Pilgrim (SM)
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FUNDS FOR SERIOUS INVESTORS
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PROSPECTUS
March 1, 1999
As supplemented November 1, 1999
This supplement supersedes all prior supplements.
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
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This prospectus contains important information about investing in the Pilgrim
Balance Sheet Opportunities Fund. 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 fund will achieve its objective. 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), aquired 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.
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<PAGE>
WHAT'S
INSIDE
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[GRAPHIC OMITTED] OBJECTIVE These pages contain a description of the fund,
including its objective, investment strategy,
risks and portfolio managers.
[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 the fund.
[GRAPHIC OMITTED] RISKS
How the fund has performed. A chart that shows
HOW THE the fund's financial performance for the past
[GRAPHIC OMITTED] FUND HAS ten years.
PERFORMED
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Pilgrim Balance Sheet Opportunities Fund 2
Meet the portfolio managers 4
Your guide to buying, selling and
exchanging shares of Pilgrim funds 5
Mutual fund earnings and your taxes 13
Financial highlights 15
Where to go for more information 16
<PAGE>
PILGRIM Portfolio managers
BALANCE SHEET Robert Kinsey
OPPORTUNITIES Kevin Mathews
FUND G. David Underwood
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OBJECTIVE [GRAPHIC OMITTED]
This fund seeks income, with a secondary objective of capital appreciation,
primarily by investing in domestic debt and equity securities.
INVESTMENT STRATEGY [GRAPHIC OMITTED]
The portfolio manager reviews various factors relating to an issuer, especially
its financial statements, to determine which type of security -- debt or equity
- -- offers the best potential for high current income combined with the potential
for capital growth.
Under normal market conditions, the fund invests at least 51% of its total
assets in income-producing securities. It may hold up to 50% of its assets in
debt securities rated as low as B by Moody's or S&P (junk bonds). Equity
securities include common stocks, preferred stocks, convertible securities and
warrants and other stock purchase rights. Income-producing securities have
varying maturities and pay fixed, floating or adjustable interest rates. The
fund may also hold pay-in-kind securities and discount obligations, including
zero coupon securities. The fund may invest up to 20% of its net assets in
foreign issuers, but only 10% of its net assets can be in securities that are
not listed on a U.S. securities exchange.
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
(as a % of offering price) % 5.75 none none none
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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)
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Operating expenses paid each year by the fund
(as a % of average net assets)
Class A Class B Class C Class T
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Management fee % 0.65 0.65 0.65 0.65
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Distribution and service (12b-1) fees % 0.30 1.00 1.00 0.75
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Other expenses % 0.52 0.52 0.50 0.49
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Total fund operating expenses % 1.47 2.17 2.15 1.89
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(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 7 for
details.
(2) This charge decreases over time. Please see page 7 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.
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 $ 720 979 1,364 2,326(3)
if you don't sell your shares $ 220 679 1,164 2,326(3)
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Class C
if you sell your shares $ 318 673 1,154 2,483
if you don't sell your shares $ 218 673 1,154 2,483
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Class T
if you sell your shares $ 592 794 1,021 2,102(4)
if you don't sell your shares $ 192 594 1,021 2,102(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
<PAGE>
PILGRIM
BALANCE SHEET
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 high yield securities and equities, this
fund's performance may go up or down rapidly 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 be a market to sell
the security at a reasonable price.
Although the portfolio manager invests in a mix of debt securities and equities
to decrease volatility, the mix the portfolio manager chooses may also lower the
fund's performance.
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.
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HOW THE FUND HAS PERFORMED [GRAPHIC OMITTED]
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 Lipper Balanced Fund Index. This information may help to
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.]
