments can also be affected by the following:
o adverse political, social or economic developments in foreign countries
o unfavorable currency exchange rates
o a lack of liquidity in foreign markets
o inadequate or inaccurate information about foreign companies
o accounting, auditing and/or financial reporting standards that are
different from those in the United States.
Investments in emerging markets are affected by additional risks:
o developing countries have less-mature economic structures and political
systems than those in developed countries
o developing countries may have high inflation and rapidly changing interest
and currency exchange rates.
The fund's investments in smaller companies may be subject to more abrupt or
erratic movements in price because:
o the securities of smaller companies are traded in lower volume
o smaller companies are more likely to experience changes in earnings and
growth prospects than the securities of larger, more established companies
o the value of the securities depends on the success of products or
technologies that are in a relatively early stage of development and that
may not have been tested.
The fund does not currently intend to make use of any derivatives, including
transactions in currency forwards for hedging purposes.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied since
inception, while the table below compares the fund's performance with the MSCI
EMF Index. This information may help provide an indication of the fund's risks
and potential rewards. All figures assume reinvestment of dividends and
distributions. Looking at how a fund has performed in the past is important -
but it's no guarantee of how it will perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1998 -22.58
Best and worst quarterly performance during this period:
4th quarter 1998: up 16.95%
2nd quarter 1998: down 24.79%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31, 1998. They do not reflect sales
charges and would be lower if they did.
Average annual total return(2)
MSCI
EMF
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998(4) % -27.03 -26.88 -24.02 -25.34
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Morgan Stanley Capital International Emerging Markets Free (MSCI EMF)
Index measures the performance of securities listed on exchanges in
developing nations throughout the world.
(4) The fund commenced operations on January 1, 1998.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Emerging Markets Value Fund 13
<PAGE>
PILGRIM Portfolio Managers
RESEARCH ENHANCED Timothy Devlin
INDEX FUND James Wiess
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
The fund seeks capital appreciation.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests primarily in companies that make up the S&P 500 Index. Based on
extensive research regarding projected company earnings and dividends, a
valuation model ranks companies in each industry group according to their
relative value. Using this valuation model, the portfolio managers select stocks
for the fund. Within each industry, the fund modestly overweights stocks that
are ranked as undervalued or fairly valued while modestly underweighting or not
holding stocks that appear overvalued. Industry by industry, the fund's assets
are invested so that the fund's industry sector allocations and market cap
weightings closely parallel those of the S&P 500.
By owning a large number of stocks within the S&P 500, with an emphasis on those
that appear undervalued or fairly valued, and by tracking the industry
weightings and other characteristics of that index, the fund seeks returns that
modestly exceed those of the S&P 500 over the long term with virtually the same
level of volatility.
Under normal market conditions, the fund invests at least 80% of its total
assets in common stocks included in the S&P 500. It may also invest in other
common stocks not included in the S&P 500. The fund may also invest in certain
higher-risk investments, including derivatives (generally these investments will
be limited to S&P 500 options).
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee % 0.70 0.70 0.70
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.25 0.25 0.25
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.25 1.95 1.95
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if you invested $10,000,
reinvested all your dividends, the fund earned an average annual return of 5%,
and annual operating expenses remained at the estimated level. Keep in mind that
this is only an example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 695 949 1,222 1,999
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 698 912 1,252 2,094(3)
if you don't sell your shares $ 198 612 1,052 2,094(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 298 612 1,052 2,275
if you don't sell your shares $ 198 612 1,052 2,275
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
14 Pilgrim Research Enhanced Index Fund
<PAGE>
PILGRIM
RESEARCH ENHANCED
INDEX FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk -- some more than others -- and there's always the
chancE that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities, this fund's performance may go up
or down rapidly depending on market conditions.
The portfolio managers try to remain fully invested in companies included in the
S&P 500, and generally do not change this strategy even temporarily, which could
make the fund more susceptible to poor market conditions. In addition, the
portfolio managers' use of derivative instruments may not be successful, and may
lower fund performance, prevent the fund from earning higher returns or increase
the fund's volatility.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
This fund does not have a performance history because it was formed on December
30, 1998.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Research Enhanced Index Fund 15
<PAGE>
PILGRIM Portfolio manager
INCOME AND This fund is managed by a team
GROWTH FUND of portfolio managers
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks current income balanced with capital appreciation primarily by
investing in dividend paying equity securities, convertible securities, and
investment grade debt securities.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests in a mix of equity and investment grade debt securities
designed to provide both current income and long-term growth of capital.
Under normal market conditions, the fund invests at least 65% of its total
assets in income-producing securities. It generally holds no more than 30% of
its assets in convertible securities.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 5.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee(3) % 0.75 0.75 0.75
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.35 0.37 0.34
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.40 2.12 2.09
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) This is the maximum management fee. The actual fee charged reduces with
asset size: 0.75% on the first $250 million, 0.70% on the next $250
million, 0.65% on the next $250 million, 0.60% on the next $250 million
and 0.55% on assets over $1 billion.
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 709 993 1,297 2,158
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 715 964 1,339 2,268(4)
if you don't sell your shares $ 215 664 1,139 2,268(4)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 312 655 1,124 2,421
if you don't sell your shares $ 212 655 1,124 2,421
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
16 Pilgrim Income and Growth Fund
<PAGE>
PILGRIM
INCOME AND
GROWTH FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in equities, this fund's performance may go up
or down rapidly depending on market conditions.
The fund also invests in debt securities, which means its performance will also
be affected by changes in interest rates. When interest rates increase, the
value of the fund's debt securities - particularly those with longer durations
- - will go down. In addition, convertible securities may reduce performance and
increase volatility if the issuers stop making interest and principal payments.
Although the fund's investment team invests in a mix of equity and debt
securities, the mix the team chooses may also lower the fund's performance. This
fund's performance will also be affected if the equity and debt markets don't
move as forecasted.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year since inception, while the table below compares the fund's long-term
performance with the Lipper Balanced Fund Index. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume reinvestment of dividends and distributions. Looking at how a fund has
performed in the past is important - but it's no guarantee of how it will
perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1994 -3.56
1995 21.33
1996 15.23
1997 15.56
1998 5.76
Best and worst quarterly performance during this period:
4th quarter 1998: up 12.28%
3rd quarter 1998: down 9.21%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Lipper
Balanced
Fund
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % -0.32 0.28 4.06 15.09
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 % 9.20 N/A N/A 13.87
- --------------------------------------------------------------------------------
Since inception(4) % 9.54 8.93 10.05 13.45
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Lipper Balanced Fund Index measures the performance of balanced funds
(funds that seek current income balanced with capital appreciation). The
since inception return for the Index is for the Class A time period.
(4) Class A commenced operations on November 8, 1993. Class B commenced
operations on February 9, 1994. Class C commenced operations on March 31,
1994.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Income and Growth Fund 17
<PAGE>
PILGRIM Portfolio managers
GOVERNMENT Robert Kinsey
SECURITIES Charles Ullerich
FUND
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks high current income and conservation of principal by investing
primarily in debt obligations issued or guaranteed by the U.S. government or its
agencies and instrumentalities.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
Depending on interest rates and market opportunities, the portfolio manager
selects U.S. government securities that generally have short and intermediate
terms to maturity. The average duration of the fund will generally be three to
four years.
Under normal conditions, the fund holds at least 65% of its total assets in
securities supported by the full faith and credit of the U.S. government. No
more than 20% of its assets may be in securities issued by a single
instrumentality or agency not supported by the full faith and credit of the U.S.
government. It may also invest in mortgage-backed, zero coupon and other
securities, including derivatives.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 4.75 none none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2) 4.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Management fee(3) % 0.65 0.65 0.65 0.65
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00 0.65(4)
- --------------------------------------------------------------------------------
Other expenses % 0.37 0.40 0.40 0.40
- --------------------------------------------------------------------------------
Total fund operating expenses(3) % 1.32 2.05 2.05 1.70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) These figures are before a management fee waiver of 0.15% effective June
2, 1997. After the waiver, the management fee would be 0.50% and the total
fund operating expenses would be 1.17% for Class A, 1.90% for Class B,
1.90% for Class C and 1.55% for Class T.
(4) The Class T 12b-1 plan provides for payment up to 0.95%.
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 603 873 1,164 1,990
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 708 943 1,303 2,192(5)
if you don't sell your shares $ 208 643 1,103 2,192(5)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 308 643 1,103 2,379
if you don't sell your shares $ 208 643 1,103 2,379
- --------------------------------------------------------------------------------
Class T
if you sell your shares $ 573 736 923 1,908(6)
if you don't sell your shares $ 173 536 923 1,908(6)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(5) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
(6) Class T shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
18 Pilgrim Government Securities Fund
<PAGE>
PILGRIM
GOVERNMENT
SECURITIES
FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in government securities, this fund's
performance may go up or down depending on market conditions.
The fund's performance is significantly affected by changes in interest rates.
When interest rates increase, the value of the fund's debt securities -
particularly those with longer durations - will go down. The value of the fund's
mortgage-backed investments - and the fund's yield - could be reduced if the
underlying mortgage-holders pay off their mortgages earlier than expected.
This fund's performance will also be affected if the portfolio manager makes an
inaccurate assessment of economic conditions and projected changes in interest
rates. In addition, the portfolio manager's use of derivative instruments may
not be successful, and may lower fund performance or prevent the fund from
earning higher returns. Some holdings, such as zero coupon bonds, may be more
volatile and adversely affect the value of the fund's shares.
Shares of this fund are not insured or guaranteed by the U.S. government or its
agencies or instrumentalities.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year for the past 10 years, while the table below compares the fund's long-term
performance with the Lehman Intermediate U.S. Government Index. This information
may help provide an indication of the fund's risks and potential rewards. All
figures assume reinvestment of dividends and distributions. Looking at how a
fund has performed in the past is important - but it's no guarantee of how it
will perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1989 11.73
1990 8.57
1991 14.73
1992 9.77
1993 18.48
1994 -9.82
1995 22.90
1996 0.32
1997 7.38
1998 4.84
Best and worst quarterly performance during this period:
4th quarter 1995: up 8.54%
1st quarter 1994: down 8.47%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Lehman
Intermediate
U.S.
Government
Class A Class B Class C Class T Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % 0.22 -0.44 3.37 0.90 8.49
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 % N/A N/A N/A 4.59 6.45
- --------------------------------------------------------------------------------
Ten years, ended
December 31, 1998 % N/A N/A N/A 8.52 8.34
- --------------------------------------------------------------------------------
Since inception(4) % 5.11 5.36 5.78 7.06 8.17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Lehman Brothers Intermediate U.S. Government Index measures the
performance of U.S. Treasury bonds and U.S. government agency bonds. The
since inception return for the Index is for the Class T time period.
(4) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on February 3, 1986.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim Government Securities Fund 19
<PAGE>
PILGRIM Portfolio manager
HIGH YIELD Kevin Mathews
FUND III
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks high current income by investing primarily in long-term and
intermediate-term fixed income securities, with emphasis on high-yield,
lower-rated corporate debt instruments of domestic and foreign issuers.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
The fund invests mostly in high-yield bonds (junk bonds) to achieve high current
income.
Under normal market conditions, the fund invests at least 65% of its total
assets in high-yield bonds rated below investment grade. It can hold up to 100%
of its assets in debt securities rated as low as Ca by Moody's or CC by S&P or
in securities that aren't rated but that the portfolio manager considers to be
of equivalent quality, and up to 1% of its assets in bonds in the lowest rating
categories. It may invest up to 35% of its net assets in foreign issuers, but
only 10% can be in securities that are not listed on a U.S. securities exchange.
The fund may also hold up to 25% of its assets in equity or equity-related
instruments, such as preferred stocks, convertible securities and rights and
warrants associated with debt instruments.
In periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 4.75 none none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2) 4.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
informaiton, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C Class T
- --------------------------------------------------------------------------------
Management fee % 0.60 0.60 0.60 0.60
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00 0.65(3)
- --------------------------------------------------------------------------------
Other expenses % 0.36 0.37 0.38 0.35
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.26 1.97 1.98 1.60
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) The Class T 12b-1 Plan provides for payments up to 0.95%.
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 597 856 1,134 1,925
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 700 918 1,262 2,112(4)
if you don't sell your shares $ 200 618 1,062 2,112(4)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 301 621 1,068 2,306
if you don't sell your shares $ 201 621 1,068 2,306
- --------------------------------------------------------------------------------
Class T
if you sell your shares $ 563 705 871 1,809(5)
if you don't sell your shares $ 163 505 871 1,809(5)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
(5) Class T shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
20 Pilgrim High Yield Fund III
<PAGE>
PILGRIM
HIGH YIELD
FUND III
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in high yield securities, this fund's
performance may go up or down depending on market conditions.
This fund's performance is significantly affected by changes in interest rates
or adverse market or economic developments. When interest rates increase, the
value of the fund's debt securities - particularly those with longer durations -
will go down. The value of the fund's high-yield securities are particularly
sensitive to changes in interest rates. There is also a higher risk that the
company issuing the security may not be able to meet its financial obligations,
or that there won't be a market to sell the security at a reasonable price.
This fund's performance will also be affected if the portfolio manager makes an
inaccurate assessment of economic conditions and investment opportunities, and
chooses a company that, for example, declares bankruptcy and is no longer able
to make interest or principal payments.
Foreign investments can also be affected by the following:
o adverse political, social or economic developments in foreign countries
o unfavorable currency exchange rates
o a lack of liquidity in foreign markets
o inadequate or inaccurate information about foreign companies
o accounting, auditing and/or financial reporting standards that are
different from those in the United States.
Investments in emerging markets are affected by additional risks:
o developing countries have less mature economic structures and political
systems than those in developed countries
o they may have high inflation and rapidly changing interest and currency
exchange rates.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year for the past 10 years, while the table below compares the fund's long-term
performance with the Lehman High Yield Bond Index. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume reinvestment of dividends and distributions. Looking at how a fund has
performed in the past is important - but it's no guarantee of how it will
perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1990 -14.59
1991 46.49
1992 27.58
1993 18.89
1994 -2.18
1995 13.71
1996 14.49
1997 10.87
1998 1.79
Best and worst quarterly performance during this period:
1st quarter 1991: up 16.09%
3rd quarter 1990: down 11.71%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Lehman
High Yield
Bond
Class A Class B Class C Class T Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % -2.65 -3.37 0.46 -1.94 1.87
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 % N/A N/A N/A 7.52 8.57
- --------------------------------------------------------------------------------
Since inception(4) % 7.47 7.67 8.15 9.97 10.62
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Lehman Brothers High Yield Bond Index measures the performance of
fixed-income securities that are similar, but not identical, to those in
the fund's portfolio. The since inception return for the Index is for the
Class T time period.
(4) Classes A, B and C commenced operations on June 5, 1995. Class T commenced
operations on May 30, 1989.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim High Yield Fund III 21
<PAGE>
PILGRIM Portfolio manager
HIGH TOTAL Kevin Mathews
RETURN FUND II
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks high income and capital appreciation.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
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. No more than 50% of its assets can
be 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.
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 periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 4.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee % 0.75 0.75 0.75
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.40 0.44 0.43
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.45 2.19 2.18
- --------------------------------------------------------------------------------
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 616 912 1,230 2,128
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 722 985 1,375 2,336(3)
if you don't sell your shares $ 222 685 1,175 2,336(3)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 321 682 1,169 2,513
if you don't sell your shares $ 221 682 1,169 2,513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
22 Pilgrim High Total Return Fund II
<PAGE>
PILGRIM
HIGH TOTAL
RETURN FUND II
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in high-yield securities, this fund's
performance may go up or down depending on market conditions.
This fund's performance is significantly affected by changes in interest rates.
When interest rates increase, the value of the fund's debt securities -
particularly those with longer durations - will go down. The value of the fund's
high-yield securities are particularly sensitive to changes in interest rates,
and there is a higher risk that the company that issued the security may not be
able to meet its financial obligations, or that there won't a market to sell the
security at a reasonable price.
This fund's performance will also be affected if the portfolio manager makes an
inaccurate assessment of economic conditions and investment opportunities, and
chooses a company that, for example, declares bankruptcy and is no longer able
to make interest or principal payments.
Foreign investments can also be affected by the following:
o adverse political, social or economic developments in foreign countries
o unfavorable currency exchange rates
o a lack of liquidity in foreign markets
o inadequate or inaccurate information about foreign companies
o accounting, auditing and/or financial reporting standards that are
different from those in the United States.
Investments in emerging markets are affected by additional risks:
o developing countries have less mature economic structures and political
systems than those in developed countries
o they may have high inflation and rapidly changing interest and currency
exchange rates.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year since inception, while the table below compares the fund's long-term
performance with the Lehman High Yield Bond Index. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume reinvestment of dividends and distributions. Looking at how a fund has
performed in the past is important - but it's no guarantee of how it will
perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1998 -2.93
Best and worst quarterly performance during this period:
2nd quarter 1997: up 8.89%
3rd quarter 1998: down 8.44%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31, 1998. They do not reflect sales
charges and would be lower if they did.
Average annual total return(2)
Lehman
High Yield
Bond
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % -7.61 -8.04 -4.49 1.87
- --------------------------------------------------------------------------------
Since inception(4) % 5.18 5.20 7.24 6.96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Lehman Brothers High Yield Bond Index measures the performance of
fixed-income securities that are similar, but not identical, to those in
the fund's portfolio.
(4) The fund commenced operations on January 31, 1997.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim High Total Return Fund II 23
<PAGE>
PILGRIM Portfolio manager
HIGH TOTAL Kevin Mathews
RETURN FUND
- --------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC OMITTED]
This fund seeks high income and capital appreciation.
INVESTMENT
STRATEGY [GRAPHIC OMITTED]
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. No more than 50% of its assets can
be 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.
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 periods of unusual market conditions, the fund may temporarily invest part or
all of its assets in cash or high quality money market securities. In these
circumstances, the fund may not achieve its objective.
- --------------------------------------------------------------------------------
WHAT YOU PAY
TO INVEST [GRAPHIC OMITTED]
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.
Fees you pay directly
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge on your
investment (as a % of offering price) % 4.75 none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge
(as a % of purchase or sale price,
whichever is less) % none(1)(2) 5.00(2) 1.00(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Except for purchases of $1 million or more, when you sell any of the
shares within two years of when you bought them. Please see page 36 for
details.
(2) This charge decreases over time. Please see page 36 for details. If you
purchased Class A or Class B shares prior to November 1, 1999, those
shares are subject to a different deferred sales charge. For additional
information, please refer to the SAI.
Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee(3) % 0.69 0.69 0.69
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees % 0.30 1.00 1.00
- --------------------------------------------------------------------------------
Other expenses % 0.31 0.33 0.34
- --------------------------------------------------------------------------------
Total fund operating expenses % 1.30 2.02 2.03
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) The management fee charged reduces with asset size: 0.75% on the first
$250 million, 0.70% on the next $250 million, 0.65% on the next $250
million, 0.60% on the next $250 million, and 0.55% on assets over $1
billion.
Example
Here's an example of what you would pay in expenses if 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 example - actual expenses and performance may vary.
Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A
if you sell your shares $ 601 868 1,154 1,968
- --------------------------------------------------------------------------------
Class B
if you sell your shares $ 705 934 1,288 2,163(4)
if you don't sell your shares $ 205 634 1,088 2,163(4)
- --------------------------------------------------------------------------------
Class C
if you sell your shares $ 306 637 1,093 2,358
if you don't sell your shares $ 206 637 1,09 2,358
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) Class B shares convert to Class A shares after year 8. This figure uses
Class A expenses for years 9 and 10.
24 Pilgrim High Total Return Fund
<PAGE>
PILGRIM
HIGH TOTAL
RETURN FUND
- --------------------------------------------------------------------------------
RISKS [GRAPHIC OMITTED]
All mutual funds involve risk - some more than others - and there's always the
chance that you could lose money or not earn as much as you hope.
Every fund is affected by the economy and by the investment decisions portfolio
managers make. Because it invests in high-yield securities, this fund's
performance may go up or down depending on market conditions.
This fund's performance is significantly affected by changes in interest rates.
When interest rates increase, the value of the fund's debt securities -
particularly those with longer durations - will go down. The value of the fund's
high-yield securities are particularly sensitive to changes in interest rates,
and there is a higher risk that the company that issued the security may not be
able to meet its financial obligations, or that there won't a market to sell the
security at a reasonable price.
This fund's performance will also be affected if the portfolio manager makes an
inaccurate assessment of economic conditions and investment opportunities, and
chooses a company that, for example, declares bankruptcy and is no longer able
to make interest or principal payments.
Foreign investments can also be affected by the following:
o adverse political, social or economic developments in foreign countries
o unfavorable currency exchange rates
o a lack of liquidity in foreign markets
o inadequate or inaccurate information about foreign companies
o accounting, auditing and/or financial reporting standards that are
different from those in the United States.
Investments in emerging markets are affected by additional risks:
o developing countries have less mature economic structures and political
systems than those of developed countries
o they may have high inflation and rapidly changing interest and currency
exchange rates.
- --------------------------------------------------------------------------------
HOW THE
FUND HAS [GRAPHIC OMITTED]
PERFORMED
The bar chart below shows you how the fund's performance has varied from year to
year since inception, while the table below compares the fund's long-term
performance with the Lehman High Yield Bond Index. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume reinvestment of dividends and distributions. Looking at how a fund has
performed in the past is important - but it's no guarantee of how it will
perform in the future.
Year by year total return (%)(1)
[The following table was depicted as a bar chart in the printed material.]
1994 -8.57
1995 21.17
1996 15.70
1997 11.44
1998 -7.96
Best and worst quarterly performance during this period:
3rd quarter 1997: up 7.40%
3rd quarter 1998: down 13.76%
- --------------------------------------------------------------------------------
(1) These figures are as of December 31 of each year. They do not reflect
sales charges and would be lower if they did.
Average annual total return(2)
Lehman
High Yield
Bond
Class A Class B Class C Index(3)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 % -12.26 -12.77 -9.38 1.87
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 % 4.62 N/A N/A 8.57
- --------------------------------------------------------------------------------
Since inception(4) % 5.03 4.05 4.90 8.65
- --------------------------------------------------------------------------------
(2) These figures have been restated to reflect sales charges in effect as of
November 1, 1999.
(3) The Lehman Brothers High Yield Bond Index measures the performance of
fixed-income securities that are similar, but not identical, to those in
the fund's portfolio. The since inception return for the Index is for the
Class A time period.
(4) Class A commenced operations on November 8, 1993. Classes B and C
commenced operations on February 9, 1994 and March 21, 1994, respectively.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
Pilgrim High Total Return Fund 25
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
Jeffrey Bernstein (Pilgrim Advisors)
Jeffrey Bernstein has co-managed the Pilgrim MidCap Opportunities Fund since the
fund was formed in August 1998 and has co-managed the Pilgrim Growth
Opportunities Fund since November 1999. He joined Pilgrim in May 1998.
Mr. Bernstein has over 10 years of experience in small and mid-cap investments.
Before joining Pilgrim, Mr. Bernstein was a Portfolio Manager at Strong Capital
Management where he co-managed the Strong MidCap Fund. From November 1995 to
February 1997, Mr. Bernstein was a Portfolio Manager with Berkeley Capital. From
September 1993 to November 1995, Mr. Bernstein was an Assistant Portfolio
Manager at Bankers Trust Corp. Prior to Bankers Trust, Mr. Bernstein was an
Analyst for Cowen & Co.
Charles Brandes (Brandes)
Charles Brandes has co-managed the Pilgrim International Value Fund and the
Pilgrim Emerging Markets Value Fund since the funds were formed in March 1995
and January 1998, respectively. Mr. Brandes has over 31 years of investment
management experience. He founded the general partner of Brandes Investment
Partners, L.P. in 1974 and owns a controlling interest in it. At Brandes
Investment Partners, L.P., he serves as a Managing Partner. He is a Chartered
Financial Analyst and a Member of the Association for Investment Management and
Research.
Charles Brandes and Jeff Busby structure the portfolio of the Pilgrim
International Value Fund from a buy list determined by an investment committee
of Brandes.
Jeff Busby (Brandes)
Jeff Busby has co-managed the Pilgrim International Value Fund since the fund
was formed in March 1995. Mr. Busby has over 13 years of investment management
experience. At Brandes Investment Partners, L.P., he serves as a Managing
Partner. He is also responsible for overseeing all trading activities for the
firm. He is a Chartered Financial Analyst, and a Member of the Association for
Investment Management and Research and the Financial Analysts Society.
Timothy Devlin (J.P. Morgan)
Timothy Devlin has co-managed the Pilgrim Research Enhanced Index Fund since the
fund was formed in December 1998. At J.P. Morgan Investment Management Inc., he
serves as a Portfolio Manager and Member of the Structured Equity Group.
Mr. Devlin has over 12 years of investment management experience. Before joining
J.P. Morgan Investment Management Inc. in 1996, Mr. Devlin was a Portfolio
Manager for nine years at Mitchell Hutchins Asset Management, Inc. where he
managed quantitatively-driven portfolios for institutional and retail investors.
Robert Kinsey (Pilgrim Advisors)
Robert Kinsey has co-managed the Pilgrim Government Securities Fund since
November 1999.
Mr. Kinsey has over 13 years of experience in the management of fixed-income
investments. At Pilgrim Investments Inc. (Pilgrim Investments), an affiliate of
Pilgrim Advisors, he serves as Vice President and a Senior Portfolio Manager.
Prior to joining Pilgrim Investments, Mr. Kinsey was a Vice President and fixed
income Portfolio Manager of 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.
Mary Lisanti (Pilgrim Advisors)
Mary Lisanti has managed the Pilgrim SmallCap Opportunities Fund since July
1998, has co-managed the Pilgrim MidCap Opportunities Fund since the fund was
formed in August 1998 and has co-managed the Pilgrim Growth Opportunities Fund
since November 1999. She joined Pilgrim in May 1998.
Ms. Lisanti has over 20 years of experience in small and mid-cap investments.
Before joining Pilgrim, Ms. Lisanti was a Portfolio Manager at Strong Capital
Management where she managed the Strong Small Cap Fund and co-managed the Strong
Mid Cap Fund. From 1993 to 1996, Ms. Lisanti was a Managing Director and Head of
Small and Mid-Capitalization Equity Strategies at Bankers Trust Corp. where she
managed the BT Small Cap Fund and the BT Capital Appreciation Fund. Prior to
Bankers Trust, Ms. Lisanti was a Portfolio Manager with the Evergreen Funds. She
began her career as an Analyst specializing in emerging growth stocks with
Donaldson, Lufkin & Jenrette and Shearson Lehman Hutton, and was ranked the
number one Institutional Investor Emerging Growth Stock Analyst in 1989. She is
a Chartered Financial Analyst, and a member of the New York Society of Security
Analysts and the Financial Analyst Federation.
26
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
Kevin Mathews (Pilgrim Advisors)
Kevin Mathews has managed the Pilgrim High Yield III, High Total Return II and
High Total Return funds since November 1999.
Mr. Mathews has over 16 years of experience in the management of high-yield
fixed income investments. At Pilgrim Investments, an affiliate of Pilgrim
Advisors, he serves as a Senior Vice President and Senior Portfolio Manager.
Prior to joining Pilgrim Investments, Mr. Mathews was a Vice President and
Senior Portfolio Manager of Van Kampen American Capital.
Louis Navellier (Navellier)
Louis Navellier has managed the Pilgrim Growth + Value Fund since the fund was
formed in November 1996. Mr. Navellier has over 19 years of investment
management experience and is the sole owner of Navellier & Associates, Inc., a
registered investment adviser that manages investments for institutions, pension
funds and high net worth individuals. Mr. Navellier's investment newsletter, MPT
Review, has been published for over 19 years and is widely renowned throughout
the investment community.
Ian Sunder (Brandes)
Ian Sunder has co-managed the Pilgrim Emerging Markets Value Fund since the fund
was formed in January 1998. Mr. Sunder has over nine years of investment
management experience. At Brandes Investment Partners, L.P., he serves as a
Portfolio Manager. He is a Chartered Financial Analyst, and a Member of the
Association for Investment Management and Research and the Financial Analysts
Society.
Charles Brandes and Ian Sunder structure the portfolio of the Pilgrim Emerging
Markets Value Fund from a buy list determined by an investment committee of
Brandes.
Charles Ullerich (Pilgrim Advisors)
Charles Ullerich has co-managed the Pilgrim Government Securities Fund since
November 1999. Mr. Ullerich has approximately nine years of experience in the
management of fixed-income investments. At Pilgrim Investments, an affiliate of
Pilgrim Advisors, he serves as a Vice President and Portfolio Manager. Prior to
joining Pilgrim Investments, 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.
James Wiess (J.P. Morgan)
James Wiess has co-managed the Pilgrim Research Enhanced Index Fund since the
fund was formed in December 1998. At J.P. Morgan Investment Management Inc., he
serves as a Portfolio Manager and Member of the Structured Equity Group with the
responsibility of portfolio rebalancing and research and development of
structured equities strategies.
Mr. Wiess has over 16 years of investment management experience. Before joining
J.P. Morgan Investment Management Inc. in 1992, Mr. Wiess was a Stock Index
Arbitrager for seven years at Oppenheimer & Co. and a Consultant for Data
Resources. He is a Chartered Financial Analyst.
If you have any questions, please call 1-800-992-0180.
27
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
PILGRIM ADVISORS, INC.
Pilgrim Advisors, Inc. (formerly "Northstar Investment Management Corporation")
(Pilgrim) provides advice and recommendations about investments made by all of
the funds and oversees the investment management of the funds by the
Sub-Advisers. Pilgrim is a registered investment adviser that currently manages
over $4 billion in mutual funds and institutional accounts. Pilgrim's principal
address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. Pilgrim
is an indirect wholly owned subsidiary of ReliaStar Financial Corporation
("ReliaStar"). On October 29, 1999, ReliaStar acquired Pilgrim Investments, an
investment adviser to mutual funds and institutional accounts. Pilgrim and
Pilgrim Investments share certain resources and investment personnel.
Pilgrim receives a monthly fee for its services based on the average daily net
assets of each of the funds it manages. The fee is paid by each of the funds at
the management fee rate noted for each fund beginning on page 2.
SUB-ADVISERS
BRANDES INVESTMENT PARTNERS, L.P.
A registered investment adviser, Brandes Investment Partners, L.P. (Brandes)
serves as Sub-Adviser to the Pilgrim International Value Fund and the Pilgrim
Emerging Markets Value Fund. The company was formed in May 1996 as the successor
to its general partner, Brandes Investment Partners, Inc. which has been
providing investment advisory services (through various predecessor entities)
since 1974. Brandes currently manages over $33 billion in international
portfolios. Brandes' principal address is 12750 High Bluff Drive, San Diego,
California 92130.
Brandes receives a monthly fee for its services based on the average daily net
assets of each of the funds it manages. The fee for each fund is paid by Pilgrim
and not by either of the funds, at a rate of 50% of the management fee that each
of the funds pays Pilgrim.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
A registered investment adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan) serves as Sub-Adviser to the Pilgrim Research Enhanced Index Fund. The
firm was formed in 1984. The firm evolved from the Trust and Investment Division
of Morgan Guaranty Trust Company which acquired its first tax-exempt client in
1913 and its first pension account in 1940. J.P. Morgan currently manages
approximately $323 billion for institutions and pension funds. The company is a
wholly owned subsidiary of J.P. Morgan & Co. J.P. Morgan's principal address is
522 Fifth Avenue, New York, New York 10036.
J.P. Morgan receives a monthly fee for its services based on the average daily
net assets of the Pilgrim Research Enhanced Index Fund. The fee for the fund is
paid by Pilgrim, and not by the fund, at a rate of 0.20%.
Navellier Fund Management, Inc.
A registered investment adviser, Navellier Fund Management Inc. (Navellier)
serves as Sub-Adviser to the Pilgrim Growth + Value Fund. Navellier and its
affiliate, Navellier & Associates, Inc., manage over $2 billion for
institutions, pension funds and high net worth individuals. Navellier is wholly
owned by Louis Navellier. Navellier's principal address is 1 East Liberty, Third
Floor, Reno, Nevada 89501.
Navellier receives a monthly fee for its services based on the average daily net
assets of the Pilgrim Growth + Value Fund. The fee for the fund is paid by
Pilgrim, and not by the fund, at a rate of 0.50%.
28
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
PERFORMANCE PROFILE:
Brandes Investment Partners
The charts below show the average annual total returns for the Pilgrim
International Value Fund. The fund commenced operations on March 6, 1995 as the
Brandes International Fund. It was reorganized on April 21, 1997 as the Pilgrim
International Value Fund.
These figures reflect changes in the share prices and reinvestment of dividends
and distributions, and are net of all fees and expenses. Included for comparison
are performance figures of the MSCI EAFE Index, an unmanaged index of securities
listed on exchanges in Europe, Australia and the Far East. It has been adjusted
to reflect reinvestment of dividends. The results shown below may not be the
same as the rate of return you receive on an investment in the fund, because
returns depend on when you make your investment and on how your investment is
taxed.
Pilgrim
International MSCI
Value EAFE
Fund (%) Index (%)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 13.46 20.00
- --------------------------------------------------------------------------------
Three years, ended
December 31, 1998 15.50 9.00
- --------------------------------------------------------------------------------
Total return since
March 6, 1995 15.39 11.24
- --------------------------------------------------------------------------------
[The following table was depicated as a line chart in the printed material.]
[PLOT POINTS TO COME]
[GRAPHIC OMITTED]
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
29
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
PERFORMANCE
PROFILE:
Brandes Investment Partners
These figures demonstrate the historical track record of Brandes Investment
Partners. The figures have been provided by Brandes Investment Partners and have
not been verified or audited by Pilgrim. They do not indicate how the Pilgrim
International Value Fund or Brandes Investment Partners will perform in the
future.
The charts below show the past performance of Brandes Investment Partners in
managing all accounts with investment objectives, strategies and restrictions
substantially similar, but not necessarily identical, to those of the Pilgrim
International Value Fund. The charts show average annual total returns for a
composite of the actual performance of all international equity accounts managed
by Brandes Investment Partners from July 1990 until the present.
The accounts were not subject to the same types of expenses as the fund or the
requirements of the Investment Company Act of 1940 or the Internal Revenue Code,
the limitations of which might have adversely affected performance results.
Included for comparison purposes are performance figures of the MSCI EAFE Index.
The results shown below may not be the same as the rate of return of any
particular account, because returns depend on when you make your investment and
how your investment is taxed.
MSCI
Brandes International EAFE
Equity Composite (%)(a) Index( %)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 14.76 20.00
- --------------------------------------------------------------------------------
Three years, ended
December 31, 1998 17.03 9.00
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 12.08 9.19
- --------------------------------------------------------------------------------
Total return since
July 1, 1990 16.48 6.90
(a) The annual returns presented (right) were calculated on a time-weighted and
asset-weighted, total return basis, including reinvestments of all dividends,
interest and income, realized and unrealized gain or losses and are net of
applicable investment advisory fees, brokerage commissions and execution costs,
custodial fees and any applicable foreign withholding taxes, without provision
for federal and state income taxes, if any. This total return method differs
from the SEC method of calculating total return. The Brandes composite results
include all actual, fee-paying, fully discretionary international equity
accounts under management for at least one month beginning July 1, 1990 having
substantially similar investment objectives, strategies and restrictions to
those of the Pilgrim International Value Fund. The weighted-average management
fee during the period from July 1, 1990 through December 31, 1997 was 0.91% per
year. If the fund's expenses had been deducted, they would have reduced
performance. Securities transactions are accounted for on the trade date and
cash accounting is utilized. Cash and cash equivalents are included in
performance results. Net annual returns for the composite for calendar year 1991
have been attested by an independent accounting firm. Starting with calendar
year 1992 through calendar year 1997, the composite has been examined by a Big
Five accounting firm in accordance with AIMR Level II verification standards.
The examination for calendar year 1998 has not been completed as of the date of
this prospectus. Copies of the reports of independent accountants and a complete
list and description of Brandes' composites are available on request. Brandes
has prepared the performance data in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
(AIMR-PPS(TM)). AIMR did not prepare or review this data. The fund agrees to
conform the performance presentation to any changes in the SEC staff position
relating to prior performance presentations.
[The following table was depicated as a line chart in the printed material.]
[PLOT POINTS TO COME]
[GRAPHIC OMITTED]
30
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
PERFORMANCE PROFILE:
J.P. Morgan Investment Management
These figures demonstrate the historical track record of J.P. Morgan Investment
Management. The figures have been provided by J.P. Morgan Investment Management
and have not been verified or audited by Pilgrim. They do not indicate how the
Pilgrim Research Enhanced Index Fund or J.P. Morgan Investment Management will
perform in the future.
(a) Results are net of fees and include reinvestment of earnings. This total
return method differs from the SEC method of calculating total return. If the
fund's expenses had been deducted, they would have reduced performance. J.P.
Morgan has prepared the performance data in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
(AIMR-PPS(TM)). AIMR did not prepare or review this data. The fund agrees to
conform the performance presentation to any changes in the SEC staff position
relating to prior performance presentations.
The charts presented here show J.P. Morgan Investment Management's past
performance in managing accounts with investment objectives, strategies and
restrictions substantially similar but not necessarily identical, to those of
the Pilgrim Research Enhanced Index Fund.
The charts show average annual total returns for a composite of the actual
performance of all accounts managed by J.P. Morgan following its research
enhanced equity strategy from December 1988 until the present.
The accounts were not subject to the same types of expenses as the fund or the
requirements of the Investment Company Act of 1940 or the Internal Revenue Code,
the limitations of which might have adversely affected performance results.
Included for comparison purposes are performance figures of the S&P 500 Index.
The results shown here may not be the same as the rate of return of any
particular account, because returns depend on when you make your investment and
on how your investment is taxed.
J.P. Morgan
Investment
Management S&P 500
Composite (%)(a) Index (%)
- --------------------------------------------------------------------------------
1989 30.43 31.64
- --------------------------------------------------------------------------------
1990 -2.28 -3.10
- --------------------------------------------------------------------------------
1991 29.95 30.41
- --------------------------------------------------------------------------------
1992 10.10 7.61
- --------------------------------------------------------------------------------
1993 10.60 10.06
- --------------------------------------------------------------------------------
1994 2.42 1.32
- --------------------------------------------------------------------------------
1995 38.58 37.54
- --------------------------------------------------------------------------------
1996 23.90 22.95
- --------------------------------------------------------------------------------
1997 34.17 33.35
- --------------------------------------------------------------------------------
1998 31.83 28.58
- --------------------------------------------------------------------------------
Three years, ended
December 31, 1998 29.89 28.23
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 25.48 24.06
- --------------------------------------------------------------------------------
Ten years, ended
December 31, 1998 20.16 19.21
- --------------------------------------------------------------------------------
[The following table was depicated as a line chart in the printed material.]
[PLOT POINTS TO COME]
[GRAPHIC OMITTED]
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
31
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
PERFORMANCE PROFILE:
Louis Navellier
The charts presented here show average annual total returns for the Pilgrim
Growth + Value Fund.
Pilgrim Russell
Growth + Value 2000
Fund (%) Index (%)
- --------------------------------------------------------------------------------
One year, ended
December 31, 1998 17.72 -2.54
- --------------------------------------------------------------------------------
Total return since
November 18, 1996 15.26 9.99
[The following table was depicated as a line chart in the printed material.]
[PLOT POINTS TO COME]
[GRAPHIC OMITTED]
In addition to owning Navellier Fund Management, Inc., Louis Navellier is the
sole owner of Navellier & Associates, Inc., a registered investment adviser that
has been managing large pools of private assets since 1985.
Mr. Navellier and his staff use a computer-based system he developed to analyze
over 9,000 stocks as a basis for making buying and selling decisions.
The charts on page 33 show his past performance in managing accounts with
investment objectives, strategies and restrictions substantially similar, but
not necessarily identical, to those of the Pilgrim Growth + Value Fund.
The charts show average annual total returns for a composite of the actual
performance of all equity accounts managed by Navellier & Associates from 1985
to present, calculated according to AIMR standards. This total return method
differs from the SEC method of calculating total return. Navellier has prepared
the performance data in compliance with the Performance Presentation Standards
of the Association for Investment Management and Research (AIMR-PPS(TM)). AIMR
did not prepare or review this data. The fund agrees to conform the performance
presentation to any changes in the SEC staff position relating to prior
performance presentations.