[GRAPHIC OMITTED]
1989 17.70
1990 0.78
1991 21.17
1992 8.06
1993 14.08
1994 -5.33
1995 25.11
1996 10.18
1997 23.91
1998 4.64
Best and worst quarterly performance during this period:
4th quarter 1998: up 12.71%
3rd quarter 1998: down 13.38%
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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)
Lipper
Balanced
Fund
Class A Class B Class C Class T Index(3)
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One year, ended
December 31, 1998 % -0.84 -0.36 3.58 0.83 15.09
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Five years, ended
December 31, 1998 % N/A N/A N/A 11.09 13.87
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Ten years, ended
December 31, 1998 % N/A N/A N/A 11.61 13.32
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Since inception(4) % 12.53 13.23 13.61 10.34 12.75
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(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 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 Balance Sheet Opportunities Fund 3
<PAGE>
MEET THE
PORTFOLIO
MANAGERS
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Robert Kinsey
Robert Kinsey has co-managed the Pilgrim Balance Sheet Opportunities Fund since
November 1999.
Mr. Kinsey has over 13 years of investment management experience. At Pilgrim
Investments Inc. (Pilgrim Investments), an affiliate of Pilgrim Advisors, he
serves as a Vice President and a Senior Portfolio Manager. Prior to joining
Pilgrim Investments, Mr. Kinsey was a Vice President and Fixed Income Portfolio
Manager for Federated Investors from January 1995 to March 1999. From July 1992
to January 1995 Mr. Kinsey was a Principal and Portfolio Manager for Harris
Investment Management.
Kevin Mathews
Kevin Mathews has co-managed the Pilgrim Balance Sheet Opportunities Fund 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 for Van Kampen American Capital.
G. David Underwood
G. David Underwood has co-managed the Pilgrim Balance Sheet Opportunities Fund
since November 1999.
Mr. Underwood has over 21 years of investment management experience. At Pilgrim
Investments, an affiliate of Pilgrim, he serves as a Vice President and Senior
Portfolio Manager. Prior to joining Pilgrim Investments in December 1996, Mr.
Underwood was a Director of Funds Management for First Interstate Capital
Management.
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INVESTMENT ADVISER
PILGRIM ADVISORS, INC.
Pilgrim Advisors, Inc. (formerly "Northstar Investment Management Corporation")
(Pilgrim) provides advice and recommendations about investments made by the
fund. 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 the fund. The fee is paid by the fund at a rate of 0.65%.
4
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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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.
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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, including the Pilgrim Balance Sheet Opportunities Fund, 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).
We've listed actual expenses charged to the fund beginning on page 2.
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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
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Front-end Class A yes, varies by size of investment
sales charge Class B none
Class C none
Class T none
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Deferred Class A only on investments of $1 million or more if you sell
sales charge 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
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Distribution Class A 0.05% per year
fee(1) Class B 0.75% per year
Class C 0.75% per year
Class T 0.50% per year
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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
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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
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(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.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
5
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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FRONT-END SALES CHARGES (Class A shares only)
Amount retained by
Your investment Front-end sales charge dealers
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(as a % of your (as a % of (as a % of
net investment) offering price) offering price)
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Less than $50,000 6.10 5.75 5.00
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$50,000 to $99,999 4.71 4.50 3.75
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$100,000 to $249,999 3.63 3.50 2.75
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$250,000 to $499,999 2.56 2.50 2.00
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$500,000 to $999,999 2.04 2.00 1.75
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$1,000,000 and over -- -- --
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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.
6
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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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.
Period
during
CDSC which
on shares CDSC
Your investment being sold applies
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First $1,000,000 to $2,499,999 1.00% 2 years
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$2,500,000 to $4,999,999 0.50% 1 year
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$5,000,000 and over 0.25% 1 year
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CLASS B, C & T SHARES
Years after you
bought the shares Class B Class C Class T
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1st year 5.00% 1.00% 4.00%
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2nd year 4.00% -- 3.00%
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3rd year 3.00% -- 2.00%
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4th year 3.00% -- 1.00%
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5th year 2.00% -- --
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6th year 1.00% -- --
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after 6 years -- -- --
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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 6.
Please call us or consult the SAI to find out if you are eligible for a CDSC
waiver.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
7
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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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)
Commission Amount
received by dealers paid
out of sales charges by the
you pay distributor
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Less than $50,000 5.00 --
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$50,000 to $99,999 3.75 --
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$100,000 to $249,999 2.75 --
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$250,000 to $499,999 2.00 --
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$500,000 to $999,999 1.75 --
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$1,000,000 to $2,499,999 -- 1.00
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$2,500,000 to $4,999,999 -- 0.50
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$5,000,000 and over -- 0.25
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o Class B investments
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Receives 4% of the sale price from the distributor
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o Class C investments
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Receives 1% of the sale price from the distributor
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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 5.
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.
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.
8
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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OPENING A PILGRIM ACCOUNT
Once you've chosen 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
11).
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.
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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 11, but here are a few
things you should know before you begin.
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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 fair market value of the fund's portfolio securities using
the method described in the SAI.
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.
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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 11).
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.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
9
<PAGE>
YOUR GUIDE TO BUYING,
SELLING AND EXCHANGING SHARES
OF PILGRIM FUNDS
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SOME RULES FOR SELLING
o Selling your shares may result in a deferred sales charge. Please refer to
the table on page 7.
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 14 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.
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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 14 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.
10
<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 o exchange
Form or call us at 1-800-992-0180.
- -------------------------------------------- ---------------------------------
Automatic investment plan
To sign up for this service, complete o buy
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.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
11
<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 into
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.
12
<PAGE>
MUTUAL FUND
EARNINGS AND
YOUR TAXES
- --------------------------------------------------------------------------------
HOW THE FUND PAYS DISTRIBUTIONS
The fund distributes virtually all of its net investment income quarterly and
its net capital gains annually to shareholders in the form of dividends.
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 fund or any other fund that offers Class T
shares.
[GRAPHIC OMITTED] If you have any questions, please call 1-800-992-0180.
13
<PAGE>
MUTUAL FUND
EARNINGS AND
YOUR TAXES
- --------------------------------------------------------------------------------
HOW YOUR DISTRIBUTIONS ARE TAXED
The fund intends to meet the requirements for being a tax-qualified regulated
investment company, which means it generally does not pay federal income tax on
the earnings it distributes 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.
14
<PAGE>
PILGRIM
BALANCE SHEET
OPPORTUNITIES
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 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the beginning of the period $ 13.00 11.78 12.53 12.77 12.94 11.74 12.51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.50 0.52 0.56 0.43 0.44 0.44 0.50
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 0.14 2.27 0.74 1.06 0.10 2.25 0.71
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.64 2.79 1.30 1.49 0.54 2.69 1.21
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.56) (0.54) (0.57) (0.48) (0.46) (0.46) (0.50)
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments sold $ (0.74) (1.03) (1.48) (1.25) (0.74) (1.03) (1.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (1.30) (1.57) (2.05) (1.73) (1.20) (1.49) (1.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 12.34 13.00 11.78 12.53 12.28 12.94 11.74
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 5.19 24.31 10.54 11.95 4.38 23.48 9.76
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 18537 1,281 1,100 797 5,107 4,969 3,765
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.47 1.50 1.40 1.27(3) 2.17 2.15 2.10
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- 0.02 0.09 -- -- 0.02 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % 4.02 4.01 4.30 4.99(3) 3.33 3.37 3.64
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 38 130 107 131 38 130 107
- ---------------------------------------------------------------------------------------------------------------------------------
<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 12.77 12.95 11.75 12.52 12.77
- -------------------------------------------------------------------------------------------------------------
Net investment income 0.35 0.45 0.43 0.49 0.38