The accounts were not subject to the requirements of the Investment Company Act
of 1940 or the Internal Revenue Code, the limitations of which might have
adversely affected performance results.
32
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
- --------------------------------------------------------------------------------
PERFORMANCE PROFILE:
Louis Navellier
These figures demonstrate the historical track record of Navellier & Associates.
The figures have been provided by Navellier & Associates and have not been
verified or audited by Pilgrim. They do not indicate how the Pilgrim Growth +
Value Fund or Navellier & Associates will perform in the future.
(a) Results are net of fees and expenses. Prior to January 1, 1993, any account
expenses not deducted from the accounts, such as management fees paid outside
the accounts, are not reflected in the performance results. If these fees had
been deducted from the accounts, they would have reduced performance. Fees were
not materially different from the Pilgrim Growth + Value Fund's expense ratio,
but were generally higher than the expense ratio for Class A shares and lower
than the expense ratios for Class B and Class C shares.
Navellier & Russell
Associates 2000
Composite (%)(a) Index (%)
- --------------------------------------------------------------------------------
1985 49.95 31.04
- --------------------------------------------------------------------------------
1986 31.20 5.68
- --------------------------------------------------------------------------------
1987 8.05 -8.80
- --------------------------------------------------------------------------------
1988 11.40 25.02
- --------------------------------------------------------------------------------
1989 22.20 16.26
- --------------------------------------------------------------------------------
1990 12.51 -19.48
- --------------------------------------------------------------------------------
1991 66.41 46.04
- --------------------------------------------------------------------------------
1992 3.12 18.41
- --------------------------------------------------------------------------------
1993 16.83 18.88
- --------------------------------------------------------------------------------
1994 1.53 -1.82
Navellier & Russell
Associates 2000
Composite (%)(a) Index (%)
- --------------------------------------------------------------------------------
1995 43.80 28.44
- --------------------------------------------------------------------------------
1996 10.68 16.49
- --------------------------------------------------------------------------------
1997 13.05 22.36
- --------------------------------------------------------------------------------
1998 15.14 -2.54
- --------------------------------------------------------------------------------
Three years, ended
December 31, 1998 12.94 11.58
- --------------------------------------------------------------------------------
Five years, ended
December 31, 1998 16.03 11.86
- --------------------------------------------------------------------------------
Ten years, ended
December 31, 1998 19.21 12.92
- --------------------------------------------------------------------------------
Total return since
January 1, 1985 20.58 12.69
[The following table was depicated as a line chart in the printed material.]
[PLOT POINTS TO COME]
[GRAPHIC OMITTED]
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
33
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
THERE ARE THREE STEPS TO TAKE WHEN YOU WANT TO BUY, SELL OR EXCHANGE SHARES OF
OUR FUNDS:
o first, choose a share class
o second, open a Pilgrim account and make your first investment
o third, choose one of several ways to buy, sell or exchange shares.
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All Pilgrim funds are available in Class A, Class B and Class C shares.
The chart below summarizes the differences between the share classes - your
choice of share class will depend on how much you are investing and for how
long. Large investments qualify for a reduced Class A sales charge and Class A
shares avoid the higher distribution fees of classes B and C. Investments in
Class B and Class C shares don't have a front-end sales charge but there is a
restriction on the amount you can invest in Class B shares at one time. Your
financial consultant can help you, or feel free to call us for more information.
Some of our funds also have Class T shares. You can no longer buy Class T shares
unless you are reinvesting income earned on Class T shares, or exchanging Class
T shares you already own, including Class T shares of the Cash Management Fund
of Salomon Brothers Investment Series (a money market fund that's available
through Pilgrim, but isn't one of the Pilgrim funds).
In addition to Class A, Class B and Class C shares, the Pilgrim SmallCap
Opportunities Fund, Pilgrim MidCap Opportunities Fund, Pilgrim Growth
Opportunities Fund and Pilgrim Research Enhanced Index Fund each offer Class I
shares. Class I shares are only available to certain defined benefit plans,
insurance companies and foundations investing for their own account. Class I
shares may have different sales charges and other expenses, which may affect
performance. You can obtain additional information concerning Class I shares by
calling us at 1-800-992-0180.
We've listed actual expenses charged to the funds beginning on page 2.
- --------------------------------------------------------------------------------
Maximum Class A no limit
amount you Class B $250,000
can buy Class C no limit
Class T can only be purchased by reinvesting income or
exchanging other Class T shares
- --------------------------------------------------------------------------------
Front-end Class A yes, varies by size of investment
sales charge Class B none
Class C none
Class T none
- --------------------------------------------------------------------------------
Deferred Class A only on investments of $1 million or more if you
sales charge sell within two years
Class B yes, if you sell within 6 years
Class C yes, if you sell within 1 year
Class T yes, if you sell within 4 years
- --------------------------------------------------------------------------------
Distribution Class A 0.05% per year
fee(1) Class B 0.75% per year
Class C 0.75% per year
Class T from 0.40% to 0.75% per year (varies by fund)
- --------------------------------------------------------------------------------
Service fee(1) Class A 0.25% per year
Class B 0.25% per year
Class C 0.25% per year
Class T 0.25% per year
- --------------------------------------------------------------------------------
Conversion Class B Class B shares convert to Class A shares after 8 years
Class T Class T shares convert to Class A shares after 8 years
(1) Because distribution and service (12b-1) fees are paid on an ongoing
basis, Class B, C and T shareholders could end up paying more expenses
over the long-term than if they had paid a sales charge.
34
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
FRONT-END SALES CHARGES
(Class A shares only)
<TABLE>
<CAPTION>
Equity Funds and
Your investment Income and Equity Funds Income Funds
- --------------------------------------------------------------------------------------------
(as a % of your (as a % of (as a % of your (as a % of
net investment) offering price) net investment) offering price)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 6.10 5.75 4.99 4.75
- --------------------------------------------------------------------------------------------
$50,000 to $99,999 4.71 4.50 4.71 4.50
- --------------------------------------------------------------------------------------------
$100,000 to $249,999 3.63 3.50 3.63 3.50
- --------------------------------------------------------------------------------------------
$250,000 to $499,999 2.56 2.50 2.56 2.50
- --------------------------------------------------------------------------------------------
$500,000 to $999,999 2.04 2.00 2.04 2.00
- --------------------------------------------------------------------------------------------
$1,000,000 and over -- -- -- --
</TABLE>
WAYS TO REDUCE OR ELIMINATE SALES CHARGES
There are three ways you can reduce your front-end sales charges.
1. Take advantage of purchases you've already made Rights of accumulation let
you combine the value of all the Class A shares you already own with your
current investment to calculate your sales charge.
2. Take advantage of purchases you intend to make By signing a non-binding
letter of intent, you can combine investments you plan to make over a
13-month period to calculate the sales charge you'll pay on each
investment.
3. Buy as part of a group of investors You can combine your investments with
others in a recognized group when calculating your sales charge. The
following is a general list of the groups Pilgrim recognizes for this
benefit:
o you, your spouse and your children under the age of 21
o a trustee or fiduciary for a single trust, estate or fiduciary
account (including qualifying pension, profit sharing and other
employee benefit trusts)
o any other organized group that has been in existence for at least
six months, and wasn't formed solely for the purpose of investing at
a discount.
You may not have to pay front-end sales charges or a CDSC if you are:
o an active or retired trustee, director, officer, partner or employee
(including immediate family) of
- Pilgrim or of any of its affiliated companies
- any Pilgrim affiliated investment company
- a dealer that has a sales agreement with the distributor
o a trustee or custodian of any qualified retirement plan or IRA
established for the benefit of anyone in the point above
o a dealer, broker or registered investment adviser who has entered
into an agreement with the distributor providing for the use of
shares of the funds in particular investment products such as "wrap
accounts" or other similar managed accounts for the benefit of your
clients
o a service provider for Pilgrim, any Pilgrim affiliated company, or
any Pilgrim affiliated investment company
o a Brandes employee, officer or partner
o an owner, participant or beneficiary of life insurance and/or
annuity contracts with ReliaStar Life Insurance Company (ReliaStar)
or any ReliaStar affiliated life insurance company to the extent
they invest payments made to them under the contracts in one or more
of the funds within sixty days of payment under the contracts.
Certain pension, profit sharing and other benefit plans created pursuant to a
plan qualified under Section 401 of the Code or plans under Section 456 of the
Code don't pay a front-end sales charge or a CDSC.
Investment advisors or financial planners who charge a management, consulting or
other fee for their service, don't pay a front-end sales charge or a CDSC when
they place trades for their own accounts or the accounts of their clients, or
when their clients place trades for their own accounts, as long as the accounts
are linked to the master account of the investment advisor or financial planner
on the books and records of the broker or agent.
Please call us or consult the SAI to find out if you are eligible to reduce your
sales charges using any of these methods.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
35
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGES
(Classes A, B, C & T)
We deduct a contingent deferred sales charge (CDSC) from the proceeds when you
sell shares as indicated below. A CDSC is charged on the current market value of
the shares, or on the price you paid for them, whichever is less. You aren't
charged a CDSC on shares you acquired by reinvesting your dividends, or on
amounts representing appreciation.
When you ask us to sell shares, we will sell those that are exempt from the CDSC
first, and then sell the shares you have held the longest. This helps keep your
CDSC as low as possible.
CLASS A SHARES
There is generally no CDSC on Class A shares, except for purchases of $1 million
or more, when you sell them within two years of when you bought them.
CDSC Period
on shares during which
Your investment being sold CDSC applies
- --------------------------------------------------------------------------------
First $1,000,000 to $2,499,999 1.00% 2 years
- --------------------------------------------------------------------------------
$2,500,000 to $4,999,999 0.50% 1 year
- --------------------------------------------------------------------------------
$5,000,000 and over 0.25% 1 year
- --------------------------------------------------------------------------------
CLASS B, C & T SHARES
Years after you
bought the shares Class B Class C Class T
- --------------------------------------------------------------------------------
1st year 5.00% 1.00% 4.00%
- --------------------------------------------------------------------------------
2nd year 4.00% -- 3.00%
- --------------------------------------------------------------------------------
3rd year 3.00% -- 2.00%
- --------------------------------------------------------------------------------
4th year 3.00% -- 1.00%
- --------------------------------------------------------------------------------
5th year 2.00% -- --
- --------------------------------------------------------------------------------
6th year 1.00% --
- --------------------------------------------------------------------------------
after 6 years -- -- --
- --------------------------------------------------------------------------------
WHEN THE CDSC MIGHT BE WAIVED
We may waive the CDSC for Class B and Class C shares if:
o the shareholder dies or becomes disabled
o you're selling your shares through our systematic withdrawal program
o you're selling shares of a retirement plan and you are over 70 1/2 years
old
o you're exchanging Class B, C or T shares for the same class of shares of
another Pilgrim fund
o you fall into any of the waiver categories listed on page 35.
Please call us or consult the SAI to find out if you are eligible for a CDSC
waiver.
36
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
HOW DEALERS ARE COMPENSATED
Dealers are paid in three ways for selling shares of Pilgrim funds:
THEY RECEIVE A COMMISSION WHEN YOU BUY SHARES
The amount of the commission depends on the amount you invest and the share
class you buy. Sales commissions are detailed in the chart below.
o Class A investments (% of offering price)
Equity Funds and Income and Equity Funds
Commission Amount
received by dealers paid
out of sales charges by the
you pay distributor
- --------------------------------------------------------------------------------
Less than $50,000 5.00 --
- --------------------------------------------------------------------------------
$50,000 to $99,999 3.75 --
- --------------------------------------------------------------------------------
100,000 to $249,999 2.75 --
- --------------------------------------------------------------------------------
$250,000 to $499,999 2.00 --
- --------------------------------------------------------------------------------
$500,000 to $999,999 1.75 --
- --------------------------------------------------------------------------------
$1,000,000 to $2,499,999 -- 1.00
- --------------------------------------------------------------------------------
$2,500,000 to $4,999,999 -- 0.50
- --------------------------------------------------------------------------------
$5,000,000 and over -- 0.25
- --------------------------------------------------------------------------------
Income Funds
Commission Amount
received by dealers paid
out of sales charges by the
you pay distributor
- --------------------------------------------------------------------------------
Less than $50,000 4.25 --
- --------------------------------------------------------------------------------
$50,000 to $99,999 4.00 --
- --------------------------------------------------------------------------------
$100,000 to $249,999 3.00 --
- --------------------------------------------------------------------------------
$250,000 to $499,999 2.25 --
- --------------------------------------------------------------------------------
$500,000 to $999,999 1.75 --
- --------------------------------------------------------------------------------
$1,000,000 to $2,499,999 -- 1.00
- --------------------------------------------------------------------------------
$2,500,000 to $4,999,999 -- 0.50
- --------------------------------------------------------------------------------
$5,000,000 and over -- 0.25
o Class B investments
- --------------------------------------------------------------------------------
Receives 4% of the sale price from the distributor
- --------------------------------------------------------------------------------
o Class C investments
- --------------------------------------------------------------------------------
Receives 1% of the sale price from the distributor
- --------------------------------------------------------------------------------
THEY ARE PAID A FEE BY THE DISTRIBUTOR FOR SERVICING YOUR ACCOUNT
They receive a service fee depending on the average net asset value of the class
of shares their clients hold in Pilgrim funds. These fees are paid from the
12b-1 fee deducted from each fund class. In addition to covering the cost of
commissions and service fees, the 12b-1 fee is used to pay for other expenses
such as sales literature, prospectus printing and distribution and compensation
to the distributor and its wholesalers. You'll find the 12b-1 fees listed in the
fund information beginning on page 2. Service and distribution fee percentages
appear on page 34.
THEY MAY RECEIVE ADDITIONAL BENEFITS AND REWARDS
Selling shares of Pilgrim funds may make dealers eligible for awards or to
participate in sales programs sponsored by the distributor. The costs of these
benefits and rewards are not deducted from the assets of the funds -- they are
paid from the distributor's own resources.
Currently, the distributor is sponsoring a sales program for registered
representatives of PrimeVest Financial Services, Inc. and Washington Square
Securities, Inc. through December 31, 1999 in connection with the sale by their
members of shares of the Pilgrim MidCap Opportunities Fund. The distributor has
agreed to provide such registered representatives with an additional 0.15% in
sales commissions with respect to sales of all classes of the Pilgrim MidCap
Opportunities Fund that exceed $50,000.
The distributor may also pay additional compensation to dealers including
Advest, Inc. out of its own resources for marketing and other services to
shareholders. All payments it receives for Class T shares are paid to Advest,
Inc.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
37
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
OPENING A PILGRIM ACCOUNT
Once you've chosen the funds you would like to invest in and the share class you
prefer, you're ready to open an account.
First, determine how much money you want to invest. The minimum initial
investment for Pilgrim funds is:
o $1,000 for non-retirement accounts (we reserve the right to accept smaller
amounts)
o $250 for retirement accounts
o $100 if you are investing using our automatic investment plan (see page
40).
Next, open an account in one of two ways:
o give a check to your financial consultant, who will open an account for
you, or
o complete an application and mail it to us, along with your check made
payable to Pilgrim Funds.
TAX-SHELTERED RETIREMENT PLANS
Call or write to us about opening your Pilgrim account as any one of the
following retirement plans:
o Roth IRAs
o IRAs
o SEP-IRAs
o Simple IRAs
o 403(b)(7)s.
- --------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING
Once you've opened an account and made your first investment, you can choose one
of three ways to buy, sell or exchange shares of Pilgrim funds:
o through your financial consultant
o directly, by mail or over the telephone
o using one of our automatic plans.
We'll send you a confirmation statement every time you make a transaction that
affects your account balance, except when we pay distributions.
Some broker-dealers or agents might charge you a fee if you buy, sell or
exchange shares through them.
Instructions for each option appear in the chart on page 40, but here are a few
things you should know before you begin.
- --------------------------------------------------------------------------------
HOW SHARES ARE PRICED
The price you pay when you buy and the price you receive when you sell or
exchange shares is determined by the net asset value (NAV) per share of the
share class. NAV is calculated each business day at the close of regular trading
on the New York Stock Exchange (usually 4:00 p.m. Eastern time) by dividing the
net assets of each fund class by the number of shares outstanding. To calculate
NAV, we determine the market value of the fund's portfolio securities using the
method described in the SAI. Please note that foreign securities may trade in
their primary markets on weekends or other days when the funds do not price
their shares. Therefore the value of a fund's portfolio that holds foreign
securities may change on days when you will not be able to buy, sell or exchange
your shares.
When you're buying shares, you'll pay the NAV that is next calculated after we
receive your order in proper form, plus any sales charges that apply. When
you're selling shares, you'll receive the NAV that is next calculated after we
receive your order in proper form, less any deferred sales charges that apply.
- --------------------------------------------------------------------------------
SOME RULES FOR BUYING
o The minimum amount of each investment after your first one is:
- $100 for non-retirement accounts
- $100 for retirement accounts
- $100 if you are investing using our automatic investment plan (see
page 40).
o We record most shares on our books electronically. We will issue a
certificate if you ask us in writing, however most of our shareholders
prefer not to have their shares in certificate form because certificated
shares can't be sold or exchanged by telephone or by using the systematic
withdrawal program.
o We have the right to refuse a request to buy shares.
38
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
SOME RULES FOR SELLING
o Selling your shares may result in a deferred sales charge. Please refer to
the table on page 36.
o We'll pay you within three days from the time we receive your request to
sell, unless you're selling shares you recently paid for by check. In that
case, we'll pay you when your check has cleared, which may take up to 15
days.
o If you are a corporation, partnership, executor, administrator, trustee,
custodian, guardian or if you are selling shares of a retirement plan,
you'll need to complete special documentation and give us your request in
writing. Please call us for information.
o You can reinvest part or all of the proceeds of any shares you sell
without paying a sales charge. You must let us know in writing within 90
days from the day you sold the shares, and you must buy the same class of
shares as you sold. We will reimburse you for any CDSC you paid. Please
see page 43 for information about how this can affect your taxes.
o If selling shares results in the value of your account falling below
$1,000, we have the right to close your account, so long as your account
has been open for at least a year. We'll let you know 60 days in advance,
and if you don't bring the account balance above $1,000, we'll sell your
shares, mail the proceeds to you and close your account. We may also close
your account if you give us an incorrect social security number or
taxpayer identification number.
o In unusual circumstances, we may temporarily suspend the processing of
requests to sell.
- --------------------------------------------------------------------------------
SOME RULES FOR EXCHANGING
o When you exchange shares, you are selling shares of one fund and using the
proceeds to buy shares of another fund. Please see page 43 for information
about how this can affect your taxes.
o Before you make an exchange, be sure to read the prospectus that discusses
the shares you're exchanging into.
o You can exchange shares of any fund for the same class of shares of any
other fund (including all funds within the Pilgrim family of funds), or
for shares of the Cash Management Fund without a sales charge. You will,
however, pay a sales charge if you buy shares of the Cash Management Fund,
and then exchange them for Class A shares of any of the other funds.
o For the purposes of calculating CDSC, shares you exchange will continue to
age from the day you first purchased them, even if you're exchanging into
the Cash Management Fund.
o We'll let you know 60 days in advance if we want to make any changes to
these rules.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
39
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
WAYS TO BUY, SELL OR EXCHANGE WHEN TO USE THIS OPTION
- -------------------------------------------- ---------------------------------
Through your financial consultant o buy
o sell
o exchange
- -------------------------------------------- ---------------------------------
By mail
Please call us if you have any questions -- o buy
we can't process your request until we have o sell
all of the documents we need. o exchange
- -------------------------------------------- ---------------------------------
By telephone
To sign up for this service, complete o sell
Section E of the Special Account Options Form o exchange
or call us at 1-800-992-0180.
- -------------------------------------------- ---------------------------------
Automatic investment plan
o buy
To sign up for this service, complete
Section B of the Special Account Options Form
or call us at 1-800-992-0180.
- -------------------------------------------- ---------------------------------
Systematic withdrawal program
To sign up for this service, complete o sell
Section D of the Special Account Options Form
or call us at 1-800-992-0180.
40
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
- --------------------------------------------------------------------------------
HOW TO USE IT
- --------------------------------------------------------------------------------
If you're buying shares, make your check payable to Pilgrim Funds and give it to
your financial consultant, who will forward it to us.
When you're selling or exchanging shares, give your written request to your
financial consultant, who may charge you a fee for this service.
- --------------------------------------------------------------------------------
Send your request to buy, sell or exchange in writing to:
Pilgrim Funds
P.O. Box 419368
Kansas City, MO 64141-6368
Your letter should tell us:
o your account number
o your social security number or taxpayer identification number
o the name the account is registered in
o the fund name and share class you're buying or selling, and, for
exchanges, the fund name and share class you're exchanging in to
o the dollar value or number of shares you want to buy, sell or exchange.
If you're buying, include a check payable to Pilgrim Funds with your request.
If you're selling or exchanging, your request must be signed by all registered
owners of the account.
We'll ask you to guarantee the signatures if:
o you are selling more than $50,000 worth of shares
o your address of record has changed in the past 30 days
o you want us to send the payment to someone other than the registered
owner, to an address other than the address of record, or in any form
other than by check.
Signatures can be guaranteed by a bank, a member of a national stock exchange or
another eligible institution.
- --------------------------------------------------------------------------------
You can sell or exchange your shares by telephone, subject to certain
limitations.
Call us at 1-800-992-0180 between 9:00 a.m. and 4:00 p.m. Eastern time.
When you're calling with your request, we'll ask you for your name, social
security number, broker of record or other identification. If we don't ask for
these things and we process an unauthorized telephone transaction, we are
responsible for any losses to your account. Otherwise you are responsible for
any unauthorized use of the telephone transaction service.
We'll mail the proceeds of the sale to the address of record or wire $5,000 or
more to any commercial bank in the U.S. that is a member of the Federal Reserve
System. Pilgrim does not charge a fee for this service, but your bank may charge
you a fee for receiving a wire transfer.
- --------------------------------------------------------------------------------
You can authorize us to automatically withdraw a minimum of $100 each month from
your bank account and use it to buy shares in Pilgrim funds.
There's no charge for this service, but your bank may charge you a small set-up
or transaction fee. You can cancel the program at any time.
- --------------------------------------------------------------------------------
You can ask us to automatically transfer money from your Pilgrim account into
your bank account.
We will sell shares or share fractions on your behalf monthly, quarterly or
annually and automatically deposit the proceeds into your bank account. There
may be a sales charge on shares we sell on your behalf.
You must have at least $10,000 worth of shares in your account to participate in
this program. The minimum transfer amount is $100.
It isn't to your advantage to buy and sell shares of the same fund at the same
time, so you can't set up a systematic withdrawal program and an automatic
investment plan on the same account.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
41
<PAGE>
MUTUAL FUND
EARNINGS AND
YOUR TAXES
- --------------------------------------------------------------------------------
HOW THE FUNDS PAY DISTRIBUTIONS
Each Pilgrim fund distributes virtually all of its net investment income and net
capital gains to shareholders at least annually in the form of dividends.
The funds pay income dividends as follows:
- --------------------------------------------------------------------------------
Equity Funds annually
- --------------------------------------------------------------------------------
Income and Equity Funds quarterly
- --------------------------------------------------------------------------------
Income Funds monthly
- --------------------------------------------------------------------------------
As a shareholder, you are entitled to a share of the income and capital gains a
fund distributes. The amount you receive is based on the number of shares you
own.
DISTRIBUTION OPTIONS
You can take your distributions as cash or reinvest them in the same class of
shares of any of our funds. You specify your preference when you open your
account. Distribution options vary by share class, as follows.
CLASS A, B & C SHARES
o reinvest both income dividends and capital gain distributions to buy
additional Class A, B or C shares of any fund you choose
o receive income dividends in cash and reinvest capital gain distributions
to buy additional Class A, B or C shares of any fund you choose
o receive both income dividends and capital gain distributions in cash.
If you want your distributions sent to an address other than the one we have on
record, please request so in writing.
If you don't specify how you would like to receive your distributions, we'll
automatically reinvest both income dividends and capital gain distributions in
additional shares of the same fund.
CLASS T SHARES
You can choose to receive your distributions in cash or by reinvesting them in
additional Class T shares of the same fund or any other fund that offers Class T
shares.
42
<PAGE>
MUTUAL FUND
EARNINGS AND
YOUR TAXES
- --------------------------------------------------------------------------------
HOW YOUR DISTRIBUTIONS ARE TAXED
Each Pilgrim fund intends to meet the requirements for being a tax-qualified
regulated investment company, which means they generally do not pay federal
income tax on the earnings they distribute to shareholders.
As a result, you'll generally have to pay taxes on any distributions you
receive. Ordinary income distributions, whether you take them as cash or
reinvest them, are taxable as ordinary income. Net capital gain distributions
are taxable as long-term capital gains, regardless of how long you've held the
shares.
Distributions may also be subject to state, local or foreign taxes.
If income distributed to you includes dividends paid by U.S. corporations, part
of the dividends the fund pays may be eligible for the corporate
dividends-received deduction.
TIMING YOUR PURCHASE
If you buy shares of a fund just before it makes a distribution, you will pay
the full price but part of your investment will come back to you as a taxable
distribution. Unless you are investing in a tax-deferred account, such as an
IRA, this is not to your advantage because you'll pay tax on the dividend but
will not have shared in the increase in the net asset value of the fund.
WHEN DISTRIBUTIONS ARE DECLARED
For tax purposes, distributions declared by the fund in October, November or
December and paid to you in January are taxable in the calendar year in which
they were declared.
BACKUP WITHHOLDING TAX
We'll notify you each year of the tax status of dividends and distributions. If
we don't have your tax identification number, or if you have been told by the
IRS that you are subject to backup withholding tax, we may be required to
withhold U.S. federal income tax on any distributions at the rate of 31%.
WHEN YOU SELL YOUR SHARES
When you sell or exchange shares you may realize a capital gain or loss,
depending on the difference between what your shares cost you and what you
receive for them. A capital gain or loss will be long-term or short-term,
depending on the length of time you held the shares.
In your federal income tax return you report a capital gain as income and a
capital loss as a deduction.
CONSULT YOUR TAX ADVISER
The information above is general in nature. You should consult your tax adviser
to discuss how investing in Pilgrim funds affects your personal tax situation.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
43
<PAGE>
FINANCIAL
HIGHLIGHTS
The following chart shows the fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
PILGRIM
SMALLCAP OPPORTUNITIES
FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
Year ended December 31, 1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the
period $ 27.77 24.72 20.92 19.56 27.27 24.46 20.84 19.56
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment loss $ (0.27) (0.02) (0.04) (0.09) (0.48) (0.19) (0.12) (0.12)
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments $ 2.23 3.68 3.84 2.48 2.20 3.61 3.74 2.43
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 1.96 3.66 3.80 2.39 1.72 3.42 3.62 2.31
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on
investments sold $ (0.73) (0.61) -- (1.03) (0.73) (0.61) -- (1.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.73) (0.61) -- (1.03) (0.73) (0.61) -- (1.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 29.00 27.77 24.72 20.92 28.26 27.27 24.46 20.84
----------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 7.59 14.92 18.16 12.20 6.84 14.10 17.37 11.79
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period
($000s) $ 45,461 78,160 65,660 2,335 124,065 169,516 126,859 1,491
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.47 1.43 1.46 1.50(3) 2.18 2.15 2.17 2.20(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to
average net assets % -- -- 0.01 -- -- -- 0.01 0.01
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average
net assets % (0.70) (0.07) (0.30) (0.91)(3) (1.43) (0.78) (1.01) (1.64)(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 257 175 140 71 257 175 140 71
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------
Class B Class C
Year ended December 31, 1998 1997 1996 1995(1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------
Net asset value at the beginning of the
period $ 27.26 24.46 20.84 19.56
- ---------------------------------------------------------------------------------------
Net investment loss $ (0.55) (0.20) (0.13) (0.15)
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments $ 2.26 3.61 3.75 2.46
- ---------------------------------------------------------------------------------------
Total from investment operations $ 1.71 3.41 3.62 2.31
- ---------------------------------------------------------------------------------------
Dividends from net realized gain on
investments sold $ (0.73) (0.61) -- (1.03)
- ---------------------------------------------------------------------------------------
Total distributions $ (0.73) (0.61) -- (1.03)
- ---------------------------------------------------------------------------------------
Net asset value at the end of the period $ 28.24 27.26 24.46 20.84
---------------------------------------------------------------------------------------
Total investment return(2) % 6.81 14.06 17.37 11.79
Ratios and supplemental data
- ---------------------------------------------------------------------------------------
Net assets at the end of the period
($000s) $ 29,746 51,460 7,342 62
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 2.22 2.18 2.20 2.20(3)
- ---------------------------------------------------------------------------------------
Ratio of expense reimbursement to
average net assets % -- -- 0.01 0.03
- ---------------------------------------------------------------------------------------
Ratio of net investment loss to average
net assets % (1.45) (0.82) (1.03) (1.60)(3)
- ---------------------------------------------------------------------------------------
Portfolio turnover rate % 257 175 140 71
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class T
Year ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the
period $ 27.34 24.48 20.84 19.64 20.79
- ----------------------------------------------------------------------------------------------------------------
Net investment loss $ (0.51) (0.18) (0.21) (0.34) (0.25)
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments $ 2.26 3.65 3.85 2.57 (0.76)
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations $ 1.75 3.47 3.64 2.23 (1.01)
- ----------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on
investments sold $ (0.73) (0.61) -- (1.03) (0.14)
- ----------------------------------------------------------------------------------------------------------------
Total distributions $ (0.73) (0.61) -- (1.03) (0.14)
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 28.36 27.34 24.48 20.84 19.64
- ----------------------------------------------------------------------------------------------------------------
Total investment return(2) % 6.94 14.29 17.47 11.34 (4.86)
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------
Net assets at the end of the period
($000s) $ 18,203 32,800 35,670 33,557 38,848
- ----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets $ 2.10 1.99 2.07 2.16 2.16
- ----------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to
average net assets % -- -- 0.04 -- --
- ----------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average
net assets % (1.33) (0.62) (0.89) (1.50) (1.25)
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 257 175 140 71 39
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
44
<PAGE>
PILGRIM
MIDCAP
OPPORTUNITIES
FUND
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended December 31, 1998 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 10.00 10.00 10.00
- ---------------------------------------------------------------------------------------------
Net investment loss $ (0.03) (0.03) (0.04)
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 2.99 3.00 3.00
- ---------------------------------------------------------------------------------------------
Total from investment operations $ 2.96 2.97 2.96
- ---------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 12.96 12.97 12.96
- ---------------------------------------------------------------------------------------------
Total investment return(2) % 29.60 29.70 29.60
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 610 140 87
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(3) % 1.80 2.50 2.50
- ---------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets(3) % 0.62 0.77 0.72
- ---------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets(3) % (1.10) (2.05) (2.04)
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate % 61 61 61
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A, B and C commenced operations on August 20, 1998.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
45
<PAGE>
FINANCIAL
HIGHLIGHTS
The following chart shows the fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the fund's financial statements, are included in
the annual report, which is available upon request. The figures prior to 1995
were audited by other independent accountants.
PILGRIM
GROWTH
OPPORTUNITIES
FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Year ended December 31, 1998 1997 1996 1995(1) 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 21.26 17.92 15.53 17.59 20.93
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) $ (0.08) 0.03 0.02 0.08 (0.23)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 5.09 4.16 3.18 1.95 4.97
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 5.01 4.19 3.20 2.03 4.74
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ -- -- -- (0.10) --
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.21) (0.85) (0.81) (3.99) (0.21)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.21) (0.85) (0.81) (4.09) (0.21)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 26.06 21.26 17.92 15.53 25.46
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 23.61 23.59 20.54 11.55 22.69
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 29,358 9,334 4,750 1,355 15,480
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.37 1.37 150 1.42(3) 2.13
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- 0.03 0.06 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets % (0.47) 0.04 0.11 0.63(3) (1.26)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 98 32 62 134 98
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B Class C
Year ended December 31, 1997 1996 1995(1) 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating performance
- -----------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 17.76 15.50 17.59 20.91
- -----------------------------------------------------------------------------------------------------------------
Net investment income (loss) $ (0.15) (0.06) 0.06 (0.27)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 4.17 3.13 1.92 5.05
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations $ 4.02 3.07 1.98 4.78
- -----------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ -- -- (0.08) --
- -----------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.85) (0.81) (3.99) (0.21)
- -----------------------------------------------------------------------------------------------------------------
Total distributions $ (0.85) (0.81) (4.07) (0.21)
- -----------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 20.93 17.76 15.50 25.48
- -----------------------------------------------------------------------------------------------------------------
Total investment return(2) % 22.84 19.74 11.27 22.90
- -----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 8,815 4,444 1,987 1,625
- -----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 2.14 2.20 2.07(3) 2.13
- -----------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- 0.04 -- --
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets % (0.95) (0.55) 0.06(3) (1.24)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 32 62 134 98
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Class C
Year ended December 31, 1997 1996 1995(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 17.76 15.50 17.59
- ---------------------------------------------------------------------------------------------------
Net investment income (loss) $ (0.13) (0.05) 0.04
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 4.13 3.12 1.92
- ---------------------------------------------------------------------------------------------------
Total from investment operations $ 4.00 3.07 1.96
- ---------------------------------------------------------------------------------------------------
Dividends from net investment income $ -- -- (0.06)
- ---------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.85) (0.81) (3.99)
- ---------------------------------------------------------------------------------------------------
Total distributions $ (0.85) (0.81) (4.05)
- ---------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 20.91 17.76 15.50
- ---------------------------------------------------------------------------------------------------
Total investment return(2) % 22.73 19.74 11.17
- ---------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 1,152 365 69
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 2.17 2.20 2.11(3)
- ---------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- 0.15 --
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets % (1.00) (0.57) 0.02(3)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate % 32 62 134
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class T
Year ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 21.01 17.82 15.53 15.75 17.33
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) $ (0.36) (0.17) (0.06) 0.07 0.08
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ 5.14 4.22 3.16 3.77 (1.41)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 4.78 4.05 3.10 3.84 (1.33)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ -- -- -- (0.07) (0.08)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments sold $ (0.21) (0.85) (0.81) (3.99) (0.15)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from capital -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.21) (0.85) (0.81) (4.06) (0.25)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 25.59 21.02 17.82 15.53 15.75
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 22.79 22.94 19.90 24.40 (7.66)
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 52,023 73,674 70,406 76,343 76,391
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 2.05 2.03 2.00 2.00 2.00
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- -- 0.04 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets % (1.19) (0.81) (3.05) 0.37 0.49
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 98 32 62 134 54
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
46
<PAGE>
PILGRIM
GROWTH + VALUE
FUND
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended October 31, 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Operating performance
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at the beginning of the period $ 12.15 10.00 12.08 10.00 12.08 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment loss $ (0.11) (0.05) (0.16) (0.08) (0.16) (0.08)
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $ (1.42) 2.20 (1.45) 2.16 (1.45) 2.16
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ (1.53) 2.15 (1.61) 2.08 (1.61) 2.08
- --------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments sold $ (0.18) -- (0.18) -- (0.18) --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions $
- --------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 10.44 12.15 10.29 12.08 10.29 12.08
- --------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % (12.63) 21.50 (13.38) 20.80 (13.38) 20.80
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 33,425 34,346 105,991 76,608 37,456 26,962
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(3) % 1.72 1.84 2.45 2.55 2.46 2.56
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets(3) % -- 0.02 -- 0.02 -- 0.02
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets(3) % (0.92) (0.94) (1.67) (1.68) (1.69) (1.70)
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 162 144 162 144 162 144
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A, B and C commenced operations on November 18, 1996.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
47
<PAGE>
FINANCIAL
HIGHLIGHTS
The following chart shows the fund's financial performance by share class.(1)
The 1998 and 1997 figures have been audited by PricewaterhouseCoopers LLP, whose
report, along with the fund's financial statements, are included in the annual
report, which is available upon request. The figures prior to 1997 were audited
by other independent accountants.
PILGRIM
INTERNATIONAL
VALUE FUND
<TABLE>
<CAPTION>
Class A Class B Class C
Year ended October 31, 1998 1997 1996 1995(1) 1998 1997(2) 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 10.90 9.05 8.10 7.64 10.87 10.00 10.86
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) $ 0.11 (0.09) 0.14 0.09 0.07 (0.02) 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 0.96 2.30 0.85 0.37 0.91 0.89 0.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 1.07 2.21 0.99 0.46 0.98 0.87 0.98
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ -- (0.14) (0.04) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.09) (0.22) -- -- (0.09) -- (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.09) (0.36) (0.04) -- (0.09) -- (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 11.88 10.90 9.05 8.10 11.76 10.87 11.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return(3) % 9.86 27.59 12.15 9.39(4) 9.16 8.70 9.07
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 211,018 60,539 16,777 5,188 145,976 59,185 137,651
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.74 1.80(4) 1.85 1.85(4) 2.47 2.50(4) 2.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net
assets % -- 0.27(4) 0.97 6.08(4) -- 0.08(4) --
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % 1.62 0.46(4) 1.52 1.67(4) 0.69 (0.71)(4) 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 32 26 74 -- 32 26 32
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class C
Year ended October 31, 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- -----------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 8.93 8.05 7.61
- -----------------------------------------------------------------------------------------
Net investment income (loss) $ (0.06) 0.05 0.06
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 2.20 0.86 0.38
- -----------------------------------------------------------------------------------------
Total from investment operations $ 2.14 0.91 0.44
- -----------------------------------------------------------------------------------------
Dividends from net investment income $ (0.04) (0.03) --
- -----------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.17) -- --
- -----------------------------------------------------------------------------------------
Total distributions $ (0.21) (0.03) --
- -----------------------------------------------------------------------------------------
Net asset value at the end of the period $ 10.86 8.93 8.05
- -----------------------------------------------------------------------------------------
Total investment return(3) % 25.92 11.39 8.89(4)
- -----------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 62,103 14,530 5,749
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 2.50(4) 2.50 2.50(4)
- -----------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net
assets % 0.24(4) 1.21 6.08(4)
- -----------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % (0.23)(4) 0.62 1.13(4)
- -----------------------------------------------------------------------------------------
Portfolio turnover rate % 26 74 --
- -----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The mutual fund commenced operations on March 6, 1995 as the Brandes
International Fund, a series of the Brandes Investment Trust. At the close
of business on April 18, 1997 (the "Closing"), the Pilgrim International
Value Fund (formerly the "Northstar International Value Fund") acquired
the net assets of the Brandes International Fund, pursuant to an Agreement
of Reorganization dated February 4, 1997. On April 21, 1997, the Brandes
International Fund was reorganized as the Northstar International Value
Fund.
(2) Class B commenced operations on April 18, 1997.
(3) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(4) Annualized.