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.09 0.11 2.25 0.70 1.07
- -------------------------------------------------------------------------------------------------------------
Total from investment operations 1.44 0.56 2.68 1.19 1.45
- -------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.45) (0.46) (0.45) (0.48) (0.45)
- -------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments sold (1.25) (0.74) (1.03) (1.48) (1.25)
- -------------------------------------------------------------------------------------------------------------
Total distributions (1.70) (1.20) (1.48) (1.96) 1.70
- -------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period 12.51 12.31 12.95 11.75 12.52
- -------------------------------------------------------------------------------------------------------------
Total investment return(2) 11.56 4.53 23.41 9.72 11.49
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) 1,759 753 756 372 231
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.95(3) 2.15 2.25 2.10 1.91(3)
- -------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets -- -- -- 0.10 --
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.38(3) 3.34 3.30 3.61 4.49(3)
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 131 38 130 107 131
- -------------------------------------------------------------------------------------------------------------
<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 $ 13.01 11.79 12.54 11.54 12.94
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.59 0.50 0.53 0.57 0.57
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments $ (0.01) 2.24 0.73 2.27 (1.25)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations $ 0.58 2.74 1.26 2.84 (0.68)
- ----------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.47) (0.49) (0.53) (0.59) (0.54)
- ----------------------------------------------------------------------------------------------------------------------
Dividends from net realized gain on investments
sold $ (0.74) (1.03) (1.48) (1.25) (0.16)
- ----------------------------------------------------------------------------------------------------------------------
Distributions from capital $ -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions $ (1.21) (1.52) (2.01) (1.84) (0.72)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 12.38 13.01 11.79 12.54 11.54
- ----------------------------------------------------------------------------------------------------------------------
Total investment return(2) % 4.64 23.91 10.18 25.11 (5.33)
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $ 24,065 53,201 59,490 72,472 73,764
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets % 1.89 1.83 1.69 1.68 1.69
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets % -- 0.04 0.06 -- --
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets % 3.59 3.70 3.99 4.44 4.36
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate % 38 130 107 131 59
- ----------------------------------------------------------------------------------------------------------------------
</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.
15
<PAGE>
WHERE TO GO
FOR MORE
INFORMATION
- --------------------------------------------------------------------------------
You'll find more information about the Pilgrim Balance Sheet Opportunities Fund
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 Balance Sheet
Opportunities Fund. The SAI is legally part of this prospectus (it is
incorporated by reference). A copy has been filed with the Securities and
Exchange Commission (SEC).
Please write or call for a free copy of the current Annual/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,
which is 811-2239.
- --------------------------------------------------------------------------------
Year 2000 update: Pilgrim, the 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 fund's
operations and/or the financial markets generally. There is also the risk that
the fund's performance may be adversely affected if the value of its portfolio
holdings decreases due to year 2000-related computer problems.
- --------------------------------------------------------------------------------
16
<PAGE>
P/NBSOPRO1199
<PAGE>
[GRAPHIC OMITTED]
NORTHSTAR
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999, As Supplemented November 1, 1999
* PILGRIM Balance Sheet Opportunities Fund
(formerly the "Northstar Balance Sheet Opportunities 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 Prospectus of the Fund 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 Fund, 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 Fund's
investment adviser. Northstar Distributors, Inc. (the "Underwriter") is the
underwriter to the Fund. Pilgrim Group, Inc. (formerly "Northstar Administrators
Corporation") (the "Administrator") is the Fund's administrator. The Underwriter
and the Administrator are affiliates of Pilgrim.
----------
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS ................................................... 2
INVESTMENT TECHNIQUES ..................................................... 3
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION ........................... 9
SERVICES OF PILGRIM AND THE ADMINISTRATOR ................................. 11
NET ASSET VALUE ........................................................... 12
PURCHASES AND REDEMPTIONS ................................................. 12
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................ 14
UNDERWRITER AND DISTRIBUTION SERVICES ..................................... 17
TRUSTEES AND OFFICERS ..................................................... 19
OTHER INFORMATION ......................................................... 21
PERFORMANCE INFORMATION ................................................... 22
FINANCIAL STATEMENTS ...................................................... 24
APPENDIX .................................................................. A-1
1
<PAGE>
INVESTMENT RESTRICTIONS
Pilgrim Balance Sheet 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 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 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.
In addition to the restrictions described above, the Fund may, from time
to time, agree to additional investment restrictions for purposes of compliance
with the securities laws of those state and foreign jurisdictions where that
fund intends to offer or sell its shares.
INVESTMENT TECHNIQUES
Additional Information on GNMAs. The Fund may invest in U.S. Government
securities, which are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The Fund may invest in Government National
Mortgage Associations (popularly called GNMAs or Ginnie Maes). 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 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 Fund may 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 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 the 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 the 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.
3
<PAGE>
Derivative Instruments. The Fund may invest in Derivative Instruments.
Derivative Instruments are securities that derive their value from the
performance of any 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 the 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 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
the 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 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 the 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. The Fund, by entering into
a firm commitment, may realize short-term gains or losses in connection with
such sales.
The Fund may enter into To Be Announced ("TBA") sale commitments wherein
the unit price and the estimated principal 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. 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.
The 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 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 Fund 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.). The 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
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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, the 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 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. 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 was 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 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.
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Lending Portfolio Securities. The 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, 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).
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 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 the 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 the 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 the Fund to value these
securities for purposes of calculating its net asset value.
Options -- In General. The Fund 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.
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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 Fund's
Trustees in reviewing the creditworthiness of parties to repurchase agreements
with the 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.
Pursuant to an Exemptive Order under Section 17(d) and Rule 17d-1 obtained
by the Northstar Balance Sheet Opportunities Fund on March 5, 1991, the Fund 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, the 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 Fund 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 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 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 Fund 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 Fund 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 Fund 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 Fund 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 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.
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The Fund 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 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 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 Fund 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 Fund may invest in foreign securities as noted in the Prospectus.
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.
Emerging Markets and Related Risks
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.
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.
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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
markets 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. The Fund may invest in
securities of foreign issuers. The Fund 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.
Additional Information on High Yield Securities. The Balance Sheet
Opportunities Fund 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 reflects 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. ("Moody's") or Standard & Poor's Ratings 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 descriptions of
security ratings.
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 the
Fund's assets. Conversely, during periods of rising interest rates, the value of
the 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
changes 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 the 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 Pilgrim 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Pilgrim places orders for the purchase and sale of the Fund's securities,
supervises their execution and negotiates brokerage commissions on behalf of the
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. Pilgrim seeks to obtain fair commission rates from
brokers. 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 the 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
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differs with the broker's appraisal of opportunity or value, the broker will not
be selected to execute trades in the future. Pilgrim believes that the Fund
benefits from 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 Fund. 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
Fund and its 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 Fund 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.
In purchasing and selling fixed income securities, it is the policy of the
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 Fund
will not necessarily pay the lowest spread or commission available.
The 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 Fund. 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
December 31, 1998, 1997 and 1996 the Fund paid the total brokerage commissions
indicated below, including, commissions to Advest, Inc. ("Advest"), an affiliate
of the Fund's former investment adviser.
Brokerage Commissions Paid During Fiscal Years
Ended December 31, 1998, 1997 and 1996 for the Fund
December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
Balance Sheet Opportunities Fund $13,025 81,371 90,283
10
<PAGE>
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.
The Fund's historical portfolio turnover rates are included in the Financial
Highlights tables in the Prospectus. In evaluating the 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 that described
above 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 AND THE ADMINISTRATOR
Pursuant to an Investment Advisory Agreement with the Fund, Pilgrim Advisors,
Inc. acts as the Investment Adviser to the Fund.
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 the advisory agreement to the Fund, at an
annual rate of 0.65% of the Fund's average daily net assets. This fee is accrued
daily and payable monthly.