48
<PAGE>
PILGRIM
EMERGING MARKETS
VALUE FUND
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
` Class A(1) Class B(1) Class C(1)
Year ended October 31, 1998 1998 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- --------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 10.00 10.00 10.00
- --------------------------------------------------------------------------------------------------------
Net investment income $ 0.12 0.09 0.09
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments $ (2.43) (2.44) (2.46)
- --------------------------------------------------------------------------------------------------------
Total from investment operations $ (2.31) (2.35) (2.37)
- --------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 7.69 7.65 7.63
- --------------------------------------------------------------------------------------------------------
Total investment return(2) % (23.10) (23.50) (23.70)
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 3,815 3,583 2,304
- --------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(3) % 1.80 2.50 2.50
- --------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets(3) % 2.08 2.24 2.37
- --------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets(3) % 3.38 2.55 2.60
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 7 7 7
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A, B and C commenced operations on January 1, 1998.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
49
<PAGE>
FINANCIAL
HIGHLIGHTS
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
PILGRIM
INCOME AND
GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Year ended October 31, 1998 1997 1996 1995 1994(1) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning
of the period $ 12.47 12.16 10.86 10.00 10.00 12.44 12.13
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.37 0.38 0.3 20.35 0.30 0.29 0.27
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments $ (0.22) 1.53 1.29 0.84 (0.05) (0.22) 1.55
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.15 1.91 1.6 11.19 0.25 0.07 1.82
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment
income $ (0.39) (0.34) (0.31) (0.33) (0.25) (0.30) (0.25)
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain
on investments sold $ (0.53) (1.26) -- -- -- (0.53) (1.26)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.92) (1.60) (0.31) (0.33) (0.25) (0.83) (1.51)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the
period $ 11.70 12.47 12.16 10.86 10.00 11.68 12.44
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 1.12 17.02 14.48 13.19 2.48 0.44 15.06
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the
period ($000s) $ 47,378 53,805 85,250 76,031 72,223 55,873 73,829
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets % 1.40 1.47 1.52 1.51 1.50(3) 2.12 2.18
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets % -- -- -- -- 0.47(3) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets % 2.99 2.90 2.78 3.39 3.73(3) 2.28 2.18
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 102 56 147 91 26 102 56
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B Class C
Year ended October 31, 1996 1995 1994(1) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------
Net asset value at the beginning
of the period $ 10.84 9.99 10.64 12.42 12.12
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 0.24 0.27 0.20 0.31 0.28
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments $ 1.28 0.85 (0.65) (0.24) 1.54
- ----------------------------------------------------------------------------------------------------------
Total from investment operations $ 1.52 1.12 (0.45) 0.07 1.82
- ----------------------------------------------------------------------------------------------------------
Dividends from net investment
income $ (0.23) (0.27) (0.20) (0.30) (0.26)
- ----------------------------------------------------------------------------------------------------------
Dividends from net realized gain
on investments sold $ -- -- -- (0.53) (1.26)
- ----------------------------------------------------------------------------------------------------------
Total distributions $ (0.23) (0.27) (0.20) (0.83) (1.52)
- ----------------------------------------------------------------------------------------------------------
Net asset value at the end of the
period $ 12.13 10.84 9.99 11.66 12.42
- ----------------------------------------------------------------------------------------------------------
Total investment return(2) % 13.60 12.31 (4.20) 0.51 15.04
- ----------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------
Net assets at the end of the
period ($000s) $ 71,123 60,347 37,767 41,186 69,494
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets % 2.26 2.23 2.20(3) 2.09 2.15
- ----------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets % -- -- 0.16(3) -- --
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets % 2.04 2.66 3.00(3) 2.32 2.21
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 147 91 26 102 56
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Class C
Year ended October 31, 1996 1995 1994(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- -------------------------------------------------------------------------------
Net asset value at the beginning
of the period $ 10.83 9.99 10.37
- -------------------------------------------------------------------------------
Net investment income $ 0.24 0.27 0.20
- -------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments $ 1.28 0.85 (0.38)
- -------------------------------------------------------------------------------
Total from investment operations $ 1.52 1.12 (0.18)
- -------------------------------------------------------------------------------
Dividends from net investment
income $ (0.23) (0.28) (0.20)
- -------------------------------------------------------------------------------
Dividends from net realized gain
on investments sold $ -- -- --
- -------------------------------------------------------------------------------
Total distributions $ (0.23) (0.28) (0.20)
- -------------------------------------------------------------------------------
Net asset value at the end of the
period $ 12.12 10.83 9.99
- -------------------------------------------------------------------------------
Total investment return(2) % 13.68 12.33 (1.75)
- -------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------
Net assets at the end of the
period ($000s) $ 60,458 53,661 4,823
- -------------------------------------------------------------------------------
Ratio of expenses to average net
assets % 2.20 2.22 2.20(3)
- -------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets % -- -- 0.06(3)
- -------------------------------------------------------------------------------
Ratio of net investment income
to average net assets % 2.10 2.67 2.87(3)
- -------------------------------------------------------------------------------
Portfolio turnover rate % 147 91 26
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A commenced operations on November 8, 1993. Class B commenced
operations on February 9, 1994. Class C commenced operations on March 31,
1994.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
50
<PAGE>
PILGRIM
GOVERNMENT
SECURITIES
FUND
The following chart shows the fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Year ended December 31, 1998 1997 1996 1995(1) 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.53 9.48 10.07 9.51 9.55
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.49 0.68 0.63 0.34 0.51
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ -- -- (0.60) 0.59 (0.09)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.49 0.68 0.03 0.93 0.42
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.64) (0.63) (0.62) (0.37) (0.57)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.64) (0.63) (0.62) (0.37) (0.57)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 9.38 9.53 9.48 10.07 9.40
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 5.27 7.46 0.57 10.04 4.49
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 31,181 1,744 14,185 3,235 27,250 1
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.17 1.15 1.09 1.20(3) 1.90
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net
assets % 0.15 0.17 0.20 0.20(3) 0.15
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets % 6.18 6.44 6.85 6.01(3) 5.55
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 304 129 101 295 304
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B Class C
Year ended December 31, 1997 1996 1995(1) 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating performance
- --------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.48 10.07 9.51 9.54
- --------------------------------------------------------------------------------------------------------
Net investment income $ 0.52 0.57 0.30 0.45
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ 0.11 (0.60) 0.59 (0.05)
- --------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.63 (0.03) 0.89 0.40
- --------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.56) (0.56) (0.33) (0.56)
- --------------------------------------------------------------------------------------------------------
Total distributions $ (0.56) (0.56) (0.33) (0.56)
- --------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 9.55 9.48 10.07 9.38
- --------------------------------------------------------------------------------------------------------
Total investment return(2) % 6.93 (0.15) 9.61 4.35
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 13,503 9,135 2,790 2,652
- --------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.89 1.80 1.70(3) 1.90
- --------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net
assets % 0.17 0.20 0.20(3) 0.15
- --------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets % 5.50 6.05 5.20(3) 5.44
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 129 101 295 304
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Class C
Year ended December 31, 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance
- -----------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.47 10.07 9.51
- -----------------------------------------------------------------------------------------
Net investment income $ 0.59 0.58 0.30
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ 0.04 (0.62) 0.59
- -----------------------------------------------------------------------------------------
Total from investment operations $ 0.63 (0.04) 0.89
- -----------------------------------------------------------------------------------------
Dividends from net investment income $ (0.56) (0.56) (0.33)
- -----------------------------------------------------------------------------------------
Total distributions $ (0.56) (0.56) (0.33)
- -----------------------------------------------------------------------------------------
Net asset value at the end of the period $ 9.54 9.47 10.07
- -----------------------------------------------------------------------------------------
Total investment return(2) % 6.93 (0.21) 9.61
Ratios and supplemental data
- -----------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 542 1,147 8
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.85 1.80 1.68(3)
- -----------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net
assets % 0.17 0.21 0.20(3)
- -----------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets % 5.67 6.22 5.28(3)
- -----------------------------------------------------------------------------------------
Portfolio turnover rate % 129 101 295
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class T
Year ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.55 9.48 10.07 8.74 10.32
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 0.58 0.57 0.60 0.58 0.56
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ (0.14) 0.10 (0.59) 1.35 (1.56)
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.44 0.67 0.01 1.93 (1.00)
- ----------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.60) (0.60) (0.60) (0.60) (0.57)
- ----------------------------------------------------------------------------------------------------------------
Distributions from capital $ -- -- -- -- (0.01)
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.60) (0.60) (0.60) (0.60) (0.58)
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 9.39 9.55 9.48 10.07 8.74
- ----------------------------------------------------------------------------------------------------------------
Total investment return(2) $ 4.84 7.38 0.32 22.90 (9.82)
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 49,713 89,939 112,126 150,951 152,608
- ----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.55 1.45 1.30 1.30 1.29
- ----------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement and waiver to
average net assets % 0.15 0.20 0.21 0.20 0.20
- ----------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets % 5.97 5.99 6.37 6.23 6.00
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 304 129 101 295 315
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
51
<PAGE>
FINANCIAL
HIGHLIGHTS
The following chart shows the fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
PILGRIM
HIGH YIELD
FUND III
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Year ended December 31, 1998 1997 1996 1995(1) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.14 8.94 8.56 8.68 9.15 8.95 8.57
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.75 0.73 0.76 0.48 0.68 0.67 0.71
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $ (0.55) 0.23 0.44 (0.10) (0.56) 0.23 0.43
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.20 0.96 1.20 0.38 0.12 0.90 1.14
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.75) (0.76) (0.75) (0.50) (0.69) (0.70) (0.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain $ (0.06) -- -- -- (0.06) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from capital $ -- -- (0.07) -- -- -- (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.81) (0.76) (0.82) (0.50) (0.75) (0.70) (0.76)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 8.53 9.14 8.94 8.56 8.52 9.15 8.95
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 2.25 11.18 14.74 4.48 1.28 10.38 13.94
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 31,134 16,213 13,146 7,466 139,711 108,469 79,199
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.26 1.20 1.11 1.02(3) 1.97 1.91 1.81
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % 8.27 8.06 8.60 9.83(3) 7.50 7.35 7.88
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 135 134 128 103 135 134 128
<CAPTION>
Class B Class C
Year ended December 31, 1995(1) 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 8.68 9.15 8.95 8.57 8.68
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 0.44 0.67 0.67 0.72 0.44
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $ (0.09) (0.54) 0.23 0.42 (0.09)
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.35 0.13 0.90 1.14 0.35
- ----------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.46) (0.69) (0.70) (0.69) (0.46)
- ----------------------------------------------------------------------------------------------------------------
Dividends from net realized gain $ -- (0.06) -- -- --
- ----------------------------------------------------------------------------------------------------------------
Dividends from capital $ -- -- -- (0.07) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions $ (0.46) (0.75) (0.70) (0.76) (0.46)
- ----------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 8.57 8.53 9.15 8.95 8.57
- ----------------------------------------------------------------------------------------------------------------
Total investment return(2) % 4.17 1.39 10.37 13.93 4.17
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 29,063 23,559 21,393 14,275 3,410
- ----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.71(3) 1.98 1.92 1.82 1.72(3)
- ----------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % 9.18(3) 7.48 7.35 7.85 9.29(3)
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 103 135 134 128 103
</TABLE>
<TABLE>
<CAPTION>
Class T
Year ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 9.14 8.94 8.56 8.29 9.31
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.71 0.71 0.73 0.84 0.81
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $ (0.54) 0.23 0.45 0.26 (0.99)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.17 0.94 1.18 1.10 (0.18)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.73) (0.74) (0.73) (0.83) (0.83)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain $ -- -- -- -- (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from capital $ (0.06) -- (0.07) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.79) (0.74) (0.80) (0.83) (0.84)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 8.52 9.14 8.94 8.56 8.29
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return(2) 1.79 10.86 14.49 13.71 (2.18)
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 89,116 109,320 124,431 139,711 136,426
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.60 1.47 1.31 1.33 1.34
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets % 7.83 7.77 8.43 9.69 9.08
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 135 134 128 103 86
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Classes A, B & C commenced operations on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
52
<PAGE>
PILGRIM
HIGH TOTAL
RETURN FUND II
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1)
Year ended October 31, 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 5.49 5.00 5.49 5.00 5.50 5.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.50 0.28 0.47 0.25 0.47 0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $ (0.70) 0.53 (0.70) 0.53 (0.71) 0.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ (0.20) 0.81 (0.23) 0.78 (0.24) 0.79
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.48) (0.28) (0.44) (0.25) (0.44) (0.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions declared from capital $ (0.03) (0.04) (0.03) (0.04) (0.03) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.51) (0.32) (0.47) (0.29) (0.47) (0.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 4.78 5.49 4.79 5.49 4.79 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) (4.23) 16.53 (4.90) 15.91 (4.90) 16.12
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 40,924 8,548 168,859 38,076 53,703 12,334
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(3) % 1.44 1.26 2.17 1.95 2.17 1.95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets(3) % 0.01 3.36 0.02 0.75 0.01 0.78
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets(3) % 8.90 5.89 8.17 5.20 8.16 5.17
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 150 164 150 164 150 164
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(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.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
53
<PAGE>
FINANCIAL HIGHLIGHTS
The following chart shows the fund's financial performance by share class. These
figures have been audited by PricewaterhouseCoopers LLP, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
PILGRIM
HIGH TOTAL
RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Year ended October 31, 1998 1997 1996 1995 1994(1) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning
of the period $ 5.00 4.78 4.48 4.41 5.00 5.00 4.77 4.47 4.41
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.46 0.48 0.46 0.48 0.41 0.43 0.44 0.43 0.45
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments $ (1.07) 0.20 0.32 0.07 (0.60) (1.07) 0.22 0.32 0.06
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ (0.61) 0.68 0.78 0.55 (0.19) (0.64) 0.66 0.75 0.51
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment
income $ (0.47) (0.46) (0.48) (0.48) (0.40) (0.44) (0.43) (0.45) (0.45)
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment
gain on investments sold $ (0.15) -- -- -- -- (0.15) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.62) (0.46) (0.48) (0.48) (0.40) (0.59) (0.43) (0.45) (0.45)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the
period $ 3.77 5.00 4.78 4.48 4.41 3.77 5.00 4.77 4.47
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % (13.65) 15.03 18.14 13.02 (4.11) (14.28) 14.46 17.08 11.97
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the
period ($000s) $ 148,650 215,361 167,698 88,552 50,797 428,903 577,351 346,919 96,362
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets % 1.30 1.42 1.52 1.55 1.50(3) 2.02 2.12 2.23 2.25
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets % -- -- -- -- 0.99(3) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets(3) % 9.93 9.88 9.86 10.90 10.09(3) 9.20 9.18 9.14 10.20
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 123 183 158 145 163 123 183 158 145
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B Class C
Year ended October 31, 1994(1) 1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating performance
- -------------------------------------------------------------------------------------------------
Net asset value at the beginning
of the period $ 5.20 5.02 4.79 4.49 4.41 5.06
- -------------------------------------------------------------------------------------------------
Net investment income $ 0.33 0.43 0.44 0.43 0.44 0.26
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments $ (0.80) (1.08) 0.22 0.32 0.09 (0.65)
- -------------------------------------------------------------------------------------------------
Total from investment operations $ (0.47) (0.65) 0.66 0.75 0.53 (0.39)
- -------------------------------------------------------------------------------------------------
Dividends from net investment
income $ (0.32) (0.44) (0.43) (0.45) (0.45) (0.26)
- -------------------------------------------------------------------------------------------------
Dividends from net investment
gain on investments sold $ -- (0.15) -- -- -- --
- -------------------------------------------------------------------------------------------------
Total distributions $ (0.32) (0.59) (0.43) (0.45) (0.45) (0.26)
- -------------------------------------------------------------------------------------------------
Net asset value at the end of the
period $ 4.41 3.78 5.02 4.79 4.49 4.41
- -------------------------------------------------------------------------------------------------
Total investment return(2) % (9.30) (14.41) 14.42 17.28 12.44 (7.21)
- -------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------
Net assets at the end of the
period ($000s) $ 25,880 64,141 97,457 54,382 11,011 2,330
- -------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets % 2.20(3) 2.03 2.13 2.23 2.27 2.20(3)
- -------------------------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets % 0.20(3) -- -- -- -- 0.11(3)
- -------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets(3) % 9.72(3) 9.19 9.18 9.14 10.18 9.46(3)
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate % 163 123 183 158 145 163
- -------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A commenced operations on November 8,1993. Class B commenced
operations on February 9, 1994. Class C commenced operations on March 31,
1994.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
54
<PAGE>
WHERE TO GO
FOR MORE
INFORMATION
- --------------------------------------------------------------------------------
You'll find more information about the Pilgrim family of funds in our:
ANNUAL/SEMI-ANNUAL REPORTS
Include a discussion of recent market conditions and investment strategies that
significantly affected performance, the financial statements and the auditor's
reports (in annual report only).
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more detailed information about the Pilgrim funds. The SAI is
legally part of this prospectus (it is incorporated by reference). A copy has
been filed with the Securities and Exchange Commission (SEC).
Please write or call for a free copy of the current Annual/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
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. Otherwise, you may obtain the information for
a fee by contacting the SEC:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
1-800-SEC-0330
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 SmallCap Opportunities Fund 811-4434
Pilgrim MidCap Opportunities Fund 811-8817
Pilgrim Growth Opportunities Fund 811-4431
Pilgrim Growth + Value Fund 811-7978
Pilgrim International Value Fund 811-7978
Pilgrim Emerging Markets Value Fund 811-7978
Pilgrim Research Enhanced Index Fund 811-7978
Pilgrim Income and Growth Fund 811-7978
Pilgrim Government Securities Fund 811-4423
Pilgrim High Yield Fund III 811-5496
Pilgrim High Total Return Fund II 811-7978
Pilgrim High Total Return Fund 811-7978
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
55
<PAGE>
P/NPROS1199
<PAGE>
[GRAPHIC OMITTED]
PILGRIM
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999, As supplemented November 1, 1999
*PILGRIM SmallCap Opportunities Fund
(formerly the "Northstar Special Fund")
*PILGRIM MidCap Opportunities Fund
(formerly the "Northstar Mid-Cap Growth Fund")
*PILGRIM Growth Opportunities Fund
(formerly the "Northstar Growth Fund")
*PILGRIM Growth + Value Fund
(formerly the "Northstar Growth + Value Fund")
*PILGRIM International Value Fund
(formerly the "Northstar International Value Fund")
*PILGRIM Emerging Markets Value Fund
(formerly the "Northstar Emerging Markets Value Fund")
*PILGRIM Research Enhanced Index Fund
(formerly the "Northstar Research Enhanced Index Fund")
*PILGRIM Income & Growth Fund
(formerly the "Northstar Income & Growth Fund")
*PILGRIM Government Securities Fund
(formerly the "Northstar Government Securities Fund")
*PILGRIM High Yield Fund III
(formerly the "Northstar High Yield Fund")
*PILGRIM High Total Return Fund II
(formerly the "Northstar High Total Return Fund II")
*PILGRIM High Total Return Fund
(formerly the "Northstar High Total Return Fund")
40 North Central Avenue,
Suite 1200
Phoenix, Arizona 85004
(602) 417-8100
(800) 992-0180
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectuses of
the Funds dated March 1, 1999, as supplemented November 1, 1999, as each may be
revised from time to time. To obtain a copy of a Prospectus for the Funds,
please contact Pilgrim Advisors, Inc. (formerly "Northstar Investment Management
Corporation") at the address or phone number listed above.
Pilgrim Advisors, Inc. ("Pilgrim" or the "Adviser") serves as the Funds'
investment adviser. Pilgrim has engaged Navellier Fund Management, Inc. to serve
as Sub-Adviser to the Pilgrim Growth + Value Fund, subject to the supervision of
Pilgrim. Pilgrim has engaged Brandes Investment Partners, L.P. to serve as
Sub-Adviser to the Pilgrim International Value Fund and Pilgrim Emerging Markets
Value Fund, subject to the supervision of Pilgrim. Pilgrim has engaged J.P.
Morgan Investment Management Inc. to serve as Sub-Adviser to the Pilgrim
Research Enhanced Index Fund, subject to the supervision of Pilgrim.
Collectively, Navellier Fund Management, Inc., Brandes Investment Partners, L.P.
and J.P. Morgan Investment Management Inc. will be referred to as (the
"Sub-Advisers"). Northstar Distributors, Inc. (the "Underwriter") is the
underwriter to the Funds. Pilgrim Group, Inc. (formerly "Northstar
Administrators Corporation") (the "Administrator") is the Funds' administrator.
The Underwriter and the Administrator are affiliates of Pilgrim.
----------
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS ................................................... 2
INVESTMENT TECHNIQUES ..................................................... 7
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION ........................... 15
SERVICES OF PILGRIM, THE SUB-ADVISERS AND THE ADMINISTRATOR ............... 16
NET ASSET VALUE ........................................................... 20
PURCHASES AND REDEMPTIONS ................................................. 21
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................ 22
UNDERWRITER AND DISTRIBUTION SERVICES ..................................... 25
TRUSTEES AND OFFICERS ..................................................... 30
OTHER INFORMATION ......................................................... 34
PERFORMANCE INFORMATION ................................................... 35
FINANCIAL STATEMENTS ...................................................... 39
APPENDIX .................................................................. A-1
<PAGE>
INVESTMENT RESTRICTIONS
Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities Fund,
Pilgrim Government Securities Fund and Pilgrim High Yield Fund III. The Funds
have adopted investment restrictions numbered 1 through 12 as fundamental
policies. These restrictions cannot be changed without approval by the holders
of a majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of such Fund's outstanding voting shares. Investment restrictions
numbered 13 through 21 are not fundamental policies and may be changed by vote
of a majority of the Trust's Board members at any time. Each Fund may not:
1. Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset coverage
of 300% for all borrowings;
2. Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets would be
invested in that issuer, or the Fund would own or hold more than 10% of the
outstanding voting securities of the issuer; provided, however, that up to 25%
of the Fund's total assets may be invested without regard to these limitations;
3. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter;
4. Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities);
5. Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily marketable
securities that are secured by interest in real estate or issued by companies
that deal in real estate, including real estate investment and mortgage
investment trusts; and (b) engage in financial futures contracts and related
options, as described herein and in the Fund's Prospectus;
6. Make loans, except that each of these Funds may: (a) invest in
repurchase agreements, and (b) loan its portfolio securities in amounts up to
one-third of the market or other fair value of its total assets;
7. Issue senior securities, except as appropriate to evidence indebtedness
that it is permitted to incur, provided that the deposit or payment by the Fund
of initial or maintenance margin in connection with futures contracts and
related options is not considered the issuance of senior securities;
8. Borrow money in excess of 5% of its total assets (taken at market
value);
9. Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered a pledge or
hypothecation of assets);
10. Purchase more than 10% of the voting securities of any one issuer,
except U.S. government securities;
11. Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that cannot be
disposed of within the normal course of business at approximately the amount at
which the Fund has valued the securities, excluding restricted securities that
have been determined by the Trustees of the Fund (or the persons designated by
them to make such determinations) to be readily marketable;
12. Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S. government
securities and obligations issued or guaranteed by any foreign government or its
agencies or instrumentalities, if such purchase would cause the investments of a
Fund in all such issuers to exceed 5% of the total assets of the Fund taken at
market value;
13. Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities (the deposit or payment by a Fund of initial or maintenance margin
in connection with futures contracts or related options is not considered the
purchase of a security on margin);
14. Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total assets in
options transactions, other than options on futures contracts;
15. Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the Fund, and
premiums paid on related options held by the Fund, does not exceed more than 5%
of the Fund's total assets, unless the transaction meets certain "bona fide
hedging" criteria (in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing the 5%);
2
<PAGE>
16. Invest in securities of any issuer if any officer or Trustee of the
Fund or any officer or director of Northstar owns more than 1/2 of 1% of the
outstanding securities of the issuer, and such officers, directors and Trustees
own in the aggregate more than 5% of the securities of such issuer;
17. Invest in interests in oil, gas or other mineral exploration or
development programs (although it may invest in issuers that own or invest in
such interests);
18. Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase, or except when such purchase, though not made in the open
market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets;
19. Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in other
investment companies;
20. Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the Fund's net
assets or if warrants that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing requirements, taken at the
lower of cost or market value, would represent more than 2% of the value of the
Fund's net assets (for this purpose, warrants attached to securities will be
deemed to have no value); or
21. Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except in connection with arbitrage transactions.
Pilgrim MidCap Opportunities Fund. The Fund has adopted investment
restrictions numbered 1 through 11 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting shares. Investment restrictions
numbered 12 through 15 are not fundamental policies and may be changed by vote
of a majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up to 10% of
its net assets for temporary purposes but only if, immediately after such
borrowing there is asset coverage of 300%, and (b) enter into transactions in
options, futures, and options on futures and other transactions not deemed to
involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real property, including real estate limited
partnerships (the Fund may purchase marketable securities of companies that deal
in real estate or interests therein, including real estate investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to brokers or
dealers or other financial institutions not affiliated with the Fund or
Northstar, subject to conditions established by Northstar), and may purchase or
hold participations in loans, in accordance with the investment objectives and
policies of the Fund, as described in the current Prospectus and SAI of the
Fund;
6. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
7. Sell short, except that the Fund may enter into short sales against the
box;
8. Invest more than 25% of its assets in any one industry or related group
of industries;
9. With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the value of
total assets of the Fund would be invested in securities of a single issuer;
10. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
11. Borrow money in excess of 10% of its net assets for temporary purposes;
12. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that the
Fund may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act and rules thereunder or by any
state in which shares of the Fund are registered;
13. Make an investment for the purpose of exercising control over
management;
14. Invest more than 15% of its net assets in illiquid securities; or
15. Borrow any amount in excess of 10% of the Fund's assets, other than
for temporary emergency or administrative purposes. In addition, the Fund will
not make additional investments when its borrowings exceed 5% of total assets.
3
<PAGE>
Pilgrim Growth + Value Fund. The Fund has adopted investment restrictions
numbered 1 through 11 as fundamental policies. These restrictions cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of such Fund's outstanding voting shares. Investment restrictions numbered
12 through 15 are not fundamental policies and may be changed by vote of a
majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but only if,
immediately after such borrowing there is asset coverage of 300%, and (b) enter
into transactions in options, futures, and options on futures and other
transactions not deemed to involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities of
companies that deal in real estate or interests therein, including real estate
investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to brokers or
dealers or other financial institutions not affiliated with the Fund or
Northstar, subject to conditions established by Northstar) (See "Lending
Portfolio Securities" in this SAI), and may purchase or hold participations in
loans, in accordance with the investment objectives and policies of the Fund, as
described in the current Prospectus and SAI of the Fund;
6. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
7. Sell short, except that these Funds may enter into short sales against
the box;
8. Invest more than 25% of its assets in any one industry or related group
of industries;
9. With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the value of
total assets of the Fund would be invested in securities of a single issuer;
10. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
11. Borrow money except to the extent permitted under the 1940 Act;
12. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that these
Funds may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act and rules thereunder or by any
state in which shares of the Fund are registered;
13. Make an investment for the purpose of exercising control over
management;
14. Invest more than 15% of its net assets in illiquid securities; or
15. Borrow any amount in excess of 10% of their respective assets, other
than for temporary emergency or administrative purposes. In addition, the Fund
will not make additional investments when its borrowings exceed 5% of total
assets.
Pilgrim International Value Fund and Pilgrim Emerging Markets Value Fund.
The Funds have adopted investment restrictions numbered 1 through 6 as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting shares. Investment restrictions numbered 7 through 12 are not
fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Funds may not:
1. Issue senior securities, except to the extent permitted under the 1940
Act, borrow money or pledge its assets, except that the Fund may borrow on an
unsecured basis from banks for temporary or emergency purposes or for the
clearance of transactions in amounts not exceeding 10% of its total assets (not
including the amount borrowed), provided that it will not make investments while
borrowings are in excess of 5% of the value of its total assets are outstanding;
2. Act as underwriter (except to the extent the Fund may be deemed to be
an underwriter in connection with the sale of securities in its investment
portfolio);
3. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
government securities), except that the Fund reserves the right to invest all of
its assets in shares of another investment company;
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4. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although the Fund may purchase and sell securities which
are secured by real estate, securities of companies which invest or deal in real
estate and securities issued by real estate investment trusts);
5. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts for hedging
purposes to the extent permitted under applicable federal and state laws and
regulations and except that the Fund may engage in foreign exchange forward
contracts;
6. Make loans (except for purchases of debt securities consistent with the
investment policies of the Fund and except for repurchase agreements);
7. Make short sales of securities or maintain a short position, except for
short sales against the box;
8. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
9. Write put or call options, except that the Fund may (i) write covered
call options on individual securities and on stock indices; (ii) purchase put
and call options on securities which are eligible for purchase by the Fund and
on stock indices; and (iii) engage in closing transactions with respect to its
options writing and purchases, in all cases subject to applicable federal and
state laws and regulations;
10. Purchase any security if as a result the Fund would then hold more
than 10% of any class of voting securities of an issuer (taking all common stock
issues as a single class, all preferred stock issues as a single class, and all
debt issues as a single class), except that the Fund reserves the right to
invest all of its assets in a class of voting securities of another investment
company;
11. Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment company's
voting securities or make any other investment in other investment companies
except as permitted by federal and state law, except that the Fund reserves the
right to invest all of its assets in another investment company;
12. Invest more than 15% of its net assets in illiquid securities.
Pilgrim Research Enhanced Index Fund. The Fund has adopted investment
restrictions numbered 1 through 8 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting shares. Investment restrictions
numbered 9 through 14 are not fundamental policies and may be changed by vote of
a majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up to 33 1/3%
of its net assets for temporary purposes but only if, immediately after such
borrowing there is asset coverage of 300%, and (b) enter into transactions in
options, futures, and options on futures and other transactions not deemed to
involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real estate, including real estate limited
partnerships (the Fund may purchase marketable securities of companies that deal
in real estate or interests therein, including real estate investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33 1/3% of net assets at the time the loan is made, to brokers
or dealers or other financial institutions not affiliated with the Fund or
Northstar, subject to conditions established by Northstar) (See "Lending
Portfolio Securities" in this SAI), and may purchase or hold participations in
loans, in accordance with the investment objectives and policies of the Fund, as
described in the current Prospectus and SAI of the Fund;
6. Invest more than 25% of its assets in any one industry;
7. With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the value of
total assets of the Fund would be invested in securities of a single issuer;
8. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
9. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
10. Sell short, except that the Fund may enter into short sales against
the box;
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11. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that the
Fund may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act, rules thereunder or any order
pursuant thereto or by any state in which shares of the Fund are registered;
12. Make an investment for the purpose of exercising control over
management;
13. Invest more than 15% of its net assets in illiquid securities; or
14. Borrow any amount in excess of 33 1/3% of the Fund's assets, other
than for temporary emergency or administrative purposes.
As a fundamental policy, this Fund may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
this Fund does not intend to borrow any amount in excess of 10% of its assets,
and would do so only for temporary emergency or administrative purposes. In
addition, to avoid the potential leveraging of assets, this Fund will not make
additional investments when its borrowings, including those investment
techniques which are regarded as a form of borrowing, are in excess of 5% of
total assets. If this Fund should determine to expand its ability to borrow
beyond the current operating policy, the Fund's Prospectus would be amended and
shareholders would be notified.
In addition to the above noted investment policies, the Research Enhanced
Index Fund's Sub-Adviser intends to monitor the sector and security weightings
of its portfolio relative to the composition of the S&P 500 Index. In that
regard, the Sub-Adviser intends to manage the Fund so that its sector weightings
and securities holdings closely approximate the sector and securities weightings
of the Index. As noted in the prospectus, the Sub-Adviser may vary modestly the
weightings of portfolio securities so that index securities that appear to be
overvalued may be underweighted and securities that may appear to be
underweighted may be overvalued. Steps will be taken periodically to rebalance
positions consistent with maintaining reasonable transaction costs and
reasonable weightings relative to the Index. While the Fund seeks to modestly
outperform the S&P 500 Index, the Fund expects that its returns will have a
coefficient correlation of 0.90% or better to the S&P 500 Index.
Pilgrim Income and Growth Fund, Pilgrim High Total Return Fund II and
Pilgrim High Total Return Fund. The Funds have adopted investment restrictions
numbered 1 through 11 as fundamental policies. These restrictions cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of such Fund's outstanding voting shares. Investment restrictions numbered
12 through 17 are not fundamental policies and may be changed by vote of a
majority of the Trust's Board members at any time. The Funds may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks but only if,
immediately after such borrowing there is asset coverage of 300%, and (b) enter
into transactions in options, futures, and options on futures and other
transactions not deemed to involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real property, including real estate limited
partnerships (each of these Funds may purchase marketable securities of
companies that deal in real estate or interests therein, including real estate
investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Funds may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to brokers or
dealers or other financial institutions not affiliated with the Funds or
Northstar, subject to conditions established by Northstar) (See "Lending
Portfolio Securities" in this SAI), and may purchase or hold participations in
loans, in accordance with the investment objectives and policies of the Fund, as
described in the current Prospectus and SAI of the Fund;
6. Participate in any joint trading accounts;
7. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
8. Sell short, except that these Funds may enter into short sales against
the box;
9. Invest more than 25% of its assets in any one industry or related group
of industries;
10. Purchase a security (other than U.S. government obligations) if, as a
result, more than 5% of the value of total assets of the Fund would be invested
in securities of a single issuer;
11. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
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12. Invest in a security if, as a result of such investment, more than 5%
of its total assets (taken at market value at the time of such investment) would
be invested in securities of issuers (other than issuers of federal agency
obligations) having a record, together with predecessors or unconditional
guarantors, of less than three years of continuous operation;
13. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that these
Funds may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act and rules thereunder or by any
state in which shares of the Fund are registered;
14. Purchase or retain securities of any issuer if 5% of the securities of
such issuer are owned by those officers and directors or trustees of the Fund or
of Northstar who each own beneficially more than 1/2 of 1% of its securities;
15. Make an investment for the purpose of exercising control over
management;
16. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities, including securities subject to legal or
contractual restrictions on resale (which may include private placements and
those 144A securities for which the Trustees, pursuant to procedures adopted by
the Fund, have not determined there is a liquid secondary market), repurchase
agreements maturing in more than seven days, options traded over the counter
that a Fund has purchased, securities being used to cover options a Fund has
written, securities for which market quotations are not readily available, or
other securities that, legally or in the Adviser's or Trustees' opinion, may be
deemed illiquid; or
17. Invest in interests in oil, gas or other mineral exploration
development programs (including oil, gas or other mineral leases).
As a fundamental policy, these Funds may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
these Funds do not intend to borrow any amount in excess of 10% of their
respective assets, and would do so only for temporary emergency or
administrative purposes. In addition, to avoid the potential leveraging of
assets, neither of these Funds will make additional investments when its
borrowings, including those investment techniques which are regarded as a form
of borrowing, are in excess of 5% of total assets. If any of these three Funds
should determine to expand its ability to borrow beyond the current operating
policy, the Fund's Prospectus would be amended and shareholders would be
notified.
In addition to the restrictions described above, each of these Funds may,
from time to time, agree to additional investment restrictions for purposes of
compliance with the securities laws of those foreign jurisdictions where that
Fund intends to offer or sell its shares.
INVESTMENT TECHNIQUES
Additional Information on GNMAs. The Funds may invest in U.S. government
securities, which are obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities. A substantial portion of the assets of the
Government Securities Fund have, at various times, been invested in obligations
of the Government National Mortgage Association (popularly called GNMAs or
Ginnie Maes). All of the other Funds may also invest in GNMAs from time to time.
GNMAs are mortgage backed securities representing part ownership of a pool
of mortgage loans, in which the timely payment of principal and interest is
guaranteed by the full faith and credit of the U.S. government. GNMA may borrow
U.S. Treasury funds to the extent needed to make payments under the guarantee.
The Funds purchase "modified pass-through" type GNMA Certificates for which
principal and interest are guaranteed, rather than the "straight pass through"
Certificates for which such guarantee is not available. The Funds also purchase
"variable rate" GNMA Certificates and may purchase other types that may be
issued with GNMA's guarantee.
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagors or when foreclosure occurs, such principal payments are passed
through to the Certificate holders (such as a Fund). Accordingly, the life of
the GNMA Certificate is likely to be substantially shorter than the stated
maturity of the mortgages in the underlying pool, which will have maturities of
up to 30 years. Because of such variation in prepayment rights, it is not
possible to accurately predict the life of a particular GNMA Certificate.
Payments to holders of GNMA Certificates consist of the monthly
distributions of interest and principal, less the GNMA and issuer's fees. The
portion of the monthly payment that represents a return of principal may be
reinvested by a Fund holding the GNMA in then-available GNMA obligations, which
may bear interest at a rate higher or lower than the obligation from which the
payment was received, or in a differing security. The actual yield to be earned
by the holder of a GNMA Certificate is calculated by dividing such payments by
the purchase price paid for the GNMA Certificate (which may be at a premium or a
discount from the face value of the Certificate). Unpredictable prepayments of
principal, however, can greatly change realized yields. In a period of declining
interest rates it is more likely that mortgages contained in GNMA pools will be
prepaid, thus reducing the effective yield. Moreover, any premium paid on the
purchase of a GNMA Certificate will be lost if
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the obligation is prepaid. In periods of falling interest rates, this potential
for prepayment may reduce the general upward price increase of GNMA Certificates
that might otherwise occur. As with other debt instruments, the price of GNMA
Certificates is likely to decrease in times of rising interest rates. Price
changes of the GNMA Certificates held by a Fund have a direct impact on the net
asset value per share of the Fund.
When interest rates rise, the value of a GNMA Certificate will generally
decline. Conversely, when rates fall, the GNMA Certificate value may rise,
although not as much as other debt issues, due to the prepayment feature. As a
result, the price per share a Fund's shareholder receives on redemption may be
more or less than the price paid for the shares.
The dividends per share paid by the Government Securities Fund may also vary.
Derivative Instruments. The Funds may invest in Derivative Instruments.
Derivative Instruments are securities that derive their value from the
performance of an underlying asset, usually take the form of a contract to buy
or sell as asset or commodity either now or in the future, but mortgage and
other asset-backed securities are also generally considered derivatives. Types
of derivatives include options, futures contracts, options on futures and
forward contracts. Derivative Instruments may be used for a variety of reasons,
including to enhance return, hedge certain market risks, or provide a substitute
for purchasing or selling particular securities. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit a Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (i.e., margin requirements) operated by
the clearing agency in order to reduce overall credit risk. As a result, unless
the clearing agency defaults, there is relatively little counterparty credit
risk associated with Derivatives purchased on an exchange. By contrast, no
clearing agency guarantees over-the-counter Derivatives. Therefore, each party
to an over-the-counter Derivative bears the risk that the counterparty will
default. Accordingly, Northstar and the Sub-Advisers will consider the
creditworthiness of counterparties to over-the-counter Derivatives in the same
manner as they would review the credit quality of a security to be purchased by
a Fund. Over-the-counter Derivatives are less liquid than exchange-traded
Derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the Derivative to be interested in bidding for
it.
Firm Commitments and When-Issued Securities. Each Fund may enter into firm
commitment agreements to purchase securities at an agreed-upon price on a
specified future date. An amount of cash or marketable securities equal to the
Fund's commitment will be deposited in a segregated account at the Fund's
custodian bank to secure the Fund's obligation. Although a Fund will generally
enter into firm commitments to purchase securities with the intention of
actually acquiring the securities for its portfolio (or for delivery pursuant to
options contracts it has entered into), the Fund may dispose of a security prior
to settlement if Northstar or the Fund's Sub-Adviser deems it advisable to do
so. A Fund entering into the forward commitment may realize short-term gains or
losses in connection with such sales.
A Fund may enter into To Be Announced ("TBA") sale commitments wherein the
unit price and the estimated principal amount are established upon entering into
the contract, with the actual principal amount being within a specified range of
the estimate. A Fund will enter into TBA sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, the Fund will maintain, in a segregated account, cash or marketable
securities in an amount sufficient to meet the purchase price. Unsettled TBA
sale commitments are valued at current market value of the underlying
securities. If the TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, the Fund realizes a gain or loss on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the Fund delivers securities under the commitment, the Fund
realizes a gain or loss from the sale of the securities, based upon the unit
price established at the date the commitment was entered into.
A Fund may also purchase securities on a when-issued or delayed delivery
basis. In such transactions, the price is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date, normally within one month. The value of the security on the
settlement date may be more or less than the price paid as a result of, among
other things, changes in the level of interest rates or other market factors.
Accordingly, there is a risk of loss, which is in addition to the risk of
decline in the value of the Fund's other assets. The Fund will establish a
segregated account with its custodian in which it will maintain cash and
marketable securities equal in value to commitments for when-issued or delayed
delivery securities. While when-issued or delayed
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delivery securities may be sold prior to the settlement date, it is intended
that a Fund will purchase such securities with the purpose of actually acquiring
them, unless a sale appears desirable for investment reasons.
Floating or Variable Rate Instruments. The Funds may purchase floating or
variable rate bonds, which normally provide that the holder can demand payment
of the obligation on short notice at par with accrued interest. Such bonds are
frequently secured by letters of credit or other credit support arrangements
provided by banks. Floating or variable rate instruments provide for adjustments
in the interest rate at specified intervals (weekly, monthly, semiannually,
etc.). A Fund would anticipate using these bonds as cash equivalents, pending
longer term investment of its funds. Other longer term fixed-rate bonds, with a
right of the holder to request redemption at certain times (often annually,
after the lapse of an intermediate term), may also be purchased by a Fund. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates), while providing greater opportunity
than comparable intermediate term bonds since the Fund may retain the bond if
interest rates decline. By acquiring these kinds of bonds, a Fund obtains the
contractual right to require the issuer of the security, or some other person
(other than a broker or dealer), to purchase the security at an agreed upon
price, which right is contained in the obligation itself rather than in a
separate agreement with the seller or some other person.