The Investment Advisory Agreement for the Fund was approved by the
trustees of the Fund on March 1, 1995, and by the shareholders of the 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 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 Agreement was last approved on April 30, 1998.
The Fund's Investment Advisory Agreement may be terminated without payment
of any penalty by Pilgrim, the Trustees, or the shareholders of the Fund on not
more than 60 days and not less than 30 days prior written notice. Otherwise, the
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, 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.
Pilgrim Group, Inc. (formerly "Northstar Administrators Corporation")
serves as administrator for the Fund, pursuant to an Administrative Services
Agreement with the 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 Fund's business, except for
those services performed by Pilgrim under the Investment Advisory Agreement, the
custodian for the Fund under the Custodian Agreement, the transfer agent for the
Fund under the Transfer Agency Agreement, and such other service providers as
may be retained by the Fund from time to time. The Administrator acts as liaison
among these service providers to the Fund. The Administrator is also responsible
for ensuring that the Fund operates in compliance with applicable legal
requirements and for monitoring Northstar for compliance with requirements under
applicable law and with the investment policies and restrictions of the Fund.
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 Fund was approved by the
Trustees of the Fund on March 1, 1995. The agreement was 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 Fund.
The Administrator's fee is accrued daily against the value of the Fund's
net assets and is payable by the Fund monthly at an annual rate of 0.10% of the
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
the Fund for providing certain shareholder services and assisting broker-dealer
shareholder accounts.
11
<PAGE>
During the fiscal years ended December 31, 1998, 1997 and 1996, respectively,
the Fund 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> <C>
Balance Sheet Opportunities Fund(1) $ 365,125 75,818 398,127 46,191 464,088 0
</TABLE>
- ----------
(1) Does not reflect expense reimbursement of $20,690 for the year ended
December 31, 1997 or expense reimbursement of $41,925 for the year ended
December 31, 1996.
NET ASSET VALUE
For the Pilgrim Balance Sheet Opportunities Fund, portfolio securities, options
and futures contracts and options thereon that are traded on national exchanges
or on 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 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 upon, among other things, 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 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, Class C and Class T shares of the Fund
will generally be lower than that of the Class A 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 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.
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 charge. 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)
Northstar or any of its affiliated companies, (ii) the Fund or any Northstar
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 Fund in particular investment
products such as "wrap accounts" or other
12
<PAGE>
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 Internal Revenue Code (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 Fund or any Pilgrim affiliated investment
company and (f) Brandes Investment Partners, L.P. employees, officers and
partners. Class A shares of the Fund 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 the 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 Fund 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 a Fund 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 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.
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, 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. 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 591/2 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 taxfree 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 Fund's 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
1940 Act; 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 charges 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 apply.
Exchanges. The following conditions must be met for all exchanges among
the Northstar 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 Portfolios, 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.
13
<PAGE>
The 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. The 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 the Fund and to reduce administrative expenses borne by the Fund,
Northstar reserves the right to reject any exchange request.
Conversion Feature. Class B and Class T shares of the 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
The 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% of 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, 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 the 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 the
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 the 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 the
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.
14
<PAGE>
Hedging transactions undertaken by the Fund may result in straddles for
U.S. federal income tax purposes. The straddle rules may accelerate income to
the Fund, defer losses to the Fund, and affect the character of gains (or
losses) realized by the Fund. Hedging transactions may increase the amount of
short-term capital gains realized by the Fund that is taxed as ordinary income
when distributed to shareholders. The 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.
The 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 the 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 the 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 Fund 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 Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency denominated debt
15
<PAGE>
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, such as the 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, the Fund must satisfy to
qualify as a regulated investment company under the Code. These requirements may
limit the extent to which the 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 the 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 the 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 the 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 the Fund reduce the net asset value of the 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 the 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 U.S. federal income tax
on dividends and redemption payments from the 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 the Fund, (ii)
those about whom notification has been received (either by the shareholder or by
the Fund) from the IRS that they are subject to backup withholding or (iii)
those who, to the 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.