Futures Transactions -- In General. A Fund may enter into futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange, or on
exchanges located outside the United States, such as the London International
Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign
markets may offer advantages such as trading opportunities or arbitrage
possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
an investor may look only to the broker for performance of the contract. In
addition, any profits that the Fund might realize in trading could be eliminated
by adverse changes in the exchange rate, or the Fund could incur losses as a
result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission.
Engaging in these transactions involves risk of loss to the Fund which
could adversely affect the value of the Fund's net assets. Although the Fund
intends to purchase or sell futures contracts only if there is an active market
for such contracts, no assurance can be given that a liquid market will exist
for any particular contract at any particular time. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the trading day.
Futures contract prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Manager's or
Sub-Adviser's ability to predict correctly movements in the direction of the
relevant market, and, to the extent the transaction is entered into for hedging
purposes, to ascertain the appropriate correlation between the transaction being
hedged and the price movements of the futures contract. For example, if the Fund
uses futures to hedge against the possibility of a decline in the market value
of securities held in its portfolio and the prices of such securities instead
increase, the Fund will lose part or all of the benefit of the increased value
of securities which it has hedged because it will have offsetting losses in its
futures positions. Furthermore, if in such circumstances the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. The Fund may have to sell such securities at a time when it may be
disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission (the "SEC"), the Fund may be required to segregate cash or
high quality money market instruments in connection with its commodities
transactions in an amount generally equal to the value of the underlying
commodity. The segregation of such assets will have the effect of limiting the
Fund's ability otherwise to invest those assets.
Index Warrants. The Research Enhanced Index Fund may purchase put warrants
and call warrants whose values vary depending on the change in the value of one
or more specified securities indices ("Index Warrants"). Index Warrants are
generally issued by banks or other financial institutions and give the holder
the right, at any time during the term of the warrant, to receive upon exercise
of the warrant a cash payment from the issuer, based on the value of the
underlying index at the time of exercise. In general, if the value of the
underlying index rises above the exercise price of the Index Warrant, the holder
of a call warrant will be entitled to receive a cash payment from the issuer
upon exercise, based on the difference between the value of the index and the
exercise price of the warrant; if the value of the underlying index falls, the
holder of a put warrant will be entitled to receive a cash payment from the
issuer upon exercise, based on the difference between the
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exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value of
the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Research Enhanced Index Fund
were not to exercise an Index Warrant prior to its expiration, then the Fund
would lose the amount of the purchase price paid by it for the warrant. The
Research Enhanced Index Fund will normally use Index Warrants in a manner
similar to its use of options on securities indices. The risks of the Fund's use
of Index Warrants are generally similar to those relating to its use of index
options. Unlike most index options, however, Index Warrants are issued in
limited amounts and are not obligations of a regulated clearing agency, but are
backed only by the credit of the bank or other institution that issues the
warrant. Also, Index Warrants generally have longer terms than index options.
Although the Research Enhanced Index Fund will normally invest only in
exchange-listed warrants, Index Warrants are not likely to be as liquid as
certain index options backed by a recognized clearing agency. In addition, the
terms of Index Warrants may limit the Fund's ability to exercise the warrants at
such time, or in such quantities, as the Fund would otherwise wish to do.
Lending Portfolio Securities. A Fund may lend portfolio securities to
broker-dealers and other financial institutions in an amount up to one-third of
the value of its total assets (30% of the value of total assets in the case of
the Northstar International Value and the Northstar Emerging Markets Value
Funds), provided that such loans are callable at any time by the Fund and are at
all times secured by collateral held by the Fund at least equal to the market
value, determined daily, of the loaned securities. A Fund will continue to
receive any income on the loaned securities, while simultaneously earning
interest on cash collateral (which will be invested in short-term debt
obligations) or a securities lending fee (in the case of collateral in the form
of U.S. government securities).
There may be risks of delay in recovery of the loaned securities and, in
some cases, loss of rights in the collateral should the borrower of the
securities fail financially. Loans of portfolio securities will only be made to
firms considered by Northstar to be creditworthy under guidelines adopted by the
Trustees.
Loan Participations and Assignments. Each Fund may invest in loan
participations and loan assignments. A Fund's investment in loan participations
typically will result in the Fund having a contractual relationship only with
the Lender and not with the borrower. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participations and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Fund generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any right of set-off
against the borrower, and the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund may be subject to the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the borrower.
When a Fund purchases a loan assignment from Lenders, it will acquire
direct rights against the borrowers on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and a Fund's ability to dispose
of particular assignments or participations when necessary to meet redemptions
of Fund shares, to meet the Fund's liquidity needs or when necessary in response
to a specific economic event, such as deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for assignments and
participations also may make it more difficult for a Fund to value these
securities for purposes of calculating its net asset value.
Options -- In General. The Funds may purchase and write (i.e., sell) call
or put options with respect to specific securities. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security or securities at the exercise price at any time during the
option period.
A covered call option written by a Fund is a call option with respect to
which the Fund owns the underlying security or otherwise covers the transaction
by segregating cash or other securities or by purchasing a call option on the
same security with an equal or lower exercise price. A put option written by a
Fund is covered when, among other things, cash or liquid securities having a
value equal to or greater than the exercise price of the option are placed in a
segregated account with the Fund's custodian to fulfill the obligation
undertaken. The principal reason for writing covered call and put options is to
realize, through the receipt of premiums, a greater return than would be
realized on the underlying securities alone. The Fund receives a premium from
writing covered call or put options which it retains whether or not the option
is exercised.
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There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of the
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Privately Issued Collateralized Mortgage-Backed Obligations, Interest
Obligations and Principal Obligations. Each of the MidCap Oportunities Fund,
Growth + Value Fund, International Value Fund, Emerging Markets Value Fund,
Research Enhanced Index Fund, Income and Growth Fund, High Total Return Fund II
and High Total Return Fund may invest up to 5% of its net assets in Privately
Issued Collateralized Mortgage-Backed Obligations ("CMOs"), Interest Obligations
("IOs") and Principal Obligations ("POs") when Northstar believes that such
investments are consistent with the Fund's investment objective. "CMOs" are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, privately issued CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole
loans or private pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Privately issued CMOs are
generally illiquid. Multi-class pass-through securities are equity interests in
a trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, are the sources of funds used to pay debt service on the CMOs or make
scheduled distributions on the multi-class pass-through securities.
On a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a series of a CMO in innumerable ways. The Funds
may also invest in, among others, parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally call for payments of a specified amount of
principal on each payment date.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the interest and a larger portion of the principal from
the Mortgage Assets, while the other classes will receive primarily interest and
only a small portion of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets, and
a rapid rate of principal payments may have a material adverse effect on such
security's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a Fund may fail to recoup
fully its initial investment in these securities. The determination of whether a
particular government-issued IO or PO backed by fixed-rate mortgages is liquid
is made by Pilgrim or a Sub-Adviser under guidelines and standards established
by the Board of Trustees. Such a security may be deemed liquid if it can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
Repurchase Agreements. Repurchase agreements are agreements under which a
Fund buys a money market instrument and obtains a simultaneous commitment from
the seller to repurchase the instrument at a specified time and at an agreed
upon yield. Northstar and the Sub-Advisers will use standards set by the
relevant Fund's Trustees in reviewing the creditworthiness of parties to
repurchase agreements with such Fund. In addition, no more than an aggregate of
15% of a Fund's net assets, at the time of investment, will be invested in
illiquid investments, including repurchase agreements having maturities longer
than
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seven days. In the event of failure of the executing bank or broker-dealer, a
Fund could experience some delay in obtaining direct ownership of the underlying
collateral and might incur a loss if the value of the security should decline,
as well as costs in disposing of the security.
Pursuant to an Exemptive Order under Section 17(d) and Rule 17d-1 obtained
by the Funds, excluding the Northstar Trust and the Northstar Equity Trust, on
March 5, 1991, such Funds may deposit uninvested cash balances into a single
joint account to be used to enter into repurchase agreements.
As an alternative to using repurchase agreements, a Fund may, from time to
time, invest up to 5% of its assets in money market investment companies
sponsored by a third party for short-term liquidity purposes. Such investments
are subject to the non-fundamental investment limitations described herein.
Reverse Repurchase Agreements and Dollar Roll Agreements. The Funds may
enter into reverse repurchase agreements and dollar roll agreements. Under a
reverse repurchase agreement or a dollar roll agreement, a Fund sells securities
and agrees to repurchase them, or substantially similar securities in the case
of a dollar roll agreement, at a mutually agreed upon date and price. At the
time the Fund enters into a reverse repurchase or dollar roll agreement, it will
establish and maintain a segregated account with its custodian, containing cash,
U.S. government securities, or other liquid assets from its portfolio, having a
value not less than the repurchase price (including accrued interest). The Funds
do not account for dollar rolls as a borrowing.
These agreements may involve the risk that the market value of the
securities to be repurchased by a Fund may decline below the price at which the
Fund is obligated to repurchase. Also, in the event the buyer of securities
under a reverse repurchase agreement or a dollar roll agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement or the dollar roll agreement may effectively be
restricted pending such a decision.
Short Sales. A Fund may make short sales "against the box." A short-sale
is a transaction in which a party sells a security it does not own in
anticipation of decline in the market value of that security. A short sale is
"against the box" to the extent that the Fund contemporaneously owns or has the
right to obtain securities identical to those sold short. When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow particular securities, and is often obligated to pay
over any accrued interest on such borrowed securities.
Specific Futures Transactions. The Funds may purchase and sell stock index
futures contracts. A stock index future obligates the Fund to pay or receive an
amount of cash equal to a fixed dollar amount specified in the futures contract
multiplied by the difference between the settlement price of the contract on the
contract's last trading day and the value of the index based on the stock prices
of the securities that comprise it at the opening of trading in such securities
on the next business day.
The Funds may purchase and sell interest rate futures contracts. An
interest rate future obligates the Fund to purchase or sell an amount of a
specific debt security at a future date at a specific price.
The Funds may purchase and sell currency futures. A foreign currency
future obligates the Fund to purchase or sell an amount of a specific currency
at a future date at a specific price.
The International Value Fund and Emerging Markets Value Fund will engage
in futures transactions only as a hedge against the risk of unexpected changes
in the values of securities held or intended to be held by these Funds. As a
general rule, the International Value Fund and Emerging Markets Value Fund will
not purchase or sell futures if, immediately thereafter, more than 25% of its
net assets would be hedged. In addition, these Funds will not purchase or sell
futures or related options if, immediately thereafter, the sum of the amount of
margin deposits on the Funds' existing futures positions and premiums paid for
such options would exceed 5% of the market value of the Funds' net assets.
Specific Options Transactions. The Funds may purchase and sell call and
put options in respect of specific securities (or groups or "baskets" of
specific securities) or stock indices listed on national securities exchanges or
traded in the over-the-counter market. An option on a stock index is similar to
an option in respect of specific securities, except that settlement does not
occur by delivery of the securities comprising the index. Instead, the option
holder receives an amount of cash if the closing level of the stock index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Thus, the effectiveness
of purchasing or writing stock index options will depend upon price movements in
the level of the index rather than the price of a particular stock.
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<PAGE>
Each Fund may purchase and sell call and put options on foreign currency.
These options convey the right to buy or sell the underlying currency at a price
which is expected to be lower or higher than the spot price of the currency at
the time the option is exercised or expires.
The Funds may purchase cash-settlement options on interest rate swaps,
interest rate swaps denominated in foreign currency and equity index swaps in
pursuit of its investment objective. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating-rate payments for fixed-rate
payments) denominated in U.S. dollars or foreign currency. Equity index swaps
involve the exchange by the Fund with another party of cash flows based upon the
performance of an index or a portion of an index of securities which usually
includes dividends. A cash-settled option on a swap gives the purchaser the
right, but not the obligation, in return for the premium paid, to receive an
amount of cash equal to the value of the underlying swap as of the exercise
date. These options typically are purchased in privately negotiated transactions
from financial institutions, including securities brokerage firms.
Successful use by the Funds of options will be subject to the ability of
Northstar and the Sub-Advisers to predict correctly movements in the prices of
individual stocks, the stock market generally, foreign currencies or interest
rates. To the extent these predictions are incorrect, the Funds may incur
losses.
Zero Coupon Securities. Zero coupon securities are fixed income securities
that have been stripped of their unmatured interest coupons. Zero coupon
securities are sold at a (usually substantial) discount and redeemed at face
value at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accredited over the life of the
security, and the accretion constitutes the income earned on the security for
both accounting and tax purposes. Because of these features, the market prices
of zero coupon securities are generally more volatile than the market prices of
securities that have a similar maturity but that pay interest periodically. Zero
coupon securities are likely to respond to a greater degree to interest rate
changes than are non-zero coupon securities with similar maturity and credit
qualities. Each Fund may invest a portion of its total assets in "zero coupon"
Treasury securities, which consist of Treasury bills or stripped interest or
principal components of U.S. Treasury bonds or notes.
Zero coupon Treasury bonds or notes consist of stripped interest or
principal components held in STRIPS form issued through the U.S. Treasury's
STRIPS program, which permits the beneficial ownership of the component to be
recorded directly in the Treasury book-entry system. The Funds may also purchase
custodial receipts evidencing beneficial ownership of direct interests in
component parts of U.S. Treasury bonds or notes held by a bank in a custodian or
trust account.
Risks of International Investing
The Funds may invest in foreign securities as noted in their respective
prospectuses and herein. The Research Enhanced Index Fund may invest up to 20%
of its total assets in foreign securities. Investments in foreign securities
involve special risks, including currency fluctuations, political or economic
instability in the country of issue and the possible imposition of exchange
controls or other laws or restrictions. In addition, securities prices in
foreign markets are generally subject to different economic, financial,
political and social factors than are the prices of securities in U.S. markets.
With respect to some foreign countries there may be the possibility of
expropriation or confiscatory taxation, limitations on liquidity of securities
or political or economic developments which could affect the foreign investments
of a Fund. Moreover, securities of foreign issuers generally will not be
registered with the SEC, and such issuers will generally not be subject to the
SEC's reporting requirements. Accordingly, there is likely to be less publicly
available information concerning certain of the foreign issuers of securities
held by the Fund than is available concerning U.S. companies. Foreign companies
are also generally not subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to U.S. companies. There may also be less government supervision and
regulation of foreign broker-dealers, financial institutions and listed
companies than exists in the U.S. Commission rates in foreign countries, which
are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. These factors could make foreign investments, especially
those in developing countries, more volatile. All of the above issues should be
considered before investing in a fund that may invest in foreign securities.
Emerging Markets and Related Risks
The International Value Fund may invest up to 25% of its assets and the
Emerging Markets Value Fund may invest greater than 65% of its assets in
securities of companies located in countries with emerging securities markets.
Emerging markets are the capital markets of any country that is generally
considered a developing country by the international financial community.
Currently, these markets include, but are not limited to, the markets of
Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece,
Hungary, India, Indonesia, Jordan, Malaysia, Mexico, Pakistan, Peru,
Philippines, Poland, Portugal, Russia, South Africa, Thailand, Turkey, Venezuela
and Zaire. As opportunities to invest in other emerging markets countries
develop, the Fund expects to expand and diversify further the countries in which
it invests.
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Investing in emerging market securities involves risks which are in
addition to the usual risks inherent in foreign investments. Some emerging
markets countries may have fixed or managed currencies that are not
free-floating against the U.S. dollar. Further, certain currencies may not be
traded internationally. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund.
Some countries with emerging securities markets have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some countries may differ
favorably or unfavorably from the U.S. economy in such respects as rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency, number and depth of industries forming the economy's
base, governmental controls and investment restrictions that are subject to
political change and balance of payments position. Further, there may be greater
difficulties or restrictions with respect to investments made in emerging market
countries.
Emerging securities markets typically have substantially less volume than
U.S. markets, securities in many of such markets are less liquid, and their
prices often are more volatile than securities of comparable U.S. companies.
Such markets often have different clearance and settlement procedures for
securities transactions, and in some markets there have been times when
settlements have been unable to keep pace with the volume of transactions,
making it difficult to conduct transactions. Delays in settlement could result
in temporary periods when assets which the Fund desires to invest in emerging
markets may be uninvested. Settlement problems in emerging markets countries
also could cause the Fund to miss attractive investment opportunities.
Satisfactory custodial services may not be available in some emerging markets
countries, which may result in the Fund incurring additional costs and delays in
the transportation and custody of such securities.
Additional Information on Foreign Securities. Each Fund, except Government
Securities Fund, may invest in securities of foreign issuers. Each of these
Funds other than International Value, Emerging Markets Value, High Yield, High
Total Return II and High Total Return Funds may invest up to 20% of its net
assets in foreign securities, of which 10% of its net assets may be invested in
foreign securities that are not listed on a U.S. securities exchange. High Yield
Fund may invest up to 35% of its total assets and High Total Return Fund II and
High Total Return Fund may each invest up to 50% of its assets in foreign
securities. International Value Fund and Emerging Markets Value Fund may each
invest up to 100% of its assets in securities of foreign issuers.
Additional Information on High Yield Securities. High Yield Fund III, High
Total Return Fund II, and High Total Return Fund each may invest in lower-rated
fixed income securities (i.e., junk bonds) to the extent described in the
Prospectus. The lower ratings of certain securities held by these Funds reflect
a greater possibility that adverse changes in the financial condition of the
issuer or economic conditions in general, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by these Funds more volatile and could limit a Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
such securities. In the absence of a liquid trading market for the securities
held by it, a Fund may be unable at times to establish the fair value of such
securities. The rating assigned to a security by Moody's Investors Service, Inc.
("Moody's") or Standard and Poor's Rating Service ("S&P") (or by any other
nationally recognized securities rating organization) does not reflect an
assessment of the volatility of the security's market value or the liquidity of
an investment in the security. See the Appendix for a description of a security.
Like those of other fixed income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of a Fund's
assets. Conversely, during periods of rising interest rates, the value of a
Fund's assets will generally decline. In addition, the values of such securities
are also affected by changes in general economic conditions and business
conditions affecting the specific industries of their issuers. Changes by
recognized rating services in their ratings of any fixed income security and in
the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities generally will not affect cash income derived from such securities,
but will effect a Fund's net asset value. A Fund will not necessarily dispose of
a security when its rating is reduced below its rating at the time of purchase,
although Northstar will monitor the investment to determine whether its
retention will assist in meeting a Fund's investment objective.
Certain securities held by a Fund may permit the issuer at its option to
call, or redeem, its securities. If an issuer were to redeem securities held by
a Fund during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
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PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Pilgrim, and the Sub-Adviser in the case of Growth + Value Fund,
International Value Fund, Emerging Markets Value Fund and Research Enhanced
Index Fund, places orders for the purchase and sale of the Funds' securities,
supervises their execution and negotiates brokerage commissions on behalf of
each Fund. For purposes of the remainder of this section, "Portfolio
Transactions and Brokerage Allocation," discussion of Pilgrim includes the
Sub-Adviser, but only with respect to Growth + Value Fund, International Value
Fund, Emerging Markets Value Fund and Research Enhanced Index Fund. It is the
practice of Pilgrim to seek the best prices and best execution of orders and to
negotiate brokerage commissions that in the Adviser's opinion are reasonable in
relation to the value of the brokerage services provided by the executing
broker. Brokers who have executed orders for the Funds are asked to quote a fair
commission for their services. If the execution is satisfactory and if the
requested rate approximates rates currently being quoted by the other brokers
selected by Pilgrim, the rate is deemed by Pilgrim to be reasonable. Brokers may
ask for higher rates of commission if all or a portion of the securities
involved in the transaction are positioned by the broker, if the broker believes
it has brought a Fund an unusually favorable trading opportunity, or if the
broker regards its research services as being of exceptional value and payment
of such commissions is authorized by Pilgrim after the transaction has been
consummated. If Pilgrim more than occasionally differs with the broker's
appraisal of opportunity or value, the broker would not be selected to execute
trades in the future. Pilgrim believes that each Fund benefits with a securities
industry comprised of many and diverse firms and that the long-term interest of
shareholders of the Funds is best served by its brokerage policies that include
paying a fair commission, rather than seeking to exploit its leverage to force
the lowest possible commission rate. Over-the-counter purchases and sales are
transacted directly with principal market-makers, except in those circumstances
where, in the opinion of Pilgrim, better prices and execution are available
elsewhere.
In general terms, the nature of research services provided by brokers
encompasses statistical and background information, and forecasts and
interpretations with respect to U.S. and foreign economies, U.S. and foreign
money markets, fixed income markets and equity markets, specific industry groups
and individual issues. Research services will vary from firm to firm, with
broadest coverage generally from the large full-line firms. Smaller firms, in
general, tend to provide information and interpretations on a smaller scale,
frequently with a regional emphasis. In addition, several firms monitor federal,
state, local and foreign political developments; many of the brokers also
provide access to outside consultants. The outside research assistance is
particularly useful to the Adviser's staff, since the brokers, as a group, tend
to monitor a broader universe of securities and other matters than the Adviser's
staff can follow. In addition, the outside research provides Pilgrim with a
diverse perspective on financial markets. Research and investment information is
provided by these and other brokers at no cost to Pilgrim and is available for
the benefit of other accounts advised by Pilgrim and its affiliates, and not all
of this information will be used in connection with the Funds. While this
information may be useful to varying degrees and may tend to reduce the
Adviser's expenses, it is not possible to estimate its value, and, in the
opinion of Pilgrim, it does not reduce the Adviser's expenses by a determinable
amount. The extent to which Pilgrim makes use of statistical, research and other
services furnished by brokers is considered by Pilgrim in the allocation of
brokerage business, but there is no formula by which such business is allocated.
Pilgrim does so in accordance with its judgment of the best interests of the
Funds and their shareholders.
Purchases and sales of fixed income securities will usually be principal
transactions. Such securities often will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. Each Fund may also
purchase such securities in underwritten offerings and will, on occasion,
purchase securities directly from the issuer. Generally, fixed income securities
are traded on a net basis and do not involve brokerage commissions. The cost of
executing fixed income securities transactions consists primarily of dealer
spreads and underwriting commissions.
In purchasing and selling fixed income securities, it is the policy of
each Fund to obtain the best results, while taking into account the dealer's
general execution and operational facilities, the type of transaction involved
and other factors, such as the dealer's risk in positioning the securities
involved. While Pilgrim generally seeks reasonably competitive spreads or
commissions, the Funds will not necessarily pay the lowest spread or commission
available.
Each Fund may, under circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer that has
provided statistical or other research services to the Funds. By allocating
transactions in this manner, Pilgrim is able to supplement its research and
analysis with the views and information of other securities firms. During the
fiscal years ended October 31, 1998, October 31, 1997 and October 31, 1996 in
the case of the Growth + Value, International Value, Emerging Markets Value,
Research Enhanced Index, Income and Growth, High Total Return II, and High Total
Return Funds and the fiscal years ended December 31, 1998, December 31, 1997 and
December 31, 1996 for the SmallCap Opportunities, MidCap Opportunities, Growth
Opportunities, Government Securities and High Yield III Funds, each of the Funds
listed below paid the total brokerage commissions indicated below, including, in
the case of the SmallCap Opportunities, Growth Opportunities, Government
Securitites and High Yield III Funds, commissions to Advest, Inc. ("Advest"), an
affiliate of the Funds' former investment adviser.
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Brokerage Commissions Paid During 1998, 1997 and 1996 Fiscal Years
October 31,
-----------------------------------
1998 1997 1996
-------- -------- -------
Growth + Value Fund .................. $339,495 $170,986 N/A
International Value Fund(1) .......... $995,910 $421,452 $ 46,650
Emerging Markets Value Fund(2) ....... $ 33,868 N/A N/A
Research Enhanced Index Fund(3) ...... N/A N/A N/A
Income and Growth Fund ............... $ 93,492 $507,638 $249,474
High Total Return Fund II ............ $-- $-- N/A
High Total Return Fund ............... $-- $ 222 $ 11,433
- --------------
(1) Prior to April 21, 1997, the International Value Fund was operated as the
Brandes International Fund, a series of the Brandes Investment Trust, and
distributed by Worldwide Value Distributors, L.L.C.
(2) Pilgrim Emerging Markets Value Fund commenced operations on January 1,
1998.
(3) Pilgrim Research Enhanced Index Fund commenced operations on December
30, 1998.
December 31,
-----------------------------------
1998 1997 1996
-------- -------- -------
SmallCap Opportunities Fund .......... $957,784 $874,698 $479,135
MidCap Opportunities Fund(1) ......... $ 54,968 N/A N/A
Growth Opportunities Fund ............ $423,680 $169,066 $124,024
Government Securities Fund ........... $193,230 $ -- $ 1,049
High Yield Fund III................... $ -- $ -- $ 16,591
- ---------------
(1) Pilgrim MidCap Opportunities Fund commenced operations on August 20, 1998.
A change in securities held in the portfolio of a Fund is known as
"portfolio turnover" and may involve the payment by a Fund of dealer markups or
brokerage or underwriting commissions and other transaction costs on the sale of
securities, as well as on the reinvestment of the proceeds in other securities.
Portfolio turnover rate for a fiscal year is the percentage determined by
dividing the lesser of the cost of purchases or proceeds from sales of portfolio
securities by the average of the value of portfolio securities during such year,
all excluding securities whose maturities at acquisition were one year or less.
Each Fund's historical portfolio turnover rates are included in the Financial
Highlights tables in the prospectus. In evaluating a Fund's portfolio turnover
rate, you should keep in mind that a 100% annual turnover rate would occur, for
example, if all the securities in the portfolio were replaced once in a period
of one year. A Fund's portfolio turnover rate may be higher than the Fund's
historical portfolio turnover rates if a Fund finds it necessary to
significantly change its portfolio to adopt a temporary defensive position or
respond to economic or market events. A high turnover rate would increase
commission expenses and may involve realization of gains that would be taxable
to shareholders.
SERVICES OF PILGRIM, THE SUB-ADVISERS AND THE ADMINISTRATOR
Pursuant to an Investment Advisory Agreement with each Fund, Pilgrim
Advisors, Inc. acts as the Investment Adviser to each Fund. In this capacity,
Pilgrim, subject to the authority of the Trustees of the Funds, and subject to
delegation of certain responsibilities to Navellier Fund Management, Inc. as the
Sub-Adviser for the Growth + Value Fund, Brandes Investment Partners, L.P. as
the Sub-Adviser for the International Value Fund and the Emerging Markets Value
Fund and J.P. Morgan Investment Management Inc. as the Sub-Adviser for the
Research Enhanced Index Fund, is responsible for furnishing continuous
investment supervision to the Funds and is responsible for the management of
each Fund's portfolio. Pilgrim oversees the investment management of the
Sub-Advisers for the Funds which are managed by a Sub-Adviser.
Pilgrim is an indirect wholly owned subsidiary of ReliaStar Financial
Corp. ("ReliaStar"). On October 29, 1999, Reliastar acquired Pilgrim
Investments, an investment adviser to mutual funds and institutional accounts.
Pilgrim and Pilgrim Investments share certain resources and investment
personnel.
ReliaStar is a publicly traded holding company whose subsidiaries
specialize in the life insurance business. Through ReliaStar Life Insurance
Company ("ReliaStar Life") and other subsidiaries, ReliaStar issues and
distributes individual life insurance and annuities, group life and health
insurance and life and health reinsurance, and provides related investment
management services. The address of Pilgrim is 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004. The address of ReliaStar is 20 Washington Avenue
South, Minneapolis, Minnesota 55401.
Pilgrim charges a fee under each advisory agreement to SmallCap
Opportunites Fund, MidCap Opportunities Fund, Growth Opportunities Fund, Growth
+ Value Fund, International Value Fund, Emerging Markets Value Fund, Research
Enhanced Index Fund, Government Securities Fund, High Yield Fund III and High
Total Return Fund II at an annual rate of 0.75%, 1.00%, 0.75%, 1.00%, 1.00%,
16
<PAGE>
1.00%, 0.70%, 0.65%, 0.60% and 0.75% of such Fund's average daily net assets,
respectively. This fee is accrued daily and payable monthly.
Pilgrim charges a fee to the Income and Growth Fund and High Total
Return Fund at the annual rate of 0.75% on the first $250,000,000 of aggregate
average daily net assets of each Fund, 0.70% on the next $250,000,000 of such
assets, 0.65% on the next $250,000,000 of such assets; 0.60% on the next
$250,000,000 of such assets, and 0.55% on the remaining aggregate daily net
assets of each Fund in excess of $1 billion.
The Investment Advisory Agreement for the Income and Growth Fund and High
Total Return Fund was originally approved by the Trustees of the Pilgrim
Mayflower Trust (formerly the "Northstar Trust") on October 23, 1993, and by the
sole Shareholder of the Pilgrim Income and Growth Fund and High Total Return
Fund on November 8, 1993. The Investment Advisory Agreement was last renewed by
the Trustees for one year on April 30, 1998. It will continue in effect from
year to year if specifically approved annually by (a) the Trustees, acting
separately on behalf of the Fund, including a majority of the Disinterested
Trustees, or (b) a majority of the outstanding voting securities of the Fund as
defined in the 1940 Act.
The Investment Advisory Agreement for the Growth + Value Fund, High Total
Return Fund II, International Value Fund and Research Enhanced Index Fund was
approved by the Trustees of the Pilgrim Mayflower Trust (formerly the "Northstar
Trust") on July 31, 1996, October 29, 1996, January 23, 1997 and December 16,
1998, respectively. The Investment Advisory Agreement for the Growth + Value,
International Value and High Total Return II Funds was last renewed on April 30,
1998. The Investment Advisory Agreement will continue in effect for a period of
two years and annually thereafter if specifically approved annually by (a) the
Trustees, acting separately on behalf of the Fund, including a majority of the
Disinterested Trustees, or (b) a majority of the outstanding voting securities
of the Fund as defined in the 1940 Act.
The Investment Advisory Agreement for the Emerging Markets Value Fund was
approved by the Trustees of the Pilgrim Mayflower Trust (formerly "Northstar
Trust") on behalf of the Fund on October 29,1997, and by the sole shareholder of
the Fund on November 8, 1997. The Investment Advisory Agreement will continue in
effect until November 8, 1999, and then will continue in effect from year to
year, if specifically approved annually by (a) the Trustees of the Trust, on
behalf of the Fund, including a majority of the Disinterested Trustees, or (b) a
majority of the outstanding voting securities of the Fund as defined in the 1940
Act.
The Investment Advisory Agreement for the MidCap Opportunities Fund was
approved by the Trustees of the Pilgrim Equity Trust (formerly the "Northstar
Equity Trust") on July 29, 1998, and by the sole Shareholder of the Fund on July
31, 1998. The Investment Advisory Agreement will continue in effect for a period
of two years and annually thereafter if specifically approved by (a) the
Trustees, acting separately on behalf of the Fund, including a majority of the
Disinterested Trustees, or (b) a majority of the outstanding voting securities
of the Fund as defined in the 1940 Act.
Each Investment Advisory Agreement for the remaining Funds was approved by
the Trustees of the affected Fund on March 1, 1995 and by the shareholders of
such Fund on June 2, 1995. Each such Investment Advisory Agreement continues in
effect from year to year if specifically approved annually by (a) the Trustees,
acting separately on behalf of the particular Fund, including a majority of the
Disinterested Trustees, or (b) a majority of the outstanding voting securities
of each class of such Fund as defined in the 1940 Act. The Agreements were last
renewed on April 30, 1998.
A Fund's Investment Advisory Agreement may be terminated without payment
of any penalty by Pilgrim, the Trustees of the Trust, on behalf of the Fund, or
the shareholders of the Fund on not more than 60 days and not less than 30 days
prior written notice. Otherwise, a Fund's Investment Advisory Agreement will
remain in effect for two years and will, thereafter, continue in effect from
year to year, subject to the annual approval of the Trustees of the Trust, on
behalf of the Fund, or the vote of a majority of the outstanding voting
securities of the Fund, and the vote, cast in person at a meeting duly called
and held, of a majority of the Trustees of the Fund who are not parties to the
Investment Agreement or "interested persons" (as defined in the 1940 Act) of any
such Party. Such agreement will automatically terminate in the event of its
assignment, as defined in Section 2(a)(4) of the 1940 Act.
Pursuant to a Sub-Advisory Agreement between Pilgrim and Navellier Fund
Management, Inc. ("Navellier"), dated July 31, 1996 and amended and restated on
July 1, 1998, Navellier acts as sub-adviser to the Growth + Value Fund. In this
capacity, Navellier, subject to the supervision and control of Pilgrim and the
Trustees of such Fund, will manage the Fund's portfolio investments,
consistently with its investment objective, and will execute any of the Fund's
investment policies that it deems appropriate to utilize from time to time. Fees
payable under the Sub-Advisory Agreement will accrue daily and be paid monthly
by Pilgrim. As compensation for its services, Pilgrim will pay Navellier at the
annual rate of 0.50% of the average daily net assets of Growth + Value Fund.
Navellier is wholly owned and controlled by its sole stockholder, Louis G.
Navellier. Navellier's address is: 1 East Liberty, Third Floor, Reno, Nevada,
89501. The Sub-Advisory Agreement for Growth + Value Fund was initially approved
by the Trustees of the Trust, on behalf of the Fund, on July 31, 1996. The
Amended and Restated Sub-Advisory Agreement dated July 1, 1998 was approved by
the Trustees of the Trust, on behalf of the Fund, on May 28, 1998. The
Sub-Advisory Agreement may be terminated without payment of any penalty by
Northstar, Navellier, the Trustees
17
<PAGE>
of the Trust, on behalf of the Fund, or the shareholders of such Fund on not
more than 60 days and not less than 30 days prior written notice. Otherwise, the
Sub-Advisory Agreement will remain in effect for two years and will, thereafter,
continue in effect from year to year, subject to the annual approval of the
Trustees of the Trust, on behalf of the Fund, or the vote of a majority of the
outstanding voting securities of the Fund, and the vote, cast in person at a
meeting duly called and held, of a majority of the Trustees of the Trust, on
behalf of the Fund who are not parties to the Sub-Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of any such Party.
Pursuant to a Sub-Advisory Agreement between Pilgrim and Brandes
Investment Partners, L.P. ("Brandes"), dated February 28, 1997 and a
Sub-Advisory Agreement between Pilgrim and Brandes dated November 8, 1997,
Brandes acts as Sub-Adviser to the International Value Fund and the Emerging
Markets Value Fund, respectively. In this capacity, Brandes, subject to the
supervision and control of Pilgrim and the Trustees of the Trust, on behalf of
the respective Funds, will manage each Fund's portfolio investments,
consistently with each Fund's investment objective, and will execute any of the
Fund's investment policies that it deems appropriate to utilize from time to
time. Fees payable under the Sub-Advisory Agreements will accrue daily and be
paid monthly by Pilgrim. As compensation for its services, Pilgrim will pay
Brandes at the annual rate of 50% of the management fee that each of the Funds
it subadvises pays Pilgrim. Brandes' address is 12750 High Bluff Drive, San
Diego, California 92130. Charles Brandes, who controls the general partner of
Brandes, serves as one of the Managing Directors of Brandes. The Sub-Advisory
Agreement for the International Value Fund was approved by the Trustees of the
Trust, on behalf of the Fund, on January 23, 1997. The Sub-Advisory Agreement
for the Emerging Markets Value Fund was approved by the Trustees of the Trust,
on behalf of the Fund, on October 29, 1997. The Sub-Advisory Agreements may be
terminated without payment of any penalty by Pilgrim, Brandes, the Trustees of
the Trust, on behalf of the Fund, or the shareholders of the Funds on not more
than 60 days and not less than 30 days prior written notice. Otherwise, the
Sub-Advisory Agreements will remain in effect for two years and will,
thereafter, continue in effect from year to year, subject to the annual approval
of the Trustees of the Trust on behalf of each of the Funds, or the vote of a
majority of the outstanding voting securities of such Fund, and the vote, cast
in person at a meeting duly called and held, of a majority of the Trustees of
such Fund who are not parties to the Sub-Advisory Agreement or "interested
persons" (as defined in the 1940 Act) of any such Party.
Pursuant to a Sub-Advisory Agreement between Pilgrim and J.P. Morgan
Investment Management Inc., ("J.P. Morgan"), dated December 21, 1998, J.P.
Morgan acts as sub-adviser to the Research Enhanced Index Fund. In this
capacity, J.P. Morgan, subject to the supervision and control of Pilgrim and the
Trustees of the Trust, on behalf of the Fund, will manage the Fund's portfolio
investments, consistently with the Fund's investment objective, and will execute
any of the Fund's investment policies that it deems appropriate to utilize from
time to time. Fees payable under the Sub-Advisory Agreement will accrue daily
and be paid monthly by Pilgrim. As compensation for its services, Pilgrim will
pay J.P. Morgan at the annual rate of 0.20% of the average daily net assets of
the Fund. J.P. Morgan's address is 522 Fifth Avenue, New York, New York 10036.
The Sub-Advisory Agreement for the Fund was approved by the Trustees of Trust,
on behalf of the Fund on December 16, 1998. The Sub-Advisory Agreement may be
terminated without payment of any penalty by Pilgrim, the Trustees of the Trust,
on behalf of the Fund, or the shareholders of the Fund on not more than 60 days
and not less than 30 days prior written notice. Otherwise, the Sub-Advisory
Agreement will remain in effect for two years and will, thereafter, continue in
effect from year to year, subject to the annual approval of the Trustees of the
Trust, on behalf of the Fund, or the vote of a majority of the outstanding
voting securities of the Fund, and the vote, cast in person at a meeting duly
called and held, of a majority of the Trustees of the Fund who are not parties
to the Sub-Advisory Agreement or "interested persons" (as defined in the 1940
Act) of any such Party.
Pilgrim Group, Inc. (formerly "Northstar Administrators Corporation")
serves as administrator for the Funds, pursuant to an Administrative Services
Agreement with each Fund. Subject to the supervision of the Board of Trustees,
the Administrator provides the overall business management and administrative
services necessary to the proper conduct of the Funds' business, except for
those services performed by Northstar under the Investment Advisory Agreements,
the custodian for the Funds under the Custodian Agreements, the transfer agent
for the Funds under the Transfer Agency Agreements, and such other service
providers as may be retained by the Funds from time to time. The Administrator
acts as liaison among these service providers to the Funds. The Administrator is
also responsible for ensuring that the Funds operate in compliance with
applicable legal requirements and for monitoring Pilgrim for compliance with
requirements under applicable law and with the investment policies and
restrictions of the Funds. The Administrator is an affiliate of Pilgrim. The
address of the Administrator is 40 North Central Avenue, Suite 1200, Phoenix, AZ
85004.
The Administrative Services Agreement was approved by the Trustees of the
Pilgrim Mayflower Trust (formerly the "Northstar Trust") on behalf of the
Pilgrim Income and Growth Fund and Pilgrim High Total Return Fund on October 23,
1993. The Agreement was last renewed by the Trustees for one year on April 30,
1998 and will continue in effect from year to year thereafter, provided such
continuance is approved annually by a majority of the Trustees of the Trust, on
behalf of such funds. The Administrative Services Agreement for the Pilgrim
Growth + Value Fund was approved by the Trustees of the Pilgrim Mayflower Trust
(formerly the "Northstar Trust") on July 31, 1996 and
18
<PAGE>
will continue in effect from year to year thereafter, provided such continuance
is approved annually by a majority of the Trustees. The Administrative Services
Agreement for Pilgrim International Value Fund was approved by the Trustees of
the Pilgrim Mayflower Trust (formerly the "Northstar Trust") on January 23, 1997
and will continue in effect from year to year thereafter, provided such
continuance is approved annually by a majority of the Trustees.
The Administrative Services Agreement for the Pilgrim High Total Return
Fund II was approved by the Trustees of the Pilgrim Mayflower Trust (formerly
the "Northstar Trust") on October 29, 1996. The Agreement was last renewed by
the Trustees of the Trust, on behalf of the Fund, on April 30, 1998 and will
continue in effect from year to year thereafter, provided such continuance is
approved annually by a majority of the Trustees.
The Administrative Services Agreement for the Pilgrim Emerging Markets
Value Fund was approved by the Trustees of the Pilgrim Mayflower Trust (formerly
the "Northstar Trust") on behalf of the Fund on October 29, 1997. The
Administrative Services Agreement will continue in effect until November 8,
1999, and then will continue in effect from year to year, if specifically
approved annually by a majority of the Trustees of the Trust on behalf of the
Fund.
The Administrative Services Agreement for the Pilgrim MidCap Opportunities
Fund was approved by the Trustees of the Pilgrim Equity Trust (formerly the
"Northstar Equity Trust") on behalf of the Fund on July 29, 1998, and will
continue in effect for a period of two years and annually thereafter if such
continuance is approved annually by a majority of the Trustees of the Trust.
The Administrative Services Agreement for the Pilgrim Research Enhanced
Index Fund was approved by the Trustees of the Pilgrim Mayflower Trust (formerly
the "Northstar Trust") on behalf of the Fund on December 16, 1998, and will
continue in effect for a period of two years and annually thereafter if such
continuance is approved annually by a majority of the Trustees of the Trust.
Each Administrative Services Agreement for the remaining Funds was
approved by the Trustees of the particular Fund on March 1, 1995. The agreement
was last renewed by the Trustees for one year on April 30, 1998 and will
continue in effect from year to year thereafter, provided such continuance is
approved annually by a majority of the Disinterested Trustees of the affected
Fund.
The Administrator's fee is accrued daily against the value of each Fund's
net assets and is payable by each Fund monthly at an annual rate of 0.10% of
each Fund's average daily net assets. In addition, the Administrator charges an
annual account fee of $5.00 for each account of beneficial owners of shares in a
Fund for providing certain shareholder services and assisting broker-dealer
shareholder accounts.
During the fiscal years ended October 31, 1998, 1997 and 1996, and during
the fiscal years ended December 31, 1998, 1997 and 1996, respectively, the Funds
listed below paid Pilgrim and the Administrator the following investment
advisory and administrative fees:
Total Advisory and Administrative Fees Paid
During the Fiscal Year Ended October 31,
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
---------------- ------------- ----------------- -------------- ------------- -----------
Advisory Fees(1) Admin. Fees(1) Advisory Fees(2) Admin. Fees(2) Advisory Fees Admin. Fees
---------------- -------------- ---------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Growth + Value Fund .............. $ 1,696,786 169,679 538,291 74,529 N/A N/A
International Value Fund(3) ...... $ 3,501,309 486,422 789,163 116,315 259,033 60,000
Emerging Markets Value Fund ...... $ 45,079 4,508 N/A N/A N/A N/A
Research Enhanced Index Fund(4) .. $ -- -- N/A N/A N/A N/A
Income and Growth Fund ........... $ 1,399,807 186,641 1,513,778 233,759 1,548,967 242,294
High Total Return Fund II ........ $ 1,470,229 196,031 68,888 14,025 N/A N/A
High Total Return Fund ........... $ 5,691,286 995,897 5,442,788 989,855 2,639,662 359,978
</TABLE>
- ------------------
(1) Does not reflect expense reimbursement of $99,612 for Emerging Markets
Value Fund and $27,865 for High Total Return Fund II.
(2) Does not reflect expense reimbursement of $11,165 for Growth + Value Fund,
$173,911 for International Value Fund or $105,669 for High Total Return
Fund II.
(3) Prior to April 21, 1997, the International Value Fund was managed by
Brandes Investment Partners L.P. The administrator for the Fund was the
Investment Company Administration Corporation.
(4) Research Enhanced Index Fund commenced operations on December 30, 1998.
19
<PAGE>
Total Advisory and Administrative Fees Paid
During Fiscal Year Ended December 31,
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees Fees
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SmallCap Opportunities Fund(1) . $ 2,033,840 392,303 2,341,067 266,145 1,146,789 --
MidCap Opportunities Fund(3) ... $ 73,797 7,380 N/A N/A N/A N/A
Growth Opportunities Fund(1) ... $ 1,541,921 239,970 1,412,949 136,648 575,383 --
Government Securities Fund(1)(2) $ 697,032 133,321 762,504 180,250 941,594 --
High Yield Fund III............. $ 1,537,716 322,406 1,289,419 78,343 923,929 --
</TABLE>
- -----------------
(1) Does not reflect expense reimbursement of $37,687 for the MidCap
Opportunities Fund and a fee waiver of $160,854 for the Government
Securities Fund for the year ended December 31, 1998; expense
reimbursement of $10,635 for the Growth Opportunities Fund and $227,803
for the Government Securities Fund for the year ended December 31, 1997;
and expense reimbursement of $20,615 for the SmallCap Opportunities Fund
and $34,126 for the Growth Opportunities Fund for the year ended December
31, 1996.
(2) Net of waiver of investment advisory fees of $160,854, $201,863 and
$284,286 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(3) MidCap Opportunities Fund commenced operations on August 20, 1998.
During the fiscal years ended October 31, 1998, 1997 and 1996, the Funds
listed below paid the following subadvisory fees:
Total Subadvisory Fees Paid During Fiscal Year October 31,
1998 1997 1996
---------- ---------- -------
Growth + Value Fund ................ $ 998,812 $ 275,490 N/A
International Value Fund ........... 1,750,654 288,604 N/A
Emerging Markets Value Fund ........ 26,985 N/A N/A
Income and Growth Fund ............. 178,919 245,657 21,173
During the fiscal years ended December 31, 1998, 1997 and 1996, the
SmallCap Opportunities Fund paid the following subadviser fees:
Total Subadvisory Fees Paid During Fiscal Year Ended December 31,
1998 1997 1996
-------- ---------- -------
SmallCap Opportunities Fund $789,408 1,498,283 763,034
NET ASSET VALUE
For each Fund in the Pilgrim Mayflower Trust (formerly the "Northstar
Trust"), equity securities are valued at the last sale price on the exchange or
in the principal OTC market in which such securities are traded or lacking any
sales, at the last available bid price. Prices of long-term debt securities are
valued on the basis of last reported sales price, or if no sales are reported,
the value is determined based upon the mean of representative quoted bid or
asked prices for such securities obtained from a quotation reporting system or
from established market makers, or at prices for securities of comparable
maturity, quality and type. For the Pilgrim SmallCap Opportunities, MidCap
Opportunities, Growth Opportunities, Government Securities and High Yield III
Funds, portfolio securities, options and futures contracts and options thereon
that are traded on national exchanges or in the NASDAQ System are valued at the
last sale or settlement price on the exchange or market where primarily traded
or, if none that day, at the mean of the last reported bid and asked prices,
using prices as of the close of trading on the applicable exchange or market.
Securities and options that are traded in the OTC market (other than on the
NASDAQ System) are valued at the mean of the last available bid and asked
prices. Such valuations are based on quotations of one or more dealers that make
markets in the securities as obtained from such dealers or from a pricing
service. Securities (including OTC options) for which market quotations are not
readily available (which may constitute a major portion of the High Yield Fund's
portfolio) and other assets are valued at their fair value as determined by or
under the direction of the Trustees. Such fair value may be determined by
various methods, including utilizing information furnished by pricing services
that determine calculations for such securities using methods based, among other
things, upon market transactions for comparable securities and various
relationships between securities that are generally recognized as relevant.
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock
20
<PAGE>
Exchange (usually 4:00 p.m. Eastern time), on each business day that the New
York Stock Exchange is open. Net asset value per share is computed by
determining the value of a Fund's assets (securities held plus cash and other
assets, including dividend and interest accrued but not received) less all
liabilities of the Fund (including accrued expenses other than class specific
expenses), and dividing the result by the total number of shares outstanding at
such time. The specific expenses borne by each class of shares will be deducted
from that class and will result in different net asset values and dividends. The
net asset value per share of the Class B, Class C and Class T shares of each
Fund will generally be lower than that of the Class A or Class I shares because
of the higher class specific expenses borne by each of the Class B, Class C and
Class T shares. Under normal market conditions, daily prices for securities are
obtained from independent pricing services, determined by them in accordance
with the registration statement for each Fund. Securities are valued at market
value or, if a market quotation is not readily available, at their fair value,
determined in good faith under procedures established by and under the
supervision of the Trustees. Money market instruments maturing within 60 days
are valued using the amortized cost method of valuation. This involves valuing a
security at cost on the date of acquisition and thereafter assuming a constant
accretion of a discount or amortization of a premium to maturity, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument. See "How Net Asset Value
is Determined" in the Prospectus.
PURCHASES AND REDEMPTIONS
Shares issued pursuant to the automatic reinvestment of income dividends
or capital gains distributions are not subject to a front-end or contingent
deferred sales load. There is no sales charge for qualified persons. "Qualified
Persons" are the following (a) active or retired Trustees, Directors, Officers,
Partners or Employees (including immediate family) of (i) Pilgrim or any of its
affiliated companies, (ii) the Funds or any Pilgrim affiliated investment
company or (iii) dealers having a sales agreement with the Underwriter, (b)
trustees or custodians of any qualified retirement plan or IRA established for
the benefit of a person in (a) above; (c) dealers, brokers or registered
investment advisers that have entered into an agreement with the Underwriter
providing for the use of shares of the Funds in particular investment products
such as "wrap accounts" or other similar managed accounts for the benefit of the
clients of such brokers, dealers and registered investment advisers, and (d)
pension, profit sharing or other benefit plans created pursuant to a plan
qualified under Section 401 of the Code or plans under Section 457 of the Code,
provided that such shares are purchased by an employer sponsored plan with at
least 50 eligible employees and (e) service providers of (i) Pilgrim or any of
its affiliated companies or (ii) the Funds or any Pilgrim affiliated investment
company and (f) Brandes employees, officers and partners. Class A shares of the
Funds may be purchased at net asset value, through a dealer, where the amount
invested represents redemption proceeds from another open-end fund sold with a
sales load and the same or similar investment objective, and provided the
following conditions are met: such redemption occurred no more than 60 days
prior to the purchase of shares of a Pilgrim Fund, the redeemed shares were held
for at least six months prior to redemption, and the proceeds of the redemption
are sent directly to Pilgrim or its agent, or maintained in cash or a money
market fund. No commissions will be paid to dealers in connection with such
purchases. There is also no initial sales charge for "Purchasers" (defined
below) if the initial amount invested in the Funds is at least $1,000,000 or the
Purchaser signs a $1,000,000 Letter of Intent, as hereinafter defined.
Reduced Sales Charges on Class A Shares. Investors choosing the initial
sales charge alternative may under certain circumstances be entitled to pay
reduced sales charges. The sales charge varies with the size of the purchase and
reduced charges apply to the aggregate of purchases of Fund shares made at one
time by any "Purchaser," which term includes (i) an individual and his/her
spouse and their children under the age of 21, (ii) a trustee or fiduciary
purchasing for a single trust, estate or single fiduciary account (including
IRAs, pension, profit-sharing or other employee benefit trusts created pursuant
to a plan qualified under Section 401 of the Internal Revenue Code (the "Code"),
a Simplified Employee Pension ("SEP"), Salary Reduction and other Elective
Simplified Employee Pension Accounts ("SARSEP") and 403(b) and 457 plans,
although more than one beneficiary or participant is involved); and (iii) any
other organized group of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase at a discount of redeemable securities of a registered
investment company. The circumstances under which "Purchasers" may pay reduced
sales charges are described in the Prospectus.
Purchases In-Kind of the Pilgrim International Value Fund. Investors may,
subject to the approval of the Pilgrim International Value Fund, Pilgrim and
Brandes, purchase shares of the Pilgrim International Value Fund with liquid
securities that are eligible for purchase by the Fund and that have a value that
is readily ascertainable. These transactions will be effected only if Pilgrim or
Brandes intends to retain the securities in the Fund as an investment. The Fund
reserves the right amend or terminate this practice at any time.
Redemptions. The right to redeem shares may be suspended and payment
therefor postponed during periods when the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or, if permitted by rules of
the SEC,
21
<PAGE>
during periods when trading on the Exchange is restricted, during any emergency
that makes it impracticable for any Fund to dispose of its securities or to
determine fairly the value of its net assets, or during any other period
permitted by order of the SEC for the protection of investors. Furthermore, the
Transfer Agent will not mail redemption proceeds until checks received for
shares purchased have cleared, but payment will be forwarded immediately upon
the funds becoming available. Shareholders will be subject to the applicable
deferred sales charge, if any, for their shares at the time of redemption.
The contingent deferred sales charge will be waived with respect to Class
T shares in the following instances: (i) any partial or complete redemption of
shares of a shareholder who dies or becomes disabled, so long as the redemption
is requested within one year of death or the initial determination of
disability; (ii) any partial or complete redemption in connection with
distributions under Individual Retirement Accounts ("IRAs") or other qualified
retirement plans in connection with a lump sum or other form of distribution
following retirement within the meaning of Section 72(t)(2)(A) (iv) or (v) of
the Code, disability or death, or after attaining the age of 59 1/2 in the case
of an IRA, Keogh Plan or custodial account pursuant to Section 403(b)(7) of the
Code, or on any redemption that results from a tax free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code or Section 4979(f)
of the Code; (iii) redemptions effected pursuant to the Funds' right to
liquidate a shareholder's account if the aggregate net asset value of the shares
held in the account is less than $500; (iv) redemptions effected by (A)
employees of The Advest Group, Inc. ("AGI") and its subsidiaries, (B) IRAs,
Keogh plans and employee benefit plans for those employees, and (C) spouses and
minor children of those employees, so long as orders for shares are placed on
behalf of the spouses or children by the employees; (v) redemptions effected by
accounts managed by investment advisory subsidiaries of AGI registered under the
Investment Advisers Act of 1940; and (vi) redemptions in connection with
exchanges of Fund Class T shares, including shares of the Class T account of the
Money Market Portfolio.
Deferred Sales Charges - Class A and B Shares Purchased Prior to November
1, 1999. Investors who purchased Class A or B shares of the Fund prior to
November 1, 1999 are subject to a different contingent deferred sales charge,
which applied at the time of the purchase of those shares. With respect to Class
A shares, the following contingent deferred sales charge applies:
<TABLE>
<CAPTION>
Class A Shares
- -----------------------------------------------------------------------------------------------
Your investment Contingent deferred sales Period during which
charge on shares sold contingent deferred sales
charge applies
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First $1,000,000 to $2,499,999 1.00% 18 months
- -----------------------------------------------------------------------------------------------
$2,500,000 to $4,999,999 0.50% 18 months
- -----------------------------------------------------------------------------------------------
$5,000,000 and over 0.25% 18 months
- -----------------------------------------------------------------------------------------------
</TABLE>
With respect to Class B shares, the following contingent deferred sales charge
applies:
Class B Shares
- ------------------------------------------------------------------------
Years after you bought the shares Contingent deferred sales charge
- ------------------------------------------------------------------------
1st year 5.00%
- ------------------------------------------------------------------------
2nd year 4.00%
- ------------------------------------------------------------------------
3rd year 3.00%
- ------------------------------------------------------------------------
4th year 2.00%
- ------------------------------------------------------------------------
5th year 2.00%
- ------------------------------------------------------------------------
After 5th year ---
- ------------------------------------------------------------------------
With respect to shares purchased after November 1, 1999, the contingent deferred
sales charges described in the Fund's prospectus applies.
Exchanges. The following conditions must be met for all exchanges among
the Funds and the Money Market Portfolio: (i) the shares that will be acquired
in the exchange (the "Acquired Shares") are available for sale in the
shareholder's state of residence; (ii) the Acquired shares will be registered to
the same shareholder account as the shares to be surrendered (the "Exchanged
Shares"); (iii) the Exchanged Shares must have been held in the shareholder's
account for at least 30 days prior to the exchange; (iv) except for exchanges
into the Money Market Portfolio, the account value of the Fund whose shares are
to be acquired must equal or exceed the minimum initial investment amount
required by that Fund after the exchange is implemented; and (v) a properly
executed exchange request has been received by the Transfer Agent.
Each Fund reserves the right to delay the actual purchase of the Acquired
Shares for up to five business days if it determines that it would be
disadvantaged by an immediate transfer of proceeds from the redemption of
Exchanged Shares. Normally, however, the redemption of Exchanged Shares and the
purchase of Acquired Shares will take place on the day that the exchange request
is received in proper form. Each Fund reserves the right to terminate or modify
its exchange privileges at any time upon prominent notice to shareholders. Such
notice will be given at least 60 days in advance. It is the policy of Northstar
to discourage and prevent frequent trading by shareholders among the Funds in
response to market fluctuations. Accordingly, in order to maintain a stable
asset base in each Fund and to reduce administrative expenses borne by each
Fund, Northstar reserves the right to reject any exchange request.
Conversion Feature. Class B and Class T shares of each Fund will
automatically convert to Class A shares without a sales charge at the relative
net asset values of each of the classes after eight years from the acquisition
of the Class B or Class T shares, and as a result, will thereafter be subject to
the lower distribution fee (but same service fee) under the Class A Rule 12b-1
plan for each Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Code. In order to so qualify, the Fund must, among
other things, (i) derive each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, gains
from the sale of securities or foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in stock, securities or currencies and
(ii) at the end of each quarter of the taxable year maintain at least 50% of the
value of its total assets in cash, government securities, securities of other
regulated investment companies, and other securities of issuers that represent,
with respect to each issuer, no more than 5% the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and with no
more than 25% of its assets invested in the securities (other than those of the
U.S. government or other regulated investment companies) of any one issuer or of
two or more issuers that the Fund controls and that are engaged in the same,
similar or related trades and businesses. As a regulated investment company,
each Fund generally will not be subject to federal income tax on its income and
gains that it distributes to shareholders, if at least 90% of its investment
company taxable income (which includes dividends, interest and the excess of any
short-term capital gains over long-term capital losses) for the taxable year is
distributed.
22
<PAGE>
An excise tax at the rate of 4% will be imposed on the excess, if any, of
a Fund's "required distribution" over actual distributions in any calendar year.
Generally, the "required distribution" is 98% of a Fund's ordinary income for
the calendar year plus 98% of its capital gain net income recognized during the
one-year period ending on October 31 plus undistributed amounts from prior
years. Each Fund intends to make distributions sufficient to avoid imposition of
the excise tax. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by the Fund during October, November or
December of the year with a record date in such a month and paid by the Fund
during January of the following year. Such distributions will be taxable as if
received on December 31 in the year they are declared by the Fund, rather than
the year in which they are received.
The taxation of equity options and OTC options on debt securities is
governed by Code section 1234. Pursuant to Code section 1234, the premium
received by a Fund for selling a put or call option is not included in income at
the time of receipt. If the option expires, the premium is a short-term capital
gain to the Fund. If the Fund enters into a closing transaction, the difference
between the amount paid to close out its position and the premium received is a
short-term capital gain or loss. If a call option written by a Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call option that is purchased by a Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term,
depending upon the holding period of the option. If the option is exercised, the
cost of the option, in the case of a call option, is added to the basis of the
purchased security and, in the case of a put option, reduces the amount realized
on the underlying security in determining the gain or loss.
Certain options, futures contracts and forward contracts in which a Fund
may invest are "section 1256 contracts." Gains or losses on section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40 gains or losses"); however, foreign currency gains or
losses (as discussed below) arising from certain section 1256 contracts may be
treated as ordinary income or loss. Also, section 1256 contracts held by a Fund
at the end of each taxable year (and, generally, for purposes of the 4% excise
tax, on October 31 of each year) are treated as sold on such date at fair market
value, resulting in unrealized gains or losses being treated as though they were
realized.
Hedging transactions undertaken by a Fund may result in straddles for U.S.
federal income tax purposes. The straddle rules may accelerate income to a Fund,
defer losses to a Fund, and affect the character of gains (or losses) realized
by a Fund. Hedging transactions may increase the amount of short-term capital
gains realized by a Fund that is taxed as ordinary income when distributed to
shareholders. A Fund may make one or more of the various elections available
under the Code with respect to hedging transactions. If a Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected positions will be determined under rules that vary
according to the elections made.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time a Fund accrues interest or other receivables,
or accrues expenses or other liabilities, denominated in a foreign currency and
the time the Fund actually collects such receivables, or pays such liabilities,
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and certain
options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
A Fund will not realize a gain or loss on a short sale of a security until
it closes the transaction by delivering the borrowed security to the lender. All
or a portion of any gain arising from a short sale may be treated as short-term
capital gain, regardless of the period for which he Fund held the security used
to close the short sale. In addition, the Fund's holding period for any security
that is substantially identical to that which is sold short may be reduced or
eliminated as a result of the short sale.
Investments by a Fund in zero coupon securities will result in income to
the Fund equal to a portion of the excess of the face value of the securities
over their issue price (the "original issue discount") each year that the
securities are held, even though the Fund receives no cash interest payments.
This income is included in determining the amount of income that the Fund must
distribute to maintain its status as a regulated investment company and to avoid
the payment of federal income tax and the 4% excise tax. If a Fund invests in
certain high yield original issue discount obligations issued by corporations, a
portion of the original issue discount accruing on the obligations may be
eligible for the deduction for dividends received by corporations. In such
event, a portion of the dividends of investment company taxable income received
from the Fund by its corporate shareholders may be eligible for this deduction.
23
<PAGE>
Gains derived by a Fund from the disposition of any market discount bonds
(i.e., bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by the Fund will be taxed as ordinary
income to the extent of the accrued market discount on the bonds, unless the
Fund elects to include the market discount in income as it accrues.
If a Fund invests in stock of certain foreign corporations that generate
largely passive investment-type income, or which hold a significant percentage
of assets that generate such income (referred to as "passive foreign investment
companies" or "PFICs"), these investments would be subject to special tax rules
designed to prevent deferral of U.S. taxation of the Fund's share of the PFIC's
earnings. In the absence of certain elections to report these earnings on a
current basis, regardless of whether the Fund actually receives any
distributions from the PFIC, investors in the Fund would be required to report
certain "excess distributions" from, and any gains from the disposition of stock
of, the PFIC as ordinary income. This ordinary income would be allocated ratably
to the Fund's holding period for the stock. Any amounts allocated to prior years
would be taxable at the highest rate of tax applicable in that year, increased
by an interest charge determined as though the amounts were underpayments of
tax.
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. If more than
50% of the value of a Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible and
may elect to "pass through" to the Fund's shareholders the amount of foreign
taxes paid by the Fund. Pursuant to this election, a shareholder will be
required to include in gross income (in addition to dividends actually received)
its pro rata share of the foreign taxes paid by the Fund, and may be entitled
either to deduct its pro rata share of the foreign taxes in computing its
taxable income or to use the amount as a foreign tax credit against its U.S.
federal income tax liability, subject to limitations. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass through" for that year. If a Fund is
not eligible to make the election to "pass through" to its shareholders its
foreign taxes, the foreign taxes it pays will reduce its investment company
taxable income and distributions by the Fund will be treated as U.S. source
income.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to its foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its shareholders. With respect to
the Funds, gains from the sale of securities will be treated as derived from
U.S. sources and certain currency fluctuation gains, including fluctuation gains
from foreign currency denominated debt securities, receivables and payables, and
options, futures and forward transactions, will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income (as defined for purposes of the
foreign tax credit), including the foreign source passive income passed through
by the Funds.
The current position of the Internal Revenue Service (the "IRS") generally
is to treat a regulated investment company, such as the Special Fund, as owning
its proportionate share of the income and assets of any partnership in which it
is a partner, in applying the 90% qualifying income requirement and the asset
diversification requirements that, as described above, each Fund must satisfy to
qualify as a regulated investment company under the Code. These requirements may
limit the extent to which the Special Fund may invest in limited partnerships,
especially in the case of limited partnerships that do not primarily invest in a
diversified portfolio of stocks and securities.
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. If a portion of a Fund's
income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, designated as capital
gain dividends are taxable as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in each
such share equal to the net asset value of a share of the relevant Fund on the
reinvestment date. A distribution of an amount in excess of a Fund's current and
accumulated earnings and profits will be treated by a shareholder as a return of
capital that is applied against and reduces the shareholder's basis in his or
her shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her shares, the excess will be treated by the
shareholder as a gain from a sale or exchange of the shares. Shareholders will
be notified annually as to the U.S. federal tax status of distributions, and
shareholders receiving distributions in the form of additional shares will
receive a report as to the net asset value of those shares.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss that will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days
24
<PAGE>
before and ending 30 days after disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Under certain circumstances, the sales charge incurred in acquiring shares
of a Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of a Fund originally
acquired with a sales charge are disposed of within 90 days after the date on
which they were acquired and new shares of a regulated investment company are
acquired without a sales charge or at a reduced sales charge. In that case, the
gain or loss realized on the disposition will be determined by excluding from
the tax basis of the shares all or a portion of the sales charge incurred in
acquiring those shares. This exclusion applies to the extent that the otherwise
applicable sales charge with respect to the newly acquired shares is reduced as
a result of the shareholder having incurred a sales charge paid for the new
shares. This rule may be applied to successive acquisitions of shares of stock.
Distributions by a Fund reduce the net asset value of that particular
Fund's shares. Should a distribution reduce the net asset value of a share below
a shareholder's cost for the share, such a distribution nevertheless generally
would be taxable to the shareholder as ordinary income or long-term capital
gains, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution by a Fund. The
price of shares purchased at that time may include the amount of the forthcoming
distribution, but the distribution generally would be taxable to them.
Some shareholders may be subject to withholding of Federal income tax on
dividends and redemption payments from a Fund ("backup withholding") at the rate
of 31%. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. Generally, shareholders
subject to backup withholding will be (i) those for whom a certified taxpayer
identification number is not on file with a Fund, (ii) those about whom
notification has been received (either by the shareholder or by a Fund) from the
IRS that they are subject to backup withholding or (iii) those who, to a Fund's
knowledge, have furnished an incorrect taxpayer identification number.
Generally, to avoid backup withholding, an investor must, at the time an account
is opened, certify under penalties of perjury that the taxpayer identification
number furnished is correct and that he or she is not subject to backup
withholding.
The foregoing discussion relates solely to U.S. federal income tax law.
Dividends and distributions also may be subject to state, local and foreign
taxes. Dividends paid by a Fund from income attributable to interest on
obligations of the U.S. government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
Shareholders should consult their tax advisers regarding the possible exclusion
of this portion of their dividends for state and local tax purposes. Non-U.S.
investors also should consult their tax advisers concerning the tax consequences
of ownership of shares of a Fund, including the possibility that distributions
may be subject to a 30% U.S.
withholding tax (or a reduced rate of withholding provided by treaty).
Shareholders of Class A, Class B and Class C shares may direct that income
dividends and capital gain distributions be paid to them through various options
listed in the "How Funds Pay Distributions -- Distribution Options" section of
the Funds' current Prospectus. If a shareholder selects either of two such
options (that: (a) income dividends be paid in cash and capital gain
distributions be paid in additional shares of the same class of a designated
Fund at net asset value; or (b) income dividends and capital gain distributions
both be paid in cash), and the dividend/distribution checks cannot be delivered,
or, if such checks remain uncashed for six months, each Fund reserves the right
to reinvest the dividend or distribution in the shareholder's account at the
then-current net asset value and to convert the shareholder's election to
automatic reinvestment in shares of the Fund from which the distributions were
made. Each Fund has received from the IRS, rulings to the effect that (i) the
implementation of the multiple class purchase arrangement will not result in a
Fund's dividends or distributions constituting "preferential dividends" under
the Code, and (ii) that any conversion feature associated with a class of shares
does not constitute a taxable event under federal income tax law.
UNDERWRITER AND DISTRIBUTION SERVICES
Pursuant to Underwriting Agreements, Northstar Distributors, Inc. is the
Underwriter for each Fund and as such conducts a continuous offering pursuant to
a "best efforts" arrangement requiring it to take and pay for only such
securities as may be sold to the public. The Underwriter is an affiliate of the
Adviser and the Administrator.
The Underwriting Agreements may be terminated at any time on not less than
60 days written notice, without payment of a penalty, by the Underwriter, by
vote of a majority of the outstanding class of voting securities of the affected
Fund, or by vote of a majority of the Trustees of such Fund, who are not
"interested persons" of the Fund and who have no direct or indirect
25
<PAGE>
financial interest in such agreements. The Underwriting Agreements will
terminate automatically in the event of their assignment.
In addition to the amount paid to dealers pursuant to the sales charge
table in the Prospectus, the Underwriter from time to time pays, from its own
resources or pursuant to the Fund's distribution plans (discussed below), a
bonus or other incentive to dealers (other than the Underwriter) that employ a
registered representative who sells a minimum dollar amount of the shares of a
Fund during a specific period of time. Dealers may not use sales of any of the
Fund's shares to qualify for or participate in such programs to the extent such
may be prohibited by a dealer's internal procedures or by the laws of any state
or any self-regulatory agency, such as the National Association of Securities
Dealers, Inc. Such bonuses or other incentives take the form of payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families to places
within or outside the United States, or other bonuses such as certificates for
airline tickets, dining establishments or the cash equivalent of such bonuses.
The Underwriter, from time to time, reallows all or a portion of the sales
charge on Class A shares, which it normally reallows to individual selling
dealers. However, such additional reallowance generally will be made only when
the selling dealer commits to substantial marketing support such as internal
wholesaling through dedicated personnel, internal communications and mass
mailings.
Each Fund has adopted separate distribution plans under Rule 12b-1 of the
1940 Act for each class of shares of the Fund (collectively the "Plans"). The
Plans permit each Fund to compensate the Underwriter in connection with
activities intended to promote the sale of shares of each class of shares of
each Fund.
Pursuant to the Plan for Class A shares, each Fund may compensate the
Underwriter in an amount up to 0.30% of average daily net assets of such Fund's
Class A shares. Under the Plans for Class B and Class C shares, each Fund may
compensate the Underwriter in an amount up to 1.00% of the average daily net
assets attributable to the respective class of such Fund. Pursuant to the Plan
for Class T shares, each Fund compensates the Underwriter in an amount equal to
0.95% (in the case of SmallCap Opportunities Fund and Growth Opportunities Fund)
and 0.65% (in the case of Government Securities Fund and High Yield Fund III) of
annual average daily net assets of such Fund's Class T shares. However, each of
the Class T Plans provides for compensation of up to 1.00% of annual average
daily net assets. Expenditures by the Underwriter under the Plans shall consist
of: (i) commissions to sales personnel for selling shares of the Funds
(including underwriting fees and financing expenses incurred in connection with
the sale of Class B and Class C shares); (ii) compensation, sales incentives and
payments to sales, marketing and service personnel; (iii) payments to
broker-dealers and other financial institutions that have entered into
agreements with the Underwriter in the form of a Dealer Agreement for Pilgrim
Funds for services rendered in connection with the sale and distribution of
shares of the Funds; (iv) payment of expenses incurred in sales and promotional
activities, including advertising expenditures related to the Funds; (v) the
costs of preparing and distributing promotional materials; (vi) the cost of
printing the Funds' Prospectus and SAI for distribution to potential investors;
and (vii) other activities that are reasonably calculated to result in the sale
of shares of the Funds. With respect to each Class T Plan, it is anticipated
that all of the payments received by the Underwriter under the Plan will be paid
to Advest as compensation for its prior distribution related and current
shareholder servicing related activities in connection with the Class T Shares.
A portion of the fees paid to the Underwriter pursuant to the 12b-1 plans
not exceeding 0.25% annually of the average daily net assets of each Fund's
shares may be paid as compensation for providing services to each Fund's
shareholders, including assistance in connection with inquiries related to
shareholder accounts (the "Service Fee"). In order to receive Service Fees under
the Plans, participants must meet such qualifications as are established in the
sole discretion of the Underwriter, such as services to each Fund's
shareholders; services providing each Fund with more efficient methods of
offering shares to coherent groups of clients, members or prospects of a
participant; or services permitting purchases or sales of shares, or
transmission of such purchases or sales by computerized tape or other electronic
equipment; or other processing.
The Plans are designed to be compensation plans and therefore amounts
spent by the distributor in excess of plan limits are not carried over from year
to year for reimbursement. The Plans do, however, contemplate that amounts paid
to the distributor may compensate it for past distribution efforts without
regard to any particular time period.
If the Plans are terminated in accordance with their terms, the
obligations of a Fund to compensate the Underwriter for distribution related
services pursuant to the Plans will cease; however, subject to approval by the
Trustees, including a majority of the independent Trustees, a Fund may continue
to make payments past the date on which each Plan terminates up to the annual
limits set forth in each Plan for the purpose of compensating the Underwriter
for services that were incurred during the term of the Plan.
The Trustees have concluded that there is a reasonable likelihood that the
Plans will benefit each Fund and its shareholders and that the Plans should
result in greater sales and/or fewer redemptions of Fund shares. On a quarterly
basis, the Trustees review a report on expenditures under the Plans and the
purposes for which expenditures were made. The Trustees
26
<PAGE>
conduct an additional, more extensive review annually in determining whether the
Plans shall be continued. By their terms, continuation of the Plans from year to
year is contingent on annual approval by a majority of the Trustees acting
separately on behalf of each Fund and by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plans or any related
agreements (the "Plan Trustees"). The Plans provide that they may not be amended
to increase materially the costs that a Fund may bear pursuant to the applicable
Plan without approval of the shareholders of the affected Fund and that other
material amendments to the Plans must be approved by a majority of the Plan
Trustees acting separately on behalf of each Fund, by vote cast in person at a
meeting called for the purpose of considering such amendments. The Plans further
provide that while each plan is in effect, the selection and nomination of Plan
Trustees shall be committed to the discretion of the Plan Trustees. A Plan may
be terminated at any time by vote of a majority of the Plan Trustees or a
majority of the outstanding class of shares of the affected Fund to which the
Plan relates.
During their fiscal year ended October 31, 1998, each class of shares of
the Funds listed below paid the following 12b-1 distribution and service fees
pursuant to the Plan for each class:
1998
----------------------------------------
Class A Class B Class C
----------- ----------- ----------
Growth + Value Fund ............... $ 112,335 $ 979,399 $ 342,938
International Value Fund .......... $ 420,852 $1,068,936 $1,029,533
Emerging Markets Value Fund ....... $ 5,230 $ 16,707 $ 10,940
Research Enhanced Index Fund ...... N/A N/A N/A
Income and Growth Fund ............ $ 156,253 $ 689,593 $ 655,973
High Total Return Fund II ......... $ 89,638 $1,234,071 $ 427,440
High Total Return Fund ............ $ 586,170 $ 427,440 $ 877,968
For their fiscal year ended October 31, 1998, expenses incurred by the
Distributor for distribution related activities with respect to each class of
shares of each Fund listed below were as follows:
Growth + Value Fund
----------------------------------------
Class A Class B Class C
----------- ----------- ----------
EXPENSE
Salaries/Overrides .................... $ 177,149 $ 140,012 $ 47,014
Commissions Paid ...................... $ -0- $ 540,199 $ 191,896
Marketing, RMM & Convention Expense ... $ 151,257 $ 63,747 $ 13,728
Total ................................. $ 328,406 $ 743,958 $ 252,638
International Value Fund(1)
----------------------------------------
Class A Class B Class C
--------- --------- ----------
EXPENSE
Salaries/Overrides .................... $ 980,373 $ 244,453 $ 213,255
Commissions Paid ...................... $ -0- $ 487,512 $ 928,707
Marketing, RMM & Convention Expense ... $ 567,525 $ 93,724 $ 43,554
Total ................................. $ 1,547,898 $ 825,689 $1,185,516
- -------------
(1) The International Value Fund commenced operations on April 21, 1997. Prior
to April 21, 1997, the Fund was operating as the Brandes International
Fund, a series of the Brandes Investment Trust and was distributed by
Worldwide Value Distributors, L.L.C.
Emerging Markets Value Fund(2)
-------------------------------
1998
-------------------------------
Class A Class B Class C
------- ------- -------
EXPENSE
Salaries/Overrides .................... $ 18,766 $ 9,990 $ 6,556
Commissions Paid ...................... $ -0- -0- $ 29,924
Marketing, RMM & Convention Expense ... $ 48,140 $ 16,044 $ 3,405
Total ................................. $ 66,906 $ 26,034 $ 39,885
- --------------
(2) The Emerging Markets Value Fund commenced operations on January 1, 1998.
27
<PAGE>
Research Enhanced Index Fund(3)
-------------------------------
1998
-------------------------------
Class A Class B Class C
------- ------- -------
EXPENSE
Salaries/Overrides .......................... N/A N/A N/A
Commissions Paid ............................ N/A N/A N/A
Marketing, RMM & Convention Expense ......... N/A N/A N/A
Total ....................................... N/A N/A N/A
- --------------
(3) The Research Enhanced Index Fund commenced operations on December 30, 1998.
Income and Growth Fund
-----------------------------------
1998
-----------------------------------
Class A Class B Class C
------- ------- -------
EXPENSE
Salaries/Overrides ...................... $195,906 $ 42,398 $ 25,380
Commissions Paid ........................ $ -0- $ 93,498 $ 20,011
Marketing, RMM & Convention Expense ..... $195,199 $ 43,215 $ 24,428
Total ................................... $391,105 $179,061 $ 69,819
High Total Return Fund II(4)
------------------------------------
1998
------------------------------------
Class A Class B Class C
------- ------- -------
EXPENSE
Salaries/Overrides ...................... $ 214,327 $ 387,673 $ 123,745
Commissions Paid ........................ $ -0- $1,255,483 $ 565,987
Marketing, RMM & Convention Expense ..... $ 139,213 $ 85,847 $ 18,154
Total ................................... $ 353,540 $1,729,003
- --------------
(4) The High Total Return Fund II commenced operations on January 31, 1997,
but was not available for purchase until July 4, 1997.
High Total Return Fund
------------------------------------
1998
------------------------------------
Class A Class B Class C
------- ------- -------
EXPENSE
Salaries/Overrides ...................... $ 707,507 $ 392,598 $ 50,766
Commissions Paid ........................ $-0- $ 959,737 $ 130,466
Marketing, RMM & Convention Expense ..... $ 699,168 $ 315,535 $ 32,213
Total ................................... $1,406,675 $1,667,870 $ 213,447
For their fiscal year ended October 31, 1998, the Distributor received the
following amounts in sales charges, after reallowance to Dealers:
Underwriting Fees
----------------------------------------
Class A Class B Class C
---------- ---------- ----------
Growth + Value Fund ............... $ 85,327 $ 433,641 $ 55,259
International Value Fund .......... $ 168,354 $ 308,042 $ 71,384
Emerging Markets Value Fund ....... $ 9,663 $ 3,274 $ 538
Research Enhanced Index Fund ...... $ N/A $ N/A $ N/A
Income and Growth Fund ............ $ 6,571 $ 307,734 $ 10,991
High Total Return Fund II ......... $ 230,496 $ 448,786 $ 44,439
High Total Return Fund ............ $ 139,428 $2,058,629 $ 32,513
During their fiscal year ended December 31, 1998, each class of shares of
the Funds listed below, paid the following 12b-1 distribution and service fees
pursuant to the Distribution Plan for each class:
Class A Class B Class C Class T
-------- --------- --------- ---------
SmallCap Opportunities Fund. $ 178,376 $1,471,915 $ 400,906 $ 232,160
MidCap Opportunities Fund(1) $ 403 $ 137 $ 115 N/A
Growth Opportunities Fund .. $ 58,586 $ 113,076 $ 14,030 $ 577,185
Government Securities Fund . $ 57,075 $ 191,942 $ 20,581 $ 435,230
High Yield Fund III ....... $ 62,761 $1,180,532 $ 219,323 $ 619,323
- -----------
(1) The MidCap Opportunities Fund commenced operations on August 20, 1998.