16
<PAGE>
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 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 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 the 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 Agreement 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 Fund, or
by vote of a majority of the Trustees of the Fund, 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.
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 plan (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 the
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 the rules of any self-regulatory organization, 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.
The 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 the 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, the Fund may compensate the
Underwriter in an amount up to 0.30% of average daily net assets of the Fund's
Class A shares. Under the Plans for Class B and Class C shares, the Fund may
compensate the Underwriter in an amount up to 1.00% of the average daily net
assets attributable to the respective class of the Fund. Pursuant to the Plan
for Class T shares, the Fund compensates the Underwriter in an amount equal to
0.75% of annual average daily net assets of the Fund's Class T shares. However,
the Class T Plan provides for compensation in an amount 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 Fund
(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 Northstar
Funds for services rendered in connection with the sale and distribution of
shares of the Fund; (iv) payment of expenses incurred in sales and promotional
activities, including advertising expenditures related to the Fund; (v) the
costs of preparing and distributing promotional materials; (vi) the cost of
printing the
17
<PAGE>
Fund's 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 Fund. With respect to the 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 the Fund's
shares may be paid as compensation for providing services to the 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 the Fund's shareholders;
or services providing the 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 the 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, the 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 the 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 will review a report on expenditures under the Plans and the
purposes for which expenditures were made. The Trustees will 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 the 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 the 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 the fiscal year ended December 31, 1998, each class of shares of
the Fund 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
------- ------- ------- --------
Balance Sheet Opportunities Fund ... $35,436 $51,908 $8,024 $287,758
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 Fund were as follows:
<TABLE>
<CAPTION>
Balance Sheet Opportunities Fund
----------------------------------------------
Class A Class B Class C Class T
------- ------- ------- -------
<S> <C> <C> <C> <C>
EXPENSE
Salaries/Overrides ................. $35,330 $4,803 $ 311 $ --
Commissions Paid ................... $ -- $2,667 $ 249 $ --
Marketing/Convention/RMM Expense ... $34,475 $3,933 $ 495 $ --
Total .............................. $69,805 $ $1,055 $ --
</TABLE>
18
<PAGE>
For the Fund's 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
------- ------- ------- -------
Balance Sheet Opportunities Fund ... $1,041 $25,068 $51 $4,574
TRUSTEES AND OFFICERS
The Trustees and principal officers of the 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 Northstar
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 Pilgrim Group, Inc. and Pilgrim
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
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. Since
January 1996, Trustee of the Pilgrim affiliated investment companies.
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. Since June 1995, Trustee of the Pilgrim affiliated investment
companies.
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. Since June 1995, Trustee of Pilgrim
investment companies.
*John G. Turner, Trustee. Age: 59.
Chairman and Chief Executive Officer of ReliaStar Financial Corporation
and ReliaStar Life Insurance Company, ("ReliaStar") since May 1993 and Chairman
of other ReliaStar affiliated insurance companies since 1995. Since October
1993, Director of Pilgrim 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.
- ----------
* Deemed to be an "interested person" of the Fund as defined by the 1940 Act.
19
<PAGE>
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.
Pilgrim and Pilgrim Group, Inc. make their personnel available to serve as
Officers and "Interested Trustees" of the Pilgrim 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 $6,000 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
$1,500 for attendance at each joint meeting of the 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 the Fund
as a group owned beneficially or of record less than 1% of the outstanding
securities of the Fund. To the knowledge of the Fund, as of December 31, 1998,
no shareholder owned beneficially or of record more than 5% of the Fund's
outstanding shares.
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"), Northstar Galaxy Trust Funds, Pilgrim MidCap
Opportunities Fund (formerly the "Mid-Cap Growth Fund"), Pilgrim SmallCap
Opportunities Fund (formerly the "Northstar Special Fund"), Pilgrim Growth
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 (formerly the "Northstar
Balance Sheet Opportunities Fund").