28
<PAGE>
During the fiscal year ended December 31, 1998, expenses incurred by the
Distributor (or Advest with respect to Class T Shares prior to June 2, 1995) for
certain distribution related activities with respect to each class of shares of
the Funds listed below were as follows:
SmallCap Opportunities Fund
------------------------------------------
Class A Class B Class C Class T
-------- -------- -------- ---------
EXPENSE
Salaries/Overrides ................. $204,015 $102,411 $ 22,425 $ --
Commissions Paid ................... $ 0 $106,926 $ 56,642 $ --
Marketing/Convention/RMM Expense ... $280,528 $110,510 $ 19,687 $ --
Total .............................. $484,543 $319,847 $ 98,754 $ --
MidCap Opportunities Fund
---------------------------------
Class A Class B Class C
-------- ------- -------
EXPENSE
Salaries/Overrides ...................... $ 1,504 $ 47 $ 3
Commissions Paid ........................ $ 0 $ 0 $ 0
Marketing/Convention/RMM Expense ........ $25,684 $ 9,038 $ 1,808
Total ................................... $27,188 $ 9,085 $ 1,811
Growth Opportunities Fund
----------------------------------------
Class A Class B Class C Class T
------- --------- -------- -------
EXPENSE
Salaries/Overrides .................. $ 71,838 $ 11,550 $ 1,286 $ --
Commissions Paid .................... $ 0 $ 3,933 $ 3,802 $ --
Marketing/Convention/RMM Expense .... $ 62,864 $ 8,228 $ 921 $ --
Total ............................... $134,702 $ 23,711 $ 6,009 $ --
Government Securities Fund
----------------------------------------
Class A Class B Class C Class T
-------- -------- -------- -------
EXPENSE
Salaries/Overrides .................. $ 77,481 $ 23,296 $ 2,286 $ --
Commissions Paid .................... $ 0 $ 7,887 $ 8,515 $ --
Marketing/Convention/RMM Expense .... $ 52,524 $ 10,739 $ 817 $ --
Total ............................... $130,005 $ 41,922 $ 11,618 $ --
High Yield Fund III
----------------------------------------
Class A Class B Class C Class T
-------- -------- -------- -------
EXPENSE
Salaries/Overrides .................. $ 75,788 $110,938 $ 16,931 $ --
Commissions Paid .................... $ 0 $ 66,716 $ 53,100 $ --
Marketing/Convention/RMM Expense .... $110,537 $ 79,289 $ 10,566 $ --
Total ............................... $186,325 $256,943 $ 80,597 $ --
For the following Funds' fiscal year ended December 31, 1998, the
Distributor (or Advest) received the following amounts in sales charges, after
reallowance to Dealers:
Class A Class B Class C Class T
-------- --------- --------- ---------
SmallCap Opportunities Fund. $ 39,102 $1,122,269 $ 26,180 $ 12,940
MidCap Opportunities Fund .. $ 0 $ 0 $ 0 N/A
Growth Opportunities Fund .. $ 5,852 $ 37,253 $ 1,393 $ 5,820
Government Securities Fund . $ 3,079 $ 81,950 $ 2,792 $ 4,393
High Yield Fund III ........ $ 16,445 $ 374,700 $ 14,884 $ 24,592
29
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of each Fund and their business
affiliations for the past five years are set forth below. Unless otherwise
noted, the mailing address of the Trustees and officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004
Paul S. Doherty, Trustee. Age: 64.
President, Doherty, Wallace, Pillsbury and Murphy, P.C., Attorneys.
Director, Tambrands, Inc. Since October 1993, Trustee of the Pilgrim
affiliated investment companies.
Robert B. Goode, Jr., Trustee. Age: 68
Currently retired. From 1990 to 1991, Chairman of The First Reinsurance
Company of Hartford. From 1987 to 1989, President and Director of American
Skandia Life Assurance Company. Since October 1993, Trustee of the Pilgrim
affiliated investment companies.
Alan L. Gosule, Trustee. Age: 58.
Partner, Rogers & Wells. Director, F.L. Putnam Investment Management Co.,
Inc.
*Mark L. Lipson, Trustee and President. Age: 49.
Director, Chairman and Chief Executive Officer of Pilgrim and Pilgrim
Holdings Corporation. Director and President of Pilgrim Group, Inc. and
Northstar Funding, Inc. and Director, Chairman and Chief Executive Officer of
Northstar Distributors, Inc., Trustee and President of the Pilgrim affiliated
investment companies since October 1993. Prior to August, 1993, Director,
President and Chief Executive Officer of National Securities & Research
Corporation and Director/Trustee and President of the National Affiliated
Investment Companies and certain of National's subsidiaries.
Walter H. May, Trustee. Age: 62.
Currently retired. Former Senior Executive for Piper Jaffrey, Inc.
David W.C. Putnam, Trustee. Age: 59.
President, Clerk and Director of F.L. Putnam Securities Company,
Incorporated, F.L. Putnam Investment Management Company, Incorporated,
Interstate Power Company, Inc., Trust Realty Corp. and Bow Ridge Mining Co.;
Director of Anchor Investment Management Corporation; President and Trustee of
Anchor Capital Accumulation Trust, Anchor International Bond Trust, Anchor Gold
and Currency Trust, Anchor Resources and Commodities Trust and Anchor Strategic
Assets Trust.
John R. Smith, Trustee. Age: 75.
President of New England Fiduciary Company (financial planning) since
1991; Chairman of Massachusetts Educational Financing Authority since 1987; Vice
Chairman of Massachusetts Health and Education Authority; from 1970-1991,
Financial Vice President of Boston College.
*John G. Turner, Trustee. Age: 59.
Chairman and Chief Executive Officer of ReliaStar Financial Corporation
and ReliaStar Life Insurance Company ("ReliaStar Life") since May 1993, and
Chairman of other ReliaStar affiliated insurance Ccompanies since 1995. Since
October 1993, Director of Pilgrim and affiliates. Prior to May 1993, President
and Chief Executive Officer of ReliaStar Financial Corporation and ReliaStar
Life.
David W. Wallace, Trustee. Age: 74.
Chairman of Putnam Trust Company, Lone Star Industries and FECO Engineered
Systems, Inc. He is also President and Trustee of the Robert R. Young Foundation
and Governor of New York Hospital. Director of UMC Electronics and Zurn
Industries, Inc. Former Chairman and Chief Executive Officer, Todd Shipyards and
Bangor Punta Corporation, and former Chairman and Chief Executive Officer of
National Securities & Research Corporation. Since October 1993, Trustee of the
Pilgrim affiliated investment companies.
James M. Hennessy, Executive Vice President and Secretary. Age: 50.
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary of
the Pilgrim Funds. Formerly Senior Vice President, Pilgrim Capital (April 1995 -
April 1998); Senior Vice President, Express America Mortgage Corporation (June
1992 - August 1994) and President, Beverly Hills Securities Corp. (January 1990
- - June 1992).
James R. Reis, Executive Vice President and Assistant Secretary. Age: 41.
Director, Vice Chairman (since December 1994), Executive Vice President
(since April 1995), and Director of Structured Finance (since April 1998),
Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994) and
Vice Chairman (since November 1995) of Pilgrim Securities; Executive Vice
President, Assistant Secretary and Chief Credit Officer of Pilgrim Prime Rate
Trust; Executive Vice President and Assistant Secretary of the Pilgrim Funds.
Chief Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December 1993),
Pilgrim Capital (formerly Express America Holdings Corporation). Presently
serves or has served as an officer or director of other affiliates of Pilgrim
Capital.
Michael J. Roland, Senior Vice President and Principal Financial Officer.
Age: 41. Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice
President and Principal Financial Officer of the Pilgrim Funds. He served in
same capacity from January, 1995 - April, 1997. Formerly, Chief Financial
Officer of Endeavor Group (April, 1997 to June, 1998).
*Robert W. Stallings, Chairman, Chief Executive Officer, and President.
Age: 50. Chairman, Chief Executive Officer and President of Pilgrim Group,
Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim Investments,
Inc. (since December 1994); Director, Pilgrim Securities, Inc. ("Pilgrim
Securities") (since December 1994); Chairman, Chief Executive Officer and
President of Pilgrim Bank and Thrift Fund, Inc., Pilgrim Government Securities
Income Fund, Inc. and Pilgrim Investment Funds, Inc. (since April 1995).
Chairman and Chief Executive Officer of Pilgrim Prime Rate Trust (since April
1995). Chairman and Chief Executive Officer of Pilgrim America Capital
Corporation (formerly, Express America Holdings Corporation) ("Pilgrim Capital")
(since August 1990).
Stanley D. Vyner, Executive Vice President. Age: 49.
President and Chief Executive Officer (since August 1996), Pilgrim
Investments; Executive Vice President of most of the Pilgrim Funds (since July
1996). Formerly Chief Executive Officer (November 1993 - December 1995) HSBC
Asset Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
- --------------
*Deemed to be an "interested person" of each Fund, as defined by the 1940 Act.
30
<PAGE>
Pilgrim and Pilgrim Group, Inc. make their personnel available to serve as
Officers and "Interested Trustees" of the Funds. All Officers and Interested
Trustees of the Funds are compensated by Pilgrim or Pilgrim Group, Inc. Trustees
who are not "interested persons" of the Adviser are paid an annual retainer fee
of $8,000 for their combined services as Trustees to the Funds and to retail
funds sponsored or advised by the Adviser, and a per meeting fee of $2,000 for
attendance at each joint meeting of the Funds and the other Pilgrim retail
funds. The Funds also reimburse Trustees for expenses incurred by them in
connection with such meetings.
As of December 31, 1998, all Trustees and executive officers of each Fund
as a group owned beneficially or of record less than 1% of the outstanding
securities of such Fund. To the knowledge of the Funds, as of December 31, 1998,
no shareholder owned beneficially (b) or of record (r) more than 5% of a Fund's
outstanding shares, except as set forth below:
(1) SmallCap Opportunities Fund
Class B
Merrill Lynch Pierce Fenner & Smith 18.0% (r)
Jacksonville, Florida
Class C
Merrill Lynch Pierce Fenner & Smith 7.4% (r)
Jacksonville, Florida
(2) Growth + Value Fund
Class B
Merrill Lynch Pierce Fenner &Smith 23.2% (r)
Jacksonville, Florida
Class C
Merrill Lynch Pierce Fenner &Smith 9.5% (r)
Jacksonville, Florida
(3) International Value Fund
Class A
Charles Schwab & Co. Inc.
San Francisco, California 19.0% (r)
Class B
Merrill Lynch Pierce Fenner & Smith 8.3% (r)
Jacksonville, Florida
Class C
Merrill Lynch Pierce Fenner & Smith 7.8% (r)
Jacksonville, Florida
31
<PAGE>
(4) Emerging Markets Value Fund
Class A
Northstar Investment Management Corp. 19.3% (b)
Stamford, Connecticut
(5) Income and Growth Fund
Class B
Merrill Lynch Pierce Fenner & Smith 12.0% (r)
Jacksonville, Florida
(6) Government Securities Fund
Class B
Merrill Lynch Pierce Fenner & Smith 7.1% (r)
Jacksonville, Florida
(7) High Yield Fund III
Class B
Merrill Lynch Pierce Fenner & Smith 19.2% (r)
Jacksonville, Florida
(8) High Total Return Fund II
Class B
Merrill Lynch Pierce Fenner & Smith 30.0% (r)
Jacksonville, Florida
Class C
Merrill Lynch Pierce Fenner & Smith 10.0% (r)
Jacksonville, Florida
(9) High Total Return Fund
Class B
Merrill Lynch Pierce Fenner & Smith 24.0% (r)
Jacksonville, Florida
32
<PAGE>
Compensation Table
Period Ended December 31, 1998
<TABLE>
<CAPTION>
Pension Benefits Estimated Annual Total Compensation
Compensation Accrued as Part of Benefits Upon from All Funds (18) in
from Funds(a) Fund Expenses Retirement Pilgrim Complex(b)
------------- ------------- ---------- --------------------
<S> <C> <C> <C> <C>
Paul S. Doherty ......... 18,344 N/A N/A 20,000
Robert B. Goode, Jr ..... 17,000 N/A N/A 18,500
Alan L. Gosule .......... 18,344 N/A N/A 20,000
Mark L. Lipson .......... 0 N/A N/A 0
Walter H. May ........... 18,344 N/A N/A 20,000
David W.C. Putnam ....... 18,000 N/A N/A 19,500
John R. Smith ........... 18,344 N/A N/A 20,000
John G. Turner .......... 0 N/A N/A 0
David W. Wallace ........ 18,344 N/A N/A 20,000
</TABLE>
- ----------
(a) See table below for Fund specific compensation.
(b) Compensation paid by the Pilgrim Mayflower Trust Funds (formerly the
"Northstar Trust Funds"), the Northstar Galaxy Trust Funds, the Pilgrim
MidCap Opportunities Fund (formerly the "Northstar Mid-Cap Growth Fund"),
Pilgrim SmallCap Opportunities Fund (formerly the "Northstar Special
Fund"), Pilgrim Opportunities Fund (formerly the "Northstar Growth Fund"),
Pilgrim Government Securities Fund (formerly the "Northstar Government
Securities Fund"), Pilgrim High Yield Fund III (formerly the "Northstar
High Yield Fund") and Pilgrim Balance Sheet Opportunities Fund (formerly
the "Northstar Balance Sheet Opportunities Fund").
Individual Fund(1)
Fiscal Year Compensation Tables
<TABLE>
<CAPTION>
SmallCap MidCap Growth Growth International Emerging
Opportunities Opportunities Opportunities + Value Value Market
------------- ------------- ------------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Paul S. Doherty ........ 2,369 308 1,369 1,369 1,369 974
Robert B. Goode, Jr .... 2,338 308 1,338 1,338 1,338 974
Alan L. Gosule ......... 2,369 308 1,369 1,369 1,369 974
Mark L. Lipson ......... 0 0 0 0 0 0
Walter H. May .......... 2,369 308 1,369 1,369 1,369 974
David W.C. Putnam ...... 2,338 308 1,338 1,338 1,338 974
John R. Smith .......... 2,369 308 1,369 1,369 1,369 974
John G. Turner ......... 0 0 0 0 0 0
David W. Wallace ....... 2,369 308 1,369 1,369 1,369 974
</TABLE>
<TABLE>
<CAPTION>
High High Balance
Income Government High Total Total Sheet
and Growth Securities Yield III Return II Return Opportunities
---------- ---------- --------- --------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Paul S. Doherty ....... 1,369 1,369 1,369 1,369 1,369 1,369
Robert B. Goode, Jr. .. 1,338 1,338 1,338 1,338 1,338 1,338
Alan L. Gosule ........ 1,369 1,369 1,369 1,369 1,369 1,369
Mark L. Lipson ........ 0 0 0 0 0 0
Walter H. May ......... 1,369 1,369 1,369 1,369 1,369 1,369
David W.C. Putnam ..... 1,338 1,338 1,338 1,338 1,338 1,338
John R. Smith ......... 1,369 1,369 1,369 1,369 1,369 1,369
John G. Turner ........ 0 0 0 0 0 0
David W. Wallace ...... 1,369 1,369 1,369 1,369 1,369 1,369
</TABLE>
- ---------------
(1) Pilgrim MidCap Opportunities Fund commenced operations on August 20, 1998.
Pilgrim Research Enhanced Index Fund commenced operations on December 20,
1998.
33
<PAGE>
OTHER INFORMATION
Independent Accountants. PricewaterhouseCoopers LLP has been selected as
the independent accountants of the Pilgrim Mayflower Trust (formerly the
"Northstar Trust"), Pilgrim Equity Trust (formerly the "Northstar Equity Trust")
and each of the other Pilgrim Funds. PricewaterhouseCoopers LLP audits the
Funds' annual financial statements and expresses an opinion thereon.
Custodian. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, acts as custodian, and fund accounting agent for
the Funds.
Transfer Agent. DST Systems, Inc., 210 West 10th Street, 8th floor, Kansas
City, Missouri 64105 acts as the transfer agent for each Fund.
Reports to Shareholders. The fiscal year of the Pilgrim Mayflower Trust
(formerly the "Northstar Trust") ends on October 31. The fiscal year of each
other Fund ends on December 31. Each Fund will send financial statements to its
shareholders at least semiannually. An annual report containing financial
statements audited by the independent accountants will be sent to shareholders
each year.
Organizational and Related Information. SmallCap Opportunities Fund
(formerly the "Northstar Special Fund") was organized in 1986; Growth
Opportunities Fund (formerly the "Northstar Growth Fund") was organized in 1986;
Government Securities Fund (formerly the "Northstar Government Securities Fund")
was organized in 1986; and High Yield Fund III (formerly the "Northstar High
Yield Fund") was organized 1989. Pilgrim Mayflower Trust (formerly the
"Northstar Trust"), and two of its series Income and Growth Fund (formerly the
"Northstar Income and Growth Fund") and High Total Return Fund (formerly the
"Northstar High Total Return Fund"), were organized in 1993. Growth + Value Fund
(formerly the "Northstar Growth + Value Fund") and High Total Return Fund II
(formerly the "Northstar High Total Return Fund II") were organized in 1996. The
International Value Fund commenced operations on March 6, 1995 as the Brandes
International Fund, a series of the Brandes Investment Trust. It was reorganized
on April 21, 1997 as the Pilgrim International Value Fund (formerly the
"Northstar International Value Fund"), a series of the Pilgrim Mayflower Trust
(formerly the "Northstar Trust"). The Emerging Markets Value Fund (formerly the
"Northstar Emerging Markets Value Fund"), a series of the Pilgrim Mayflower
Trust, was organized 1998. The Research Enhanced Index Fund (formerly the
"Northstar Research Enhanced Index Fund"), a series of the Pilgrim Mayflower
Trust (formerly the "Northstar Trust"), was organized in 1998.
The Pilgrim Equity Trust (formerly the "Northstar Equity Trust") and its
only series, the Pilgrim MidCap Opportunities Fund (formerly the "Northstar
Mid-Cap Growth Fund"), was organized in 1998.
The shares of each Fund, when issued, will be fully paid and
non-assessable, have no preference, preemptive, or similar rights, and will be
freely transferable. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Meetings of the shareholders will be called upon written
request of shareholders holding in the aggregate not less than 10% of the
outstanding shares of the affected Fund or class having voting rights. Except as
set forth above and subject to the 1940 Act, the Trustees will continue to hold
office and appoint successor Trustees.
Under Massachusetts law, there is a remote possibility that shareholders
of a business trust could, under certain circumstances, be held personally
liable as partners for the obligations of such trust. The Amended and Restated
Declaration of Trust for each Fund contains provisions intended to limit such
liability and to provide indemnification out of Fund property of any shareholder
charged or held personally liable for obligations or liabilities of a Fund
solely by reason of being or having been a shareholder of a Fund and not because
of such shareholder's acts or omissions or for some other reason. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations.
Year 2000 Compliance. The services provided to the Funds by the Adviser,
the Sub-Advisers, the Administrator and the Funds' other service providers are
dependent on those service providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative
implication on handling securities trades, pricing and account services. The
Adviser, the Sub-Advisers, the Administrator and the Funds' other service
providers are taking steps that each believes are reasonably designed to address
the Year 2000 Issue with respect to the computer systems that they use. Although
there can be no assurances, the Funds believe these steps will be sufficient to
avoid any material adverse impact on the Funds. The costs or consequences of
incomplete or untimely resolution of the Year 2000 Issue are unknown to the
Adviser, Sub-Advisers, Administrator and the Funds' other service providers at
this time but could have a material adverse impact on the operations of the
Funds and the Adviser, Sub-Advisers, Administrator and the Funds' other service
providers. Further, there can be no assurances, that the systems of the
companies in which the Funds invest will be timely converted or that the value
of such investments will not be adversely affected by the Year 2000 Issue.
34
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Funds may be compared in reports and
promotional literature to (1) the S&P 500, Dow Jones Industrial Average
("DJIA"), or other unmanaged indices, so that investors may compare each Fund's
results to those of a group of unmanaged securities that are widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm that ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; (iii) the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in a Fund; and (iv) well known monitoring
sources of certificates of deposit performance rates, such as Solomon Brothers,
Federal Reserve Bulletin, American Bankers and Tower Data/The Wall Street
Journal. Unmanaged indices may assume the reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses. Performance rankings are based on historical information and are not
intended to indicate future performance.
In addition, the Funds may, from time to time, include various measures of
a Fund's performance, including the current yield, the tax equivalent yield and
the average annual total return of shares of the Funds in advertisements,
promotional literature or reports to shareholders or prospective investors. Such
materials may occasionally cite statistics to reflect a Fund's volatility risk.
Yield. Quotations of yield for a specific class of shares of a Fund will
be based on all investment income attributable to that class earned during a
particular 30-day (or one month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing the net investment income per share of that class earned
during the period by the maximum offering price per share on the last day of the
month, according to the following formula:
Yield = 2 [((a - b) / (cd) + 1)^6 -1]
Where:
a = dividends and interest earned during the period attributable to a
specific class of shares
b = expenses accrued for the period attributable to that class (net of
reimbursements)
c = the average daily number of shares of that class outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period
The maximum offering price includes a maximum contingent deferred sales
charge of 4%, in the case of Class T shares, 5% for Class B shares, and 1%, for
Class C shares.
All accrued expenses are taken into account as follows. Accrued expenses
include all recurring expenses that are charged to all shareholder accounts in
proportion to the length of the base period, including but not limited to
expenses under the Funds' distribution plans. Except as noted, the performance
results take the contingent deferred sales charge into account.
The yield for Class A, B and C shares of the Income and Growth Fund, High
Total Return Fund II and, High Total Return Fund; and Class A, B, C and T shares
of the SmallCap Opportunities Fund, Growth Opportunities Fund, Government
Securities Fund and High Yield Fund III for the month ended December 31, 1998
was as follows:
Yield
Fund Class A Class B Class C Class T
Income + Growth Fund ................ 1.32 0.66 0.68 N/A
Government Securities Fund .......... 5.97 5.61 5.63 5.95
High Yield Fund III ................. 8.01 7.70 7.68 8.06
High Total Return Fund II ........... 10.32 10.12 10.09 N/A
High Total Return Fund .............. 11.56 11.39 11.36 N/A
35
<PAGE>
Average Annual Total Return. Standardized quotations of average annual
total return ("Standardized Return") for each class of shares will be expressed
in terms of the average annual compounded rate of return for a hypothetical
investment in such class of shares over periods of 1, 5 and 10 years or up to
the life of the class of shares, calculated for each class separately pursuant
to the following formula:
P(1+T) to the power of n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = the average annual total return
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period.
All total return figures reflect the deduction of a proportional share of
each class's expenses (on an annual basis), the deduction of the maximum initial
sales load (in the case of Class A shares) and the maximum contingent deferred
sales charge applicable to a complete redemption of the investment (in the case
of Class B, Class C and Class T shares), and assume that all dividends and
distributions are reinvested when paid.
Non-Standardized Return. In addition to the performance information
described above, the Funds may provide total return information that is not
calculated according to the formula set forth above ("Non-Standardized Return").
Neither initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return. Excluding a Fund's sales charge from a
total return calculation produces a higher total return figure.
The following tables summarize the calculation of Standardized and
Non-Standardized Return for Class A, B and C shares of the Growth + Value Fund,
International Value Fund, Emerging Markets Value Fund, Research Enhanced Index
Fund, Income and Growth Fund, High Total Return Fund II, and High Total Return
Fund; Class A, B and C of the MidCap Opportunities Fund and for Class A, B, C
and T shares of the SmallCap Opportunities Fund, Growth Opportunities Fund,
Government Securities Fund and High Yield Fund III for the periods indicated.
Pilgrim Mayflower Trust (formerly the "Northstar Trust"). The following
table summarizes the calculation of Average Annual Total Return for the periods
indicated through October 31, 1998, assuming the maximum sales charge HAS been
assessed:
Since
One Year(1) Inception(2)
----------- ------------
Growth + Value Fund
Class A ....................................... (16.81)% 0.56%
Class B ....................................... (17.64)% 0.33%
Class C ....................................... (14.23)% 2.35%
International Value Fund
Class A ....................................... 4.68% 12.79%
Class B ....................................... 4.16% 9.22%
Class C ....................................... 8.07% 13.62%
Emerging Markets Value Fund
Class A ....................................... N/A N/A
Class B ....................................... N/A N/A
Class C ....................................... N/A N/A
Research Enhanced Index Fund
Class A ....................................... N/A N/A
Class B ....................................... N/A N/A
Class C ....................................... N/A N/A
Income and Growth Fund
Class A ....................................... (3.67)% 8.31%
Class B ....................................... (4.26)% 7.39%
Class C ....................................... (0.43)% 8.52%
- ------------
(1) Annualized.
(2) The inception date for Class A, B and C shares of the Growth+Value Fund is
November 18, 1997. The inception date for Class A and C shares of the
International Value Fund is March 6, 1995; the inception date for Class B
shares of the International Value Fund is April 18, 1997. The inception
date for Class A, B and C shares of the Emerging Markets Value Fund is
January 1, 1998. The inception date for Class A, B and C shares of the
Research Enhanced Index Fund is December 30, 1998. The inception date of
Class A, B and C shares of the Income and Growth Fund and High Total
Return Fund is November 8, 1993, February 9, 1994 and March 21, 1994,
respectively. The inception date for Class A, B and C shares of the High
Total Return Fund II is January 31, 1997.
36
<PAGE>
Since
One Year(1 Inception(2)
---------- ------------
High Total Return Fund II
Class A ............................................. (8.73) 3.43%
Class B ............................................. (9.26)% 3.61%
Class C ............................................. (5.77)% 5.73%
High Total Return Fund
Class A (17.76) 4.14%
Class B (18.05)% 3.10%
Class C (15.16)% 3.89%
The following table summarizes the calculation of Average Annual Total
Return for the periods indicated through October 31, 1998, assuming the maximum
sales charge HAS NOT been assessed:
Since
One Year(1 Inception(2)
---------- ------------
Growth + Value Fund
Class A ............................................. (12.63)% 3.11%
Class B ............................................. (13.38)% 2.35%
Class C ............................................. (13.38)% 2.35%
International Value Fund
Class A ............................................. 9.86% 14.31%
Class B ............................................. 9.16% 11.68%
Class C ............................................. 9.07% 13.62%
Emerging Markets Value Fund
Class A ............................................. N/A N/A
Class B ............................................. N/A N/A
Class C ............................................. N/A N/A
Research Enhanced Index Fund
Class A ............................................. N/A N/A
Class B ............................................. N/A N/A
Class C ............................................. N/A N/A
Income and Growth Fund
Class A ............................................. 1.12% 9.38%
Class B ............................................. 0.44% 7.71%
Class C ............................................. 0.51% 8.52%
High Total Return Fund II
Class A ............................................. (4.23)% 6.36%
Class B ............................................. (4.90)% 5.72%
Class C ............................................. (4.90)% 5.73%
High Total Return Fund
Class A ............................................. (13.65)% 5.16%
Class B ............................................. (14.28)% 3.37%
Class C ............................................. (14.41)% 3.89%
- -------------
(1) Annualized.
(2) The inception date for Class A, B and C shares of the Growth + Value Fund
is November 18, 1997. The inception date for Class A and C shares of the
International Value Fund is March 6, 1995; the inception date for Class B
shares of the International Value Fund is April 18, 1997. The inception
date for Class A, B and C shares of the Emerging Markets Value Fund is
January 1, 1998. The inception date for Class A, B and C shares of the
Research Enhanced Index Fund is December 30, 1998. The inception date of
Class A, B and C shares of the Income and Growth Fund and High Total
Return Fund is November 8, 1993, February 9, 1994 and March 21, 1994,
respectively. The inception date for Class A, B and C shares of the High
Total Return Fund II is January 31, 1997.
37
<PAGE>
The Remaining Funds. The following table summarizes the calculation of
Average Annual Total Return for Class A, B and C shares of the remaining Funds
for the period from commencement of operations of such classes (June 5, 1995 for
the SmallCap Opportunities, Growth Opportunities, Government Securities and High
Yield III Funds and August 20, 1998 for the MidCap Opportunities Fund) through
December 31, 1998, assuming the maximum sales charge HAS been assessed:
Fund Class of Shares One Year Since Inception
- ---- --------------- -------- ---------------
SmallCap Opportunities Fund Class A 2.50% 13.25%
Class B 1.84% 13.62%
Class C 5.81% 14.00%
MidCap Opportunities Fund Class A N/A N/A
Class B N/A N/A
Class C N/A N/A
Growth Opportunities Fund Class A 17.74% 20.61%
Class B 17.69% 21.16%
Class C 21.90% 21.50%
Government Securities Fund Class A 0.22% 5.11%
Class B (0.44)% 5.36%
Class C 3.37% 5.78%
High Yield Fund III Class A (2.65)% 7.47%
Class B (3.37)% 7.67%
Class C 0.46% 8.15%
The following table summarizes the calculation of Average Annual Total
Return for Class A, B and C shares of the remaining Funds for the period from
commencement of operations of such classes (June 5, 1995 for the SmallCap
Opportunities, Growth Opportunities, Government Securities and High Yield III
Funds and August 20, 1998 for the MidCap Opportunities Fund) through December
31, 1998, assuming the maximum sales charge HAS NOT been assessed:
Fund Class of Shares One Year Since Inception
- ---- --------------- -------- ---------------
SmallCap Opportunities Fund Class A 7.59% 14.81%
Class B 6.84% 14.02%
Class C 6.81% 14.00%
MidCap Opportunities Fund Class A N/A N/A
Class B N/A N/A
Class C N/A N/A
Growth Opportunities Fund Class A 23.61% 22.27%
Class B 22.69% 21.50%
Class C 22.90% 21.50%
Government Securities Fund Class A 5.27% 6.54%
Class B 4.49% 5.84%
Class C 4.35% 5.78%
High Yield Fund III Class A 2.25% 8.92%
Class B 1.28% 8.12%
Class C 1.39% 8.15%
The following table summarizes the calculation of Average Annual Total
Return for Class T shares of the remaining Funds for the periods indicated
through December 31, 1998, assuming the maximum sales charge HAS been assessed:
Since
One Year Five Years Ten Years Inception(3)
-------- ---------- --------- ------------
SmallCap Opportunities Fund .... 2.94% 8.75% 13.88% 10.20%
MidCap Opportunities Fund ...... -- -- -- --
Growth Opportunities Fund....... 18.79% 15.76% 14.96% 13.50%
Government Securities Fund ..... 0.90% 4.59% 8.52%% 7.06%
High Yield Fund III ............ (1.93)% 7.52% N/A 9.97%
- -------------
(3) The inception date for Class T shares of SmallCap Opportunities, Growth
Opportunities and Government Securities Funds was February 3, 1986. The
inception date for Class T shares of the MidCap Opportunities Fund was
August 20, 1998. The inception date for Class T shares of the High Yield
Fund III was May 30, 1989.
38
<PAGE>
The following table summarizes the calculation of Average Annual Total
Return for Class T shares of the remaining Funds for the periods indicated
through December 31, 1998, assuming the maximum sales charge HAS NOT been
assessed:
Since
One Year Five Years Ten Years Inception(3)
-------- ---------- --------- ------------
SmallCap Opportunities Fund .... 6.94% 8.75% 13.88% 10.20%
Growth Opportunities Fund ...... 22.79% 15.76% 14.96% 13.50%
Government Securities Fund ..... 4.84% 4.59% 8.52% 7.06%
High Yield Fund III ............ 1.80% 7.52% N/A 9.97%
- ---------------
(3) The inception date for Class T shares of SmallCap Opportunities, Growth
Opportunities and Government Securities Funds was February 3, 1986. The
inception date for Class T shares of the MidCap Opportunities Fund was
August 20, 1998. The inception date for Class T shares of the High Yield
Fund III was May 30, 1989.
A Fund may quote its performance in various ways, using various types of
comparisons to market indices, other funds or investment alternatives, or to
general increases in the cost of living. All performance information supplied by
the Funds in advertising is historical and is not intended to indicate future
returns. Each Fund's share prices and total returns fluctuate in response to
market conditions and other factors, and the value of the Fund's shares when
redeemed may be more or less than their original cost.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of, or
selections from, editorials or articles about a Fund. These editorials or
articles may include quotations of performance from other sources, such as
Lipper or Morningstar. Sources for Fund performance information and articles
about the Fund may include the following: Banxquote, Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Consumer Digest, Financial
World, Forbes, Fortune, IBC/Donoghues's Money Fund Report, Ibbotson Associates,
Inc., Investment Company Data, Inc., Investor's Daily, Lipper Analytical
Services, Inc.'s Mutual Fund Performance Analysis, Money, Mutual Fund Values,
The New York Times, Personal Investing News, Personal Investor, Success, USA
Today, U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Services.
When comparing yield, total return and investment risk of shares of a Fund
with other investments, investors should understand that certain other
investments have different risk characteristics than an investment in shares of
the Fund. For example, certificates of deposit may have fixed rates of return
and may be insured as to principal and interest by the FDIC, while a Fund's
returns will fluctuate and its share values and returns are not guaranteed.
Money market accounts offered by banks also may be insured by the FDIC and may
offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. government.
Money market mutual funds may seek to offer a fixed price per share.
The performance of a Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representative of performance of the
Fund for any period in the future. The performance of a Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest, and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
FINANCIAL STATEMENTS
The audited financial statements of SmallCap Opportunities, Growth
Opportunities, Government Securities and High Yield III Funds as of and for the
year ended December 31, 1998 and the report of the independent accountants,
PricewaterhouseCoopers LLP, with respect to such financial statements are hereby
incorporated herein by reference to the Annual Report to Shareholders of The
Northstar Funds for the year ended December 31, 1998. (Please note, as of
November 1, 1999, the Northstar Funds have been renamed the Pilgrim Funds.)
Northstar Equity Trust audited financial statements dated December 31,
1998 and the report of the independent accountants, PricewaterhouseCoopers LLP
with respect to such financial statements, are hereby incorporated herein by
reference to the Annual Report to Shareholders of the Northstar Equity Trust for
the fiscal year ended December 31, 1998. (Please note, as of November 1, 1999,
the Northstar Equity Trust has been renamed the Pilgrim Equity Trust.)
The Northstar Trust audited financial statements dated October 31, 1998
and the report of the independent accountants, PricewaterhouseCoopers LLP with
respect to such financial statements, are hereby incorporated herein by
reference to the Annual Report to Shareholders of the Northstar Trust for the
fiscal year ended October 31, 1998. (Please note, as of November 1, 1999, the
Northstar Trust has been renamed the Pilgrim Mayflower Trust.)
39
<PAGE>
APPENDIX
Description of Moody's Investors Service, Inc. ("Moody's") Corporate Bond
Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which made the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporation ("S&P") Corporate Debt Ratings
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures and adverse
conditions.
A-1
<PAGE>
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
<PAGE>
[GRAPHIC OMITTED]
PILGRIM
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999, AS SUPPLEMENTED NOVEMBER 1, 1999
* PILGRIM Smallcap Opportunities Fund
(Formerly the "Northstar Special Fund")
* PILGRIM Midcap Opportunities Fund
(Formerly the "Northstar Mid-Cap Growth Fund")
* PILGRIM Growth Opportunities Fund
(Formerly the "Northstar Growth Fund")
* PILGRIM Research Enhanced Index Fund
(Formerly the ""Northstar Research Enhanced Index Fund")
INSTITUTIONAL CLASS SHARES
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(602) 417-8100
(800) 992-0180
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of the
Institutional Class Shares of the Pilgrim SmallCap Opportunities Fund, Pilgrim
MidCap Opportunities Fund, Pilgrim Growth Opportunities Fund and Pilgrim
Research Enhanced Index Fund dated March 1, 1999, as supplemented November 1,
1999, as each may be revised from time to time. To obtain a copy of the Funds'
Prospectus, please contact Pilgrim Advisers, Inc. (formerly "Northstar
Investment Management Corportion") at the address or phone number listed above.
Pilgrim Advisors, Inc. ("Pilgrim" or the "Adviser") serves as the Funds'
investment adviser. Pilgrim has engaged J.P. Morgan Investment Management Inc.
("J.P. Morgan" or the "Sub-Adviser") to serve as sub-adviser to the Pilgrim
Research Enhanced Index Fund, subject to the supervision of Pilgrim. Northstar
Distributors, Inc. (the "Underwriter") is the underwriter to the Funds. Pilgrim
Group, Inc. (formerly "Northstar Administrators Corporation") (the
"Administrator") is the Funds' administrator. The Underwriter and the
Administrator are affiliates of Pilgrim.
----------
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS ................................................... 2
INVESTMENT TECHNIQUES ..................................................... 6
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION ........................... 13
SERVICES OF PILGRIM, THE SUB-ADVISER AND THE ADMINISTRATOR ................ 15
NET ASSET VALUE ........................................................... 17
REDEMPTIONS ............................................................... 17
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................ 17
UNDERWRITER AND DISTRIBUTION SERVICES ..................................... 20
TRUSTEES AND OFFICERS ..................................................... 21
OTHER INFORMATION ......................................................... 23
PERFORMANCE INFORMATION ................................................... 24
FINANCIAL STATEMENTS ...................................................... 25
APPENDIX .................................................................. A-1
<PAGE>
INVESTMENT RESTRICTIONS
Pilgrim SmallCap Opportunities Fund. The Fund has adopted investment
restrictions numbered 1 through 12 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund's
outstanding voting shares. Investment restrictions numbered 13 through 21 are
not fundamental policies and may be changed by vote of a majority of the Trust's
Board members at any time. The Fund may not:
1. Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset coverage
of 300% for all borrowings;
2. Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets would be
invested in that issuer, or the Fund would own or hold more than 10% of the
outstanding voting securities of the issuer; provided, however, that up to 25%
of the Fund's total assets may be invested without regard to these limitations;
3. Underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter;
4. Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities);
5. Make any investment in real estate, commodities or commodities
contracts, except that these Funds may: (a) purchase or sell readily marketable
securities that are secured by interest in real estate or issued by companies
that deal in real estate, including real estate investment and mortgage
investment trusts; and (b) engage in financial futures contracts and related
options, as described herein and in the Fund's Prospectus;
6. Make loans, except that these Funds may: (a) invest in repurchase
agreements, and (b) loan its portfolio securities in amounts up to one-third of
the market or other fair value of its total assets;
7. Issue senior securities, except as appropriate to evidence indebtedness
that it is permitted to incur, provided that the deposit or payment by the Fund
of initial or maintenance margin in connection with futures contracts and
related options is not considered the issuance of senior securities;
8. Borrow money in excess of 5% of its total assets (taken at market
value);
9. Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by a Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered a pledge or
hypothecation of assets);
10. Purchase more than 10% of the voting securities of any one issuer,
except U.S. government securities;
11. Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that cannot be
disposed of within the normal course of business at approximately the amount at
which the Fund has valued the securities, excluding restricted securities that
have been determined by the Trustees of the Fund (or the persons designated by
them to make such determinations) to be readily marketable;
12. Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S. government
securities and obligations issued or guaranteed by any foreign government or its
agencies or instrumentalities, if such purchase would cause the investments of a
Fund in all such issuers to exceed 5% of the total assets of the Fund taken at
market value;
13. Purchase securities on margin, except these Funds may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities (the deposit or payment by a Fund of initial or maintenance margin
in connection with futures contracts or related options is not considered the
purchase of a security on margin);
14. Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total assets in
options transactions, other than options on futures contracts;
15. Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the Fund, and
premiums paid on related options held by the Fund, does not exceed more than 5%
of the Fund's total assets, unless the transaction meets certain "bona fide
hedging" criteria (in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing the 5%);
2
<PAGE>
16. Invest in securities of any issuer if any officer or trustee of the
Fund or any officer or director of Northstar owns more than 1/2 of 1% of the
outstanding securities of the issuer, and such officers, directors and trustees
own in the aggregate more than 5% of the securities of such issuer;
17. Invest in interests in oil, gas or other mineral exploration or
development programs (although it may invest in issuers that own or invest in
such interests);
18. Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase, or except when such purchase, though not made in the open
market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets;
19. Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in other
investment companies;
20. Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the Fund's net
assets or if warrants that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing requirements, taken at the
lower of cost or market value, would represent more than 2% of the value of the
Fund's net assets (for this purpose, warrants attached to securities will be
deemed to have no value); or
21. Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except in connection with arbitrage transactions. The
Strategic Income Fund, additionally, may not invest in interests of real estate
limited partnerships.
Pilgrim MidCap Opportunities Fund. The Fund has adopted investment
restrictions numbered 1 through 11 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting shares. Investment restrictions
numbered 12 through 15 are not fundamental policies and may be changed by vote
of a majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up to 10% of
its net assets for temporary purposes but only if, immediately after such
borrowing there is asset coverage of 300%, and (b) enter into transactions in
options, futures, and options on futures and other transactions not deemed to
involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real property, including real estate limited
partnerships (the Fund may purchase marketable securities of companies that deal
in real estate or interests therein, including real estate investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33% of net assets at the time the loan is made, to brokers or
dealers or other financial institutions not affiliated with the Fund or
Northstar, subject to conditions established by Northstar) (See "Lending
Portfolio Securities" in this SAI), and may purchase or hold participations in
loans, in accordance with the investment objectives and policies of the Fund, as
described in the current Prospectus and SAI of the Fund;
6. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
7. Sell short, except that the Fund may enter into short sales against the
box;
8. Invest more than 25% of its assets in any one industry or related group
of industries;
9. With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the value of
total assets of the Fund would be invested in securities of a single issuer;
10. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
11. Borrow money in excess of 10% of its net assets for temporary
purposes;
12. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that the
Fund may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act and rules thereunder or by any
state in which shares of the Fund are registered;
3
<PAGE>
13. Make an investment for the purpose of exercising control over
management;
14. Invest more than 15% of its net assets in illiquid securities; or
15. Borrow any amount in excess of 10% of the Fund's assets, other than
for temporary emergency or administrative purposes. In addition, the Fund will
not make additional investments when its borrowings exceed 5% of total assets.
Pilgrim Growth Opportunities Fund. The Fund has adopted investment
restrictions numbered 1 through 12 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting shares. Investment restrictions
numbered 13 through 21 are not fundamental policies and may be changed by vote
of a majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, except from a bank and as a temporary measure for
extraordinary or emergency purposes, provided the Fund maintains asset coverage
of 300% for all borrowings;
2. Purchase securities of any one issuer (except U.S. government
securities) if, as a result, more than 5% of the Fund's total assets would be
invested in that issuer, or the Fund would own or hold more than 10% of the
outstanding voting securities of the issuer; provided, however, that up to 25%
of the Fund's total assets may be invested without regard to these limitations;
3. Underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter;
4. Concentrate its assets in the securities of issuers all of which
conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities);
5. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may: (a) purchase or sell readily marketable
securities that are secured by interest in real estate or issued by companies
that deal in real estate, including real estate investment and mortgage
investment trusts; and (b) engage in financial futures contracts and related
options, as described herein and in the Fund's Prospectus;
6. Make loans, except that the Fund may: (a) invest in repurchase
agreements, and (b) loan its portfolio securities in amounts up to one-third of
the market or other fair value of its total assets;
7. Issue senior securities, except as appropriate to evidence indebtedness
that it is permitted to incur, provided that the deposit or payment by the Fund
of initial or maintenance margin in connection with futures contracts and
related options is not considered the issuance of senior securities;
8. Borrow money in excess of 5% of its total assets (taken at market
value);
9. Pledge, mortgage or hypothecate in excess of 5% of its total assets
(the deposit or payment by the Fund of initial or maintenance margin in
connection with futures contracts and related options is not considered a pledge
or hypothecation of assets);
10. Purchase more than 10% of the voting securities of any one issuer,
except U.S. government securities;
11. Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that cannot be
disposed of within the normal course of business at approximately the amount at
which the Fund has valued the securities, excluding restricted securities that
have been determined by the Trustees of the Fund (or the persons designated by
them to make such determinations) to be readily marketable;
12. Purchase securities of any issuer with a record of less than 3 years
of continuous operations, including predecessors, except U.S. government
securities and obligations issued or guaranteed by any foreign government or its
agencies or instrumentalities, if such purchase would cause the investments of
the Fund in all such issuers to exceed 5% of the total assets of the Fund taken
at market value;
13. Purchase securities on margin, except the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities (the deposit or payment by the Fund of initial or maintenance
margin in connection with futures contracts or related options is not considered
the purchase of a security on margin);
14. Write put and call options, unless the options are covered and the
Fund invests through premium payments no more than 5% of its total assets in
options transactions, other than options on futures contracts;
15. Purchase and sell futures contracts and options on futures contracts,
unless the sum of margin deposits on all futures contracts held by the Fund, and
premiums paid on related options held by the Fund, does not exceed more than 5%
of Fund's total assets, unless the transaction meets certain "bona fide hedging"
criteria (in the case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in computing the 5%);
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16. Invest in securities of any issuer if any officer or trustee of the
Fund or any officer or director of Northstar owns more than 1/2 of 1% of the
outstanding securities of the issuer, and such officers, directors and trustees
own in the aggregate more than 5% of the securities of such issuer;
17. Invest in interests in oil, gas or other mineral exploration or
development programs (although it may invest in issuers that own or invest in
such interests);
18. Purchase securities of any investment company, except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase, or except when such purchase, though not made in the open
market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets;
19. Purchase more than 3% of the outstanding voting securities of another
investment company, invest more than 5% of its total assets in another
investment company, or invest more than 10% of its total assets in other
investment companies;
20. Purchase warrants if, as a result, warrants taken at the lower of cost
or market value would represent more than 5% of the value of the Fund's net
assets or if warrants that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing requirements, taken at the
lower of cost or market value, would represent more than 2% of the value of the
Fund's net assets (for this purpose, warrants attached to securities will be
deemed to have no value); or
21. Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except in connection with arbitrage transactions.
Pilgrim Research Enhanced Index Fund. The Fund has adopted investment
restrictions numbered 1 through 8 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting shares. Investment restrictions
numbered 9 through 14 are not fundamental policies and may be changed by vote of
a majority of the Trust's Board members at any time. The Fund may not:
1. Borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that it may: (a) borrow from banks up to 33 1/3%
of its net assets for temporary purposes but only if, immediately after such
borrowing there is asset coverage of 300%, and (b) enter into transactions in
options, futures, and options on futures and other transactions not deemed to
involve the issuance of senior securities;
2. Underwrite the securities of others;
3. Purchase or sell real estate, including real estate limited
partnerships (the Fund may purchase marketable securities of companies that deal
in real estate or interests therein, including real estate investment trusts);
4. Deal in commodities or commodity contracts, except in the manner
described in the current Prospectus and SAI of the Fund;
5. Make loans to other persons (but the Fund may, however, lend portfolio
securities, up to 33 1/3% of net assets at the time the loan is made, to brokers
or dealers or other financial institutions not affiliated with the Fund or
Northstar, subject to conditions established by Northstar) (See "Lending
Portfolio Securities" in this SAI), and may purchase or hold participations in
loans, in accordance with the investment objectives and policies of the Fund, as
described in the current Prospectus and SAI of the Fund;
6. Invest more than 25% of its assets in any one industry;
7. With respect to 75% of the Fund's assets, purchase a security (other
than U.S. government obligations) if, as a result, more than 5% of the value of
total assets of the Fund would be invested in securities of a single issuer;
8. Purchase a security if, as a result, more than 10% of any class of
securities, or more than 10% of the outstanding voting securities of an issuer,
would be held by the Fund;
9. Purchase on margin (except that for purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts will not be deemed to be purchases of securities on margin);
10. Sell short, except that the Fund may enter into short sales against
the box;
11. Purchase securities of other investment companies, except in
connection with a merger, consolidation or sale of assets, and except that the
Fund may purchase shares of other investment companies, subject to such
restrictions as may be imposed by the 1940 Act, rules thereunder or any order
pursuant thereto or by any state in which shares of the Fund are registered;
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12. Make an investment for the purpose of exercising control over
management;
13. Invest more than 15% of its net assets in illiquid securities; or
14. Borrow any amount in excess of 33 1/3% of the Fund's assets, other
than for temporary emergency or administrative purposes.
As a fundamental policy, this Fund may borrow money from banks to the
extent permitted under the 1940 Act. As an operating (non-fundamental) policy,
this Fund does not intend to borrow any amount in excess of 10% of its assets,
and would do so only for temporary emergency or administrative purposes. In
addition, to avoid the potential leveraging of assets, this Fund will not make
additional investments when its borrowings, including those investment
techniques which are regarded as a form of borrowing, are in excess of 5% of
total assets. If this Fund should determine to expand its ability to borrow
beyond the current operating policy, the Fund's Prospectus would be amended and
shareholders would be notified.
In addition to the above noted investment policies, the Research Enhanced
Index Fund's Sub-Adviser intends to monitor the sector and security weightings
of its portfolio relative to the composition of the S&P 500 Index. In that
regard, the Sub-Adviser intends to manage the Fund so that its sector weightings
and securities holdings closely approximate the sector and securities weightings
of the Index. As noted in the prospectus, the Sub-Adviser may vary modestly the
weightings of portfolio securities so that index securities that appear to be
overvalued may be underweighted and securities that may appear to be
underweighted may be overvalued. Steps will be taken periodically to rebalance
positions consistent with maintaining reasonable transaction costs and
reasonable weightings relative to the Index. While the Fund seeks to modestly
outperform the S&P 500 Index, the Fund expects that its returns will have a
coefficient correlation of 0.90% or better to the S&P 500 Index.
In addition to the restrictions described above, each of these Funds may,
from time to time, agree to additional investment restrictions for purposes of
compliance with the securities laws of those foreign jurisdictions where that
Fund intends to offer or sell its shares.
INVESTMENT TECHNIQUES
Derivative Instruments. The Funds may invest in Derivative Instruments.
Derivative Instruments are securities that derive their value from the
performance of an underlying assets, usually take the form of a contract to buy
or sell as asset or commodity either now or in the future, but mortgage and
other asset-backed securities are also generally considered derivatives. Types
of derivatives include options, futures contracts, options on futures and
forward contracts. Derivative Instruments may be used for a variety of reasons,
including to enhance return, hedge certain market risks, or provide a substitute
for purchasing or selling particular securities. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit a Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (i.e., margin requirements) operated by
the clearing agency in order to reduce overall credit risk. As a result, unless
the clearing agency defaults, there is relatively little counterparty credit
risk associated with Derivatives purchased on an exchange. By contrast, no
clearing agency guarantees over-the-counter Derivatives. Therefore, each party
to an over-the-counter Derivative bears the risk that the counterparty will
default. Accordingly, Pilgrim will consider the creditworthiness of
counterparties to over-the-counter Derivatives in the same manner as it would
review the credit quality of a security to be purchased by a Fund.
Over-the-counter Derivatives are less liquid than exchange-traded Derivatives
since the other party to the transaction may be the only investor with
sufficient understanding of the Derivative to be interested in bidding for it.
Firm Commitments and When-Issued Securities. The Funds may enter into firm
commitment agreements to purchase securities at an agreed-upon price on a
specified future date. An amount of cash or short-term U.S. government
securities equal to the Fund's commitment will be deposited in a segregated
account at the Fund's custodian bank to secure the Fund's obligation. Although a
Fund will generally enter into firm commitments to purchase securities with the
intention of actually acquiring the securities for its portfolio (or for
delivery pursuant to options contracts it has entered into), the Fund may
dispose of a security prior to settlement if Pilgrim deems it advisable to do
so. A Fund entering into the forward commitment may realize short-term gains or
losses in connection with such sales.
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The Funds may enter into To Be Announced ("TBA") sale commitments wherein
the unit price and the estimated principal amount are established upon entering
into the contract, with the actual principal amount being within a specified
range of the estimate. A Fund will enter into TBA sale commitments to hedge its
portfolio positions or to sell mortgage-backed securities it owns under delayed
delivery arrangements. Proceeds of TBA sale commitments are not received until
the contractual settlement date. During the time a TBA sale commitment is
outstanding, the Fund will maintain, in a segregated account, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price. Unsettled
TBA sale commitments are valued at current market value of the underlying
securities. If the TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, the Fund realizes a gain or loss on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the Fund delivers securities under the commitment, the Fund
realizes a gain or loss from the sale of the securities, based upon the unit
price established at the date the commitment was entered into.
The Funds may also purchase securities on a when-issued or delayed
delivery basis. In such transactions, the price is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date, normally within one month. The value of the security on
the settlement date may be more or less than the price paid as a result of,
among other things, changes in the level of interest rates or other market
factors. Accordingly, there is a risk of loss, which is in addition to the risk
of decline in the value of the Fund's other assets. The Fund will establish a
segregated account with its custodian in which it will maintain cash and
marketable securities equal in value to commitments for when-issued or delayed
delivery securities. While when-issued or delayed delivery securities may be
sold prior to the settlement date, it is intended that a Fund will purchase such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons.
Floating or Variable Rate Instruments. The Funds may purchase floating or
variable rate bonds, which normally provide that the holder can demand payment
of the obligation on short notice at par with accrued interest. Such bonds are
frequently secured by letters of credit or other credit support arrangements
provided by banks. Floating or variable rate instruments provide for adjustments
in the interest rate at specified intervals (weekly, monthly, semiannually,
etc.). A Fund would anticipate using these bonds as cash equivalents, pending
longer term investment of its funds. Other longer term fixed-rate bonds, with a
right of the holder to request redemption at certain times (often annually,
after the lapse of an intermediate term), may also be purchased by the Fund.
These bonds are more defensive than conventional long-term bonds (protecting to
some degree against a rise in interest rates), while providing greater
opportunity than comparable intermediate term bonds since the Fund may retain
the bond if interest rates decline. By acquiring these kinds of bonds, a Fund
obtains the contractual right to require the issuer of the security, or some
other person (other than a broker or dealer), to purchase the security at an
agreed upon price, which right is contained in the obligation itself rather than
in a separate agreement with the seller or some other person.
Futures Transactions -- In General. The Funds may enter into futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange, or on
exchanges located outside the United States, such as the London International
Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign
markets may offer advantages such as trading opportunities or arbitrage
possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
an investor may look only to the broker for performance of the contract. In
addition, any profits that the Fund might realize in trading could be eliminated
by adverse changes in the exchange rate, or the Fund could incur losses as a
result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission.
Engaging in these transactions involves risk of loss to the Fund which
could adversely affect the value of the Fund's net assets. Although the Fund
intends to purchase or sell futures contracts only if there is an active market
for such contracts, no assurance can be given that a liquid market will exist
for any particular contract at any particular time. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the trading day.
Futures contract prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Manager's
ability to predict correctly movements in the direction of the relevant market,
and, to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the transaction being hedged and
the price movements of the futures contract. For example, if the Fund uses
futures to hedge against the possibility of a decline in the market value of
securities held in its portfolio and
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the prices of such securities instead increase, the Fund will lose part or all
of the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission (the "SEC"), the Fund may be required to segregate cash or
high quality money market instruments in connection with its commodities
transactions in an amount generally equal to the value of the underlying
commodity. The segregation of such assets will have the effect of limiting the
Fund's ability otherwise to invest those assets.
GNMAS. The Funds may invest in U.S. government securities, which are
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities. Obligations of the Government National Mortgage Association
(popularly called GNMAs or Ginnie Maes) are mortgage backed securities
representing part ownership of a pool of mortgage loans, in which the timely
payment of principal and interest is guaranteed by the full faith and credit of
the U.S. government. GNMA may borrow U.S. Treasury funds to the extent needed to
make payments under the guarantee. The Fund may purchase "modified pass-through"
type GNMA Certificates for which principal and interest are guaranteed, rather
than the "straight pass through" Certificates for which such guarantee is not
available. The Funds also may purchase "variable rate" GNMA Certificates and
other types that may be used with GNMA's guarantee.
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagors or when foreclosure occurs, such principal payments are passed
through to the Certificate holders (such as the Fund). Accordingly, the life of
the GNMA Certificate is likely to be substantially shorter than the stated
maturity of the mortgages in the underlying pool, which will have maturities of
up to 30 years. Because of such variation in prepayment rights, it is not
possible to accurately predict the life of a particular GNMA Certificate.
Payments to holders of GNMA Certificates consist of the monthly
distributions of interest and principal, less the GNMA and issuer's fees. The
portion of the monthly payment that represents a return of principal may be
reinvested by a Fund holding the GNMA in then-available GNMA obligations, which
may bear interest at a rate higher or lower than the obligation from which the
payment was received, or in a differing security. The actual yield to be earned
by the holder of a GNMA Certificate is calculated by dividing such payments by
the purchase price paid for the GNMA Certificate (which may be at a premium or a
discount from the face value of the Certificate). Unpredictable prepayments of
principal, however, can greatly change realized yields. In a period of declining
interest rates it is more likely that mortgages contained in GNMA pools will be
prepaid, thus reducing the effective yield. Moreover, any premium paid on the
purchase of a GNMA Certificate will be lost if the obligation is prepaid. In
periods of falling interest rates, this potential for prepayment may reduce the
general upward price increase of GNMA Certificates that might otherwise occur.
As with other debt instruments, the price of GNMA Certificates is likely to
decrease in times of rising interest rates. Price changes of the GNMA
Certificates held by a Fund have a direct impact on the net asset value per
share of the Fund.
When interest rates rise, the value of a GNMA Certificate will generally
decline. Conversely, when rates fall, the GNMA Certificate value may rise,
although not as much as other debt issues, due to the prepayment feature. As a
result, the price per share the shareholder receives on redemption may be more
or less than the price paid for the shares.
High Yield Securities. The Funds may invest in lower-rated fixed income
securities to the extent described in the Prospectus. The lower ratings of
certain securities held by the Fund reflect a greater possibility that adverse
changes in the financial condition of the issuer or economic conditions in
general, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payment of interest and
principal would likely make the values of securities held by the Fund more
volatile and could limit the Fund's ability to sell its securities at prices
approximating the values the Fund had placed on such securities. In the absence
of a liquid trading market for the securities held by it, the Fund may be unable
at times to establish the fair value of such securities. The rating assigned to
a security by Moody's Investors Service, Inc. or S&P (or by any other nationally
recognized securities rating organization) does not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. See the Appendix for a description of a security.
Like those of other fixed income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of a Fund's
assets. Conversely, during periods of rising interest rates, the value of a
Fund's assets will generally decline. In addition, the values of such securities
are also affected by changes in general economic conditions and business
conditions affecting the specific industries of their issuers. Changes by
recognized rating services in their ratings of any fixed income security and in
the ability of an issuer to
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make payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities generally will not
affect cash income derived from such securities, but will effect a Fund's net
asset value. The Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase, although Northstar will
monitor the investment to determine whether its retention will assist in meeting
the Fund's investment objective.
Certain securities held by the Fund may permit the issuer at its option to
call, or redeem, its securities. If an issuer were to redeem securities held by
the Fund during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
Index Warrants. The Funds may purchase put warrants and call warrants
whose values vary depending on the change in the value of one or more specified
securities indices ("Index Warrants"). Index warrants are generally issued by
banks or other financial institutions and give the holder the right, at any time
during the term of the warrant, to receive upon exercise of the warrant a cash
payment from the issuer, based on the value of the underlying index at the time
of exercise. In general, if the value of the underlying index rises above the
exercise price of the Index Warrant, the holder of a call warrant will be
entitled to receive a cash payment from the issuer upon exercise, based on the
difference between the value of the index and the exercise price of the warrant;
if the value of the underlying index falls, the holder of a put warrant will be
entitled to receive a cash payment from the issuer upon exercise, based on the
difference between the exercise price of the warrant and the value of the index.
The holder of a warrant would not be entitled to any payments from the issuer at
any time when, in the case of a call warrant, the exercise price is greater than
the value of the underlying index, or, in the case of a put warrant, the
exercise price is less than the value of the underlying index. If the Fund were
not to exercise an Index Warrant prior to its expiration, then the Fund would
lose the amount of the purchase price paid by it for the warrant. The Fund will
normally use Index Warrants in a manner similar to its use of options on
securities indices. The risks of the Fund's use of Index Warrants are generally
similar to those relating to its use of index options. Unlike most index
options, however, Index Warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution that issues the warrant. Also, Index Warrants
generally have longer terms than index options. Although the Strategic Income
Fund will normally invest only in exchange-listed warrants, Index Warrants are
not likely to be as liquid as certain index options backed by a recognized
clearing agency. In addition, the terms of Index Warrants may limit the Fund's
ability to exercise the warrants at such time, or in such quantities, as the
Fund would otherwise wish to do.
International Investing. The SmallCap Opportunities, Growth Opportunities
and Research Enhanced Index Funds may each invest up to 20% of their net assets
in foreign securities, of which 10% of its net assets may be invested in foreign
securities that are not listed on a U.S. securities exchange. The MidCap
Opportunities Fund may invest up to 25% of its net assets in foreign securities,
of which 10% of its net assets may be invested in foreign securities that are
not listed on a U.S. securities exchange. These limits are designed to
accommodate the increased globalization of companies as well as the redomiciling
of companies for tax treatment purposes. They are not currently expected to be
used to increase direct non-U.S. exposure. Investments in foreign securities
involve special risks, including currency fluctuations, political or economic
instability in the country of issue and the possible imposition of exchange
controls or other laws or restrictions. In addition, securities prices in
foreign markets are generally subject to different economic, financial,
political and social factors than are the prices of securities in U.S. markets.
With respect to some foreign countries there may be the possibility of
expropriation or confiscatory taxation, limitations on liquidity of securities
or political or economic developments which could affect the foreign investments
of the Fund. Moreover, securities of foreign issuers generally will not be
registered with the SEC, and such issuers will generally not be subject to the
SEC's reporting requirements. Accordingly, there is likely to be less publicly
available information concerning certain of the foreign issuers of securities
held by the Fund than is available concerning U.S. companies. Foreign companies
are also generally not subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to U.S. companies. There may also be less government supervision and
regulation of foreign broker-dealers, financial institutions and listed
companies than exists in the U.S. Commission rates in foreign countries, which
are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. These factors could make foreign investments, especially
those in developing countries, more volatile. All of the above issues should be
considered before investing in the Fund.
Lending Portfolio Securities. The Funds may lend portfolio securities to
broker-dealers and other financial institutions in an amount up to one-third of
the value of its total assets, provided that such loans are callable at any time
by the Fund and are at all times secured by collateral held by the Fund at least
equal to the market value, determined daily, of the loaned securities. The Fund
will continue to receive any income on the loaned securities, while
simultaneously earning interest on cash collateral (which will be invested in
short-term debt obligations) or a securities lending fee (in the case of
collateral in the form of U.S. government securities).
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There may be risks of delay in recovery of the loaned securities and, in
some cases, loss of rights in the collateral should the borrower of the
securities fail financially. Loans of portfolio securities will only be made to
firms considered by Pilgrim to be creditworthy under guidelines adopted by the
Trustees.
Loan Participations and Assignments. The Funds may invest in loan
participations and loan assignments. A Fund's investment in loan participations
typically will result in the Fund having a contractual relationship only with
the Lender and not with the Borrower. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participations and only upon receipt by the Lender of the
payments from the Borrower. In connection with purchasing Participations, the
Fund generally will have no right to enforce compliance by the Borrower with the
terms of the loan agreement relating to the Loan, nor any right of set-off
against the Borrower, and the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund may be subject to the credit risk of both the Borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the Borrower.
When a Fund purchases a loan assignment from Lenders, it will acquire
direct rights against the Borrowers on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and a Fund's ability to dispose
of particular assignments or participations when necessary to meet redemptions
of Fund shares, to meet the Fund's liquidity needs or when necessary in response
to a specific economic event, such as deterioration in the creditworthiness of
the Borrower. The lack of a liquid secondary market for assignments and
participations also may make it more difficult for a Fund to value these
securities for purposes of calculating its net asset value.
Options -- In General. The Funds may purchase and write (i.e., sell) call
or put options with respect to specific securities. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security or securities at the exercise price at any time during the
option period.
A covered call option written by a Fund is a call option with respect to
which the Fund owns the underlying security or otherwise covers the transaction
by segregating cash or other securities. A put option written by a Fund is
covered when, among other things, cash or liquid securities having a value equal
to or greater than the exercise price of the option are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken. The
principal reason for writing covered call and put options is to realize, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. The Fund receives a premium from writing covered
call or put options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of the
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Privately Issued Collateralized Mortgage-Backed Obligations, Interest
Obligations and Principal Obligations. Each of the MidCap Opportunities Fund and
Research Enhanced Index Fund may invest up to 5% of its net assets in Privately
Issued Collateralized Mortgage-Backed Obligations ("CMOs"), Interest Obligations
("IOs") and Principal Obligations ("POs") when Northstar believes that such
investments are consistent with the Fund's investment objective. Collateralized
mortgage obligations or "CMOs" are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, privately issued CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but also
may be
10
<PAGE>
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Privately issued
CMOs are per se illiquid. Multi-class pass-through securities are equity
interest in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multi-class pass-through
securities. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, are the sources of funds used to pay debt
service on the CMOs or make scheduled distributions on the multi-class
pass-through securities.
On a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a series of a CMO in innumerable ways. The Fund may
also invest in, among others, parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally call for payments of a specified amount of
principal on each payment date.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the interest and a larger portion of the principal from
the Mortgage Assets, while the other classes will receive primarily interest and
only a small portion of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets, and
a rapid rate of principal payments may have a material adverse effect on such
security's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a Fund may fail to recoup
fully its initial investment in these securities. The determination of whether a
particular government-issued IO or PO backed by fixed-rate mortgage is liquid is
made by Northstar under guidelines and standards established by the Board of
Trustees. Such a security may be deemed liquid if it can be disposed of promptly
in the ordinary course of business at a value reasonably close to that used in
the calculation of net asset value per share.
Repurchase Agreements. Repurchase agreements are agreements under which a
Fund buys a money market instrument and obtains a simultaneous commitment from
the seller to repurchase the instrument at a specified time and at an agreed
upon yield. Northstar will use standards set by the Fund's Trustees in reviewing
the creditworthiness of parties to repurchase agreements with such Fund. In
addition, no more than an aggregate of 15% of the Fund's net assets, at the time
of investment, will be invested in illiquid investments, including repurchase
agreements having maturities longer than seven days. In the event of failure of
the executing bank or broker-dealer, the Fund could experience some delay in
obtaining direct ownership of the underlying collateral and might incur a loss
if the value of the security should decline, as well as costs in disposing of
the security.
As an alternative to using repurchase agreements, the Funds may, from time
to time, invest up to 5% of its assets in money market investment companies
sponsored by a third party for short-term liquidity purposes. Such investments
are subject to the non-fundamental investment limitations described herein.
Reverse Repurchase Agreements and Dollar Roll Agreements. The Funds may
enter into reverse repurchase agreements and dollar roll agreements. Under a
reverse repurchase agreement or a dollar roll agreement, a Fund sells securities
and agrees to repurchase them, or substantially similar securities in the case
of a dollar roll agreement, at a mutually agreed upon date and price. At the
time the Fund enters into a reverse repurchase or dollar roll agreement, it will
establish and maintain a segregated account with its custodian, containing cash,
U.S. government securities, or other liquid assets from its portfolio, having a
value not less than the repurchase price (including accrued interest). The Fund
does not account for dollar rolls as a borrowing.
These agreements may involve the risk that the market value of the
securities to be repurchased by the Fund may decline below the price at which
the Fund is obligated to repurchase. Also, in the event the buyer of securities
under a reverse repurchase agreement or a dollar roll agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver
11
<PAGE>
may receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement or the dollar roll agreement may effectively be
restricted pending such a decision.
Short Sales. The Funds may make short sales "against the box." A
short-sale is a transaction in which a party sells a security it does not own in
anticipation of decline in the market value of that security. A short sale is
"against the box" to the extent that the Fund contemporaneously owns or has the
right to obtain securities identical to those sold short. When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow particular securities, and is often obligated to pay
over any accrued interest on such borrowed securities.
Small and Medium Companies. The SmallCap Opportunities, MidCap
Opportunities and Growth Opportunities Funds may invest a substantial portion of
its assets in small and medium companies. While small and medium companies
generally have the potential for rapid growth, investments in small and medium
companies often involve greater risks than investments in larger, more
established companies because small and medium companies may lack the management
experience, financial resources, product diversification, and competitive
strengths of larger companies. In addition, in many instances the securities of
small and medium companies are traded only OTC or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of small and
medium companies may be subject to greater and more abrupt price fluctuations.
When making large sales, the Funds may have to sell portfolio holdings at
discounts from quoted prices or may have to make a series of small sales over an
extended period of time due to the trading volume of small and medium company
securities. Investors should be aware that, based on the foregoing factors, an
investment in the SmallCap Opportunities, MidCap Opportunities and Growth
Opportunities Funds may be subject to greater price fluctuations than an
investment in a fund that invests primarily in larger, more established
companies. Pilgrim's research efforts may also play a greater role in selecting
securities for the SmallCap Opportunities, MidCap Opportunities and Growth
Opportunities Funds than in a fund that invests in larger, more established
companies.
Specific Futures Transactions. The Funds may purchase and sell stock index
futures contracts. A stock index future obligates the Fund to pay or receive an
amount of cash equal to a fixed dollar amount specified in the futures contract
multiplied by the difference between the settlement price of the contract on the
contract's last trading day and the value of the index based on the stock prices
of the securities that comprise it at the opening of trading in such securities
on the next business day.
The Funds may purchase and sell interest rate futures contracts. An
interest rate future obligates the Fund to purchase or sell an amount of a
specific debt security at a future date at a specific price.
The Funds may purchase and sell currency futures. A foreign currency
future obligates the Fund to purchase or sell an amount of a specific currency
at a future date at a specific price.
Specific Options Transactions. The Funds may purchase and sell call and
put options in respect of specific securities (or groups or "baskets" of
specific securities) or stock indices listed on national securities exchanges or
traded in the over-the-counter market. An option on a stock index is similar to
an option in respect of specific securities, except that settlement does not
occur by delivery of the securities comprising the index. Instead, the option
holder receives an amount of cash if the closing level of the stock index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Thus, the effectiveness
of purchasing or writing stock index options will depend upon price movements in
the level of the index rather than the price of a particular stock.
The Funds may purchase and sell call and put options on foreign currency.
These options convey the right to buy or sell the underlying currency at a price
which is expected to be lower or higher than the spot price of the currency at
the time the option is exercised or expires.
The Funds may purchase cash-settlement options on interest rate swaps,
interest rate swaps denominated in foreign currency and equity index swaps in
pursuit of its investment objective. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating-rate payments for fixed-rate
payments) denominated in U.S. dollars or foreign currency. Equity index swaps
involve the exchange by the Fund with another party of cash flows based upon the
performance of an index or a portion of an index of securities which usually
includes dividends. A cash-settled option on a swap gives the purchaser the
right, but not the obligation, in return for the premium paid, to receive an
amount of cash equal to the value of the underlying swap as of the exercise
date. These options typically are purchased in privately negotiated transactions
from financial institutions, including securities brokerage firms.
12
<PAGE>
Successful use by the Fund of options will be subject to the ability of
Northstar to predict correctly movements in the prices of individual stocks, the
stock market generally, foreign currencies or interest rates. To the extent the
Manager's predictions are incorrect, the Fund may incur losses.
Zero Coupon Securities. Zero coupon securities are fixed income securities
that have been stripped of their unmatured interest coupons. Zero coupon
securities are sold at a (usually substantial) discount and redeemed at face
value at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accredited over the life of the
security, and the accretion constitutes the income earned on the security for
both accounting and tax purposes. Because of these features, the market prices
of zero coupon securities are generally more volatile than the market prices of
securities that have a similar maturity but that pay interest periodically. Zero
coupon securities are likely to respond to a greater degree to interest rate
changes than are non-zero coupon securities with similar maturity and credit
qualities. The Funds may invest a portion of their total assets in "zero coupon"
Treasury" securities, which consist of Treasury bills or stripped interest or
principal components of U.S. Treasury bonds or notes.
Zero coupon Treasury bonds or notes consist of stripped interest or
principal components held in STRIPS form issued through the U.S. Treasury's
STRIPS program, which permits the beneficial ownership of the component to be
recorded directly in the Treasury book-entry system. The Funds may also purchase
custodial receipts evidencing beneficial ownership of direct interests in
component parts of U.S. Treasury bonds or notes held by a bank in a custodian or
trust account.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Pilgrim, and the Sub-Adviser in the case of Research Enhanced Index Fund,
places orders for the purchase and sale of the Funds' securities, supervises
their execution and negotiates brokerage commissions on behalf of each Fund. For
purposes of the remainder of this section, "PORTFOLIO TRANSACTIONS AND BROKERAGE
ALLOCATION," discussion of Pilgrim includes the Sub-Adviser, but only with
respect to Research Enhanced Index Fund. It is the practice of Pilgrim to seek
the best prices and best execution of orders and to negotiate brokerage
commissions that in the Adviser's opinion, are reasonable in relation to the
value of the brokerage and research services provided by the executing broker.
Pilgrim seeks to obtain fair commission rates from brokers. If the execution is
satisfactory and if the requested rate charged by a broker approximates rates
currently being quoted by the other brokers selected by Pilgrim, the rate is
generally deemed by Pilgrim to be reasonable. Some brokers may be paid higher
rates of commission if all or a portion of the securities involved in the
transaction are positioned by the broker, if the broker believes it has brought
a Fund an unusually favorable trading opportunity, or if the broker's research
services have special value and payment of such commissions is authorized by
Pilgrim after the transaction has been consummated. If Pilgrim more than
occasionally differs with the broker's appraisal of opportunity or value, the
broker would not be selected to execute trades in the future. Pilgrim believes
that the Funds benefits with a securities industry comprised of many and diverse
firms and that the long term interest of shareholders of the Funds is best
served by its brokerage policies that include paying a fair commission, rather
than seeking to exploit its leverage to force the lowest possible commission
rate. Over-the-counter purchases and sales are transacted directly with
market-makers, except in those circumstances where, in the opinion of Pilgrim,
better prices and execution are available elsewhere.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances to cause an account
to pay a broker or dealer a commission for effecting a transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the brokerage and
research services provided by the broker or dealer. Brokerage and research
services include (1) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (2)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (3) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
Pilgrim has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e),
Northstar allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will Pilgrim make
binding commitments as to the level of brokerage commissions it will allocate to
a broker, nor will it commit to pay cash if any informal targets are not met.
In general terms, the nature of research services provided by brokers
encompasses statistical and background information, and forecasts and
interpretations with respect to U.S. and foreign economies, U.S. and foreign
money markets, fixed income markets and equity markets, specific industry groups
and individual issues. Research services will vary from firm to firm, with
broadest coverage generally from the large full-line firms. Smaller firms, in
general, tend to provide information and
13
<PAGE>
interpretations on a smaller scale, frequently with a regional emphasis. In
addition, several firms monitor federal, state, local and foreign political
developments; many of the brokers also provide access to outside consultants.
The outside research assistance is particularly useful to the Adviser's staff,
since the brokers, as a group, tend to monitor a broader universe of securities
and other matters than the Adviser's staff can follow. In addition, the outside
research provides Pilgrim with a diverse perspective on financial markets.
Research and investment information is provided by these and other brokers at no
cost to Pilgrim and is available for the benefit of other accounts advised by
Northstar and its affiliates; and not all of this information will be used in
connection with the Funds. While this information may be useful in varying
degrees and may tend to reduce the Adviser's expenses, it is not possible to
estimate its value, and, in the opinion of Pilgrim, it does not reduce the
Adviser's expenses by a determinable amount. The extent to which Pilgrim makes
use of statistical, research and other services furnished by brokers is
considered by Pilgrim in the allocation of brokerage business, but there is no
formula by which such business is allocated. Pilgrim does so in accordance with
its judgment of the best interests of the Funds and their shareholders.
Purchases and sales of fixed income securities will usually be principal
transactions. Such securities often will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. The funds will also
purchase such securities in underwritten offerings and will, on occasion,
purchase securities directly from the issuer. Generally, fixed income securities
are traded on a net basis and do not involve brokerage commissions. The cost of
executing fixed income securities transactions consists primarily of dealer
spreads and underwriting commissions available.
In purchasing and selling fixed income securities, it is the policy of the
Funds to obtain the best results, while taking into account the dealer's general
execution and operational facilities, the type of transaction involved and other
factors, such as the dealer's risk in positioning the securities involved. While
Northstar generally seeks reasonable competitive spreads or commissions, the
Funds will not necessarily pay the lowest spread or commission available.
The Funds may, under circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer that has
provided statistical or other research services to the Funds. By allocating
transactions in this manner, Pilgrim is able to supplement its research and
analysis with the views and information of other securities firms.
Brokerage Commissions Paid During Fiscal Years Ended
December 31, 1998, 1997 and 1996
December 31,
--------------------------------------
1998 1997 1996(1)
-------- -------- --------
SmallCap Opportunities Fund ........ $957,784 $874,698 $479,135
MidCap Opportunities Fund(2) ....... $ 54,968 N/A N/A
Growth Opportunities Fund .......... $423,680 $169,066 $124,024
- -------------
(1) During the fiscal year 1995, the SmallCap Opportunities Fund and the
Growth Opportunities Fund paid $6,450 and $2,400, respectively, in
brokerage commissions to Advest, Inc.
(2) Pilgrim MidCap Opportunities Fund commenced operations on August 20, 1998.
A change in securities held in the portfolio of a Fund is known as
"Portfolio Turnover" and may involve the payment by the Fund of dealer mark-ups
or brokerage or underwriting commissions and other transaction costs on the sale
of securities, as well as on the reinvestment of the proceeds in other
securities. Portfolio turnover rate for a fiscal year is the percentage
determined by dividing the lesser of the cost of purchases or proceeds from
sales of portfolio securities by the average of the value of portfolio
securities during such year, all excluding securities whose maturities at
acquistion were one year or less. A 100% annual turnover rate would occur, for
example, if all the securities in the portfolio were replaced once in a period
of one year. The Funds cannot accurately predict their portfolio turnover rate,
but Pilgrim anticipates that the SmallCap Opportunities, MidCap Opportunities
and Growth Opportunities Funds' rates will exceed 300%, while the Research
Enhanced Index Fund's rate will exceed 150% under normal market conditions. The
Funds' portfolio turnover rates may be higher than that described above if the
Funds finds it necessary to significantly change their portfolios to adopt a
temporary defensive position or respond to economic or market events. A high
turnover rate would increase commission expenses and may involve realization of
gains that would be taxable to shareholders.
The placement of portfolio transactions with broker-dealers who sell
shares of the Funds are subject to rules adopted by the National Association of
Securities Dealers, Inc. ("NASD").
SERVICES OF PILGRIM, THE SUB-ADVISER AND THE ADMINISTRATOR
Pursuant to an Investment Advisory Agreement with each Fund, Pilgrim
Advisors, Inc. acts as the Investment Adviser to the Funds. In this capacity,
Pilgrim, subject to the authority of the Trustees of the Funds is responsible
for furnishing continuous investment supervision to the Funds and is responsible
for the management of each Fund's portfolio.
14
<PAGE>
Pilgrim is an indirect, wholly-owned subsidiary of ReliaStar Financial
Corp. ("ReliaStar"). On October 29, 1999, ReliaStar acquired Pilgrim
Investments, an investment advisor to mutal funds and institutional accounts.
Pligrim and Pilgrim Investments share certain resources and investment
personnel.
ReliaStar is a publicly traded holding company whose subsidiaries
specialize in the life insurance business. Through ReliaStar Life Insurance
Company ("ReliaStar Life") and other subsidiaries, ReliaStar issues and
distributes individual life insurance and annuities, group life and health
insurance and life and health reinsurance, and provides related investment
management services. The address of Pilgrim is 40 North Central Avenue, Suite
1200, Phoenix, AZ 85004. The address of ReliaStar is 20 Washington Avenue South,
Minneapolis, Minnesota 55401.
Pilgrim charges a fee under each advisory agreement to SmallCap
Opportunities, MidCap Opportunities, Growth Opportunities and Research Enhanced
Index Funds at an annual rate of 0.75%, 1.00%, 0.75% and 0.70% of such Fund's
average daily net assets, respectively. This fee is accrued daily and payable
monthly.
The Investment Advisory Agreement for both the Pilgrim SmallCap
Opportunities and Pilgrim Growth Opportunities Funds was approved by the
Trustees of each Fund on March 1, 1995 and by the shareholders of each Fund on
June 2, 1995. The Investment Advisory Agreement continues in effect from year to
year if specifically approved annually by (a) the Trustees, acting separately on
behalf of the particular Fund, including a majority of the Disinterested
Trustees, or (b) a majority of the outstanding voting securities of each class
of such Fund as defined in the 1940 Act. The Agreements were last renewed on
April 30, 1998.
The Investment Advisory Agreement for the Pilgrim MidCap Opportunities
Fund was originally approved by the Trustees of the Pilgrim Equity Trust
(formerly the "Northstar Equity Trust"), on behalf of the Fund, on July 29,
1998, and by the sole Shareholder of the Fund on July 31, 1998. The Investment
Advisory Agreement will continue in effect for a period of two years and
annually thereafter if specifically approved annually by (a) the Trustees,
acting separately on behalf of the Fund, including a majority of the
Disinterested Trustees, or (b) a majority of the outstanding voting securities
of the Fund as defined in the 1940 Act.
The Investment Advisory Agreement for the Pilgrim Research Enhanced Index
Fund was approved by the Trustees of the Pilgrim Mayflower Trust (formerly the
"Northstar Trust"), on behalf of the Fund, on December 16, 1998, and by the sole
Shareholder of the Fund on December 16, 1998. The Investment Advisory Agreement
will continue in effect for a period of two years and annually thereafter if
specifically approved by (a) the Trustees, acting separately on behalf of the
Fund, including a majority of the Disinterested Trustees, or (b) a majority of
the outstanding voting securities of the Fund as defined in the 1940 Act.
A Fund's Investment Advisory Agreement may be terminated without payment
of any penalty by Pilgrim, the Trustees of the Trust, on behalf of the Fund, or
the shareholders of the Fund on not more than 60 days and not less than 30 days
prior written notice. Otherwise, a Fund's Investment Advisory Agreement will
remain in effect for two years and will, thereafter, continue in effect from
year to year, subject to the annual approval of the Trustees of the Trust, on
behalf of the Fund, or the vote of a majority of the outstanding voting
securities of the Fund, and the vote, cast in person at a meeting duly called
and held, of a majority of the Trustees of the Fund who are not parties to the
Investment Agreement or "interested persons" (as defined in the 1940 Act) of any
such Party. Such agreement will automatically terminate in the event of its
assignment, as defined in Section 2(a)(4) of the 1940 Act.