20
<PAGE>
Individual Fund(1)
Fiscal Year Compensation Tables
<TABLE>
<CAPTION>
SmallCap Growth Growth + International Emerging
Opportunities MidCap Opportunities Value Value Markets
------------- ------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Paul S. Doherty ........ 2,369 308 1,369 1,369 1,369 97
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
<CAPTION>
High High Balance
Income and Government High Total Total Sheet
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) The Pilgrim Research Enhanced Index Fund (formerly the "Northstar 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 Pilgrim Balance Sheet Opportunities Fund.
PricewaterhouseCoopers LLP audits the Fund's 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 Fund.
Transfer Agent. DST Systems, Inc., 210 West 10th Street, 8th Floor, Kansas
City, Missouri 64105, acts as the transfer agent for the Fund.
Reports to Shareholders. The fiscal year of the Fund ends on December 31.
The 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. The Pilgrim Balance Sheet
Opportunities Fund (formerly the "Northstar Balance Sheet Opportunities Fund")
was organized in 1986.
The shares of the 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 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 the Fund contains provisions intended to limit such
liability and to provide indemnification out of Fund property
21
<PAGE>
to 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 the Fund by the Adviser,
the Administrator and the Fund's 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 Fund's 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 Fund believes
these steps will be sufficient to avoid any material adverse impact on the Fund.
The costs or consequences of incomplete or untimely resolution of the Year 2000
Issue are unknown to the Adviser, Administrator and the Fund's other service
providers at this time but could have a material adverse impact on the
operations of the Fund 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 Fund invests will be timely converted or that the value
of such investments will not be adversely affected by Year 2000 Issue.
PERFORMANCE INFORMATION
Performance information for the Fund may be compared in reports and
promotional literature to (i) 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 (a measure of 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.
Yield. Quotations of yield for a specific class of shares of the 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 5% for Class B shares, 1% for Class C shares, and 4% for Class T
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 Fund's distribution plans. Except as noted, the performance
results take the contingent deferred sales charge into account.
22
<PAGE>
The yield for Class A, B, C and T shares of the Fund for the month ended
December 31, 1998 was as follows:
Class A Class B Class C Class T
------- ------- ------- -------
` 4.79% 4.24% 4.34% 4.67%
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 Fund 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 A, B and C shares of the Balance Sheet Opportunities Fund for
the period from commencement of operations of such classes (June 5, 1995)
through December 31, 1998, assuming the maximum sales charge HAS been assessed:
Class of Shares One Year Since Inception
--------------- -------- ---------------
Class A 0.18% 12.86%
Class B -0.36% 13.23%
Class C 3.58% 13.61%
The following table summarizes the calculation of Average Annual Total
Return for Class A, B and C shares of the Balance Sheet Opportunities Fund for
the period from commencement of operations of such classes (June 5, 1995)
through December 31, 1998, assuming the maximum sales charge HAS NOT been
assessed:
Class of Shares One Year Since Inception
--------------- -------- ---------------
Class A 5.19% 14.42%
Class B 4.38% 13.62%
Class C 4.53% 13.61%
The following table summarizes the calculation of Average Annual Total
Return for Class T shares of the Balance Sheet Opportunities Fund 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)
-------- ---------- --------- ------------
0.83% 11.09% 11.61% 10.34%
The following table summarizes the calculation of Average Annual Total
Return for Class T shares of the Balance Sheet Opportunities Fund 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)
-------- ---------- --------- ------------
4.64% 11.09% 11.61% 10.34%
- ----------
(3) The inception date for Class T shares was February 3, 1986.
23
<PAGE>
The 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 Fund in advertising is historical and is not intended to indicate future
returns. The 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/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 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 the Balance Sheet Opportunities Fund
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 that the names of the Northstar Funds were changed to the Pilgrim Funds
effective November 1, 1999.
24
<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.
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