Pursuant to a Sub-Advisory Agreement between Pilgrim and J.P. Morgan
Investment Management Inc., dated December 21, 1998, J.P. Morgan acts as
sub-adviser to the Pilgrim Research Enhanced Index Fund. In this capacity, J.P.
Morgan, subject to the supervision and control of Pilgrim and the Trustees of
the Trust, on behalf of the Fund, will manage the Fund's portfolio investments,
consistently with the Fund's investment objective, and will execute any of the
Fund's investment policies that it deems appropriate to utilize from time to
time. Fees payable under the Sub-Advisory Agreement will accrue daily and be
paid monthly by Pilgrim. As compensation for its services, Pilgrim will pay J.P.
Morgan at the annual rate of 0.20% of the average daily net assets of the Fund.
J.P. Morgan's address is 522 Fifth Avenue, New York, New York 10036. The
Sub-Advisory Agreement for the Fund was approved by the Trustees of Trust, on
behalf of the Fund, on December 16, 1998. The Sub-Advisory Agreement may be
terminated without payment of any penalty by Pilgrim, the Trustees of the Trust,
on behalf of the Fund, or the shareholders of the Fund on not more than 60 days
and not less than 30 days prior written notice. Otherwise, the Sub-Advisory
Agreement will remain in effect for two years and will, thereafter, continue in
effect from year to year, subject to the annual approval of the Trustees of the
Trust on behalf of the Fund, or the vote of a majority of the outstanding voting
securities of the Fund, and the vote, cast in person at a meeting duly called
and held, of a majority of the Trustees of the Fund who are not parties to the
Sub-Advisory Agreement or "interested persons" (as defined in the 1940 Act) of
any such Party.
Pilgrim Group, Inc. (formerly "Northstar Administrators Corporation")
serves as administrator for the Funds, pursuant to an Administrative Services
Agreement with each Fund. Subject to the supervision of the Board of Trustees,
the Administrator provides the overall business management and administrative
services necessary to the proper conduct of the Funds' business, except for
those services performed by Pilgrim under the Investment Advisory Agreement, the
custodian for the Funds under the Custodian Agreements, the transfer agent for
the Funds under the Transfer Agency Agreements, and such other service providers
as may be retained by the Funds from time to time. The Administrator acts as
liaison among these service providers to the Funds. The Administrator is also
responsible for ensuring that the Funds operate in compliance with applicable
legal requirements and for
15
<PAGE>
monitoring Pilgrim for compliance with requirements under applicable law and
with the investment policies and restrictions of the Funds. The Administrator is
an affiliate of Pilgrim. The address of the Administrator is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004.
The Administrative Services Agreement for the Pilgrim SmallCap
Opportunities and the Growth Opportunities Funds was approved by the Trustees of
each Fund on March 1, 1995, and continued in effect until June 2, 1997. The
agreement was last renewed by the Trustees for one year on April 30, 1998 and
will continue in effect from year to year thereafter, provided such continuance
is approved annually by a majority of the Disinterested Trustees of the affected
Fund.
The Administrative Services Agreement for the Pilgrim MidCap Opportunities
Fund was approved by the Trustees of the Pilgrim Equity Trust (formerly the
"Northstar Equity Trust"), on behalf of the Fund, on July 29, 1998, and will
continue in effect for a period of two years and annually thereafter if such
continuance is approved annually by a majority of the Trustees of the Trust.
The Administrative Services Agreement for the Pilgrim Research Enhanced
Index Fund was approved by the Trustees of the Pilgrim Mayflower Trust (formerly
the "Northstar Trust"), on behalf of the Fund, on December 16, 1998, and will
continue in effect for a period of two years and annually thereafter is such
continuance is approved by a majority of the Trustees of the Trust.
The Administrator's fee is accrued daily against the value of each Fund's
net assets and is payable by each Fund monthly at an annual rate of 0.10% of
each Fund's average daily net assets. In addition, the Administrator charges an
annual account fee of $5.00 for each account of beneficial owners of shares of a
Fund for providing certain shareholder services and assisting broker-dealer
shareholder accounts.
During the fiscal years ended December 31, 1998, 1997 and 1996 for the
Pilgrim SmallCap Opportunities Fund, the Pilgrim MidCap Opportunities Fund and
the Growth Opportunities Fund, the Funds paid Pilgrim and the Administrator the
following investment advisory and administrative fees:
Total Advisory and Administrative Fees Paid
During Fiscal Year Ended December 31,
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
Advisory Admin. Advisory Admin. Advisory Admin.
Fees Fees Fees Fees Fees Fees
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SmallCap Opportunities Fund(1) .. $2,033,840 392,303 2,341,067 266,145 1,146,789 N/A
MidCap Opportunities Fund(2)..... $ 73,797 7,380 N/A N/A N/A N/A
Growth Opportunities Fund(1)(3) . $1,541,921 239,970 1,412,949 136,648 575,383 N/A
</TABLE>
- --------------
(1) The Fund did not pay administrative fees for the years ended December 31,
1996 or 1995. The Administrative Services Agreement for the Fund, which
was approved by the Trustees of the Fund on March 1, 1995, provided that
until June 2, 1997, the Administrator would not receive any compensation
under such agreement and thereafter would receive such compensation as the
Board of Trustees of the Fund may determine. Prior to June 5, 1995 the
Fund was managed by Boston Securities Counselors, Inc. and did not utilize
the services of an administrator.
(2) The Pilgrim MidCap Opportunities Fund commenced operations on August 20,
1998. Does not reflect expense reimbursement of $37,687 for the year ended
December 31, 1998.
(3) Does not reflect expense reimbursement of $10,635 and $34,126 for the year
ended December 31, 1997 and 1996, respectively.
TOTAL SUBSIDIARY FEES PAID
DURING FISCAL YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- -------
SmallCap Opportunities Fund(1) .... $ 789,408 1,498,283 763,034
- ----------
(1) The Pilgrim SmallCap Opportunities Fund was subadvised by Navellier Fund
Management, Inc. from February 1, 1996 through June 30, 1998.
NET ASSET VALUE
For the Pilgrim MidCap Opportunities and Research Enhanced Index Funds,
equity securities are valued at the last sale price on the exchange or in the
principal OTC market in which such securities are being valued, or lacking any
sales, at the last available bid price. Prices of long-term debt securities are
valued on the basis of last reported sales price, or if no sales are reported,
the value is determined based upon the mean of representative quoted bid or
asked prices for such securities obtained from a quotation reporting system or
from established market makers, or at prices for securities of comparable
maturity, quality and type. For the Pilgrim SmallCap Opportunities and Growth
Opportunities Funds, portfolio securities, options and futures contracts and
options thereon that are traded on national exchanges or in the NASDAQ System
are valued at the last sale or settlement price on the exchange or market where
primarily traded or, if none that day, at the mean of the last reported bid and
asked prices using
16
<PAGE>
prices as of the close of trading on the applicable exchange or market.
Securities and options that are traded in the OTC market (other than on the
NASDAQ System) are valued at the mean of the last available bid and asked
prices. Such valuations are based on quotations of one or more dealers that make
markets in the securities as obtained from such dealers or from a pricing
service. Securities (including OTC options) for which market quotations are not
readily available and other assets are valued at their fair value as determined
by or under the direction of the Trustees. Such fair value may be determined by
various methods, including utilizing information furnished by pricing services
that determine calculations for such securities using methods based, among other
things, upon market transactions for comparable securities and various
relationships between securities that are generally recognized as relevant.
The net asset value of the Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (usually 4:00 p.m. Eastern time), on each business day that the
New York Stock Exchange (the "Exchange") is open. Net asset value per share is
computed by determining the value of the Fund's assets (securities held plus
cash and other assets, including dividend and interest accrued but not received)
less all liabilities of the Fund (including accrued expenses other than class
specific expenses), and dividing the result by the total number of shares
outstanding at such time. The specific expenses borne by each class of shares
will be deducted from that class and will result in different net asset values
and dividends. The net asset value per share of the Class B and Class C shares
of the Fund will generally be lower than that of the Class A or Class I shares
because of the higher class specific expenses borne by each of the Class B and
Class C shares.
Under normal market conditions, daily prices for securities are obtained
from independent pricing services, determined by them in accordance with the
registration statement for the Fund. Securities are valued at market value or,
if a market quotation is not readily available, at their fair value, determined
in good faith under procedures established by and under the supervision of the
Trustees. Money market instruments maturing within 60 days are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. See "How Net Asset Value is
Determined" in the Prospectus.
REDEMPTIONS
The right to redeem shares may be suspended and payment therefore
postponed during periods when the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or, if permitted by rules of the SEC,
during periods when trading on the Exchange is restricted, or during any
emergency that makes it impracticable for the Fund to dispose of its securities
or to determine fairly the value of its net assets or during any other period
permitted by order of the SEC for the protection of investors. Furthermore, the
Transfer Agent will not mail redemption proceeds until checks received for
shares purchased have cleared, but payment will be forwarded immediately upon
the funds becoming available.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code (the "Code"). In order to so
qualify, the Fund must, among other things, (i) derive each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
certain securities loans, gains from the sale of securities or foreign
currencies, or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in stock, securities or currencies and (ii) at the end of each quarter of the
taxable year maintain at least 50% of the value of its total assets in cash,
government securities, securities of other regulated investment companies, and
other securities of issuers that represent, with respect to each issuer, no more
than 5% the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and with no more than 25% of its assets invested in
the securities (other than those of the U.S. government or other regulated
investment companies) of any one issuer or of two or more issuers that the Fund
controls and that are engaged in the same, similar or related trades and
businesses. As a regulated investment company, the Fund generally will not be
subject to federal income tax on its income and gains that it distributes to
shareholders, if at least 90% of its investment company taxable income (which
includes dividends, interest and the excess of any short-term capital gains over
long-term capital losses) for the taxable year is distributed.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
the Fund's "required distribution" over actual distributions in any calendar
year. Generally, the "required distribution" is 98% of a Fund's ordinary income
for the calendar year plus 98% of its capital gain net income recognized during
the one-year period ending on October 31 plus undistributed amounts from prior
years. The Fund intends to make distributions sufficient to avoid imposition of
the excise tax. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by the Fund during October,
17
<PAGE>
November or December of the year with a record date in such a month and paid by
the Fund during January of the following year. Such distributions will be
taxable as if received on December 31 in the year they are declared by the Fund,
rather than the year in which they are received.
The taxation of equity options and OTC options on debt securities is
governed by Code section 1234. Pursuant to Code section 1234, the premium
received by a Fund for selling a put or call option is not included in income at
the time of receipt. If the option expires, the premium is a short-term capital
gain to the Fund. If the Fund enters into a closing transaction, the difference
between the amount paid to close out its position and the premium received is a
short-term capital gain or loss. If a call option written by a Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call option that is purchased by a Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term,
depending upon the holding period of the option. If the option is exercised, the
cost of the option, in the case of a call option, is added to the basis of the
purchased security and, in the case of a put option, reduces the amount realized
on the underlying security in determining the gain or loss.
Certain options, futures contracts and forward contracts in which the Fund
may invest are "section 1256 contracts." Gains or losses on section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40 gains or losses"); however, foreign currency gains or
losses (as discussed below) arising from certain section 1256 contracts may be
treated as ordinary income or loss. Also, section 1256 contracts held by a Fund
at the end of each taxable year (and, generally, for purposes of the 4% excise
tax, on October 31 of each year) are treated as sold on such date at fair market
value, resulting in unrealized gains or losses being treated as though they were
realized.
Hedging transactions undertaken by the Fund may result in straddles for
U.S. federal income tax purposes. The straddle rules may accelerate income to a
Fund, defer losses to a Fund, and affect the character of gains (or losses)
realized by a Fund. Hedging transactions may increase the amount of short-term
capital gains realized by a Fund that is taxed as ordinary income when
distributed to shareholders. A Fund may make one or more of the various
elections available under the Code with respect to hedging transactions. If the
Fund makes any of the elections, the amount, character and timing of the
recognition of gains or losses from the affected positions will be determined
under rules that vary according to the elections made.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time a Fund accrues interest or other receivables,
or accrues expenses or other liabilities, denominated in a foreign currency and
the time the Fund actually collects such receivables, or pays such liabilities,
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and certain
options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
A Fund will not realize a gain or loss on a short sale of a security until
it closes the transaction by delivering the borrowed security to the lender. All
or a portion of any gain arising from a short sale may be treated as short-term
capital gain, regardless of the period for which the Fund held the security used
to close the short sale. In addition, the Fund's holding period for any security
that is substantially identical to that which is sold short may be reduced or
eliminated as a result of the short sale.
Investments by a Fund in zero coupon securities will result in income to
the Fund equal to a portion of the excess of the face value of the securities
over their issue price (the "original issue discount") each year that the
securities are held, even though the Fund receives no cash interest payments.
This income is included in determining the amount of income that the Fund must
distribute to maintain its status as a regulated investment company and to avoid
the payment of federal income tax and the 4% excise tax. If the Fund invests in
certain high yield original issue discount obligations issued by corporations, a
portion of the original issue discount accruing on the obligations may be
eligible for the deduction for dividends received by corporations. In such
event, a portion of the dividends of investment company taxable income received
from the Fund by its corporate shareholders may be eligible for this deduction.
Gains derived by the Fund from the disposition of any market discount
bonds (i.e., bonds purchased other than at original issue, where the face value
of the bonds exceeds their purchase price) held by the Fund will be taxed as
ordinary income to the extent of the accrued market discount on the bonds,
unless the Fund elects to include the market discount in income as it accrues.
If a Fund invests in stock of certain foreign corporations that generate
largely passive investment-type income, or which hold a significant percentage
of assets that generate such income (referred to as "passive foreign investment
companies" or "PFICs"), these investments would be subject to special tax rules
designed to prevent deferral of U.S. taxation of the Fund's
18
<PAGE>
share of the PFIC's earnings. In the absence of certain elections to report
these earnings on a current basis, regardless of whether the Fund actually
receives any distributions from the PFIC, investors in the Fund would be
required to report certain "excess distributions" from, and any gains from the
disposition of stock of, the PFIC as ordinary income. This ordinary income would
be allocated ratably to the Fund's holding period for the stock. Any amounts
allocated to prior years would be taxable at the highest rate of tax applicable
in that year, increased by an interest charge determined as though the amounts
were underpayments of tax.
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. If more than
50% of the value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible and
may elect to "pass through" to the Fund's shareholders the amount of foreign
taxes paid by the Fund. Pursuant to this election, a shareholder will be
required to include in gross income (in addition to dividends actually received)
its pro rata share of the foreign taxes paid by the Fund, and may be entitled
either to deduct its pro rata share of the foreign taxes in computing its
taxable income or to use the amount as a foreign tax credit against its U.S.
federal income tax liability, subject to limitations. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass through" for that year. If the Fund is
not eligible to make the election to "pass through" to its shareholders its
foreign taxes, the foreign taxes it pays will reduce its investment company
taxable income and distributions by the Fund will be treated as U.S. source
income.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to its foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its shareholders. With respect to
the Funds, gains from the sale of securities will be treated as derived from
U.S. sources and certain currency fluctuation gains, including fluctuation gains
from foreign currency denominated debt securities, receivables and payables, and
options, futures and forward transactions, will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income (as defined for purposes of the
foreign tax credit), including the foreign source passive income passed through
by the Fund.
The current position of the Internal Revenue Service (the "IRS") generally
is to treat a regulated investment company as owning its proportionate share of
the income and assets of any partnership in which it is a partner, in applying
the 90% qualifying income requirement and the asset diversification requirements
that, as described above, the Fund must satisfy to qualify as a regulated
investment company under the Code. These requirements may limit the extent to
which a Fund may invest in limited partnerships, especially in the case of
limited partnerships that do not primarily invest in a diversified portfolio of
stocks and securities.
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. If a portion of the Fund's
income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, designated as capital
gain dividends are taxable as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in each
such share equal to the net asset value of a share of the Fund on the
reinvestment date. A distribution of an amount in excess of the Fund's current
and accumulated earnings and profits will be treated by a shareholder as a
return of capital that is applied against and reduces the shareholder's basis in
his or her shares. To the extent that the amount of any such distribution
exceeds the shareholder's basis in his or her shares, the excess will be treated
by the shareholder as a gain from a sale or exchange of the shares. Shareholders
will be notified annually as to the U.S. federal tax status of distributions,
and shareholders receiving distributions in the form of additional shares will
receive a report as to the net asset value of those shares.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss that will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Under certain circumstances, the sales charge incurred in acquiring shares
of a Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of a Fund originally
acquired with a sales charge are disposed of within 90 days after the date on
which they were acquired and new shares of a regulated investment company are
acquired without a sales charge or at a reduced sales charge. In that case, the
gain or loss realized on the disposition will be determined by excluding from
the tax basis of the shares all or a portion of the sales charge incurred in
19
<PAGE>
acquiring those shares. This exclusion applies to the extent that the otherwise
applicable sales charge with respect to the newly acquired shares is reduced as
a result of the shareholder having incurred a sales charge paid for the new
shares. This rule may be applied to successive acquisitions of shares of stock.
Distributions by a Fund reduce the net asset value of that Fund's shares.
Should a distribution reduce the net asset value of a share below a
shareholder's cost for the share, such a distribution nevertheless generally
would be taxable to the shareholder as ordinary income or long-term capital
gains, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution by a Fund. The
price of shares purchased at that time may include the amount of the forthcoming
distribution, but the distribution generally would be taxable to them.
Some shareholders may be subject to withholding of Federal income tax on
dividends and redemption payments from a Fund ("backup withholding") at the rate
of 31%. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. Generally, shareholders
subject to backup withholding will be (i) those for whom a certified taxpayer
identification number is not on file with a Fund, (ii) those about whom
notification has been received (either by the shareholder or by a Fund) from the
IRS that they are subject to backup withholding or (iii) those who, to a Fund's
knowledge, have furnished an incorrect taxpayer identification number.
Generally, to avoid backup withholding, an investor must, at the time an account
is opened, certify under penalties of perjury that the taxpayer identification
number furnished is correct and that he or she is not subject to backup
withholding.
The foregoing discussion relates solely to U.S. federal income tax law.
Dividends and distributions also may be subject to state, local and foreign
taxes. Dividends paid by the Fund from income attributable to interest on
obligations of the U.S. government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
Shareholders should consult their tax advisers regarding the possible exclusion
of this portion of their dividends for state and local tax purposes. Non-U.S.
investors also should consult their tax advisers concerning the tax consequences
of ownership of shares of the Fund, including the possibility that distributions
may be subject to a 30% U.S. withholding tax (or a reduced rate of withholding
provided by treaty).
Shareholders of Class A, Class B and Class C shares may direct that income
dividends and capital gain distributions be paid to them through various options
listed in the "How the Fund Pays Distributions -- Distribution Options" section
of the Fund's current Prospectus. If a shareholder selects either of two such
options (that: (a) income dividends be paid in cash and capital gain
distributions be paid in additional shares of the same class of the Fund at net
asset value; or (b) income dividends and capital gain distributions both be paid
in cash), and the dividend/distribution checks cannot be delivered, or, if such
checks remain uncashed for six months, the Fund reserves the right to reinvest
the dividend or distribution in the shareholder's account at the then-current
net asset value and to convert the shareholder's election to automatic
reinvestment in shares of the Fund from which the distributions were made. The
Fund has received from the IRS, rulings to the effect that (i) the
implementation of the multiple class purchase arrangement will not result in the
Fund's dividends or distributions constituting "preferential dividends" under
the Code, and (ii) that any conversion feature associated with a class of shares
does not constitute a taxable event under federal income tax law.
UNDERWRITER AND DISTRIBUTION SERVICES
Pursuant to Underwriting Agreements, Northstar Distributors, Inc. is the
Underwriter for each Fund and as such conducts a continuous offering pursuant to
a "best efforts" arrangement requiring it to take and pay for only such
securities as may be sold to the public. The Underwriter is an affiliate of the
Adviser and the Administrator.
The Underwriting Agreements may be terminated at any time on not more than
60 days written notice, without payment of a penalty, by the Underwriter, by
vote of a majority of the outstanding class of voting securities of the Fund, or
by vote of a majority of the Trustees, who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan or in any agreements. The Underwriting Agreements will terminate
automatically in the event of their assignment.
TRUSTEES AND OFFICERS
The Trustees and principal Officers of the Trust and their business
affiliations for the past five years are set forth below. Unless otherwise
noted, the mailing address of the Trustees and Officers is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004.
Paul S. Doherty, Trustee. Age: 64.
President, Doherty, Wallace, Pillsbury and Murphy, P.C., Attorneys.
Director, Tambrands, Inc. Since October 1993, Trustee of the Pilgrim affiliated
investment companies.
20
<PAGE>
Robert B. Goode, Jr., Trustee. Age: 68.
Currently retired. From 1990 to 1991, Chairman of The First Reinsurance
Company of Hartford. From 1987 to 1989, President and Director of American
Skandia Life Assurance Company. Since October 1993, Trustee of the Pilgrim
affiliated investment companies.
Alan L. Gosule, Trustee. Age: 58.
Partner, Rogers & Wells. Director, F.L. Putnam Investment Management Co.,
Inc. Since June 1995, Trustee of the Pilgrim affiliated investment companies.
*Mark L. Lipson, Trustee and President. Age: 49.
Director, Chairman and Chief Executive Officer of Pilgrim and Pilgrim
Holdings Corporation. Director and President of Northstar Administrators
Corporation and Northstar Funding, Inc. and Director, Chairman and Chief
Executive Officer of Northstar Distributors, Inc., Trustee and President of the
Northstar affiliated investment companies since October 1993. Prior to August,
1993, Director, President and Chief Executive Officer of National Securities &
Research Corporation and President and Director/Trustee of the National
Affiliated Investment Companies and certain of National's subsidiaries.
Walter H. May, Trustee. Age: 62.
Currently retired. Former Senior Executive for Piper Jaffrey, Inc.
David W.C. Putnam, Trustee. Age: 59.
President, Clerk and Director of F.L. Putnam Securities Company,
Incorporated, F.L. Putnam Investment Management Company, Incorporated,
Interstate Power Company, Inc., Trust Realty Corp. and Bow Ridge Mining Co.;
Director of Anchor Investment Management Corporation; President and Trustee of
Anchor Capital Accumulation Trust, Anchor International Bond Trust, Anchor Gold
and Currency Trust, Anchor Resources and Commodities Trust and Anchor Strategic
Assets Trust.
John R. Smith, Trustee. Age: 75.
President of New England Fiduciary Company (financial planning) since
1991; Chairman of Massachusetts Educational Financing Authority since 1987; Vice
Chairman of Massachusetts Health and Education Authority; from 1970-1991,
Financial Vice President of Boston College.
*John G. Turner, Trustee. Age: 59.
Chairman and Chief Executive Officer of ReliaStar Financial Corporation
and ReliaStar Life Insurance Company, ("ReliaStar Life") since May 1993 and
Chairman of other ReliaStar affiliated insurance companies since 1995. Since
October 1993, Director of Northstar and affiliates. Prior to May 1993, President
and Chief Executive Officer of ReliaStar and ReliaStar Life.
David W. Wallace, Trustee. Age: 74.
Chairman of Putnam Trust Company, Lone Star Industries and FECO Engineered
Systems, Inc. He is also President and Trustee of the Robert R. Young Foundation
and Governor of New York Hospital. Director of UMC Electronics and Zurn
Industries, Inc. Former Chairman and Chief Executive Officer, Todd Shipyards and
Bangor Punta Corporation, and former Chairman and Chief Executive Officer of
National Securities & Research Corporation. Since October 1993, Trustee of the
Pilgrim affiliated investment companies.
James M. Hennessy, Executive Vice President and Secretary. Age: 50.
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary of
each of the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim Capital
(April 1995 - April 1998); Senior Vice President, Express America Mortgage
Corporation (June 1992 - August 1994) and President, Beverly Hills Securities
Corp. (January 1990 - June 1992).
James R. Reis, Executive Vice President and Assistant Secretary. Age: 41.
Director, Vice Chairman (since December 1994), Executive Vice President
(since April 1995), and Director of Structured Finance (since April 1998),
Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994) and
Vice Chairman (since November 1995) of Pilgrim Securities; Executive Vice
President, Assistant Secretary and Chief Credit Officer of Pilgrim Prime Rate
Trust; Executive Vice President and Assistant Secretary of the Pilgrim Funds.
Chief Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December 1993),
Pilgrim Capital (formerly Express America Holdings Corporation). Presently
serves or has served as an officer or director of other affiliates of Pilgrim
Capital.
Michael J. Roland, Senior Vice President and Principal Financial Officer.
Age: 41. Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice
President and Principal Financial Officer of the Pilgrim Funds. He served in
same capacity from January, 1995 - April, 1997. Formerly, Chief Financial
Officer of Endeavor Group (April, 1997 to June, 1998).
*Robert W. Stallings, Chairman, Chief Executive Officer, and President.
Age: 50. Chairman, Chief Executive Officer and President of Pilgrim Group,
Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim Investments,
Inc. (since December 1994); Director, Pilgrim Securities, Inc. ("Pilgrim
Securities") (since December 1994); Chairman, Chief Executive Officer and
President of Pilgrim Bank and Thrift Fund, Inc., Pilgrim Government Securities
Income Fund, Inc. and Pilgrim Investment Funds, Inc. (since April 1995).
Chairman and Chief Executive Officer of Pilgrim Prime Rate Trust (since April
1995). Chairman and Chief Executive Officer of Pilgrim America Capital
Corporation (formerly, Express America Holdings Corporation) ("Pilgrim Capital")
(since August 1990).
Stanley D. Vyner, Executive Vice President. Age: 49. President and Chief
Executive Officer (since August 1996), Pilgrim Investments; Executive Vice
President of most of the Pilgrim Funds (since July 1996). Formerly Chief
Executive Officer (November 1993 - December 1995) HSBC Asset Management
Americas, Inc., and Chief Executive Officer, and Actuary (May 1986 - October
1993) HSBC Life Assurance Co.
- -----------
* Deemed to be an "interested person" of each Fund, as defined by the 1940 Act.
21
<PAGE>
Pilgrim and Pilgrim Group Inc. make their personnel available to serve as
Officers and "Interested Trustees" of the Trust. All Officers and Interested
Trustees of the Trust are compensated by Pilgrim or Pilgrim Group, Inc. Trustees
who are not "interested persons" of the Adviser are paid an annual retainer fee
of $6,000 for their combined services as Trustees to the Trust and to retail
funds sponsored or advised by the Adviser, and a per meeting fee of $1,500 for
attendance at each joint meeting of the Trusts and the other Pilgrim retail
funds. The Trust also reimburses Trustees for expenses incurred by them in
connection with such meetings.
As of December 31, 1998, all Trustees and executive officers of each Fund
as a group owned beneficially or of record less than 1% of the outstanding
securities of such Fund. To the knowledge of the Funds, as of December 31, 1998,
no shareholder owned beneficially (b) or of record (r) more than 5% of a Fund's
outstanding shares, except as set forth below:
(1) MidCap Opportunities Fund
Reliastar Pension Account 15.1% (R)
Minneapolis, Minnesota
(2) Growth Opportunities Fund
ReliaStar Pension Account 15.8% (r)
Minneapolis, Minnesota
(3) Research Enhanced Index Fund
ReliaStar Pension Account 15.0% (r)
Minneapolis, Minnesota
Compensation Table
Period Ending December 31, 1998
<TABLE>
<CAPTION>
Pension Benefits Estimated Annual Total Compensation
Compensation Accrued as Part of Benefits Upon from all Funds (18) in
From Funds(a) Fund Expenses Retirement Pilgrim Complex(b)
------------- ------------- ---------- --------------------
<S> <C> <C> <C> <C>
Paul S. Doherty .......... 18,344 N/A N/A 20,000
Robert B. Goode, Jr ...... 17,000 N/A N/A 18,500
Alan L. Gosule ........... 18,344 N/A N/A 20,000
Mark L. Lipson ........... 0 N/A N/A 0
Walter H. May ............ 18,344 N/A N/A 20,000
David W.C. Putnam ........ 18,000 N/A N/A 19,500
John R. Smith ............ 18,344 N/A N/A 20,000
John G. Turner ........... 0 N/A N/A 0
David W. Wallace ......... 18,344 N/A N/A 20,000
</TABLE>
- ----------
(a) See table below for Fund specific compensation.
(b) Compensation paid by the Pilgrim Mayflower Trust Funds (formerly the
"Northstar Trust Funds"), the Northstar Galaxy Trust Funds, the Pilgrim MidCap
Opportunities Fund (formerly the "Northstar Mid-Cap Growth Fund"), Pilgrim
SmallCap Opportunities Fund (formerly the "Northstar Special Fund"), Pilgrim
Opportunities Fund (formerly the "Northstar Growth Fund), Pilgrim Government
Securities Fund (formerly the "Northstar Government Securities Fund"), Pilgrim
High Yield Fund III (formerly the "Northstar High Yield Fund") and Pilgrim
Balance Sheet Opportunities Fund (formerly the "Northstar Balance Sheet
Opportunities Fund").
22
<PAGE>
Individual Fund(1)
Fiscal Year Compensation Tables
<TABLE>
<CAPTION>
SmallCap MidCap Growth Growth + International Emerging
Opportunities Opportunities Opportunities Value Value Markets
------------- ------------- ------------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Paul S. Doherty ....... 2,369 308 1,369 1,369 1,369 974
Robert B. Goode, Jr ... 2,338 308 1,338 1,338 1,338 974
Alan L. Gosule ........ 2,369 308 1,369 1,369 1,369 974
Mark L. Lipson ........ 0 0 0 0 0 0
Walter H. May ......... 2,369 308 1,369 1,369 1,369 974
David W.C. Putnam ..... 2,338 308 1,338 1,338 1,338 974
John R. Smith ......... 2,369 308 1,369 1,369 1,369 974
John G. Turner ........ 0 0 0 0 0 0
David W. Wallace ...... 2,369 308 1,369 1,369 1,369 974
</TABLE>
High High Balance
Income and Government Yield Total Total Sheet
Growth Securities III Return II Return Opportunities
------ ---------- ----- --------- ------ -------------
Paul S. Doherty ..... 1,369 1,369 1,369 1,369 1,369 1,369
Robert B. Goode, Jr . 1,338 1,338 1,338 1,338 1,338 1,338
Alan L. Gosule ...... 1,369 1,369 1,369 1,369 1,369 1,369
Mark L. Lipson ...... 0 0 0 0 0 0
Walter H. May ....... 1,369 1,369 1,369 1,369 1,369 1,369
David W.C. Putnam ... 1,338 1,338 1,338 1,338 1,338 1,338
John R. Smith ....... 1,369 1,369 1,369 1,369 1,369 1,369
John G. Turner ...... 0 0 0 0 0 0
David W. Wallace .... 1,369 1,369 1,369 1,369 1,369 1,369
- ---------
(1) The Pilgrim Research Enhanced Index Fund commenced operations on December
30, 1998.
OTHER INFORMATION
Independent Accountants. PricewaterhouseCoopers LLP has been selected as
the independent accountants of the Funds, Pilgrim Equity Trust (formerly the
"Northstar Equity Trust") and Pilgrim Mayflower Trust (formerly the "Northstar
Trust"). PricewaterhouseCoopers LLP audits the Fund's annual financial
statements and issues an opinion thereon.
Custodian. State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02110, acts as custodian, and fund accounting agent for the Funds,
Pilgrim Equity Trust (formerly the "Northstar Equity Trust") and Pilgrim
Mayflower Trust (formerly the "Northstar Trust").
Transfer Agent. DST Systems, Inc., 210 West 10th St., 8th Floor, Kansas
City, Missouri 64105, acts as transfer agent for the Funds.
Reports to Shareholders. The fiscal year end of the Pilgrim SmallCap
Opportunities, MidCap Opportunities and Growth Opportunities Funds is December
31. The fiscal year end of the Pilgrim Research Enhanced Index Fund is October
31. The Funds will send financial statements to their shareholders at least
semiannually. An annual report containing financial statements audited by the
independent accountants will be sent to shareholders each year.
Organizational and Related Information. The Pilgrim SmallCap Opportunities
Fund (formerly the "Northstar Special Fund") and Pilgrim Growth Opportunities
Fund (formerly the "Northstar Growth Fund") were organized in 1986. The Pilgrim
MidCap Opportunities Fund (formerly the "Northstar Mid-Cap Growth Fund"), a
series of the Pilgrim Equity Trust (formerly the "Northstar Equity Trust"), was
organized in 1998. The Pilgrim Research Enhanced Fund (formerly the "Northstar
Research Enhanced Index Fund"), a series of the Pilgrim Mayflower Trust
(formerly the "Northstar Trust"), was organized in 1998.
The shares of each Fund, when issued, will be fully paid and
non-assessable, have no preference, preemptive, or similar rights, and will be
freely transferable. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Meetings of the shareholders will be called upon written
request of shareholders holding in the aggregate not less than 10% of the
outstanding shares of affected Fund or class having voting rights. Except as set
forth above and subject to the 1940 Act, the Trustees will continue to hold
office and appoint successor Trustees.
23
<PAGE>
Under Massachusetts law, there is a remote possibility that shareholders
of a business trust could, under certain circumstances, be held personally
liable as partners for the obligations of such trust. The Declaration of Trust
for the Fund contains provisions intended to limit such liability and to provide
indemnification out of Fund property of any shareholder charged or held
personally liable for obligations or liabilities of the Fund solely by reason of
being or having been a shareholder of the Fund and not because of such
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Year 2000 Compliance. The services provided to each Fund by the Adviser,
the Administrator and the Funds' other service providers are dependent on those
service providers' computer systems. Many computer software and hardware systems
in use today cannot distinguish between the year 2000 and the year 1900 because
of the way dates are encoded and calculated (the "Year 2000 Issue"). The failure
to make this distinction could have a negative implication on handling
securities trades, pricing and account services. The Adviser, the Administrator
and the Funds' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. Although there can be no assurances, the Funds believe
these steps will be sufficient to avoid any material adverse impact on the
Funds. The costs or consequences of incomplete or untimely resolution of the
Year 2000 Issue are unknown to the Adviser, Administrator and the Funds' other
service providers at this time but could have a material adverse impact on the
operations of the Funds and the Adviser, Administrator and the Fund's other
service providers. Further, there can be no assurances, that the systems of the
companies in which the Funds invest will be timely converted or that the value
of such investments will not be adversely affected by the Year 2000 Issue.
PERFORMANCE INFORMATION
Performance information for the Funds may be compared in reports and
promotional literature to (1) the S&P 500, Dow Jones Industrial Average
("DJIA"), or other unmanaged indices, so that investors may compare the Fund's
results to those of a group of unmanaged securities that are widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm that ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; (iii) the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Fund; and (iv) well known
monitoring sources of certificates of deposit performance rates, such as Solomon
Brothers, Federal Reserve Bulletin, American Bankers and Tower Data/The Wall
Street Journal. Unmanaged indices may assume the reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses. Performance rankings are based on historical information and are not
intended to indicate future performance.
In addition, the Fund may, from time to time, include various measures of
the Fund's performance, including the current yield, the tax equivalent yield
and the average annual total return of shares of the Fund in advertisements,
promotional literature or reports to shareholders or prospective investors. Such
materials may occasionally cite statistics to reflect the Fund's volatility
risk.
Average Annual Total Return. Standardized quotations of average annual
total return ("Standardized Return") for each class of shares will be expressed
in terms of the average annual compounded rate of return for a hypothetical
investment in such class of shares over periods of 1, 5 and 10 years or up to
the life of the class of shares, calculated for each class separately pursuant
to the following formula:
P(1+T) to the power of n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = the average annual total return
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period.
All total return figures reflect the deduction of a proportional share of
each class's expenses (on an annual basis), the deduction of the maximum initial
sales load (in the case of Class A shares) and the maximum contingent deferred
sales charge applicable to a complete redemption of the investment (in the case
of Class B and Class C shares), and assume that all dividends and distributions
are reinvested when paid.
24
<PAGE>
Non-Standardized Return. In addition to the performance information
described above, the Funds may provide total return information that is not
calculated according to the formula set forth above ("Non-Standardized Return").
Neither initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return. Excluding the Fund's sales charge from a
total return calculation produces a higher total return figure.
The following table summarizes the calculation of Average Annual Total
Return for Class I shares of the Growth Opportunities Fund for the period from
commencement of operations (March 31, 1997) through December 31, 1998 assuming
the maximum sales charge HAS been assessed:
Class One Since
of Shares Year Inception
-------- ------- ---------
Class I 24.06% 28.08%
The following table summarizes the calculation of Average Annual Total
Return for Class I shares of the Growth Opportunities Fund for the period from
commencement of operations of such classes (March 31, 1997) through December 31,
1998 assuming the maximum sales charge HAS NOT been assessed:
Class One Since
of Shares Year Inception
-------- ------- ---------
Class I 24.06% 28.08%
A Fund may quote its performance in various ways, using various types of
comparisons to market indices, other funds or investment alternatives, or to
general increases in the cost of living. All performance information supplied by
the Funds in advertising is historical and is not intended to indicate future
returns. Each Fund's share prices and total returns fluctuate in response to
market conditions and other factors, and the value of the Fund's shares when
redeemed may be more or less than their original cost.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Fund, including reprints of, or selections
from, editorials or articles about the Fund. These editorials or articles may
include quotations of performance from other sources, such as Lipper or
Morningstar. Sources for Fund performance information and articles about the
Fund may include the following: Banxquote, Barron's, Business Week, CDA
Investment Technologies, Inc, Changing Times, Consumer Digest, Financial World,
Forbes, Fortune, IBC/Donoghue's, Money Fund Report, Ibbotson Associates, Inc.,
Investment Company Data, Inc., Investor's Daily, Lipper Analytical Services,
Inc.'s Mutual Fund Performance Analysis, Money, Mutual Fund Values, The New York
Times, Personal Investing News, Personal Investor, Success, USA Today, U.S. News
and World Report, The Wall Street Journal and Wiesenberger Investment Company
Services.
When comparing yield, total return and investment risk of shares of the
Fund with other investments, investors should understand that certain other
investments have different risk characteristics than an investment in shares of
the Fund. For example, certificates of deposit may have fixed rates of return
and may be insured as to principal and interest by the FDIC, while the Fund's
returns will fluctuate and its share values and returns are not guaranteed.
Money market accounts offered by banks also may be insured by the FDIC and may
offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. government.
Money market mutual funds may seek to offer a fixed price per share.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representative of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest, and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
FINANCIAL STATEMENTS
The audited financial statements of SmallCap Opportunities Fund and Growth
Opportunities Fund as of and for the year ended December 31, 1998 and the report
of the independent accountants, PricewaterhouseCoopers LLP with respect ot the
financial statements, are hereby incorporated herein by reference to the Annual
Report to Shareholders of the Northstar Funds for the year ended December 31,
1998. (Please note, as of November 1, 1999, the Northstar Funds have been
renamed the Pilgrim Funds.)
The Northstar Equity Trust's audited financial statements dated December
31, 1998 and the report of the independent accountants, PricewaterhouseCoopers
LLP with respect to such financial statements, are hereby incorporated herein by
reference to the Annual Report to Shareholders of the Northstar Equity Trust for
the fiscal year ended December 31, 1998. (Please note, as of November 1, 1999,
the Northstar Equity Trust has been renamed the Pilgrim Equity Trust.)
25
<PAGE>
The Northstar Trust's audited financial statements dated October 31, 1998
and the report of the independent accountants, PricewaterhouseCoopers LLP with
respect to such financial statements, are hereby incorporated herein by
reference to the Annual Report to Shareholders of the Northstar Trust for the
fiscal year ended October 31, 1998. Please note that because the Pilgrim
Research Enhanced Index Fund commenced operations on December 30, 1998, its
financial statements will not be available until December 1999. (Please note, as
of November 1, 1999, the Northstar Trust has been renamed the Pilgrim Mayflower
Trust.)
26
<PAGE>
APPENDIX
Description of Moody's Investors Service, Inc. ("Moody's")
Corporate Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which made the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporation's ("S&P") Corporate Debt Ratings
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
A-1
<PAGE>
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures and adverse
conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
